<PAGE>   1
 
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1996
 
                                                     REGISTRATION NO. 33-
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                            ------------------------
 
                            LUCENT TECHNOLOGIES INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                               <C>                               <C>
             DELAWARE                            3661                           22-3408857
 (State or other jurisdiction of     (Primary Standard Industrial            (I.R.S. Employer
  incorporation or organization)     Classification Code Number)           Identification No.)
</TABLE>
 
                              600 MOUNTAIN AVENUE
                             MURRAY HILL, NJ 07974
                                 (908) 582-8500
              (Address, including zip code, and telephone number,
       including area code, of registrant's principal executive offices)
 
                               RICHARD J. RAWSON
                    SENIOR VICE PRESIDENT & GENERAL COUNSEL
                              600 MOUNTAIN AVENUE
                             MURRAY HILL, NJ 07974
                                 (201) 606-2810
           (Name, address, including zip code, and telephone number,
                   including area code, of agent for service)
 
                                   Copies to:
 
      STEVEN A. ROSENBLUM                              CHARLES S. WHITMAN III
WACHTELL, LIPTON, ROSEN & KATZ                          DAVIS POLK & WARDWELL
      51 WEST 52ND STREET                               450 LEXINGTON AVENUE
      NEW YORK, NY 10019                                 NEW YORK, NY 10020
 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
  As soon as practicable after this registration statement becomes effective.
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box.  / /
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
===========================================================================================================
                                                          PROPOSED          PROPOSED
TITLE OF EACH CLASS                                       MAXIMUM            MAXIMUM
OF SECURITIES                         AMOUNT TO BE     OFFERING PRICE       AGGREGATE         AMOUNT OF
TO BE REGISTERED                     REGISTERED(1)      PER UNIT(2)     OFFERING PRICE(2)  REGISTRATION FEE
-----------------------------------------------------------------------------------------------------------
<S>                                 <C>               <C>               <C>                <C>
Common Stock, par value              )
  $.01 per share..................   )                                    $100,000,000         $34,483
----------------------------------   )
Preferred Share Purchase             )
  Rights(3).......................   )
-----------------------------------------------------------------------------------------------------------
Total.............................                                        $100,000,000         $34,483
===========================================================================================================
</TABLE>
 
(1) Includes           shares to be sold pursuant to the overallotment option
    granted to the U.S. Underwriters.
(2) Estimated solely for purposes of determining the registration fee pursuant
    to Rule 457(o) promulgated under the Securities Act of 1933.
(3) Rights initially will trade together with the Common Stock. The value
    attributable to the Rights, if any, is reflected in the market price of the
    Common Stock.
 
     THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>   2
 
                            LUCENT TECHNOLOGIES INC.
 
         CROSS-REFERENCE SHEET PURSUANT TO REGULATION S-K, ITEM 501(b)
 
<TABLE>
<CAPTION>
 ITEM                                                                LOCATION
 NO.                                                              IN PROSPECTUS
------                                              ------------------------------------------
<S>     <C>                                         <C>
    I.  Forepart of the Registration Statement and
        Outside Front Cover Page of Prospectus....  Outside Front Cover Page
   II.  Inside Front and Outside Back Cover
        Pages of Prospectus.......................  Inside Front Cover Page; Table of Contents
  III.  Summary Information, Risk Factors and
        Ratio of Earnings to Fixed Charges........  Prospectus Summary; Risk Factors;
                                                    The Company
   IV.  Use of Proceeds...........................  Use of Proceeds
    V.  Determination of Offering Price...........  Underwriting
   VI.  Dilution..................................  Not Applicable
  VII.  Selling Security Holders..................  Not Applicable
 VIII.  Plan of Distribution......................  Outside Front Cover Page; Underwriting
   IX.  Description of Securities to be
        Registered................................  Outside Front Cover Page; Description of
                                                    Capital Stock
    X.  Interests of Named Experts and Counsel....  Not Applicable
   XI.  Information with respect to the
        Registrant................................  Outside Front Cover Page; Prospectus
                                                    Summary; Risk Factors; The Company; Use of
                                                    Proceeds; Dividend Policy; Certain
                                                    Transactions in Connection with the
                                                    Offerings; Capitalization; Selected
                                                    Financial Data; Pro Forma Condensed
                                                    Financial Statements; Management's
                                                    Discussion and Analysis of Financial
                                                    Condition and Results of Operations;
                                                    Business; Management; Arrangements Between
                                                    the Company and AT&T; Principal
                                                    Stockholder; Description of Capital Stock;
                                                    Shares Eligible for Future Sale; Financial
                                                    Statements
  XII.  Disclosure of Commission Position on
        Indemnification for Securities Act
        Liabilities...............................  Not Applicable
</TABLE>
<PAGE>   3
 
                                EXPLANATORY NOTE
 
     This Registration Statement contains two forms of prospectus: one to be
used in connection with a United States and Canadian offering (the "U.S.
Prospectus") and one to be used in connection with a concurrent offering outside
the United States and Canada (the "International Prospectus"). The prospectuses
are identical in all respects except for the front cover page and the inside
front cover page. In addition, the International Prospectus contains a section
entitled "Certain United States Tax Consequences to Non-United States Holders."
Pages included in the International Prospectus and not in the U.S. Prospectus
are marked "Alternate Page for International Prospectus."
<PAGE>   4
 
PROSPECTUS (Subject to Completion)
Issued February 5, 1996
                                              Shares

                              LUCENT TECHNOLOGIES           [LOGO]

                                  COMMON STOCK
                            ------------------------
OF THE         SHARES OF COMMON STOCK BEING OFFERED,         SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS
    AND         SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES
    AND CANADA BY THE INTERNATIONAL UNDERWRITERS. ALL OF THE SHARES OF
       COMMON STOCK ARE BEING OFFERED BY LUCENT TECHNOLOGIES INC., WHICH
       IS CURRENTLY A WHOLLY OWNED SUBSIDIARY OF AT&T CORP. PRIOR TO THE
        OFFERINGS, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK.
        IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
           PRICE WILL BE BETWEEN $      AND $      PER SHARE. SEE
           "UNDERWRITING" FOR A DISCUSSION OF THE FACTORS
              CONSIDERED IN DETERMINING THE INITIAL PUBLIC
                               OFFERING PRICE.
 
AFTER THE OFFERINGS, AT&T WILL OWN APPROXIMATELY     % (    % IF THE U.S.
UNDERWRITERS EXERCISE THEIR OVERALLOTMENT OPTION IN FULL) OF THE COMMON STOCK.
  AT&T HAS ANNOUNCED ITS INTENTION, SUBJECT TO SATISFACTION OF CERTAIN
  CONDITIONS, TO DIVEST ITS OWNERSHIP INTEREST IN THE COMPANY BY DECEMBER
    31, 1996 BY MEANS OF A TAX-FREE DISTRIBUTION TO ITS SHAREHOLDERS. SEE
                 "ARRANGEMENTS BETWEEN THE COMPANY AND AT&T."
                            ------------------------
 
    APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK ON THE NEW YORK STOCK
                       EXCHANGE UNDER THE SYMBOL "    ."
                            ------------------------
 
   SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR INFORMATION CONCERNING CERTAIN
          FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
                            ------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
       EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
           SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
            COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
                 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
                             IS A CRIMINAL OFFENSE.
 
      --------------------------------------------------------------------------
 
                             PRICE $       A SHARE
 
                                ----------------
 
<TABLE>
<CAPTION>
                                                          UNDERWRITING
                                        PRICE TO         DISCOUNTS AND        PROCEEDS TO
                                         PUBLIC          COMMISSIONS(1)      THE COMPANY(2)
                                    ----------------    ----------------    ----------------
<S>                                 <C>                 <C>                 <C>
Per Share.....................             $                   $                   $
Total(3)......................             $                   $                   $
</TABLE>
 
------------
    (1) The Company has agreed to indemnify the Underwriters against certain
        liabilities, including liabilities under the Securities Act of 1933, as
        amended.
 
    (2) Before deducting expenses payable by the Company estimated at
        $          .
 
    (3) The Company has granted to the U.S. Underwriters an option, exercisable
        within 30 days of the date hereof, to purchase up to an aggregate of
                additional shares of Common Stock at the Price to Public less
        Underwriting Discounts and Commissions for the purpose of covering
        overallotments, if any. If the U.S. Underwriters exercise such option in
        full, the total Price to Public, Underwriting Discounts and Commissions
        and Proceeds to the Company will be $        , $        and $        ,
        respectively. See "Underwriting."
                            ------------------------
 
     The shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the shares will be made on or about             , 1996 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in same-day funds.
                            ------------------------
 
                           Joint Global Coordinators
MORGAN STANLEY & CO.                                        GOLDMAN, SACHS & CO.
           Incorporated
                            ------------------------
 
MORGAN STANLEY & CO.                                        GOLDMAN, SACHS & CO.
            Incorporated
 
                              MERRILL LYNCH & CO.
 
          , 1996
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.

<PAGE>   5
 
     NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
                            ------------------------
 
     UNTIL               , 1996 (25 DAYS AFTER COMMENCEMENT OF THE OFFERINGS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
                            ------------------------
 
     For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Common Stock or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.
 
     In this Prospectus references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
                            ------------------------
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                         PAGE
                                         -----
<S>                                      <C>
Prospectus Summary....................       3
Risk Factors..........................       9
The Company...........................      15
Use of Proceeds.......................      17
Dividend Policy.......................      17
Certain Transactions in Connection
  with the Offerings..................      18
Capitalization........................      20
Selected Financial Data...............      21
Pro Forma Condensed Financial
  Statements..........................      22
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................      23
Business..............................      33
Management............................      50
Arrangements Between the Company and
  AT&T................................      65
Principal Stockholder.................      77
Description of Capital Stock..........      78
Shares Eligible for Future Sale.......      84
Underwriting..........................      86
Legal Matters.........................      88
Experts...............................      89
Available Information.................      89
Index to Financial Statements.........     F-1
</TABLE>
 
                            ------------------------
 
     IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
                            ------------------------
 
     This Prospectus contains trademarks, service marks or registered marks of
the Company, AT&T Corp. ("AT&T"), their respective subsidiaries, and other
companies, as indicated.
 
                                        2
<PAGE>   6
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information set forth elsewhere in this
Prospectus. As used herein, references to the "Company" include the historical
operating results and activities of, and assets and liabilities assigned to, the
businesses and operations which comprise the Company as of the date hereof.
Unless otherwise indicated, all data in this Prospectus are based on the
assumption that the U.S. Underwriters do not exercise their overallotment
option.
                            ------------------------
 
                                  THE COMPANY
 
     Lucent Technologies Inc. (the "Company") is one of the world's leading
designers, developers and manufacturers of telecommunications systems, software
and products. The Company is a global market leader in the sale of public
telecommunications systems, and is a supplier of systems or software to 23 of
the world's 25 largest network operators. The Company is also a global market
leader in the sale of business communications systems and in the sale of
microelectronic components for communications applications to manufacturers of
communications systems and computers. Further, the Company is the largest
supplier in the United States of telecommunications products for consumers. In
addition, the Company has provided engineering, installation, maintenance or
operations support services to over 250 network operators in 75 countries, over
1.4 million business locations in the United States, and approximately 100,000
business locations in over 90 other countries. The Company's research and
development activities are conducted through Bell Laboratories ("Bell Labs"),
one of the world's foremost industrial research and development organizations.
 
     The Company's revenues of $21.4 billion for the year ended December 31,
1995, were generated from the sale of systems for network operators (54% of
total revenues), business communications systems (24%), microelectronic products
(9%), consumer products (8%), and other systems and products, including
integrated systems for the United States government (5%). In 1995, approximately
77% of the Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports).
 
     Systems for Network Operators.  The Company's systems and software enable
network operators to provide wireline and wireless local, long distance and
international voice, data and video communications services. The Company's
switching, transmission and cable systems are packaged and customized with
application software, operations support systems and associated professional
services, and range in size from small rural telephone systems to some of the
world's largest wireline and wireless networks. The Company's network operator
customers include local, long distance and international telecommunications
companies and cable television companies. The Company has a wireline local
access installed base of approximately 110 million lines, representing
approximately 58% of the United States and 13% of the worldwide installed base.
The Company's wireless systems are in operation in nine of the top ten United
States Metropolitan Statistical Areas ("MSAs").
 
     Business Communications Systems.  The Company's business systems are
primarily customer premises-based telecommunications systems which are used in
networks that enable businesses to communicate within and between locations. The
Company has the largest installed base in the United States of private branch
exchanges ("PBXs"), key systems, structured cabling systems and voice processing
systems. In addition, the Company's direct sales, installation and maintenance
force works with business customers to integrate the Company's hardware and
software into customized applications such as call centers, which support such
customer services as banking by telephone and airline reservations.
 
     Microelectronics.  The Company's microelectronic components include
high-performance integrated circuits ("ICs"), electronic power systems and
optoelectronic components for communications applications. These microelectronic
products are important components of many of the Company's own systems and
products. The Company also supplies these components to other manufacturers of
communications systems and computers. The Company is a market leader in several
IC product areas critical to communications applications, including digital
signal processors ("DSPs") for digital cellular telephones and standard-cell
application specific integrated circuits ("ASICs"). At December 31, 1995, the
Company's DSPs were included in more than half of the world's digital cellular
telephones.
 
                                        3
<PAGE>   7
 
     Consumer Products.  The Company offers a wide range of corded, cordless and
cellular telephones, telephone answering systems and related accessories in the
United States for consumers and small businesses. For the nine months ended
September 30, 1995, the Company sold 31% of the corded telephones, 28% of the
cordless telephones and 34% of the telephone answering systems sold in the
United States, approximately double the market share of any single competitor in
each of these categories.
 
                               INDUSTRY OVERVIEW
 
     The global telecommunications networking industry includes systems,
software and products used for voice, data and video communications. This
industry has undergone significant transformation and growth since the
mid-1980's as a result of changes in domestic and international public policy,
technological innovations and economic factors. The Company believes that these
forces will intensify, and that the number of customers and the complexity of
the networks they demand will increase. In addition, the Company believes that
these networks will increasingly become multifunctional in nature, supporting
simultaneous wireline or wireless access to any combination of voice, data and
video communications services, thus reducing the operating costs associated with
separate networks. The Company further believes that the traditionally distinct
technology platforms supporting voice and data will converge, as will those
platforms for the traditionally separate wireline and wireless networks. In the
Company's view, significant industry growth areas will include wireless access,
multifunctional systems and networking software. The Company further believes
that the principal building blocks of the industry are and will continue to be
software, microelectronics and product innovation in advanced digital switching
and transmission platforms, supported by a competency in and a knowledge of
telecommunications networking.
 
                                    STRATEGY
 
     The Company believes that the global public policy, technological and
economic forces transforming the telecommunications industry are creating
opportunities for the Company to capitalize on its competency in and knowledge
of networking, software and microelectronics. The Company intends to utilize the
research and development capabilities of Bell Labs, its broad and well
established product lines and its strong global customer relationships with
leading network operators and major businesses to remain a leader in
telecommunications networking and to capitalize on the growing convergence of
voice and data and of wireline and wireless networks. Further, the Company is
increasing its focus on customers in the United States and internationally who
consider AT&T as a competitor or potential competitor and therefore have been
reluctant to rely on AT&T as a strategic supplier. The Company believes that
growth opportunities will be available in both developed and developing
countries, and that a significant portion of its growth will derive from the
sale of telecommunications networking systems outside the United States. The
Company intends to focus its efforts globally on wireless networks,
multifunctional systems and networking software.
 
     Wireless Networks.  The Company's strategy is to provide network operators
and businesses with complete, flexible wireless networks which will complement
or, in the case of systems for network operators, compete over time with
wireline networks. The Company's sales of wireless infrastructure systems have
grown as a percent of total revenues from 6.1% in 1993 to 10.3% in 1995. The
Company's wireless infrastructure systems for mobile and fixed access are
designed to support leading air interface standards around the world. The
Company believes that its recent advances and innovations in microelectronics
and software will produce further enhancements to its wireless communications
systems.
 
     Multifunctional Systems.  The Company's strategy is to provide network
operators and businesses with flexible integrated multifunctional systems that
will enable them to enhance their networks to support simultaneously wireline or
wireless access to any combination of voice, data and video communications. The
Company intends to continue to utilize its expertise in digital switching,
digital transmission, optical technologies and telecommunications networking
software to provide these systems.
 
                                        4
<PAGE>   8
 
     Networking Software.  The Company's strategy is to use its software
expertise to enable network operators and businesses to continue to offer their
customers new and differentiating services. Further, the Company intends to
continue to offer telecommunications networking software that simplifies the
operation of networks and automates labor intensive network management and
provisioning tasks to reduce operating expenses and improve network efficiency.
The Company is pursuing these objectives through its research and development
activities at Bell Labs, where, in 1995, approximately two-thirds of the
technical staff were engaged in software-related activities.
 
     The Company intends to pursue the above strategies globally through a
strong management emphasis on the rapid commercialization of customer-focused
technological innovations. The Company believes that, as an independent entity,
it will have a greater ability to pursue these strategies by defining its own
priorities and maintaining a focus on its customers. In response to its
establishment as a stand-alone entity, the Company has undertaken a
comprehensive review of all of its operations, including its organizational
structure, products and markets, with a view toward maximizing its return on
investments. In connection with this review, the Company adopted a strategic
reorganization plan and recorded pre-tax restructuring charges of $2,613
million, and other charges for asset impairments and other items of $188
million, in the fourth quarter of 1995. See "The Company -- Strategic
Reorganization" and "Business -- Strategy."
 
                              SEPARATION FROM AT&T
 
     The Company is currently a wholly owned subsidiary of AT&T. On September
20, 1995, AT&T announced its intention to create a separate company composed of
the AT&T businesses and operations that now comprise the Company, and the
associated assets and liabilities of such businesses and operations (the
"Separation"). AT&T also announced its intention to distribute to its
shareholders by December 31, 1996, subject to certain conditions, all of its
interest in the Company following the Offerings (the "Distribution"). See "The
Company -- Conditions to the Distribution." After the completion of the
Offerings and prior to the Distribution, AT&T will own approximately      % of
the outstanding shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company (     % if the U.S. Underwriters exercise their
overallotment option in full). The Company, AT&T and, in certain cases, NCR
Corporation ("NCR") have entered into or will, on or prior to the consummation
of the Offerings (the "Closing Date"), enter into certain agreements providing
for the Separation and governing various interim and ongoing relationships
between and among the three companies, including an agreement between the
Company and AT&T providing for the purchase of products, licensed materials and
services from the Company. See "Arrangements Between the Company and AT&T."
 
                                        5
<PAGE>   9
 
                                 THE OFFERINGS
 
<TABLE>
<S>                                            <C>
Common Stock Offered
  U.S. Offering..............................            shares
  International Offering.....................            shares
     Total Offerings.........................            shares(1)
Common Stock to be outstanding
  immediately after the Offerings............            shares(1)(2)
Common Stock to be held by AT&T
  immediately after the Offerings............            shares(1)
Use of Proceeds..............................  The net proceeds to the Company from the
                                               Offerings are estimated to be approximately
                                               $     million ($     million if the U.S.
                                               Underwriters exercise their overallotment
                                               option in full). Such proceeds will be used
                                               to repay approximately $     million of
                                               indebtedness outstanding under the Working
                                               Capital Facility (as defined herein) and for
                                               general corporate purposes. See "Use of
                                               Proceeds."
Dividend Policy..............................  It is anticipated that, subject to the
                                               Company's financial results and declaration
                                               by the Company's Board of Directors (the
                                               "Company Board"), the Company initially will
                                               pay a quarterly dividend of $     per share
                                               of Common Stock, beginning with a dividend
                                               payable in the third quarter of 1996, in
                                               respect of the operations of the Company in
                                               the second quarter of 1996 (which is
                                               equivalent to an annual dividend of
                                               approximately $.12 per share of common stock
                                               of AT&T ("AT&T Common Stock") outstanding at
                                               the Closing Date). If the Company does not
                                               have sufficient earnings and profits for
                                               federal income tax purposes prior to the
                                               Distribution, dividends paid on the Common
                                               Stock prior to the Distribution would be
                                               treated for federal income tax purposes as
                                               non-taxable return of capital to the extent
                                               of the holder's basis in the Common Stock and
                                               as a capital gain to the extent of any excess
                                               over such basis. See "Dividend Policy."
NYSE Symbol..................................
Rights.......................................  One Right (as defined herein) will be
                                               attached to each share of Common Stock sold
                                               in the Offerings. See "Description of Capital
                                               Stock -- Antitakeover Effects of Certain
                                               Provisions of the Certificate and By-Laws."
</TABLE>
 
---------------
(1) Does not include up to           shares of Common Stock which the U.S.
    Underwriters have the option to purchase solely to cover overallotments. If
    the U.S. Underwriters exercise their overallotment option in full,
              shares of Common Stock will be outstanding after the Offerings.
 
(2) Does not include shares of Common Stock that will be issuable upon exercise
    of employee stock options, (not all of which will be immediately
    exercisable) and other Common Stock-based employee benefit awards that will
    be issued at the time of the Distribution under the Company's 1996 Long Term
    Incentive Plan (the "1996 LTIP") in substitution for AT&T Stock Awards (as
    defined herein). See "Management -- Executive Compensation" and
    "Arrangements Between the Company and AT&T -- Employee Benefits Agreement."
 
                                        6
<PAGE>   10
 
                             SUMMARY FINANCIAL DATA
 
     The following table presents summary selected historical financial data of
the Company. The information set forth below should be read in conjunction with
"Pro Forma Condensed Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements and notes thereto included elsewhere in this Prospectus.
The consolidated statement of operations data set forth below for each of the
three years ended December 31, 1995 and the consolidated balance sheet data at
December 31, 1995 and 1994 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this
Prospectus, and should be read in conjunction with those financial statements
and the notes thereto. The consolidated statement of operations data for each of
the two years ended December 31, 1992 and the consolidated balance sheet data at
December 31, 1993, 1992 and 1991 are derived from unaudited consolidated
financial statements not included in this Prospectus.
 
     The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate, stand-alone entity during the periods covered. Per share
data for net income and dividends have not been presented because the Company's
business was operated through divisions of AT&T for the periods presented. See
"Risk Factors -- Limited Relevance of Historical Financial Information."
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------------
                                                1995       1994       1993       1992       1991
                                              --------   --------   --------   --------   --------
                                                                               (UNAUDITED) (UNAUDITED)
<S>                                           <C>        <C>        <C>        <C>        <C>
                                                                 (IN MILLIONS)
STATEMENT OF OPERATIONS DATA
  Revenues..................................  $ 21,413   $ 19,765   $ 17,734   $ 17,312   $ 16,312
  Costs(1)..................................    12,945     11,337     10,088     10,383      9,385
     Gross margin...........................     8,468      8,428      7,646      6,929      6,927
  Operating expenses
     Selling, general and administrative
       expenses(1)(2).......................     7,083      5,360      5,016      4,814      6,241
     Research and development expenses(1)...     2,385      2,097      1,961      1,711      1,996
  Operating income (loss)...................    (1,000)       971        669        404     (1,310)
  Income (loss) before income taxes and
     cumulative effects of accounting
     changes................................    (1,116)       854        666        302     (1,529)
  Cumulative effects of accounting
     changes................................        --         --     (4,208)        --         --
  Net income (loss)(1)......................      (853)       523     (3,750)       194       (975)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                AT DECEMBER 31,
                                              ----------------------------------------------------
                                                1995       1994       1993       1992       1991
                                              --------   --------   --------   --------   --------
                                                                    (UNAUDITED) (UNAUDITED) (UNAUDITED)
                                                                 (IN MILLIONS)
<S>                                           <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA
  Total assets..............................  $ 19,722   $ 17,340   $ 17,109   $ 14,466   $ 13,855
  Total debt................................     4,014      3,164      3,195      3,942      4,871
  Stockholder's equity......................     1,434      2,476      2,580      3,098      3,827
</TABLE>
 
---------------
(1) 1995 includes pre-tax restructuring and other charges of $2,801 ($1,847
    after taxes) recorded as $892 of costs, $1,645 of selling, general and
    administrative expenses and $264 of research and development expenses. (See
    Note 5 of Notes to Consolidated Financial Statements.)
 
(2) 1991 includes pre-tax restructuring and other charges of $1,006 ($612 after
    taxes).
 
                                        7
<PAGE>   11
 
                SUMMARY PRO FORMA CONDENSED FINANCIAL STATEMENTS
 
     The following unaudited pro forma condensed balance sheet data at December
31, 1995 for the Company give effect to (i) the Offerings, assuming an initial
public offering price of $     per share (the mid-point of the range set forth
on the cover page of this Prospectus), (ii) the retention by AT&T of accounts
receivable having a face amount estimated for pro forma purposes at
approximately $2,000 million and (iii) the prepayment by AT&T of $500 million to
be applied to accounts receivable from AT&T that are due and payable on or after
January 1, 1997 for the purchase of products, licensed materials and services
from the Company (such retention of accounts receivable and prepayment are
referred to herein as the "Related Transactions"). See "Certain Transactions in
Connection with the Offerings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview." The unaudited pro
forma balance sheet data was prepared assuming that the Offerings and the
Related Transactions had occurred on December 31, 1995.
 
     The unaudited pro forma financial data presented below do not purport to
represent what the financial position actually would have been had the Offerings
and the Related Transactions occurred on the date referred to above or to
project the Company's financial position for any future date. The unaudited pro
forma data and adjustments should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
 
     For unaudited pro forma statement of operations purposes no adjustments are
required except to reflect the number of shares of Common Stock to be
outstanding after the Offerings. On a pro forma basis, net loss per share for
the year ended December 31, 1995 would be $       based on           shares of
Common Stock outstanding.
 
<TABLE>
<CAPTION>
                                                                         AT DECEMBER 31, 1995
                                                                --------------------------------------
                                                                             ADJUSTMENTS    PRO FORMA
                                                                HISTORICAL   (UNAUDITED)   (UNAUDITED)
                                                                ----------   -----------   -----------
                                                                            (IN MILLIONS)
<S>                                                             <C>          <C>           <C>
BALANCE SHEET DATA
  Total assets................................................   $  19,722    $   1,400     $  21,122
  Working capital.............................................        (384)       1,400         1,016
  Total debt..................................................       4,014           --         4,014
  Stockholders' equity........................................       1,434          900         2,334
</TABLE>
 
                                        8
<PAGE>   12
 
                                  RISK FACTORS
 
     Purchasers of shares of Common Stock should carefully consider and evaluate
all of the information set forth in this Prospectus, including the risk factors
listed below. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and "Arrangements Between the Company and
AT&T" for a description of other factors generally affecting the Company's
business.
 
RISK OF NONCOMPLETION OF THE DISTRIBUTION
 
     AT&T has announced that, subject to certain conditions, AT&T intends to
distribute to its shareholders by December 31, 1996 all of the Common Stock
owned by AT&T following the Offerings. See "The Company -- Conditions to the
Distribution" and "Arrangements Between the Company and AT&T -- Separation and
Distribution Agreement." No assurance can be given that such conditions will be
satisfied or waived, or that the Distribution will occur. As described herein,
one of AT&T's principal reasons for deciding to effect the Distribution was to
eliminate what AT&T perceived as a growing adverse impact on the Company's
relationship with its customers and potential customers as a result of the
Company's affiliation with AT&T. Although AT&T expects to effect the
Distribution, it is likely that the failure of the Distribution to occur in the
time frame contemplated or at all would materially adversely affect the Company.
See "The Company -- Background of the Separation and Distribution."
 
CONTROL BY AT&T PENDING THE DISTRIBUTION; ONGOING RELATIONSHIP WITH AT&T
 
     Prior to the Distribution, AT&T will control the Company and will continue
to be able to elect the entire Company Board and to determine the outcome of
corporate actions requiring stockholder approval. After the completion of the
Offerings and prior to the Distribution, AT&T will own approximately   % of the
outstanding shares of Common Stock (  % if the U.S. Underwriters exercise their
overallotment option in full). See "Principal Stockholder."
 
     The Company currently has, and after the Offerings and the Distribution
will continue to have, a variety of contractual relationships with AT&T and its
affiliates, including a multi-year purchase agreement, under which AT&T will
remain one of the Company's largest customers. There can be no assurance that
existing and potential customers will not be deterred by the existence of these
relationships or by the historical ties between the Company and AT&T. See
"Arrangements Between the Company and AT&T."
 
SHARES ELIGIBLE FOR FUTURE SALE
 
     The planned Distribution would involve the distribution of an aggregate of
          shares of Common Stock to the shareholders of AT&T by December 31,
1996. Substantially all of such shares would be eligible for immediate resale in
the public market. The Company is unable to predict whether substantial amounts
of Common Stock will be sold in the open market in anticipation of, or
following, the Distribution. Any sales of substantial amounts of Common Stock in
the public market, or the perception that such sales might occur, whether as a
result of the Distribution or otherwise, could materially adversely affect the
market price of the Common Stock. See "Shares Eligible for Future Sale."
 
COMPETITION
 
     The Company currently faces significant competition in its markets and
expects that the level of price and product competition will increase. In
addition, as a result of both the trend toward global expansion by foreign and
domestic competitors and technological and public policy changes, the Company
anticipates that new and different competitors will enter its markets. These
competitors may include entrants from the telecommunications, software and data
networking industries. Existing competitors have, and new competitors may have,
strong financial capability, technological expertise and well-recognized brand
names. Depending on the continuing pace of global expansion by domestic and
foreign competitors, the nature of their product offerings and prices, and the
extent to which they benefit from foreign market subsidies, as well as the new
types of product offerings from companies in other industries and the timing and
circumstances of the entry of these
 
                                        9
<PAGE>   13
 
competitors into the Company's markets, the Company's future revenues and net
income could be materially adversely affected. See "Business."
 
     In addition, the Regional Bell Operating Companies (the "RBOCs")
historically have been prohibited from manufacturing telecommunications
equipment by the terms of the Modification of Final Judgment (the "MFJ") entered
into in connection with the divestiture of the RBOCs by AT&T in 1984. The RBOCs
are major customers of the Company. Legislation passed by the United States
Congress, and currently awaiting signature by the President (the
"Telecommunications Legislation"), contains provisions that would permit the
RBOCs, subject to satisfying certain conditions, to manufacture
telecommunications equipment. It is possible that, assuming the
Telecommunications Legislation is enacted, one or more RBOCs may decide to
manufacture telecommunications equipment, to design and provide
telecommunications software, or to form alliances with other manufacturers. Any
of these developments could result in increased competition for the Company and
reduce the RBOCs' purchases from the Company.
 
DEPENDENCE ON NEW PRODUCT DEVELOPMENT
 
     The markets for the Company's principal products are characterized by
rapidly changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating telecommunications
systems for network operators and business customers. The Company's operating
results will depend to a significant extent on its ability to continue to
introduce new systems, software and services successfully on a timely basis and
to reduce costs of existing systems, software and services. The success of these
and other new offerings is dependent on several factors, including proper
identification of customer needs, cost, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. There can be no assurance that the Company will successfully
identify new product or service opportunities and develop and bring new systems,
software and services to market in a timely manner, or that products or
technologies developed by others will not render the Company's offerings
obsolete or noncompetitive. Any such development could have a material adverse
effect on the Company's future competitive position and results of operations.
In addition, new technological innovations generally require a substantial
investment before any assurance is available as to their commercial viability,
including, in some cases, certification by international and domestic
standards-setting bodies. See "Business." There can be no assurance that any of
the technologies in which the Company is focusing its research and development
investments will achieve broad acceptance in the marketplace, and the lack of
such market acceptance could have a material adverse effect on the Company's
future competitive position and results of operations.
 
     In addition, there can be no assurance that the Company will be able to
attract and retain the highly skilled technical personnel necessary to enable
the Company to develop new products, systems and software successfully.
 
ENVIRONMENTAL MATTERS
 
     The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States, these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities, including assessment and cleanup work, underway at
46 current and former manufacturing, laboratory and recycling facilities to
comply, or to determine compliance, with applicable environmental protection
laws. AT&T and its subsidiaries have been listed as potentially responsible
parties ("PRPs") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes, either by a government agency (which may have either
sought information concerning AT&T's connection to the site, or may have sought
from AT&T participation in site cleanup work or contribution toward the cost of
site cleanup), or by a private party seeking contribution to site cleanup costs.
Under the terms of the Separation and Distribution Agreement (as defined
herein), the Company will assume or indemnify AT&T for all liabilities
associated with these sites. It is often difficult to estimate the future impact
of environmental matters, including potential liabilities. Although the Company
believes that its reserves are adequate, there can be no assurance that the
amount of capital
 
                                       10
<PAGE>   14
 
expenditures and other expenses which will be required to complete remedial
actions and to comply with applicable environmental laws will not exceed the
amounts reflected in the Company's reserves or will not have a material adverse
effect on the financial condition of the Company or on the Company's results of
operations.
 
RISK OF INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
 
     The Company relies on patent, trademark, trade secret and copyright laws
both to protect its proprietary technology and to protect the Company against
claims from others. Although the Company believes that it has direct
intellectual property rights or rights under cross-licensing arrangements
covering substantially all of its material technologies, given the technological
complexity of its systems and products, there can be no assurance that claims of
infringement will not be asserted against the Company or against the Company's
customers in connection with their use of the Company's systems and products,
nor can there be any assurance as to the outcome of any such claims. See
"Arrangements Between the Company and AT&T -- Patent Licenses and Related
Matters" and "-- Technology Licenses and Related Matters."
 
RELIANCE ON MAJOR CUSTOMERS
 
     Historically, the Company has relied on a limited number of customers for a
substantial portion of its total revenues. In terms of total revenues, the
Company's largest customer has been AT&T, although other large customers may
purchase more of any particular system or product line. The contribution of AT&T
to the Company's total revenues and percentage of total revenues for the years
ended December 31, 1995, 1994 and 1993 was $2,119 million (9.9%), $2,137 million
(10.8%) and $1,967 million (11.1%), respectively. Except as set forth in the
General Purchase Agreement and the Supplemental Agreements (each as defined
herein) entered into between the Company and AT&T, following the Offerings AT&T
is not obligated to make any minimum level of future purchases from the Company
or to provide the Company with binding forecasts of product purchases for any
future period. Pursuant to the General Purchase Agreement, AT&T and its
designated affiliates have committed to purchase an aggregate of at least $3,000
million of products, licensed materials and services from the Company during the
three-year period ending December 31, 1998. See "Arrangements Between the
Company and AT&T -- Purchase Agreements."
 
     In addition, sales to approximately ten network operators (including AT&T),
some of which may vary from year to year, constituted approximately 38%, 41% and
42% of total revenues in the years ended December 31, 1995, 1994 and 1993,
respectively. The Company has diversified its customer base in the past several
years and expects this trend to continue. Nevertheless, the Company expects that
a significant portion of its future revenues will continue to be generated by a
limited number of customers. See "Business." The loss of any of these customers
or any substantial reduction in orders by any of these customers could
materially adversely affect the Company's operating results. The United States
government is, in the aggregate, also a large customer of the Company. Given the
current pressures on the government to reduce its overall level of spending,
there can be no assurance that government purchases from the Company will not
decrease in the future.
 
MULTI-YEAR CONTRACTS
 
     The Company has several significant contracts for the sale of
infrastructure systems to network operators which extend over a multi-year
period. In certain cases, these contracts relate to new technologies which may
not have been deployed previously on a large scale commercial basis, and there
can be no assurance that these contracts can be completed on a timely basis, in
accordance with the customer's technical specifications or without significant
cost overruns. Certain of the Company's multi-year contracts also contain
demanding installation and maintenance requirements, in addition to other
performance criteria relating to timing, unit cost requirements and compliance
with government regulations, which, if not satisfied, could subject the Company
to substantial penalties, damages or non-payment, or could result in contract
termination. There can be no assurance of the Company's ability to satisfy these
requirements completely, without losses. In addition, specific terms of such
contracts may cause revenues under these agreements to fluctuate. The Company
expects that multi-year contracts it may enter into in the future may give rise
to similar uncertainties.
 
                                       11
<PAGE>   15
 
SEASONALITY; OUTLOOK FOR FIRST QUARTER OF 1996
 
     The Company's business is highly seasonal, with revenue and net income
concentrated in the fourth quarter of the year. Consequently, during the three
quarters ending in March, June and September, the Company historically has not
been as profitable as in the quarter ending in December, and the Company
traditionally incurs losses in the first quarter. Such seasonality also causes
the Company's cash flow requirements to vary greatly from quarter to quarter.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Variability in the Company's Business." In 1996, the Company
expects that its net income for the first quarter will show a loss and that such
loss may be greater than that for the equivalent period in 1995.
 
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
 
     The Company has never operated as a stand-alone company. After the
Offerings and prior to the Distribution, the Company will continue to be a
subsidiary of AT&T, but will operate as a stand-alone company, and AT&T will
have no obligation to provide assistance to the Company or any of its
subsidiaries except as described in "Arrangements Between the Company and AT&T."
 
     In anticipation of being established as a stand-alone entity, the Company
has reviewed its business and operations and is implementing certain
organizational changes. See "The Company -- Strategic Reorganization." The
Company believes that these changes, when implemented, will have a positive
impact. However, there can be no assurance that this positive impact will be
realized or that these changes will not have an adverse impact on the Company's
future revenues and net income.
 
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
 
     The financial information included herein may not necessarily reflect the
results of operations, financial position and cash flows of the Company in the
future or what the results of operations, financial position and cash flows
would have been had the Company been a separate, stand-alone entity during the
periods presented. The financial information included herein does not reflect
many significant changes that will occur in the funding and operations of the
Company as a result of the Separation and the Offerings. In addition, the
consolidated financial statements of the Company include certain assets,
liabilities, revenues and expenses which were not historically recorded at the
level of, but are associated with, the businesses transferred to the Company.
See "Certain Transactions in Connection with the Offerings," "Pro Forma
Condensed Financial Statements," including the discussion of the assumptions
reflected therein, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
 
CHANGE OF COMPANY BRAND NAME
 
     In connection with the Separation, the Company will, rapidly in the case of
some products and over specified periods of time in the case of other products,
change the trademarks and trade names under which it conducts its business. The
Company believes that its sale of business communications systems to small
businesses and sales of consumer products have benefitted from the use of the
"AT&T" brand name. The impact of the change in trademarks and trade names and
other changes (including, without limitation, restrictions on the use of the
"AT&T" brand name and related trade dress) on the Company's business and
operations cannot be fully predicted. See "Arrangements Between the Company and
AT&T -- Brand License and Related Matters."
 
FUTURE CAPITAL REQUIREMENTS
 
     The Company's working capital requirements and cash flow provided by
operating activities can vary greatly from quarter to quarter, depending on the
volume of production, the timing of deliveries, the build-up of inventories, and
the payment terms offered to customers. In the past, the Company's working
capital needs have been satisfied pursuant to AT&T's corporate-wide cash
management policies. However, AT&T is no longer providing funds to finance the
Company's operations.
 
                                       12
<PAGE>   16
 
     The Company believes that the proceeds of the Offerings, along with the
Working Capital Facility, cash flow from operations and long- and short-term
debt financings, will be sufficient to satisfy its future working capital,
capital expenditure, research and development and debt service requirements,
including debt service requirements on the Commercial Paper Program (as defined
herein). The Company intends to file, prior to the Closing Date, a shelf
registration statement to register the offering of up to $          of long-term
debt. Although the Company believes that it will be able to access the capital
markets on terms and in amounts that will be satisfactory to it, there can be no
assurance that the Company will be successful in this regard. The Company has
not yet been assigned a senior debt rating by any nationally-recognized
statistical rating organization. The historical financial statements of the
Company reflect an interest rate applicable to short-term debt of AT&T. The
Company expects that it will incur long-term debt as well as short-term debt,
and that its cost of capital will be higher than that reflected in the Company's
historical financial statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition, Liquidity
and Capital Resources."
 
     Network operators, domestically and internationally, increasingly have
required their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
The ability of the Company to arrange or provide financing, without AT&T's
support, will depend on a number of factors, including the Company's capital
structure and level of available credit. There can be no assurance that the
Company will be able to continue to arrange or provide such financing following
the Offerings on terms and conditions, and in amounts, that will be satisfactory
to such network operators. Any such inability of the Company to arrange or
provide financing in accordance with its past practices could have a material
adverse effect on the Company's financial condition and results of operations.
 
RISK OF INTERNATIONAL GROWTH AND FOREIGN EXCHANGE
 
     The Company intends to continue to pursue growth opportunities in
international markets. In many international markets, long-standing
relationships between potential customers of the Company and their local
providers, and protective regulations, including local content requirements and
type approvals, create barriers to entry. In addition, pursuit of such
international growth opportunities may require significant investments for an
extended period before returns on such investments, if any, are realized. Such
projects and investments could be adversely affected by reversals or delays in
the opening of foreign markets to new competitors, exchange controls, currency
fluctuations, investment policies, repatriation of cash, nationalization, social
and political risks, taxation, and other factors, depending on the country in
which such opportunity arises. In addition, the laws and policies of the United
States affecting foreign trade, investment and taxation could also adversely
affect such projects and investments. There can be no assurance that the Company
will be able to overcome these barriers.
 
     A significant change in the value of the dollar against the currency of one
or more countries where the Company recognizes substantial revenue or earnings
may materially adversely affect the Company's results. The Company attempts to
mitigate any such effects through the use of foreign currency contracts,
although there can be no assurances that such attempts will be successful.
 
CERTAIN ANTITAKEOVER EFFECTS
 
     The Restated Certificate of Incorporation of the Company (the
"Certificate") and the By-Laws of the Company (the "By-Laws"), the Rights, and
applicable provisions of the Delaware General Corporation Law (the "DGCL"),
contain several provisions that may make more difficult the acquisition of
control of the Company without the approval of the Company Board. Certain
provisions of the Certificate and the By-Laws, among other things, (i) classify
the Company Board into three classes, each of which (after an initial transition
period) will serve for staggered three-year periods; (ii) provide that a
director of the Company may be removed by the stockholders only for cause; (iii)
provide that only the Company Board or the Chairman of the Board of the Company
may call special meetings of the stockholders; (iv) provide that the
stockholders may take action only at a meeting of the stockholders; (v) provide
that stockholders must comply with certain advance notice procedures in order to
nominate candidates for election to the Company Board or to place stockholders'
proposals on the agenda for consideration at meetings of the stockholders; and
(vi) provide that
 
                                       13
<PAGE>   17
 
the stockholders may amend or repeal any of the foregoing provisions of the
Certificate or the By-Laws only by a vote of 80% of the stock entitled to vote
generally in the election of directors (the "Voting Stock"). The Rights would
cause substantial dilution to a person or group that attempts to acquire the
Company on terms not approved in advance by the Company Board. With certain
exceptions, Section 203 of the DGCL ("Section 203") imposes certain restrictions
on mergers and other business combinations between the Company and any holder of
15% or more of the Common Stock. Some of the provisions described above do not
apply to, or otherwise contain exceptions for, AT&T as long as AT&T beneficially
owns a majority of the Common Stock. See "Description of Capital
Stock -- Antitakeover Effects of Certain Provisions of the Certificate and
By-Laws" and " -- Delaware Business Combination Statute."
 
ABSENCE OF A PUBLIC MARKET FOR THE COMMON STOCK
 
     Prior to the Offerings, there has been no public market for the Common
Stock. Although the Company intends to file an application to list the Common
Stock on The New York Stock Exchange, Inc. (the "NYSE"), there can be no
assurance that an active public market for the Common Stock will develop or that
the price at which the Common Stock will trade will not be lower than the
initial public offering price. The initial public offering price will be
determined through negotiations between the Company and the Underwriters. See
"Underwriting."
 
                                       14
<PAGE>   18
 
                                  THE COMPANY
 
     The Company is one of the world's leading designers, developers and
manufacturers of telecommunications systems, software and products. The Company
is a global market leader in the sale of public telecommunications systems, and
is a supplier of systems or software to 23 of the world's 25 largest network
operators. The Company is also a global market leader in the sale of business
communications systems and in the sale of microelectronic components for
communications applications to manufacturers of communications systems and
computers. Further, the Company is the largest supplier in the United States of
telecommunications products for consumers. In addition, the Company has provided
engineering, installation, maintenance or operations support services to over
250 network operators in 75 countries, over 1.4 million business locations in
the United States and approximately 100,000 business locations in over 90 other
countries. The Company's research and development activities are conducted
through Bell Labs, one of the world's foremost industrial research and
development organizations.
 
     The Company's revenues of $21.4 billion for the year ended December 31,
1995 were generated from the sale of systems for network operators (54% of total
revenues), business communications systems (24%), microelectronic products (9%),
consumer products (8%) and other systems and products, including integrated
systems for the United States government (5%). In 1995, approximately 77% of the
Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports).
 
     The Company was incorporated in Delaware in November 1995. The Company has
its principal executive offices at 600 Mountain Avenue, Murray Hill, New Jersey
07974. Its telephone number at such offices is (908) 582-8500.
 
BACKGROUND OF THE SEPARATION AND DISTRIBUTION
 
     The Company is a wholly owned subsidiary of AT&T. Historically, AT&T has
viewed its strategy of vertical integration, combining communications equipment,
communications services and other businesses, as a source of strength in
addressing the challenges and opportunities presented by the environment in
which it has done business. However, changes in customer needs and demands,
public policy and technology are creating a new industry structure in which,
increasingly, the advantages of this vertical integration strategy are
outweighed by its costs and disadvantages. As a result of the industry
restructuring over the past decade, new actual and potential competitors of AT&T
have been created by the growth of companies formerly affiliated with AT&T and
by the expansion of other domestic and international companies, both
geographically and in terms of scope of services provided. These changes have
resulted in a situation in which many of the actual and potential customers of
the Company are or will be competitors of AT&T's communications services
business. As a result, the obstacles currently faced by the Company in marketing
its products to competitors and potential competitors of AT&T's communications
services business have become severe and are expected to continue to intensify.
For these reasons, AT&T has announced that, subject to certain conditions, AT&T
intends to distribute to its shareholders by December 31, 1996 all of the Common
Stock owned by AT&T after the Offerings. See "Risk Factors -- Risk of
Noncompletion of the Distribution."
 
     After the completion of the Offerings and prior to the Distribution, AT&T
will own approximately      % of the outstanding shares of Common Stock (     %
if the U.S. Underwriters exercise their overallotment option in full). The
Company and AT&T have entered into certain agreements providing for the
Separation and the provision by AT&T of certain interim services to the Company.
See "Arrangements Between the Company and AT&T."
 
CONDITIONS TO THE DISTRIBUTION
 
     The Distribution is subject to the satisfaction, or waiver by the Board of
Directors of AT&T (the "AT&T Board"), in its sole discretion, of the following
conditions: (i) a private letter ruling from the Internal Revenue Service (the
"IRS") shall have been obtained, and shall continue in effect, to the effect
that, among other things, the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the transfer to the Company
of assets and the assumption by the Company of liabilities in connection with
the Separation will not result in
 
                                       15
<PAGE>   19
 
recognition of any gain or loss for federal income tax purposes to AT&T, the
Company or AT&T's or the Company's shareholders, and such ruling shall be in
form and substance satisfactory to AT&T, in its sole discretion; (ii) any
material Governmental Approvals and Consents (as such terms are defined in the
Separation and Distribution Agreement) necessary to consummate the Distribution
shall have been obtained and shall be in full force and effect; (iii) no order,
injunction or decree issued by any court or agency of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of the
Distribution shall be in effect, and no other event outside the control of AT&T
shall have occurred or failed to occur that prevents the consummation of the
Distribution; and (iv) no other events or developments shall have occurred
subsequent to the Closing Date that, in the judgment of the AT&T Board, would
result in the Distribution having a material adverse effect on AT&T or on the
shareholders of AT&T. The AT&T Board will have the sole discretion to determine
the date of consummation of the Distribution (the "Distribution Date") at any
time after the Closing Date and on or prior to December 31, 1996. AT&T has
agreed to consummate the Distribution no later than December 31, 1996, subject
to the satisfaction, or waiver by the AT&T Board, in its sole discretion, of the
conditions set forth above. In the event that any such condition shall not have
been satisfied or waived on or before December 31, 1996, AT&T has agreed to
consummate the Distribution as promptly as practicable following the
satisfaction or waiver of all such conditions. AT&T may terminate the obligation
to consummate the Distribution if the Distribution has not occurred by December
31, 1997. See "Risk Factors -- Risk of Noncompletion of the Distribution" and
"Arrangements Between the Company and AT&T -- Separation and Distribution
Agreement."
 
STRATEGIC REORGANIZATION
 
     The Company historically has operated as part of AT&T. The Separation will
establish the Company as a stand-alone entity with objectives separate from
those of AT&T. The Company intends to focus its resources and management
emphasis on the technologies and markets it views as critical to its long-term
success as a stand-alone entity. The Company therefore has undertaken a
comprehensive review of all of its operations, including its organizational
structure, products and markets, with a view toward maximizing its return on
investments. In connection with this review, the Company adopted a strategic
reorganization plan and recorded a pre-tax restructuring charge of $2,613
million in the fourth quarter of 1995. In addition, in the fourth quarter of
1995, the Company recorded a charge of $188 million for asset impairments and
other items.
 
     As part of these efforts, and as announced January 2, 1996, the Company
will eliminate approximately 22,000 positions, of which approximately 11,000 are
management positions and 11,000 occupational positions. Approximately 1,000
additional management employees are employed by businesses that the Company has
announced plans to sell. As of December 31, 1995, approximately 4,100 management
employees have accepted a voluntary severance package, the majority of whom will
leave the Company in early 1996. The Company expects approximately 70% of all
separations to be completed by the end of 1996 and the majority of the remaining
separations to be completed during 1997. These reductions are the result of the
Company's decisions to form a single corporate structure that eliminated
duplicative management and streamlined administrative functions, and to
outsource certain corporate functions.
 
     The Company's reorganization efforts also include a plan to close all of
the Company's 338 retail stores (the "Phone Center Stores"), most of which are
expected to be closed by May 1996. In addition, the Company plans to consolidate
certain international facilities and redeploy internationally certain sales
support functions for international customers that previously were performed in
the United States. In conjunction with these work force reduction and
consolidation efforts, the Company intends to reduce its leased space from
approximately 19 million square feet to approximately 14 million square feet and
to reduce its owned space from approximately 37 million square feet to
approximately 28 million square feet.
 
     As part of the redefinition of its objectives, the Company intends to focus
its investments on its core technologies, primarily through expanded and
targeted research and development efforts. Consequently, the Company has decided
to sell and exit tangential product lines and markets, including the
manufacturing of certain data communications equipment, backplanes and printed
circuit boards. In 1995, revenues associated with operations that the Company
has exited or expects to exit in connection with these reorganization efforts
 
                                       16
<PAGE>   20
 
accounted for approximately 4.6% of the Company's total revenues. Where
appropriate, the Company will pursue core technologies through strategic
acquisitions, partnerships or joint ventures. For example, the Company has
entered into an agreement to acquire, subject to specified conditions, certain
telecommunications assets of certain of Philips Electronics N.V.'s ("Philips")
subsidiaries, primarily in France and Germany (the "Philips Businesses"). This
acquisition is designed to permit the Company to expand its global line of
systems which support non-United States standards for mobile and fixed wireless
access and digital optical transport.
 
     Finally, in addition to seeking to control expenses, the Company is
instituting processes designed to reduce the costs and time required to develop
and bring to market new systems, software and products. The Company intends to
create product realization centers at which it will locate Bell Labs developers
with product managers and manufacturing teams. The Company's development efforts
will be oriented toward scaleable and reusable software and microelectronic
technologies that it intends to incorporate into products addressing multiple
marketplaces.
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the Offerings are estimated to be
approximately $     million ($       million if the U.S. Underwriters exercise
their overallotment option in full) after deducting estimated underwriting
discounts and commissions and offering expenses, assuming an initial public
offering price of $     per share, the mid-point of the range set forth on the
cover page of this Prospectus. Such proceeds will be used to repay approximately
$     million of indebtedness under the Working Capital Facility and for general
corporate purposes.
 
                                DIVIDEND POLICY
 
     It is anticipated that, following the Offerings, the Company initially will
declare and pay cash dividends at the quarterly rate of $     per share of
Common Stock, beginning with a dividend payable in the third quarter of 1996; in
respect of the operations of the Company in the second quarter of 1996 (which is
equivalent to an annual dividend of approximately $.12 per share of AT&T Common
Stock outstanding at the Closing Date). The declaration of dividends by the
Company and the amount thereof will, however, be in the discretion of the
Company Board and will depend upon the Company's results of operations,
financial condition, cash requirements, future prospects and other factors
deemed relevant by the Company Board.
 
     There is no assurance that the Company will have earnings and profits for
federal income tax purposes until the Distribution. To the extent the Company
does not have sufficient earnings and profits, dividends paid on the Common
Stock prior to the Distribution would be treated for federal income tax purposes
as a non-taxable return of capital to the extent of the holder's basis in the
Common Stock and as a capital gain to the extent of any excess over such basis.
Dividends paid to corporate holders that are treated as return of capital or
capital gains would not qualify for the intercorporate dividends-received
deduction. See "Risk Factors -- Risk of Noncompletion of the Distribution."
 
                                       17
<PAGE>   21
 
             CERTAIN TRANSACTIONS IN CONNECTION WITH THE OFFERINGS
 
     The Company is currently a wholly owned subsidiary of AT&T. Prior to
February 1, 1996, AT&T conducted the Company's businesses through various
divisions and subsidiaries. Beginning February 1, 1996, AT&T began effectuating
the Separation by transferring to the Company the assets and liabilities related
to such businesses, except that AT&T is retaining accounts receivable having a
face amount estimated for pro forma purposes at approximately $2,000 million.
The Company believes that the Separation will be substantially completed,
including the transfer of substantially all of such assets and liabilities, by
the Closing Date. To the extent certain transfers will not be accomplished until
after the Offerings or the Distribution, the Company and AT&T have agreed on the
timing and terms of such transfers. See "Arrangements Between the Company and
AT&T -- Separation and Distribution Agreement" and "-- Employee Benefits
Agreement." The Separation and the transactions being undertaken in connection
therewith, including the Offerings and the Distribution, are being effected
pursuant to a Separation and Distribution Agreement, dated as of February 1,
1996, by and among the Company, AT&T and NCR (the "Separation and Distribution
Agreement"). AT&T has announced that, subject to certain conditions, AT&T
intends to distribute to its shareholders by December 31, 1996 all of the Common
Stock of the Company owned by AT&T following the Offerings. See "Arrangements
Between the Company and AT&T -- Separation and Distribution Agreement."
 
     In addition, as contemplated by the Separation and Distribution Agreement,
the Company, AT&T and, in certain cases, NCR have entered into or will, on or
prior to the Closing Date, enter into certain ancillary agreements which govern
various interim and ongoing relationships between and among the three companies
(the "Ancillary Agreements"). The Ancillary Agreements include agreements with
respect to employee benefit arrangements, intellectual property arrangements,
the provision of interim services, tax sharing and various commercial
arrangements, including the sale of equipment by the Company to AT&T. Pursuant
to the General Purchase Agreement, AT&T and its designated affiliates have
committed to purchase an aggregate of at least $3,000 million of products,
licensed materials and services from the Company during the three-year period
ending December 31, 1998. AT&T has also agreed to prepay $500 million to the
Company, on or prior to the Closing Date, to be applied to accounts receivable
from AT&T that are due and payable on or after January 1, 1997 for the purchase
of products, licensed materials and services from the Company. See "Arrangements
Between the Company and AT&T."
 
     As reflected in the audited consolidated balance sheets for the Company at
December 31, 1995 and 1994, the Company has had limited direct third-party
indebtedness and historically has relied on internally generated funds and funds
provided by AT&T to finance its operations. However, AT&T is no longer providing
funds to finance the Company's operations. The Company has entered into a
Competitive Advance and Revolving Credit Facility Agreement, dated as of
February 1, 1996, with Chemical Bank, as Agent (the "Initial Working Capital
Facility"), pursuant to which the Company may borrow up to $1,000 million,
subject to the terms and conditions thereof. Prior to the Offerings, the Company
expects to enter into a credit agreement pursuant to which the Company may
borrow up to $3,000 million, subject to the terms and conditions thereof, which
would replace the Initial Working Capital Facility (the "Working Capital
Facility"). The Company expects to repay all or a portion of the amounts drawn
under the Working Capital Facility with a portion of the proceeds of the
Offerings. In addition, prior to the Closing Date, AT&T intends to issue up to
$4,000 million of short-term debt under a commercial paper facility (the
"Commercial Paper Program") which will be assumed by the Company, subject to
certain conditions, at the Closing Date. It is contemplated that AT&T will
retain as of the Closing Date the proceeds of all borrowings under the
Commercial Paper Program and that AT&T will be released from all of its
obligations thereunder, with the result that the Company will become the obligor
thereunder. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview." The Commercial Paper Program will be
supported by a back-up credit facility with third-party financial institutions.
 
     In deciding upon the initial capitalization of the Company, a number of
factors were considered, including the Company's pro forma debt to capital
ratio, the Company's prospective financing requirements, the Company's desired
credit rating, the Company's working capital and capital expenditure
requirements and the Company's need to procure bid and performance bonds, to
arrange or provide customer financing, to
 
                                       18
<PAGE>   22
 
engage in hedging transactions and to attain required self-insurance levels. The
Company believes that the proceeds of the Offerings, as well as the Working
Capital Facility, cash flow from operations and short- and long-term debt
financings, will be sufficient to satisfy its future working capital, capital
expenditure, research and development and debt service requirements, including
debt service requirements on the Commercial Paper Program. The Company also
believes that it will be able to procure bid and performance bonds, to arrange
or provide customer financing as necessary, and to engage in hedging
transactions, on commercially acceptable terms. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition, Liquidity and Capital Resources" and "Risk Factors -- Future Capital
Requirements."
 
                                       19
<PAGE>   23
 
                                 CAPITALIZATION
 
     Set forth below is the historical capitalization of the Company at December
31, 1995 and on a pro forma basis to give effect to the Offerings (assuming an
initial public offering price of $          per share, the mid-point of the
range set forth on the cover page of this Prospectus) and the Related
Transactions. The unaudited pro forma balance sheet set forth below should be
read in conjunction with the unaudited pro forma condensed financial statements
of the Company and the historical financial statements of the Company appearing
elsewhere in this Prospectus. For an explanation of the adjustments made in
order to derive the unaudited pro forma information below, see "Certain
Transactions in Connection with the Offerings" and "Pro Forma Condensed
Financial Statements."
 
<TABLE>
<CAPTION>
                                                                       AT DECEMBER 31, 1995
                                                                    ---------------------------
                                                                                      PRO FORMA
                                                                    HISTORICAL        (UNAUDITED)
                                                                    -----------       ---------
                                                                           (IN MILLIONS)
<S>                                                                 <C>               <C>
SHORT-TERM DEBT:
  Debt maturing within one year...................................    $    49          $    49
  Debt sharing amount in anticipation of assumption of the
     Commercial Paper Program.....................................      3,842            3,842
                                                                     --------         ------- -
          Total short-term debt...................................    $ 3,891          $ 3,891
                                                                     ========         ========
LONG-TERM DEBT (INCLUDING CAPITAL LEASES).........................    $   123          $   123
STOCKHOLDER'S EQUITY..............................................      1,434            2,334
                                                                     --------         ------- -
TOTAL CAPITALIZATION..............................................    $ 1,557          $ 2,457
                                                                     ========         ========
</TABLE>
 
                                       20
<PAGE>   24
 
                            SELECTED FINANCIAL DATA
 
     The following table presents selected historical financial data of the
Company. The information set forth below should be read in conjunction with "Pro
Forma Condensed Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements and notes thereto included elsewhere in this Prospectus. The
consolidated statement of operations data set forth below for each of the three
years ended December 31, 1995 and the consolidated balance sheet data at
December 31, 1995 and 1994 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this
Prospectus, and should be read in conjunction with those financial statements
and the notes thereto. The consolidated statement of operations data for each of
the two years ended December 31, 1992 and the consolidated balance sheet data at
December 31, 1993, 1992 and 1991 are derived from unaudited consolidated
financial statements not included in this Prospectus.
 
     The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate, stand-alone entity during the periods covered. Per share
data for net income and dividends have not been presented because the Company's
businesses were operated through various divisions and subsidiaries of AT&T for
the periods presented. See "Risk Factors -- Limited Relevance of Historical
Financial Information."
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                            -------------------------------------------------------------
                                              1995       1994        1993          1992          1991
                                            --------   --------   -----------   -----------   -----------
                                                                                (UNAUDITED)   (UNAUDITED)
                                                                    (IN MILLIONS)
<S>                                         <C>        <C>        <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA
  Revenues................................  $ 21,413   $ 19,765    $   17,734    $  17,312     $  16,312
  Costs(1)................................    12,945     11,337        10,088       10,383         9,385
     Gross margin.........................     8,468      8,428         7,646        6,929         6,927
  Operating expenses
     Selling, general and administrative
       expenses(1)(2).....................     7,083      5,360         5,016        4,814         6,241
     Research and development
       expenses(1)........................     2,385      2,097         1,961        1,711         1,996
  Operating income (loss).................    (1,000)       971           669          404        (1,310)
  Income (loss) before income taxes and
     cumulative effects of accounting
     changes..............................    (1,116)       854           666          302        (1,529)
  Cumulative effects of accounting
     changes..............................        --         --        (4,208)          --            --
  Net income (loss)(1)....................      (853)       523        (3,750)         194          (975)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                   AT DECEMBER 31,
                                            -------------------------------------------------------------
                                              1995       1994        1993          1992          1991
                                            --------   --------   -----------   -----------   -----------
                                                                     (UNAUDITED)(UNAUDITED)   (UNAUDITED)
                                                                    (IN MILLIONS)
<S>                                         <C>        <C>        <C>           <C>           <C>
BALANCE SHEET DATA
  Total assets............................  $ 19,722   $ 17,340    $   17,109    $  14,466     $  13,855
  Total debt..............................     4,014      3,164         3,195        3,942         4,871
  Stockholder's equity....................     1,434      2,476         2,580        3,098         3,827
</TABLE>
 
---------------
(1) 1995 includes pre-tax restructuring and other charges of $2,801 ($1,847
    after taxes) recorded as $892 of costs, $1,645 of selling, general and
    administrative expenses and $264 of research and development expenses. (See
    Note 5 of Notes to Consolidated Financial Statements).
 
(2) 1991 includes pre-tax restructuring and other charges of $1,006 ($612 after
    taxes).
 
                                       21
<PAGE>   25
 
                    PRO FORMA CONDENSED FINANCIAL STATEMENTS
 
     The unaudited pro forma condensed balance sheet at December 31, 1995, set
forth below, has been prepared assuming that the Offerings and the Related
Transactions occurred on such date. THE UNAUDITED PRO FORMA BALANCE SHEET
PRESENTED BELOW DOES NOT PURPORT TO REPRESENT WHAT THE COMPANY'S FINANCIAL
POSITION ACTUALLY WOULD HAVE BEEN HAD THE OFFERINGS AND THE RELATED TRANSACTIONS
OCCURRED ON THE DATE INDICATED OR TO PROJECT THE COMPANY'S FINANCIAL POSITION
FOR ANY FUTURE DATE. The unaudited pro forma adjustments are based upon
available information and certain assumptions that the Company believes are
reasonable. The unaudited pro forma balance sheet should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the historical financial statements of the Company and the
notes thereto appearing elsewhere in this Prospectus.
 
     For unaudited pro forma statement of operations purposes, no adjustments
are required except to reflect the number of shares of Common Stock outstanding
after the Offerings. On a pro forma basis net loss per share for the year ended
December 31, 1995 would be $          based on           shares of Common Stock
outstanding.
 
<TABLE>
<CAPTION>
                                                                      AT DECEMBER 31, 1995
                                                          ---------------------------------------------
                                                                          ADJUSTMENTS        PRO FORMA
                                                          HISTORICAL      (UNAUDITED)       (UNAUDITED)
                                                          ----------     --------------     -----------
                                                                          (IN MILLIONS)
<S>                                                       <C>            <C>                <C>
ASSETS
Cash and cash equivalents...............................   $    448         $  3,400(1)(2)    $ 3,848
Accounts receivable -- net..............................      5,354           (2,000)(3)        3,354
Inventories.............................................      3,222                             3,222
Deferred income taxes -- net............................      1,482                             1,482
Other current assets....................................        173                               173
                                                          ----------     --------------     -----------
     Total current assets...............................     10,679            1,400           12,079
Property, plant and equipment -- net....................      4,338                             4,338
Prepaid pension costs...................................      2,522                             2,522
Deferred income taxes -- net............................        872                               872
Capitalized software....................................        387                               387
Other assets............................................        924                               924
                                                          ----------     --------------     -----------
     Total assets.......................................   $ 19,722         $  1,400          $21,122
                                                            =======      ===========        =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................   $  1,229         $                 $ 1,229
Payroll and benefit-related liabilities.................      3,026                             3,026
Postretirement and postemployment benefit liabilities...        227                               227
Debt sharing amount in anticipation of assumption of the
  Commercial Paper Program(4)...........................      3,842                             3,842
Debt maturing within one year...........................         49                                49
Other current liabilities...............................      2,690                             2,690
                                                          ----------                        -----------
  Total current liabilities.............................     11,063                            11,063
Postretirement and postemployment benefit liabilities...      5,569                             5,569
Long-term debt..........................................        123                               123
Other liabilities.......................................      1,533              500(2)         2,033
                                                          ----------     --------------     -----------
  Total liabilities.....................................     18,288              500           18,788
Total stockholders' equity..............................      1,434              900(1)(3)      2,334
                                                          ----------     --------------     -----------
          Total liabilities and stockholders' equity....   $ 19,722         $  1,400          $21,122
                                                            =======      ===========        =========
</TABLE>
 
---------------
(1) Reflects the sale of             shares in the Offerings assuming a purchase
    price of $       per share (the mid-point of the range set forth on the
    cover page of this Prospectus). As set forth under "Use of Proceeds," the
    Company expects to use the proceeds of the Offerings to repay approximately
    $           million of indebtedness under the Working Capital Facility and 
    for general corporate purposes.
 
(2) Gives effect to the prepayment by AT&T of $500 to be applied to accounts
    receivable from AT&T that are due and payable on or after January 1, 1997
    for the purchase of products, licensed materials and services from the
    Company.
 
(3) Reflects the retention by AT&T of customer accounts receivable having a face
    amount estimated for pro forma purposes at approximately $2,000.
 
(4) See "Certain Transactions in Connection with the Offerings."
 
                                       22
<PAGE>   26
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     The Company is currently a wholly owned subsidiary of AT&T. Prior to
February 1, 1996, AT&T conducted the Company's businesses through various
divisions and subsidiaries. Beginning February 1, 1996, AT&T began effectuating
the Separation by transferring to the Company the assets and liabilities related
to such businesses, except that AT&T is retaining accounts receivable having a
face amount estimated for pro forma purposes at approximately $2,000 million.
The Company believes that the Separation will be substantially completed,
including the transfer of substantially all of such assets and liabilities, by
the Closing Date. To the extent certain transfers cannot be accomplished until
after the Offerings or the Distribution, the Company and AT&T have agreed on the
timing and terms of such transfers. See "Arrangements Between the Company and
AT&T -- Separation and Distribution Agreement" and "-- Employee Benefits
Agreement." The Separation and the transactions being undertaken in connection
therewith, including the Offerings and the Distribution, are being effected
pursuant to the Separation and Distribution Agreement. AT&T has announced that,
subject to certain conditions, AT&T intends to distribute to its shareholders by
December 31, 1996 all of the Common Stock of the Company owned by AT&T following
the Offerings. See "Arrangements Between the Company and AT&T -- Separation and
Distribution Agreement."
 
     After the completion of the Offerings and prior to the Distribution, AT&T
will own approximately      % of the outstanding shares of Common Stock (     %
if the U.S. Underwriters exercise their overallotment option in full). The
Company and AT&T and, in certain cases, NCR have entered into or will, on or
prior to the Closing Date, enter into certain agreements providing for the
Separation and governing various interim and ongoing relationships between and
among the three companies, including an agreement between the Company and AT&T
providing for the purchase of products, licensed materials and services from the
Company. See "Arrangements Between the Company and AT&T."
 
     The consolidated financial statements of the Company, which are discussed
below, reflect the results of operations, financial position and cash flows of
the businesses transferred to the Company from AT&T in the Separation. As a
result, the consolidated financial statements of the Company have been carved
out from the financial statements of AT&T using the historical results of
operations and historical basis of the assets and liabilities of such
businesses. Additionally, the consolidated financial statements of the Company
include certain assets, liabilities, revenues and expenses which were not
historically recorded at the level of, but are primarily associated with, such
businesses. Management believes the assumptions underlying the Company's
financial statements to be reasonable.
 
     The financial information included herein, however, may not necessarily
reflect the results of operations, financial position and cash flows of the
Company in the future or what the results of operations, financial position and
cash flows would have been had the Company been a separate, stand-alone entity
during the periods presented. This is due to the historical operation of the
Company as part of the larger AT&T enterprise. The financial information
included herein does not reflect the many significant changes that will occur in
the funding and operations of the Company as a result of the Separation and the
Offerings.
 
     As set forth in the financial information included herein, interest expense
reflects interest associated with the aggregate borrowings for each period
presented primarily using AT&T's average commercial paper rates. In the future,
the Company expects to have a combination of long-term and short-term debt and,
accordingly, expects that interest expenses will be higher than those
historically reflected. General corporate overhead related to AT&T's corporate
headquarters and common support divisions has been allocated to the Company
based on the ratio of the Company's external costs and expenses to AT&T's
external costs and expenses. This allocation of AT&T's general corporate
overhead expense may not reflect the Company's actual general corporate overhead
expense as a separate entity. Also, certain expenses incurred by the Company
were for services received from AT&T under direct contracting arrangements.
Although management believes the allocations and the charges for such services
to be reasonable, the costs of these services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the Company
had been
 
                                       23
<PAGE>   27
 
an independent entity and had otherwise contracted for or managed these
functions. Subsequent to the Separation, the Company will manage these functions
using its own resources or contract with third parties to perform these services
and, in addition, will be responsible for the costs and expenses associated with
the management of a public corporation. In addition, income taxes were
calculated as if the Company filed separate tax returns. However, AT&T was
managing its tax position for the benefit of its entire portfolio of businesses,
and its tax strategies are not necessarily reflective of the tax strategies that
the Company would have followed or will follow as a stand-alone entity.
 
     Prior to the Separation, the businesses transferred to the Company were
funded through AT&T and the Company had limited indebtedness to third parties.
The Company plans to assume, as of the Closing Date, approximately $4,000
million of direct short-term debt under the Commercial Paper Program. To the
extent that the aggregate amount of indebtedness of the Company shown in the
consolidated financial statements exceeds the direct third-party indebtedness of
the businesses transferred to the Company, such amount is reflected in the
consolidated financial statements as debt and shown as "Debt sharing amount in
anticipation of assumption of the Commercial Paper Program." This debt is
classified as short-term debt, consistent with the expectation that the Company
will assume, at the Closing Date, the commercial paper issued under the
Commercial Paper Program.
 
STRATEGIC REORGANIZATION
 
     The Company historically has operated as part of AT&T. The Separation will
establish the Company as a stand-alone entity with objectives separate from
those of AT&T. The Company intends to focus its resources on the technologies
and markets it views as critical to its long-term success as a stand-alone
entity. The Company therefore has undertaken a comprehensive review of all of
its operations, including its organizational structure, products and markets,
with a view toward maximizing its return on investments. In connection with this
review, the Company adopted a strategic reorganization plan and recorded a
pre-tax restructuring charge of $2,613 million in the fourth quarter of 1995, in
addition to charges of $188 million for asset impairments and other items.
 
     The total restructuring and other charges of $2,801 million ($1,847 million
after taxes) for 1995 was recorded as $892 million of costs, $1,645 million of
selling, general and administrative expenses, and $264 million of research and
development expenses. The charges included $1,509 million for employee
separation and other related items, $627 million for asset write-downs, $202
million for closing, selling and consolidating facilities and $463 million for
other items. Of the total charges, $1,788 million will result in future cash
payments and $1,013 million of the charges related to noncash items.
 
     As part of these efforts, and as announced January 2, 1996, the Company
will eliminate approximately 22,000 positions, of which approximately 11,000 are
management positions and 11,000 are occupational positions. Approximately 1,000
additional management employees are employed by operations that the Company has
announced plans to sell. As of December 31, 1995, approximately 4,100 management
employees have accepted a voluntary severance package, the majority of whom will
leave the Company in early 1996. The Company expects approximately 70% of all
separations to be completed by the end of 1996 and the majority of the remaining
separations to be completed during 1997. These reductions are the result of the
Company's decisions to form a single corporate structure that eliminates
duplicative management and streamlines administrative functions, and to
outsource certain corporate functions.
 
     The Company's reorganization efforts also include a plan to close all of
the Company's 338 Phone Center Stores, most of which are expected to be closed
by May 1996, and to distribute its consumer products only through national,
regional and catalog retailers and network operators. In addition, the Company
plans to consolidate certain international facilities and redeploy
internationally certain sales support functions for international customers that
were previously performed in the United States.
 
     As part of the redefinition of its objectives, the Company intends to focus
its investments on its core technologies, primarily through expanded and
targeted research and development efforts. Consequently, the Company has decided
to sell and exit tangential product lines and markets, including its Paradyne
subsidiary which manufactures certain data communications equipment, and its
microelectronics interconnect products
 
                                       24
<PAGE>   28
 
business which manufactures backplanes and printed circuit boards. In 1995,
revenues associated with operations that the Company has exited or expects to
exit in connection with these reorganization efforts accounted for approximately
4.6% of the Company's total revenues. When appropriate, the Company will pursue
core technologies through strategic acquisitions, partnerships or joint
ventures. For example, the Company has entered into an agreement to acquire,
subject to specified conditions, certain telecommunications assets of the
Philips Businesses. This acquisition is designed to permit the Company to expand
its global line of systems which support non-United States standards for mobile
and fixed wireless access and digital optical transport.
 
     The restructuring charges also included costs associated with early
termination of building leases, the closing, sale or consolidation of certain
owned facilities and asset write-downs as part of the plan to sell certain
businesses and to restructure certain operations.
 
VARIABILITY IN THE COMPANY'S BUSINESS
 
     There are a number of factors that contribute to variability in the
Company's business. This variability can produce wide fluctuations in revenues
and earnings quarter to quarter, and in some cases year to year. Variability is
not a new trend and the Company expects it to continue, and possibly intensify.
Notwithstanding this variability, the Company has increased both revenues and
earnings (absent restructuring and other charges). The factors contributing to
variability include seasonality, multi-year contracts and associated revenue
recognition.
 
  Seasonality
 
     The following table sets forth the unaudited total revenues, gross margin
and net income of the Company on a quarterly basis for each of the two years
ended December 31, 1995:
 
<TABLE>
<CAPTION>
                                        FIRST      SECOND     THIRD      FOURTH         TOTAL
                                        ------     ------     ------     -------       -------
                                                            (IN MILLIONS)
    <S>                                 <C>        <C>        <C>        <C>           <C>
    1995
    Total revenues....................  $4,159     $5,083     $4,744     $ 7,427       $21,413
    Gross margin......................   1,850      2,251      2,042       2,325(1)      8,468(1)
    Net income (loss).................     (18)       163         17      (1,015)(2)      (853)(2)
    1994
    Total revenues....................   4,052      4,665      4,776       6,272        19,765
    Gross margin......................   1,740      2,028      2,006       2,654         8,428
    Net income (loss).................     (29)        90         53         409           523
</TABLE>
 
---------------
(1) Includes restructuring charges of $892 of costs.
 
(2) Includes restructuring and other charges of $2,801 ($1,847 after taxes).
 
     Like most telecommunications systems manufacturers, the Company's sales are
highly seasonal. Most of the Company's large customers delay a large and growing
percentage of their capital expenditures until the fourth quarter due to
cautious capital spending against budgets, while still seeking year-end tax
benefits. A focus on project completion by year-end also supports this buying
behavior. The Company has responded to this customer capital spending trend in
various ways that assure product availability and the necessary sales focus
during a critical quarterly period. Further, the Company has placed an increased
focus on the completion of software releases by mid-year to allow for commercial
availability and delivery in the fourth quarter. These software releases require
significant research and development expenditures early in the year, with
minimal offsetting revenues, but are key contributors to the Company's profits
during the fourth quarter. The Company's promotional and sales incentive
programs also tend to focus on the fourth quarter to sustain marketing support
during this period. Additionally, sales of consumer products in the retail
markets are generally stronger in the fourth quarter, corresponding to holiday
buying. In contrast, adverse weather conditions and incomplete customer budget
plans, as well as the impact of customer vacation schedules on
 
                                       25
<PAGE>   29
 
deployment and purchasing plans, tend particularly to depress Company revenues
during the first and third quarters.
 
     As a result of growing competitive pressures among network operators (which
have led to an increasing emphasis on return on investment and the budgeting
process), along with the increasing prominence of software as a percentage of
the Company's revenues, the trend toward seasonality has been increasing over
the past three years.
 
     Due to the foregoing factors, the Company's revenues and net income are
strongest in the fourth quarter of each year, representing 34.7% and 31.7% of
consolidated revenues and 83.7% (before restructuring and other charges) and
78.2% of net income in 1995 and 1994, respectively. Software sales were higher
in the fourth quarter of 1995 than those in the comparable quarter in 1994.
Consequently, the Company's results of operations for the first three quarters
of each year have in the aggregate been significantly less profitable than the
fourth quarter and the Company has frequently experienced net losses in the
first quarter.
 
  Multi-Year Contracts and Associated Revenue Recognition
 
     In recent years, the purchasing behavior of the Company's large customers
has increasingly been characterized by the use of fewer, larger contracts. This
trend is expected to intensify, and contributes to the variability of the
Company's results. Such larger purchase contracts typically involve longer
negotiating cycles, require the dedication of substantial amounts of working
capital and other Company resources, and in general require investments which
may substantially precede recognition of associated revenues. Moreover, in
return for larger, longer-term purchase commitments, customers often demand more
stringent acceptance criteria, which can also cause revenue recognition delays.
Certain multi-year contracts may relate to new technologies which may not have
been previously deployed on a large-scale commercial basis. The Company may
incur significant initial cost overruns and losses on such contracts which would
be recognized in the quarter in which they became ascertainable. Further profit
estimates on such contracts are revised periodically over the lives of the
contracts, and such revisions can have a significant impact on reported earnings
in any one quarter.
 
     The Company has managed this particular aspect of variability by
significantly reducing its product development, manufacturing and system
deployment intervals. The Company has also invested in project management tools
and disciplines to enhance its ability to execute successfully. Additionally,
the Company has worked to deploy its resources against the highest-value
projects. In part to manage the fluctuations produced by this buying behavior,
the Company has diversified its customer base, both in the United States and
internationally, and has developed relationships with other sets of customers
(including, for example, competitive access providers ("CAPs"), cable television
network operators and computer manufacturers).
 
     Revenue recognition for work on multi-year contracts is based upon the
specific terms and conditions of each contract. These terms and conditions may
vary markedly depending upon the nature of the technology being purchased and
the development cycles of such technology, the specific requirements of the
customer, delivery, deployment schedules and acceptance criteria. Therefore, the
amount of purchases actually contracted for or deployed in a period may differ
substantially from the revenues realized for the same period.
 
                                       26
<PAGE>   30
 
GENERAL
 
     The following table sets forth the Company's revenues by product line, and
the approximate percentage of total revenues represented thereby, for each of
the three years ended December 31, 1995:
 
<TABLE>
<CAPTION>
                                                1995                1994                1993
                                           ---------------     ---------------     ---------------
<S>                                        <C>         <C>     <C>         <C>     <C>         <C>
                                                               ($ IN MILLIONS)
  Systems for Network Operators..........  $11,459      54%    $10,841      55%    $ 9,367      53%
  Business Communications Systems........    5,144      24       4,557      23       3,982      22
  Microelectronic Products...............    1,864       9       1,461       7       1,323       8
  Consumer Products......................    1,787       8       1,924      10       1,816      10
  Other Systems and Products.............    1,159       5         982       5       1,246       7
                                           -------     ---     -------     ---     -------     ---
     Total...............................  $21,413     100%    $19,765     100%    $17,734     100%
                                           =======     ===     =======     ===     =======     ===
</TABLE>
 
     The following table sets forth a summary of costs and expenses as a
percentage of revenues for each of the three years ended December 31, 1995, and
for the year ended December 31, 1995 as adjusted to exclude the restructuring
and other charges:
 
<TABLE>
<CAPTION>
                                                             1995          1995      1994      1993
                                                         -------------     -----     -----     -----
                                                         (AS ADJUSTED)
<S>                                                      <C>               <C>       <C>       <C>
Revenues...............................................      100.0%        100.0%    100.0%    100.0%
Costs..................................................       56.3          60.5      57.4      56.9
                                                           -------          ----      ----      ----
  Gross margin.........................................       43.7          39.5      42.6      43.1
Operating expenses
  Selling, general and administrative
     expenses..........................................       25.4          33.1      27.1      28.3
  Research and development expenses....................        9.9          11.1      10.6      11.0
                                                           -------          ----      ----      ----
Operating income (loss)................................        8.4%         (4.7%)     4.9%      3.8%
                                                           =======          ====      ====      ====
</TABLE>
 
1995 VERSUS 1994
 
     Revenues grew in the Company's three largest product lines in 1995 compared
with 1994, causing total revenues to increase $1,648 million or 8.3%. Growth in
revenues from customers outside the United States (international and export)
provided 74.5% of the increase in revenues. International revenues (which
include export revenues) represented 23.3% of total revenues in 1995 compared to
19.1% of total revenues in 1994.
 
     Revenues from systems for network operators were $11,459 million, an
increase of $618 million or 5.7% in 1995 compared with 1994. Sales of wireless
infrastructure to network operators accounted for approximately 15% of total
sales to network operators. Sales in the United States were essentially flat,
which the Company attributes to delays in spending by network operators and
their growing reluctance to purchase from a potential competitor. However,
domestic sales of wireless infrastructure increased approximately 19%. Revenues
from systems for network operators outside the United States increased
approximately 28% in 1995 compared with 1994. These increases were due primarily
to increases in sales of wireless infrastructure of approximately 14%, to
increases in sales of switching and transmission systems, including software, of
approximately 22%, and to revenues under a contract awarded in 1994 to design
and build a fully digital telecommunications network in Saudi Arabia.
 
     Revenues from business communications systems of $5,144 million increased
$587 million or 12.9% in 1995 compared with 1994, primarily due to strong United
States and international product sales growth. Service revenues increased due to
growth in maintenance contracts and higher installation revenues associated with
the increased sales. United States revenues grew approximately 10%, primarily
due to increased sales of DEFINITY(R) products, including upgrades, and sales of
INTUITY(TM) voice messaging products. This increase was offset in part by the
continuing decline in the rental base, reflecting the Company's emphasis on the
sale
 
                                       27
<PAGE>   31
 
rather than rental of its products. International revenues grew approximately
36%, primarily due to sales of the Company's SYSTIMAX(R) structured cabling
systems and higher sales through international distributors.
 
     Sales of microelectronic products of $1,864 million increased $403 million
or 27.6% in 1995 compared with 1994, due to higher sales of ICs both inside and
outside the United States. Most of this growth derived from sales to customers
outside the United States. Included in microelectronic products are sales of the
Company's interconnect products business which the Company plans to sell.
 
     Revenues from consumer product sales (including sales through the Phone
Center Stores, which the Company plans to close) were $1,787 million, a decline
of $137 million or 7.1% in 1995 compared with 1994. The decrease in 1995
revenues was primarily due to the expected continuing decline in the customer
base for rental revenues for telephones and declines in product sales related to
discontinued product lines, partially offset by strong consumer demand for
cordless telephones.
 
     Revenues from sales of other systems and products of $1,159 million in 1995
increased $177 million or 18.0% compared with 1994, due to higher royalties.
Sales of other systems and products include revenues from the Company's Paradyne
subsidiary, which the Company plans to sell.
 
     Costs of $12,945 million increased $1,608 million or 14.2% in 1995 compared
with 1994. Excluding the restructuring and other charges of $892 million, costs
grew $716 million or 6.3%, reflecting the higher volume of sales and services.
Gross margin decreased to 39.5% in 1995 from 42.6% in 1994, due to restructuring
and other charges. Excluding these charges, gross margin increased to 43.7% in
1995 from 1994, due to increased sales of higher margin software products to
network operators, offset in part by the erosion of high margin rental revenues.
 
     Research and development expenses of $2,385 million increased $288 million
or 13.7% in 1995 compared with 1994. This increase was due to restructuring
charges of $264 million (which were principally related to the reduction in
administrative support functions at Bell Labs and disposal of research and
development assets related to changing technologies), as well as development
work associated with software, wireless access and type approval and
certification of products for local markets. Research and development expenses
represented 11.1% of revenues in 1995 compared with 10.6% of revenues in 1994.
Excluding the charges, research and development expenses represented 9.9% of
revenues in 1995. Consistent with the Company's strategy, the Company expects
that research and development expenses, as an absolute amount and as a
percentage of revenues, will increase in 1996.
 
     Selling, general and administrative expenses of $7,083 million increased
$1,723 million or 32.1% in 1995 compared with 1994. This increase was due to
$1,645 million in restructuring and other charges and increased spending on
sales and sales support efforts, including expenses relating to growth in
international revenues. Selling, general and administrative expenses were 33.1%
of revenues in 1995, an increase from 27.1% of revenues in 1994, reflecting the
restructuring charges (which were principally related to the reduction in
personnel in administrative and corporate support functions and at Phone Center
Stores). Excluding the charges, selling general and administrative expenses were
25.4% of revenues in 1995, reflecting cost containment efforts.
 
     Interest expense in 1995 was $280 million, an increase of $80 million or
40% compared with 1994. The increase was due primarily to higher average debt
levels and higher interest rates in 1995 compared with 1994.
 
     Other income -- net increased $81 million to $164 million in 1995 compared
with 1994, primarily due to gains on investments in 1995.
 
     The effective income tax rate of 23.6% in 1995 decreased from 38.8% in
1994, primarily due to the nondeductibility of certain of the 1995 restructuring
and other charges, which resulted in a net loss for 1995.
 
     For 1995, the Company had a net loss of $853 million, reflecting $2,801
million ($1,847 million after taxes) of restructuring and other charges.
Excluding the charges, net income was $994 million, an increase of $471 million,
or 90.1%, compared to 1994.
 
                                       28
<PAGE>   32
 
1994 VERSUS 1993
 
     Revenues grew in each of the Company's four main product lines in 1994
compared with 1993, causing revenue to increase $2,031 million or 11.5%. Growth
in revenues from customers outside of the United States provided approximately
38% of the increase. International revenues represented 19.1% of total revenues
in 1994 compared with 16.9% in 1993.
 
     Revenues from systems for network operators rose $1,474 million or 15.7% to
$10,841 million in 1994 compared with 1993. Approximately 16% of the revenue
growth was the result of AG Communications Systems Corporation being accounted
for on a consolidated basis after the Company increased its ownership to 80%
from 49%. Sales of wireless infrastructure to network operators accounted for
approximately 14% of total sales to network operators. Sales in the United
States increased 15%. The increases also resulted from an increase in wireless
sales of approximately 55%, and an increase in sales of switching and
transmission systems, including software, of approximately 13%. Revenues from
systems for network operators outside the United States increased approximately
19%. These increases were due primarily to increases in wireless sales of
approximately 49% and to increases in sales of switching and transmission
systems, including software, of approximately 7%.
 
     Revenues from business communications systems were $4,557 million, an
increase of $575 million or 14.4% in 1994 compared with 1993 due to strong
United States and international product sales growth. Service revenues increased
due to growth in maintenance contracts and higher installation revenues
associated with the increased sales. Partially offsetting these increases was
the erosion of the rental base which continued to drive rental revenues down.
United States revenues grew approximately 10% primarily due to increased sales
of DEFINITY products, including upgrades to accommodate expansion in the number
of area codes, sales of INTUITY CONVERSANT(R) voice processing products and
sales of INTUITY AUDIX(R) voice messaging products. International revenues grew
approximately 53% primarily due to the implementation of the Company's global
growth strategy which included acquisitions in Europe.
 
     Revenues from microelectronic products of $1,461 million increased $138
million or 10.4% in 1994 compared with 1993 due to higher sales of ICs and
electronic power systems to customers outside of the United States.
 
     Revenues from consumer products were $1,924 million, an increase of $108
million or 5.9% in 1994 compared with 1993. The increase in 1994 sales was due
primarily to strong consumer sales of cellular and cordless phones, partially
offset by the continuing decline in rental revenues for telephones.
 
     Revenues from sales of other systems and products were $982 million in
1994, a decrease of $264 million or 21.2% compared with 1993. The decrease
results from a decline in sales of special design products for the United States
government due to reductions in defense spending.
 
     Costs of $11,337 million increased $1,249 million, or 12.4% in 1994
compared with 1993. The increase is due to the higher volume of sales and
services. The gross margin percentage declined to 42.6% in 1994 from 43.1% in
1993. Increases in gross margins for most major product lines were more than
offset by a lower gross margin for consumer products due to the erosion of the
rental base.
 
     Research and development expenses of $2,097 million increased $136 million
or 6.9% in 1994 compared with 1993, as a result of work related to wireless
system technology and type approval and certification of products for local
standards. Research and development expenses represented 10.6% of 1994 revenues,
as compared with 11.1% of revenues in 1993.
 
     Selling, general and administrative expenses of $5,360 million increased
$344 million, or 6.9% in 1994 compared with 1993. The increase was largely due
to increased spending on sales and sales support efforts, as well as for
expenses related to global growth. Selling, general and administrative expenses
as a percentage of revenues decreased to 27.1% in 1994 from 28.3% in 1993,
reflecting cost containment efforts.
 
     Other income -- net in 1994 was $83 million compared to $193 million in
1993. The decrease of $110 million in 1994 compared with 1993 relates primarily
to a charge of $38 million in 1994 for the closing of
 
                                       29
<PAGE>   33
 
a hand-held tablet communication device business and higher losses on foreign
currency. See Note 4 of Notes to Consolidated Financial Statements.
 
     Interest expense of $200 million in 1994 was approximately the same as in
1993, due primarily to lower interest rates on higher average borrowings in 1994
compared to 1993.
 
     The effective income tax rate was 38.8% in 1994, compared with 31.3% in
1993. The lower effective tax rate in 1993 relates primarily to a net tax
benefit recorded in 1993 to increase the Company's net deferred tax assets to
reflect the increase in the federal income tax rate from 34% to 35%.
 
     The adoption of three accounting standards, effective January 1, 1993,
issued by the Financial Standards Accounting Board resulted in an after-tax
charge of $4,208 million in 1993, representing the cumulative effect of these
accounting changes.
 
     Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions," requires accrual of
estimated future retiree benefits during the years in which employees are
working and accumulating these benefits. Previously, health care benefits were
expensed as claims were incurred and life insurance benefits were expensed as
plans were funded. A one-time after-tax charge for the unfunded portions of
these liabilities of $3,722 million was recorded in 1993 as a cumulative effect
of accounting change upon adoption of this standard.
 
     SFAS No. 112, "Employers' Accounting for Postemployment Benefits," requires
the Company to accrue for estimated future postemployment benefits, including
separation payments, during the years in which employees are working and
accumulating these benefits, and for disability payments when the disabilities
occur. Previously, costs for separations were recognized when approved and
disability benefits were recognized when paid. The Company recognized a $530
million after-tax charge upon adoption of this standard.
 
     SFAS No. 109, "Accounting for Income Taxes," requires, among other
provisions, the computation of deferred tax amounts using the enacted corporate
income tax rates for the years in which the taxes will be paid or refunds
received. A cumulative effect of accounting change benefit of $44 million was
recognized in 1993 related to adopting this standard.
 
     Reported net income increased $4,273 million for the year ended December
31, 1994 compared with the year ended December 31, 1993, primarily due to the
$4,208 million net charge for the accounting changes discussed above. Excluding
the cumulative effect of the accounting changes in 1993, net income increased
$65 million, or 14.2% for the year ended December 31, 1994 compared with the
year ended December 31, 1993.
 
ENVIRONMENTAL
 
     The Company's current and historical operations are subject to a wide range
of environmental protection laws. The Company has remedial and investigatory
activities underway at 46 current and former facilities. In addition, AT&T and
its subsidiaries have been named a PRP at numerous "Superfund" sites pursuant to
CERCLA or comparable state statutes. Under the Separation and Distribution
Agreement, the Company will assume or indemnify AT&T for all liabilities
associated with these sites. The Company has accrued for such liabilities when
it is probable that such liability will be incurred and the amount of such costs
can be reasonably estimated. However, it is often difficult to estimate the
future impact of environmental matters, including potential liabilities.
Although the Company believes that its reserves are adequate, there can be no
assurance that the amount of capital expenditures and other expenses relating to
remedial actions and compliance with applicable environmental laws will not
exceed the amounts reflected in the Company's reserves or will not have a
material adverse effect on the financial condition of the Company or the
Company's results of operations.
 
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 
     The Company generated (used) cash flow from operations of $492 million,
$1,620 million and $(1,240) million for the years ended 1995, 1994 and 1993,
respectively. The decline in cash flow provided by operations
 
                                       30
<PAGE>   34
 
in 1995 compared to 1994 was primarily due to the higher accounts receivable
balance at year-end 1995, reflecting significantly higher fourth quarter sales,
and higher inventory balances, as work in process for long-term contracts
increased. The improvement in cash flow from operations in 1994 compared with
1993 was due to lower levels of contributions to trusts for retiree benefits in
1994.
 
     Fluctuations in the amount of inventories, accounts receivable and accounts
payable are principally associated with the level and timing of business
volumes. In 1995, the Company's inventory turnover ratio decreased slightly to
3.4 times from 3.5 times in 1994. Accounts receivable were outstanding an
average of 81 days in 1995, compared with 76 days in 1994, reflecting the
increase in fourth quarter revenues in 1995.
 
     Cash flow used in investing activities was $1,342 million, $567 million and
$1,087 million in 1995, 1994 and 1993, respectively. Capital expenditures, the
largest component, were $1,277 million, $878 million and $577 million for the
years ended 1995, 1994 and 1993, respectively. Capital expenditures generally
relate to expenditures for equipment and facilities used in manufacturing and
research and development, including expansion of manufacturing capacity, and
expenditures for cost reduction efforts and international growth. For example,
in 1995 capital expenditures included construction of a new facility to
consolidate the Company's operations relating to systems for network operators
and expansion of manufacturing capacity for ICs and wireless equipment.
 
     Net cash provided by (used in) financing activities was $710 million,
$(782) million, and $2,482 million for the years ended 1995, 1994 and 1993,
respectively. The Company historically has relied on AT&T to provide financing
for its operations. The cash flows from financing activities reflected herein
principally reflect changes in the Company's assumed capital structure. These
cash flows are not necessarily indicative of the cash flows that would have
resulted if the Company were a stand-alone entity.
 
     Prepaid pension costs are increasing as returns on pension plan assets
exceed pension benefits earned during the year plus interest cost on the
projected benefit obligation.
 
     In the normal course of business the Company uses various financial
instruments, including derivative financial instruments, for purposes other than
trading. The Company does not use derivative financial instruments for
speculative purposes. These instruments include commitments to extend credit,
letters of credit, guarantees of debt, interest rate swap and cap agreements,
and foreign currency exchange contracts. Foreign currency exchange contracts are
used to mitigate foreign currency exposure. As is customary for these types of
instruments, collateral is generally not required to support these financial
instruments. The Separation and Distribution Agreement provides that, as between
the Company and AT&T, the Company has assumed all liabilities under or otherwise
relating to derivatives and similar obligations primarily related to the
Company's business. Initially, AT&T may continue to perform obligations under
such derivatives and similar obligations on behalf of the Company but all
amounts paid to or received from third parties will be charged to, or paid over
or credited to, the Company, as the case may be.
 
     By their nature all such instruments involve risk including the credit risk
of nonperformance by counterparties, and the Company's maximum potential loss
may exceed the amount recognized in the Company's balance sheet. However, at
both December 31, 1995 and 1994, in management's opinion there was no
significant risk of loss in the event of nonperformance of the counterparties to
these financial instruments. The Company controls its exposure to credit risk
through credit approvals, credit limits and monitoring procedures, and
management believes that reserves for losses are adequate. The Company does not
have any significant exposure to any individual customer or counterparty, nor
have any major concentration of credit risk related to any financial
instruments.
 
     The ratio of total debt to total capital (debt plus equity) was 73.7% at
December 31, 1995, compared to 56.1% at December 31, 1994. The increase reflects
the lower level of equity due to the restructuring and other charges taken in
1995. The Offerings and the other Related Transactions result in a pro forma
debt to capital ratio for the Company as of December 31, 1995 of approximately
63.2%. If the U.S. Underwriters exercise their overallotment option in full, the
pro forma debt to capital ratio as of December 31, 1995 will be approximately
     %.
 
     For the reasons described under "-- Variability in the Company's Business,"
the Company's working capital requirements and cash flow provided by operating
activities can vary greatly from quarter to quarter, depending on the volume of
production, the timing of deliveries and the payment terms offered to customers.
 
                                       31
<PAGE>   35
 
In the past, the Company's working capital needs have been satisfied as part of
AT&T's corporate-wide cash management policies. However, AT&T is no longer
providing funds to finance the Company's operations.
 
     The Company estimates that the future cash expenditures to implement the
restructuring programs will be approximately $1,788 million and will be paid
primarily in 1996. Such expenditures are expected to be funded through cash
flows from operations and working capital. As part of the Separation, AT&T is
retaining accounts receivable that arose in the business of the Company having a
face amount estimated for pro forma purposes at approximately $2,000 million. To
meet its working capital needs, the Company has entered into the Initial Working
Capital Facility, pursuant to which the Company may borrow up to $1,000 million,
subject to the terms and conditions thereof. Prior to the Closing Date, the
Company expects to replace the Initial Working Capital Facility with the Working
Capital Facility, pursuant to which the Company would be able to borrow up to
$3,000 million. The Company expects to repay approximately $     million of the
amounts drawn under the Working Capital Facility with a portion of the proceeds
of the Offerings. Borrowings under the Initial Working Capital Facility will
bear interest at rates based from time to time on (i) the London interbank
offered rate plus 0.15% or, in certain cases plus or minus such spread as may be
agreed to between the Company and the lender, (ii) the rate for certificates of
deposits of major United States money center banks plus 0.275%, (iii) a fixed
competitive bid rate or (iv) a floating rate equal to the higher of the agents'
prime lending rate and the overnight Federal Funds rate as chosen by the
Company.
 
     In addition, AT&T will issue approximately $4,000 million of short-term
debt under the Commercial Paper Program, which will be assumed by the Company,
subject to certain conditions, at the Closing Date. The Commercial Paper Program
will be supported by a back-up credit facility with third-party financial
institutions. It is contemplated that AT&T will retain the proceeds of all
borrowings under the Commercial Paper Program and that, on the Closing Date,
AT&T will be released from all of its obligations thereunder, with the result
that the Company will become the obligor thereunder. Pursuant to the General
Purchase Agreement, AT&T has agreed to prepay $500 million to the Company, on or
prior to the Closing Date, to be applied to accounts receivable from AT&T that
are due and payable on or after January 1, 1997 for the purchase of products,
licensed materials and services from the Company. See "Use of Proceeds" and "Pro
Forma Condensed Financial Statements."
 
     The Company believes that the proceeds of the Offerings, as well as the
Working Capital Facility, cash flow from operating and short- and long-term debt
financings, will be sufficient to satisfy its future working capital, capital
expenditure, research and development, and debt service requirements, including
debt service requirements on the Commercial Paper Program. The Company intends
to file, prior to the Closing Date, a shelf registration statement to register
the offering of up to $               of long-term debt. The Company further
believes that it will be able to access the capital markets on terms and in
amounts that will be satisfactory to it, although there can be no assurance that
will be the case. The Company believes that it will be able to obtain bid and
performance bonds, to arrange or provide customer financing as necessary, and to
engage in hedging transactions on commercially acceptable terms.
 
RECENT PRONOUNCEMENTS
 
     Effective on October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of ." This standard requires the Company to review long-lived assets and certain
identifiable intangibles held and used for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of this standard did not have a material impact on the
Company's results of operations, financial condition or cash flows because this
was essentially the method the Company used in the past to measure and record
asset impairments. The 1995 restructuring and other charges did include
recognition of asset impairments.
 
     In 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," will be
adopted. This standard establishes a fair value method for accounting for or
disclosing stock-based compensation plans. This standard will be adopted in 1996
by disclosing the pro forma consolidated net income and earnings per share
amounts assuming the fair value method was effective on January 1, 1995. The
adoption of this standard will not affect the Company's results of operations,
financial position or cash flows.
 
                                       32
<PAGE>   36
 
                                    BUSINESS
 
     The Company is one of the world's leading designers, developers and
manufacturers of telecommunications systems, software and products. The Company
is a global market leader in the sale of public telecommunications systems, and
is a supplier of systems and software to 23 of the world's 25 largest network
operators. The Company is also a global market leader in the sale of business
communications systems and in the sale of microelectronic components for
communications applications to manufacturers of communications systems and
computers. Further, the Company is the largest supplier in the United States of
telecommunications products for consumers. In addition, the Company has provided
engineering, installation, maintenance or operation support services to over 250
network operators in 75 countries, over 1.4 million business locations in the
United States and approximately 100,000 business locations in over 90 other
countries. The Company's research and development activities are conducted
through Bell Labs, one of the world's foremost industrial research and
development organizations.
 
     The Company's revenues of $21.4 billion for the year ended December 31,
1995, were generated from the sale of systems for network operators (54% of
total revenues), business communications systems (24%), microelectronic products
(9%), consumer products (8%), and other systems and products, including
integrated systems for the United States government (5%). In 1995, approximately
77% of the Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports).
 
     The following table sets forth the revenues by product line for each of the
five years ended December 31:
 
<TABLE>
<CAPTION>
                                                    1995      1994      1993      1992      1991
                                                   -------   -------   -------   -------   -------
                                                                    (IN MILLIONS)
<S>                                                <C>       <C>       <C>       <C>       <C>
  Systems for Network Operators..................  $11,459   $10,841   $ 9,367   $ 9,616   $ 9,028
  Business Communications Systems................    5,144     4,557     3,982     3,689     3,610
  Microelectronic Products.......................    1,864     1,461     1,323     1,167       781
  Consumer Products..............................    1,787     1,924     1,816     1,934     1,934
  Other Systems and Products.....................    1,159       982     1,246       906       959
                                                   -------   -------   -------   -------   -------
     Total.......................................  $21,413   $19,765   $17,734   $17,312   $16,312
                                                   =======   =======   =======   =======   =======
</TABLE>
 
INDUSTRY OVERVIEW
 
     The global telecommunications networking industry includes systems,
software and products used for voice, data and video communications. This
industry has undergone significant transformation and growth since the
mid-1980's as a result of changes in domestic and international public policy,
technological innovations and economic factors. The Company believes that these
forces will intensify, and that the number of customers and the complexity of
the networks they demand will increase. In addition, the Company believes that
these networks will increasingly become multifunctional in nature, supporting
simultaneous wireline or wireless access to any combination of voice, data and
video communications services, thus reducing the operating costs associated with
separate networks. The Company further believes that the traditionally distinct
technology platforms supporting voice and data will converge, as will those
platforms for the traditionally separate wireline and wireless networks. In the
Company's view, significant industry growth areas will include wireless access,
multifunctional systems and networking software. The Company further believes
that the principal building blocks of the industry are and will continue to be
software, microelectronics and product innovation in advanced digital switching
and transmission platforms, supported by a competency in and a knowledge of
telecommunications networking.
 
  Public Policy Changes
 
     Changes in the public policy affecting telecommunications services have
increased, and are expected to further increase, the number of network operators
and, therefore, the demand for telecommunications network systems and products
worldwide. In the United States, changes in federal and state regulations have
created a
 
                                       33
<PAGE>   37
 
number of new network operators and fostered competition between both new and
established network operators. For example, in 1995, the Federal Communications
Commission (the "FCC") auctioned additional spectrum for wireless
communications, thus potentially doubling the number of operators licensed to
compete in each MSA from two to four. The FCC has also announced plans to
auction additional spectrum in 1996. Changes in FCC regulations governing
interconnections have created the opportunity for CAPs to enter the market. Over
the past several years, certain state public utility commissions have removed
the prohibition on competition in intra-LATA long distance services, thereby
opening these markets to a number of competitors.
 
     More broadly, the United States Congress has passed the Telecommunications
Legislation, currently awaiting signature by the President, which, subject to
certain conditions, would permit local and long distance telecommunications
companies, cable television companies and electric utility companies to compete
with each other to provide local and long distance telephony and video services.
The Company believes that the Telecommunications Legislation (assuming it is
enacted), together with these other government initiatives, will increase the
demand for systems, software and services as network operators respond to the
changing competitive environment by constructing new or enhancing existing
networks.
 
     Over the last few years, the governments of a number of developed and
developing countries have privatized their state-owned telecommunications
monopolies. In most instances, as part of the privatization, such governments
have imposed service requirements on the newly privatized network operators
resulting in an acceleration of capital expenditures on networking systems,
software and services. In addition, certain governments have granted licenses to
new network operators to compete with the traditional network operators in their
countries. The Company expects the trend toward telecommunications service
competition to continue.
 
  Technological Innovation
 
     Telecommunications networking has undergone several technological
transformations, including the ongoing evolution from voice-centric to
multifunctional applications of any combination of voice, data and video, from
hardware-enabled to software-enabled and from wireline-only to an environment
where wireline and wireless interoperate. In addition, technological platforms
that support telecommunications networking and data networking have begun to
converge. To support the changing demands occasioned by these transformations,
networks are becoming more software intensive and the microelectronic content of
networking systems and end-user products is increasing.
 
     These changes have added significantly to the number of services that
network operators can offer. Increasingly, network operators and business
customers are demanding multifunctional networks that can simultaneously support
any combination of voice, data and video services accessible from wireline and
wireless terminal devices. For example, telecommunications service providers are
beginning to offer multifunctional services, such as integrated services digital
network ("ISDN") which allows for the dynamic allocation of bandwidth between,
and the simultaneous transmission of any combination of voice, data and video,
and individual call routing, which permits the user to easily designate and
change the wireline or wireless telephone number to which their calls should be
directed. In addition, cable television operators are beginning to expand beyond
one-way broadcast to provide interactive services, and have announced their
intent to provide telephony and high speed data services.
 
     The Company believes that traditionally distinct telecommunications
networks and data networks increasingly will be built on the same technological
platforms. The Company further believes that the convergence between voice and
data networking will continue as a result of the further adoption of common
technologies such as optical transmission and asynchronous transfer mode ("ATM")
switching.
 
  Economic Factors
 
     The Company expects network operators and business enterprises in general
to pursue growth opportunities through acquisition and investment around the
world. Multinational enterprises are demanding telecommunications systems and
services in foreign locations similar to those to which they are accustomed in
their home market. To attract these businesses and their investments, countries
are under pressure to upgrade their
 
                                       34
<PAGE>   38
 
communications infrastructure. In developing countries there is greater demand
from citizens for an increase in teledensity (the number of telephones per
capita) following increases in their standard of living.
 
     Network operators around the world are under increased pressure to increase
revenues and operating margins. As a result, they are demanding new networking
systems and software which permit them to satisfy end-user demands and reduce
operating expenses through the automation of previously labor intensive
activities or other increases in the efficiency of their networks.
 
STRATEGY
 
     The Company believes that the global public policy, technological and
economic forces transforming the telecommunications industry are creating
opportunities for the Company to capitalize on its competency in and knowledge
of networking, software and microelectronics. The Company intends to utilize the
research and development capabilities of Bell Labs, its broad and well
established product lines and its strong global customer relationships with
leading network operators and major businesses to remain a leader in
telecommunications networking and to capitalize on the growing convergence of
voice and data and of wireline and wireless networks. Further, the Company is
increasing its focus on customers in the United States and internationally who
consider AT&T as a competitor or potential competitor and therefore have been
reluctant to rely on AT&T as a strategic supplier. The Company believes that
growth opportunities will be available in both developed and developing
countries, and that a significant portion of its growth will derive from the
sale of telecommunications networking systems outside the United States. The
Company intends to focus its efforts globally on wireless networks,
multifunctional systems and networking software.
 
     The Company intends to pursue the above strategies through a strong
management emphasis on the rapid commercialization of customer-focused
technological innovations. See "The Company -- Strategic Reorganization." The
Company believes that, as an independent entity, it will have a greater ability
to pursue these strategies by defining its own priorities and maintaining a
focus on its customers.
 
  Wireless Networks
 
     Wireless communications is a fast growing segment of the global
telecommunications market with the number of global subscribers increasing from
16 million in 1991 to 53 million in 1994. From 1993 to 1995, the Company's sales
of wireless infrastructure systems grew as a percent of total revenues from 6.1%
to 10.3%. New and upgraded digital wireless networks are being deployed by
network operators to meet the mobility needs of end-users, to expand their
networks into areas unserved by traditional telephony services and to provide a
wireless alternative to traditional wireline network access. In addition,
businesses are deploying wireless telecommunications systems and data networks
to improve the flexibility and connectivity of their office designs.
 
     An important element of the Company's strategy is to provide network
operators and businesses with complete, flexible wireless networks which will
complement, and, in the case of network operators, compete over time with
wireline networks. As a result, the Company's networks are designed to
interoperate with existing local networks and to be upgraded with new software,
thereby enabling network operators to offer new services or to change standards
as end-user demand dictates. To accomplish this, the Company's wireless
infrastructure systems, which utilize the 5ESS(R)-2000 switch (the "5ESS
switch"), are compatible with the following air interface standards: advanced
mobile telephone service ("AMPS"), the analog standard which is currently the
leading standard in North America; global systems for mobile communications
("GSM"), the pan-European digital standard; cellular digital packet data
("CDPD"), a leading standard for data transmission in North America; and the
emerging digital standards code division multiple access ("CDMA") and time
division multiple access ("TDMA"). The Company believes that its implementation
of CDMA technology provides superior digital voice quality, greater capacity
utilization and allows for lower power handsets than other wireless
technologies. The Company currently is deploying what will be the first national
CDMA network in the United States and one of the world's largest AMPS networks
in Korea. The Company has recently entered the GSM market with the pending
acquisition of the Philips Businesses and with the award
 
                                       35
<PAGE>   39
 
from the Ministry of Post and Telecommunications of Saudi Arabia to build an
infrastructure system based on the GSM standard which, when completed, will be
one of the world's largest GSM-based networks.
 
     For business customers, the Company's strategy is to respond to its
customers' needs for mobility by offering wireless voice and data communication
networks within a building or campus. The Company has sought to accomplish this
by applying its radio frequency expertise to traditional PBX and local area
networking ("LAN") applications. For example, the Company was the first to offer
enhanced PBX and key system products which will support both traditional and
cordless handsets. Further, the Company recently announced its FREEWORKS(TM)
family of wireless business systems which includes a cellular PBX.
 
     The Company believes that enhancements to wireless communications will
continue to be generated by microelectronic advances and software innovations.
The Company will seek to remain in the forefront of these technologies by
building upon its Bell Labs expertise through continued research and development
investments in DSPs and networking software.
 
  Multifunctional Systems
 
     Network operators are demanding networks that allow them to expand the
breadth of their service offerings, and businesses are demanding networks which
allow them to integrate voice and data communications within and between their
facilities.
 
     The Company intends to utilize its expertise in digital switching, digital
transmission and optical technologies to continue to enable network operators
and businesses to deploy multifunctional networks which simultaneously can
support any combination of voice, data and video communications through various
combinations of copper, coaxial, wireless and fiber transmission media. An
important element of the Company's strategy is to seek to remain in the
forefront of these innovations by continuing its investments in critical
software and microelectronic technologies. The Company is also seeking to
capitalize on the convergence of voice and data networks with the 5E10 software
release, the introduction of its wide area network GLOBEVIEW(R)-2000, an ATM
switch for network operators, and its recently introduced MultiMedia
Communications eXchange ("MMCX") for business customers, which integrates PBX
and LAN capabilities.
 
  Networking Software
 
     As part of its strategy the Company seeks to continue to build upon its
software expertise as networks become more software intensive. Networking
software is used to create, provision and manage services and to support the
efficient, cost-effective operation of networks. Networking software is also
used by network operators and businesses to offer new services which will
differentiate them in the marketplace and which will automate labor intensive
service management and provisioning tasks. The Company is pursuing these
objectives through its research and development activities at Bell Labs, where,
in 1995, approximately two-thirds of the technical staff were engaged in
software-related activities. The Company's intelligent network and application
software enables network operators to offer a broad array of enhanced and
differentiated services such as toll free calling (800 service in the United
States) and call waiting. In addition, the Company is a leader in operation
support systems for telephone networks with systems like its Advanced System for
Operations Support ("ASOS"), which is one of the first systems to enable network
operators to manage the work flow, planning, surveillance, provisioning and
continuous testing of their multifunctional networks. Further, the Company
intends to continue to develop customized business applications like call
centers, which permit the routing and administration of a large volume of
incoming calls and the integration with business databases of customer and
product information.
 
  International Growth
 
     The Company believes that the opportunities described above will be
available in both developed and developing countries and that a significant
portion of its growth will derive from the sale of telecommunications networking
systems, software and services outside the United States. Many of the network
operators and businesses that are pursuing international opportunities are well
established and well capitalized companies
 
                                       36
<PAGE>   40
 
with whom the Company has strong relations. The Company intends to pursue global
opportunities in a focused and disciplined approach to build upon the successes
the Company has achieved and will involve the withdrawal from areas where future
profitability is deemed questionable. The Company intends to utilize a
combination of joint ventures and direct investments to achieve its goals in
this area.
 
SYSTEMS FOR NETWORK OPERATORS
 
     The Company designs, develops, manufactures and services systems and
software which enable network operators to provide wireline and wireless local,
long distance and international voice, data and video services and cable
television service. The Company's networks, which include switching,
transmission and cable systems, are packaged and customized with application
software, operations support systems and associated professional services.
 
  Systems and Services
 
     Telecommunications Networking Systems.  The Company designs, develops,
manufactures and services advanced telecommunications networking systems, which
include equipment, software and associated professional services. These systems
connect, route, manage and store voice, data and video in any combination, and
are used for: wireline access; local and long distance switching; intelligent
network services and signaling; wireless communications, including both cellular
and personal communications services ("PCS"); and high-speed, broadband
multifunctional communications.
 
     The Company is one of the world's largest suppliers in each of the five
broad elements that comprise telecommunications networks: switching systems,
which route information through the network; transmission systems, which provide
the communications path through the network that carries information between
points in the network; operation support systems, which enable service providers
to manage the work flow, planning, surveillance, management, provisioning and
continuous testing of their networks; intelligent network/ application software,
which enables service providers to offer a broad array of enhanced and
differentiated services; and cable systems, which provide the transport media
between points in a network. These systems collectively comprise the
infrastructure that enables telecommunications network operators to provide
traditional narrowband voice and data services and that enables both new and
traditional network operators to offer broadband multifunctional services.
 
     The Company has a wireline local access installed base (the number of
access lines serviced by switches manufactured by the Company) of approximately
110 million lines, representing approximately 58% of the United States and 13%
of the total worldwide installed base. The Company's primary switching products
are the 5ESS switch for local and long distance switching and international
gateways, and the 4ESS(TM) Digital Switch (the "4ESS switch") for long distance
and international switching.
 
     The 5ESS switch is the most reliable switch in the industry, with an
average supplier-attributable time out of service of less than two minutes per
year. The 5ESS switch is in service in 49 countries with more than 72 million
access lines sold. In recent years, substantially all of the newly installed
access lines have been digital, providing the base for the evolution to ISDN and
other multifunctional services. From 1988 to 1994, the 5ESS switch was installed
by United States network operators to service over 40% of their new central
office lines, many to replace older analog installations.
 
     The 5ESS switch is used throughout the world to provide a combination of
network applications, including local and long distance switching and
international gateways, operator services, network signaling, intelligent
networking and wireless switching. As of September 1995, the 5ESS switch, with
the Company's 5E10 software, has enabled network operators to offer simultaneous
wireline and wireless, local, long distance and international services as well
as any combination of voice, data and video.
 
     The 4ESS switch, which was developed for and is primarily deployed in
AT&T's network, is used to provide domestic and international long distance
switching. The 4ESS switch can handle over 775,000 peak hour calls.
 
                                       37
<PAGE>   41
 
     The Company designs, develops, manufactures and services a broad range of
transmission access and transport systems. Network operators use these systems
to transport any combination of voice, data and video between subscribers and
the central office or between points within a network engaged in local, national
or international communications. In 1992, the Company's transmission systems
business was awarded the Malcolm Baldrige National Quality Award.
 
     World standards for transmission systems have undergone rapid technological
progress in recent years. The new standards, known as Synchronous Optical
Network ("SONET") in North America and SDH in other markets, maximize
transmission capability and simplify network management for network operators.
The Company markets systems supporting both standards and is one of the largest
suppliers of SONET-based systems. As part of the pending acquisition of the
Philips Businesses, the Company has agreed to acquire, subject to certain
conditions, Philips' SDH transmission product line. This acquisition is intended
to broaden the Company's SDH product catalog.
 
     The Company offers a broad line of transmission access systems for the
provision of a wide range of services, including traditional telecommunications
service and broadband multifunctional services, in which it was the first
supplier. Transmission access systems transport information between the
subscriber and the central office. The Company's products include SLC(R)-2000, a
hybrid fiber/copper pair system, and HFC-2000(TM), a hybrid fiber/coaxial
system, both of which extend fiber-based optical transmission into the local
loop. The Company's products also include the SDV-2000, a switched digital video
system which extends fiber to the curb, and ASOS, one of the first operations
support system which enables network operators to manage the work flow,
planning, surveillance, provisioning and continuous testing of their
multifunctional networks.
 
     The Company's transmission transport systems are utilized for high capacity
communications between points within a communications network. These products
are primarily digital and provide for the movement of any combination of voice,
data, and video across fiber, coaxial and microwave based media. The Company's
products include fiber transport systems (FT 2000), digital multiplexer systems
(DDM 2000) and the digital access and cross connect systems (DACS(TM) family of
products).
 
     The Company's operation support systems enhance a network operator's
ability to activate, manage and maintain its networks. These systems
continuously monitor network performance and activity level, and allow for rapid
trouble identification, load balancing and planning for network utilization. The
Company's systems support the efforts of network operators to reduce operating
costs and minimize labor by automating previously labor intensive tasks.
 
     The Company's network management systems offer a broad array of modular
software, including element managers designed for traditional telephony, video
and wireless; network managers that monitor, test and optimize the utilization
of a network; service managers that manage work flow; and business managers that
include customer service systems. For example, the Company's NetMinder system is
an advanced network management routing system that mitigates network congestion
through efficient call routing and completion which is utilized by leading
domestic and international network operators.
 
     The Company's A-I-NET(R) intelligent network products enable network
operators to offer new services that can be created, deployed or managed by
themselves, the Company, or third parties. Services created with A-I-NET
products include toll free calling (800 service in the United States), call
forwarding, call waiting, voice dialing and messaging.
 
     The Company has recently introduced products to address the growing demand
for emerging broadband multifunctional services which permit the simultaneous
transmission of any combination of voice, data and video. In 1994, the Company
introduced its GLOBEVIEW-2000 Broadband System, which is one of the highest
capacity ATM switches offered for use in public networks. More than 100
GLOBEVIEW-2000 Broadband Systems are currently installed at more than 25
customers in nine countries, including local network operators such as Ameritech
Corporation, GTE Corporation and BellSouth Corporation; long distance network
operators such as AT&T; cable television operators such as Time Warner Inc. and
Cablevision Systems Corporation; and foreign network operators such as British
Telecommunications plc,
 
                                       38
<PAGE>   42
 
Kokushin Denshin Denwa Co. Ltd. of Japan and the network operator that is
currently the sole broadband service provider in China.
 
     In addition, the Company designs, develops, manufactures and services cable
systems, which include optical fiber, fiber optic cable, electronic wire and
cable and apparatus for both fiber and copper cable systems. The Company's cable
systems are used to connect various devices in a network and terminal devices to
public and private networks. These cable systems are deployed for outside plant
and central office wiring, and for traditional telephony, cable television,
wireless networks and broadband applications.
 
     The Company is one of the world's largest suppliers of fiber optic cable
systems, high strength, high performance fiber for underseas cablers and outside
plant turnkey systems, which are generally large capital projects in emerging
markets for the engineering and construction of telecommunications
infrastructure. The Company's TRUEWAVE(TM) optical fiber enables network
operators to reduce their costs by increasing the distance between optical
amplifiers. In addition, the Company offers customers their choice of any
combination of fiber and cable design.
 
     Wireless Network Systems.  The Company designs, develops, manufactures and
services wireless network infrastructure systems, which include the 5ESS switch,
base stations, wireless network software and operation support systems. These
systems provide network operators with the capability to offer a wide range of
cellular and other wireless communications services, including PCS, wireless
data and fixed wireless access. The Company's sales of wireless infrastructure
systems have grown as a percent of total revenues from 6.1% in 1993 to 10.3% in
1995.
 
     The Company's wireless systems are in operation in nine of the top ten
United States MSAs. The Company's primary wireless system is the AUTOPLEX(R)
System 1000 product family, which includes the Series II base station, which has
a higher call handling capacity per single control complex than any other base
station on the market. The base station contains the radio transceiver that
establishes wireless communications with a mobile telephone. Base stations are
arranged geographically so that mobile customers can be "handed off" seamlessly
from one base station to the next as they travel. The network intelligence to
accomplish this is housed in the Company's Mobile Switching Center, which
includes the 5ESS switch and which connects the base stations to the public
telephone network. The Company also offers base stations for start-up
applications and smaller markets, a minicell product for rural and international
markets and a microcell for congested, high traffic areas.
 
     Wireless technology is evolving from analog to digital. The Company
provides networks based on a variety of the leading air interface standards:
AMPS, CDMA, TDMA and GSM. The Company believes that its implementation of CDMA
technology provides superior digital voice quality and greater capacity
utilization, and allows for the utilization of lower power handsets than other
wireless technologies. As part of the pending acquisition of the Philips
Businesses and in furtherance of its goal to enhance its international
operations in this area, the Company has agreed, subject to certain conditions,
to acquire Philips' GSM research, design, development, manufacturing, marketing
and sales capabilities. The Company is deploying what will be the first national
CDMA network in the United States, one of the world's largest AMPS networks in
Korea, and one of the world's largest GSM-based networks in Saudi Arabia.
 
     In addition, the Company designs, develops, manufactures and services fixed
wireless access systems. The Company offers Wireless Subscriber Systems, which
support the AMPS standard, and the new AIRLOOP(R) Wireless Local Loop system,
which utilizes CDMA technology. Also, as part of the pending acquisition of the
Philips Businesses, the Company has agreed, subject to certain conditions, to
acquire Philips' fixed wireless system, which is based on the DECT (digital
enhanced cordless telephone) standard. All three systems enable network
operators to expand their networks in markets where traditional wireline systems
are not cost justified, and to provide telephone services as an alternative to
traditional network operators.
 
     The Company designs, develops, manufactures, and services CDPD-based
wireless data systems which enable wireless network operators to offer data
services as an overlay to their existing analog voice infrastructure without
acquiring additional spectrum or upgrading to a digital network. These systems
offer the increased reliability and efficiency of switched digital packet data
systems.
 
                                       39
<PAGE>   43
 
     Due to the complexity of wireless systems, the Company also offers a broad
range of professional services, which include project management, site
acquisition, radio frequency engineering, microwave relocation, construction
management, cellular optimization and wireless data support.
 
  Markets
 
     The principal customers for the Company's systems are network operators
that provide wireline and wireless local, long distance and international
telecommunications services. The Company's systems for network operators are
installed to expand the capacity and features offered by existing networks, to
replace older technology in existing networks and to establish new networks for
entrants into deregulated or previously unserved markets. See "Risk
Factors -- Reliance on Major Customers."
 
     As a result of structural, public policy and technological changes, since
the mid-1980's the telecommunications industry has undergone a period of
significant growth in the number of lines in service and applications offered.
In developed markets, deregulation has permitted new market entrants to
construct networks in previously monopolistic markets. In response, existing
network operators have expanded beyond traditional franchises and are offering
new services. In emerging markets, privatization, competition and economic
expansion have increased demand for networking systems. At the same time,
technological advances also have increased demand by reducing operating costs
and facilitating new applications, including multifunctional services.
 
     Changes in customer needs and demands, public policy and technology are
creating a new industry structure in which many of the actual and potential
customers of the Company are or will be competitors of AT&T's communications
services business. As a result, the obstacles currently faced by the Company in
marketing its products to competitors and potential competitors of AT&T's
communications services business have become severe and are expected to continue
to intensify. For these reasons, AT&T has announced that, subject to certain
conditions, it intends to effect the Distribution.
 
     The Company markets and sells its products worldwide primarily through a
direct sales force due to the complexity of these systems. Most of the Company's
sales of systems for network operators are made pursuant to general purchase
agreements, which establish the terms and conditions and provide for price
determination to be made on a contract bid basis. In addition, certain of the
large infrastructure projects are conducted under long-term, fixed-price
contracts. See "Risk Factors -- Multi-Year Contracts" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Variability in the Company's Business."
 
     As a result of the increased complexity of systems for network operators
and the high cost of developing and maintaining in-house expertise, network
operators demand complete, integrated and turn-key projects. Network operators
increasingly are seeking overall network or systems solutions that require an
increased software content which would enable them to deploy rapidly new and
differentiable services. In response, the Company has formed an organization
focused on turn-key network engineering projects for both public and private
sector customers. The Company markets integrated solutions whereby the Company
assumes full responsibility for the project, and engineers, designs and installs
the network, including equipment and software manufactured by both the Company
and third parties. In certain cases, operation of the network through contract
also may be included in the project.
 
     Increasingly, as a result of the financial demands of major network
deployments, network operators are looking to their suppliers to arrange for
financing. The ability to provide financing is a requirement to conduct business
in certain emerging markets. As a result, the Company works with its customers
to structure and place financing packages. See "Risk Factors -- Future Capital
Requirements."
 
     In order to market its product line worldwide, the Company has established
wholly owned subsidiaries and joint ventures with local companies in 16
countries. This approach also helps the Company meet local content regulations,
reduce its foreign exchange exposure and establish a local identity and employee
base.
 
  Competition
 
     The Company believes that it enjoys a strong competitive position due to
its broad product line, large installed base, strong relationship with key
customers, technological expertise and new product development capabilities. The
primary competitors in the market for telecommunications systems, in addition to
the
 
                                       40
<PAGE>   44
 
Company, are four very large European and North American companies which have
substantial technological and financial resources and which offer similar broad
product catalogs. These competitors are Alcatel Alsthom, Northern Telecom
Limited, Siemens AG and Telefonaktiebolaget LM Ericsson. In 1994, the Company
and these four competitors collectively accounted for over 35% of the world's
public network systems sales, of which the Company's sales of systems for
network operators accounted for 8%.
 
     In addition, in all of the Company's product areas other than switching,
the Company faces significant competition from companies which do business in
one or a number of such product areas. For example, in wireless systems,
Motorola, Inc. and Nokia Corporation, both of which are very large companies
with substantial technological and financial resources, are significant
competitors. In transmission and cable systems, the markets are highly
fragmented and include hundreds of smaller competitors.
 
BUSINESS COMMUNICATIONS SYSTEMS
 
     The Company designs, develops, manufactures and services telecommunications
systems and products for large and small business customers, home offices and
government agencies. The Company's business communications systems can be
upgraded regularly with new software releases, can support local and wide area
voice and data networking and are often integral components of global enterprise
networks. The Company's systems primarily are customer premises-based private
switching systems and products, call center systems, voice processing systems,
which include voice messaging and voice response systems, and the associated
application software and professional support services.
 
     The Company is the market leader in customer premises-based
telecommunication systems in the United States with the largest aggregate
installed base of PBXs, key systems, structured cabling systems and voice
processing systems. The Company serves over 1.4 million business locations in
the United States and approximately 100,000 business locations in over 90 other
countries.
 
  Systems and Services
 
     The Company's core business communications system products are private
switching systems, generally PBXs and key systems, usually located at the
customer's premises, that permit a number of local telephones or terminals to
communicate with one another, with or without use of the public telephone
network. The Company offers the DEFINITY communications system family of
products for large customers and the wired and wireless MERLIN LEGEND(R) and
PARTNER(R) systems for smaller businesses and home offices. The DEFINITY
Enterprise Communication Server provides real-time voice and mixed-media call
processing. The recently announced FREEWORKS family of business mobility
solutions includes the DEFINITY Cellular Business System, which enables in- and
out-of-building mobility with standard cellular phones.
 
     The Company's messaging and response systems store and forward voice, data
and images and conduct initial call processing, which integrates PBX and
computer functions. In addition, the Company is the technological leader in the
development of speech recognition algorithms, which have been incorporated into
both public and private call processing applications, such as operator services.
The Company's principal systems include the INTUITY AUDIX and DEFINITY AUDIX
voice messaging systems for use with the Company's or a competitor's PBX;
INTUITY CONVERSANT, a multi-lingual interactive voice response system which can
recognize speech in nine languages/dialects; and the INTUITY Multimedia
Messaging System, a system that combines voice messaging and voice-response
technology into a single desktop application.
 
     The Company is the United States market leader in the sale of call center
systems, integrating the hardware and software associated with computing,
telephony, and multifunctional messaging and response applications. Call centers
are the initial entry point for customers to access a business' telephone sales
and support operation. The Company's systems permit the routing and
administration of a large volume of incoming calls, and the integration with
business databases of customer and product information. The Company's call
center systems are used by companies in diverse industries such as financial
services, retailing and transportation. The call center environment in which
these companies operate is characterized by hundreds of telephone service agents
located in geographically dispersed networked sites, processing tens of
 
                                       41
<PAGE>   45
 
thousands of calls per hour. For example, using these systems, businesses can
provide their customers with the ability to check balances or order status, to
place orders, and to receive additional information and support. The Company has
the ability to build customized systems integrating a variety of products,
including both newly purchased equipment and equipment manufactured by third
parties.
 
     In October 1995, the Company introduced the MMCX, the industry's first
multifunctional product to deliver real-time business calling features such as
conferencing, transfer, call coverage, and add/drop to switched voice or data
networking. The MMCX allows customers to migrate their existing network to
multifunction capabilities. This enables the customer to support new
applications and transport technologies, such as ATM.
 
     In addition, subsequent to its introduction in 1989, the Company's SYSTIMAX
structured wiring system for business customers, which provides broadband
multifunctional LAN interconnections within a building or campus, has grown into
the global market leader. These systems are comprised of fiber optic and copper
cable and associated apparatus.
 
     The Company offers a wide range of professional service options, including
remote diagnostics, a variety of on-demand services and dedicated on-site
technicians. Their on-demand services involve routine testing and diagnostics,
maintenance and repair, moves and rearrangements, and software and hardware
upgrade installations.
 
     The Company believes that a key competitive advantage is its remote
diagnostics and repair capability, which permits the Company to monitor, test,
maintain and resolve problems from its regional service centers. Many of the
Company's systems are designed with intelligent software which establishes a
real-time link between the customer premises and a regional service center's
expert system. This permits the customer to reduce its system down-time and
enables the Company to automate many maintenance and repair tasks.
 
  Markets
 
     The Company markets its systems to large and small businesses and
government agencies. In the United States, the Company markets its systems
through the industry's largest direct sales force. Outside the United States,
the Company markets its systems directly and through a network of dealers and
distributors. The Company's systems are deployed in applications for customer
sales and service, conferencing and collaboration, mobility and distributed work
force, messaging and enterprise networking. The Company fields a large group of
application specialists to design call center, distance learning and other
customized applications.
 
     The Company considers its close working relationships with its customers
and its knowledge of their individual business needs to be important
contributors to its success. The Company's sales historically have been
facilitated by system upgrades, which provide a migration path to new
applications, and new system sales to its existing customer base.
 
     The Company believes that the premises-based communications market is
transforming from distinct voice and data networks to single multifunctional
networks that will be able to support any combination of voice, video and data
communications simultaneously. The Company is designing certain business
communications systems to enable its customers to simplify their premises
networks by combining separate voice, video and data networks into a single
architecture. The Company's development efforts are being focused on extending
the ubiquity and ease of use of today's voice calls to multifunctional
communications, and on reducing the costs associated with the administration and
maintenance of the customer's network.
 
     The Company has entered into alliances with Lotus Development Corporation,
to enable multimedia messaging in the Lotus Notes* environment, and with Novell,
Inc. to extend multimedia messaging and computer/telephony integration, and was
one of the founders with International Business Machines Corporation, Apple
Computer, Inc., and Siemens AG of VERSIT*, an industry consortium organized to
ensure the interoperability of multivendor multimedia applications.
 
---------------
 
* Lotus Notes is a registered trademark of Lotus Development Corporation; VERSIT
  is a trademark of the consortium's founders.
 
                                       42
<PAGE>   46
 
  Competition
 
     The Company competes principally with three other large companies with
substantial technological and financial resources in the sale of business
communication systems. These competitors are Northern Telecom Limited, Siemens
AG (through its subsidiary Siemens Rolm Communications, Inc.) and Alcatel
Alsthom. Together with the Company, in 1994 these four competitors accounted for
approximately 40% of the sales of business communications systems globally, with
the Company accounting for approximately 8%. In addition, as the market
transforms to multifunctional systems, the Company expects that it also may
encounter competition from companies that design and manufacture data network
equipment.
 
     The Company believes that key competitive factors in this market are
service support, the ability to upgrade existing systems for new applications,
price and reliability.
 
MICROELECTRONICS PRODUCTS
 
     The Company designs, manufactures and sells ICs, electronic power systems
and optoelectronic components for communications applications. These
microelectronic products are important components of many of the Company's own
systems and products. The Company also supplies these components to other
manufacturers of communications systems and computers. The Company is a market
leader in several IC product areas critical to communications applications,
including DSPs for digital cellular phones and standard-cell ASICs. At December
31, 1995, the Company's DSPs were included in more than half of the world's
digital cellular telephones.
 
  Products
 
     The Company's ICs are designed to provide advanced communications and
control functions for a wide variety of electronic products and systems. The
Company focuses on IC products that are used in communications and computing and
that require high-performance and low power chip architectures; complex
large-scale chip design in digital, analog and mixed-signal technologies; DSP
architectures and algorithms; high-frequency and high-voltage technologies; and
high speed data and signal processing. The Company offers a wide variety of
standard, semi-custom and custom products for cellular equipment, communications
networks, computers and computer peripherals, modems and consumer communications
products. Products include DSPs, ASICs, field programmable gate arrays and
communications ICs. The Company's products are manufactured using a variety of
technologies, from low-power, low-voltage submicron CMOS (complementary metal
oxide semiconductors) to high-frequency and high-voltage bipolar processes. The
Company's Orlando IC factory was awarded the Shingo Prize for excellence in
manufacturing in 1994.
 
     The Company designs, develops and manufactures energy systems, electronic
power supplies and associated magnetic components for the telecommunications and
electronic data processing industries. These products serve applications ranging
from modems for personal computers to large telephone central offices. Products
include DC/DC converters, AC/DC switching power supplies, transformers,
inductors and energy systems that provide alarm, control, and backup power
management. The Company's Dallas electronic power systems factory was awarded
the Shingo Prize in 1992. In 1994, the Company was the first U.S. manufacturer
to be awarded the Deming Prize for quality for its electronic power systems
business.
 
     The Company designs, develops and manufactures optoelectronic products
which convert electricity to light (emitters) and light to electricity
(detectors), thereby facilitating optical transmission of information. These
products include semiconductor lasers, photodetectors, integrated transmitters
and receivers, and advanced-technology erbium-doped fiber amplifiers. The
Company provides these products worldwide to manufacturers serving the
telecommunications, cable television and network computing markets.
Optoelectronic products extend the transmission capacity of fiber to meet the
requirements of such applications as video-on-demand, interactive video,
teleconferencing, image transmission and remote database searching. The Company
markets a number of advanced products, including critical optoelectronic
components that support telecommunication transmission; long-wavelength optical
data modules for data networking; and analog lasers for use in cable television
fiber optic transmission. The Company believes that its optoelectronic products
have
 
                                       43
<PAGE>   47
 
higher photonics reliability than those of its competitors due to their low
field failure rate and the Company's evaluation methodologies in manufacturing
that allow the detection and elimination of early failures.
 
     The Company seeks to respond to the pace of technological change by
improving its manufacturing process technologies and developing advanced design
tools and low-cost assembly and test capabilities. In addition to using the
capabilities of Bell Labs, the Company has established close, working relations
with customers to conceive, research, develop and design new products jointly.
To support these relationships, the Company maintains a presence in the form of
research, design, manufacturing and sales offices in over 15 countries. As a
result of these relationships, the Company has been able to develop a number of
technological innovations for its customers. For example, in order to help
reduce customers' time to market, in 1994 the Company developed the first DSP
products with on-chip flash memory. These products allow customers to load,
test, and reload development software in actual prototype systems.
 
     The Company also designs and manufactures printed circuit boards and
backplanes. The Company expects to exit this business and has offered these
operations for sale.
 
  Markets
 
     The Company's microelectronic products are sold globally to manufacturers
of communications systems and computers. In addition, the Company's energy power
systems are sold directly to U.S. and foreign telephone companies. The Company's
customers are competing in markets characterized by rapid technological changes,
decreasing product life cycles, price competition and increased user
applications. These markets have experienced significant expansion in the number
and types of products they offer to end-users, particularly in personal
computing and portable access communication devices. As a result, the Company's
customers continue to demand components which are smaller, require less power,
are more complex, provide greater functionality, and are produced with shorter
design cycles and less manufacturing lead time.
 
     In 1995, the Company also introduced a GSM hardware platform based upon a
highly integrated multiple-chip design for digital cellular phones that performs
all the key handset functions between the microphone and the antenna in both
voice and data services. The Company also sells the associated software product
elements necessary to support the GSM standard.
 
     In 1995, more than half of the Company's microelectronic production was
sold to customers other than the Company. The Company's microelectronic products
are also key components of its systems for network operators, business
communications systems, and consumer products. The Company's microelectronics
products compete with products of third-party manufacturers for inclusion in the
Company's systems and products.
 
  Competition
 
     The Company believes that its success is due to technological leadership,
product leadership, and close relationships with key customers. The market for
microelectronic products is global and generally highly fragmented. The
Company's competitors differ widely among product categories. The Company's
competitors in certain IC product categories include Motorola, Inc. and Texas
Instruments Incorporated; in electronic power systems include Astec Industries,
Inc. and Unitech plc (through its subsidiary, NEMEC-Lambda); and in
optoelectronics include Fujitsu Limited and Northern Telecom Limited.
 
     The Company believes that key competitive factors in the microelectronics
marketplace are the early involvement in customers' future application
requirements, the speed of product and technological innovation, price, customer
service, and manufacturing capacity. Other important competitive factors include
quality, reliability and local manufacturing presence.
 
CONSUMER PRODUCTS
 
     The Company designs, manufactures, services and leases communications
products for consumer, small office and home office use. For the nine months
ended September 30, 1995, the Company sold 31% of the
 
                                       44
<PAGE>   48
 
corded telephones, 28% of the cordless telephones and 34% of the telephone
answering systems sold in the United States, approximately double the market
share of any single competitor in each of these categories.
 
  Products
 
     The Company has a broad catalog of telephone products for the consumer
market. Cordless telephones are the Company's primary consumer product line, to
which the Company has continued to make improvements and innovations. The
Company was the first in the industry to introduce cordless telephones with 25
channel capability, which reduces interference. The Company also offers a broad
line of analog, digital, stand-alone and integrated telephone answering systems,
which are offered in corded and cordless versions. The Company's main corded
product is the TRIMLINE(R) telephone, with more than 88 million units sold over
the last 30 years. The Company sold over 2.5 million TRIMLINE telephones in
1995.
 
     The Company offers a broad range of cellular products which support all of
the major United States cellular standards. The Company has captured
approximately 5% of the United States market for cellular products since
entering the market in 1992. The Company's product development efforts are
focused on developing flexible, digital wireless handsets capable of supporting
all of the major standards for cellular and PCS service in the United States.
 
     The Company is implementing a common design for its consumer products,
which includes a common look, feel, feature placement and feature use. As part
of this process, the Company expects to reduce the number of different
components and casings used in its product line. The Company believes this
uniformity will reduce costs, reinforce its brand identity, and increase
manufacturing flexibility. Under the Brand License Agreement (as defined
herein), the Company has the right to market certain consumer products under the
"AT&T" name alone, and in combination with the Company's name, each for certain
specified periods. See "Arrangements Between the Company and AT&T -- Brand
License and Related Matters."
 
  Markets
 
     The Company distributes its products in the United States through
approximately 900 retailers representing over 17,000 retail outlets, including
such national retailers as Wal-Mart Stores, Inc., Sears, Roebuck and Co.,
Circuit City Stores, Inc., Best Buy Co., Inc. and Service Merchandise Company.
The Company also sells its products through the Phone Center Stores. As part of
the Company's reorganization efforts, the Company plans to close all 338 of the
Phone Center Stores by May 1996. See "The Company -- Strategic Reorganization."
The Company also offers consumers a rental option for selected products, and
currently serves over 5 million rental customers.
 
  Competition
 
     The Company believes that its position in the consumer communications
products industry is due to the quality and reliability of its products, the
"AT&T" brand name, its strong distribution channels and its broad product line.
The Company's competitors in consumer products are traditional consumer
electronic manufacturers. The industry is characterized by significant
consolidation within each product category, although the principal competitors
in each are different. In traditional telephone products, the Company's
principal competitors are Thomson Consumer Electronics (marketing under the GE
brand), U.S. Electronics, Inc. (marketing under the BellSouth brand), Panasonic
Co., USA and Sony Corporation which, together with the Company, accounted for
over 70% of market sales in the first three quarters of 1995, of which the
Company accounted for 31%.
 
OTHER SYSTEMS AND PRODUCTS
 
     The Company designs, develops and manufactures advanced technology systems
which support the United States federal government's need for specially designed
integrated systems for military and civilian use. The Company offers a full
range of products on a direct funding basis from the United States government.
These systems focus on undersea sensor systems, information processing and
secure communications. The
 
                                       45
<PAGE>   49
 
funded research has generated commercial by-products in lightwave transmission
equipment, wireless communications systems and multifunctional compression
algorithms.
 
     The Company, through its subsidiary, Paradyne, also designs and
manufactures modems and other data communications equipment for communications
and computing. The Company has offered for sale this subsidiary.
 
BELL LABORATORIES
 
     The Company has been and will continue to be supported by the technological
expertise provided by Bell Labs, one of the world's foremost industrial research
and development organizations. All of the operations of Bell Labs which support
the businesses of the Company, and basic research capability, which together
comprise approximately 75% of the total resources of Bell Labs, will be a part
of the Company. The remaining approximately 25% of the resources of Bell Labs
that historically have supported AT&T's communications services business will be
retained by AT&T. Bell Labs has made significant discoveries and advances in
communications science and technology, software design and engineering, and
networking. These contributions include the invention of the transistor and the
design and development of ICs and many types of lasers. Areas of Bell Labs
research and development work in recent years include: networking software;
lightwave transmission, which offers greater transmission capacity than other
transmission systems; electronic switching technology, which enables rapid call
processing, increased reliability and reduced network costs; microelectronics
components, which bring the latest advantages of very large scale integration to
the full range of products offered by the Company.
 
     Since its founding in 1925, on average, one patent has been issued per day
to Bell Labs. Further, seven Bell Labs scientists have received the Nobel Prize
for physics, seven have received the United States National Medal of Science,
and five have received the National Medal of Technology. In addition, Bell Labs
was the first institution to be awarded the National Medal of Technology.
 
     Bell Labs is thoroughly integrated with the Company's operating units in
design, development and manufacturing engineering. In general, substantially all
of Bell Labs' development staff are aligned with specific operating units. In
addition, its research, standards, architecture work and software consulting are
core functions structured to support all of the Company's operating units.
 
     Bell Labs' research and development activities continue to focus on the
core technologies critical to the Company's success, which are software, network
design and engineering, microelectronics and photonics.
 
     Bell Labs is a leader in software research, development and engineering for
communications applications. In 1969, it produced the UNIX* operating system, in
1972, the C and, in 1983, the C++ programming languages, and, recently, PLAN
9(TM), a distributed operating system that advances client/server applications
over public as well as private networks. In addition, since the early 1980's
Bell Labs' innovations in fault-tolerant software have enabled the Company to
achieve a level of system reliability with off-the-shelf commercial processors
that allows the Company to reduce its reliance on custom microprocessors.
 
     Bell Labs has contributed many innovations in voice quality, and is a
leader in the development of digital signal processing. In the 1990's Bell Labs
has developed a number of innovative algorithms for high-quality speech and
audio at low-bit rates, for high-definition television, and for data, image, and
video compression in multifunctional communications. These innovations have
contributed to the Company's implementation of speech processing applications
which include text-to-speech synthesis, speech recognition and automatic
translation of speech from one language to another.
 
     Bell Labs has led in the development of software-based networking
technologies that support the Company's systems and products. Since the 1970's,
Bell Labs' inventions have included automated network management and cellular
mobile communications. Recently, it has developed systems for digital cellular,
 
---------------
 
* UNIX is a registered trademark licensed exclusively by Novell, Inc.
 
                                       46
<PAGE>   50
 
PCS, mobile computing and wireless LANs. Bell Labs' research in ATM led to the
Company's offering of the first large ATM switch in 1993, and is presently
focusing on ATM offerings for office and home applications.
 
     The microelectronics industry began with Bell Labs' invention of the
transistor. Bell Labs' innovations in IC design and manufacturing include
molecular beam epitaxy in 1968, which is the technique used to build
semiconductors one atomic layer at a time.
 
     Similarly, Bell Labs' advances extended from the first semiconductor lasers
that could operate at room temperature to the microlasers used in today's
broadband multifunctional transmission systems, and from early optical fiber
research to today's optical amplifiers and TRUEWAVE fiber. Current photonic
research includes work on passive optical networks, photonic switching and
quantum wire lasers.
 
RESEARCH AND DEVELOPMENT
 
     The Company's research and product development costs charged to expense
were $2,121 million (excluding the 1995 restructuring and other charges), $2,097
million and $1,961 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Historically, the Company has targeted approximately 1% of its
revenues to fund basic research activities.
 
MFJ AGREEMENTS
 
     Certain agreements associated with the implementation of the MFJ impose
obligations concerning AT&T's manufacturing support of RBOC equipment needs,
including advance notice of AT&T's discontinuance of support for certain
equipment, and, in that event, the transfer to the RBOCs of necessary technical
resources, including, under certain circumstances, software source codes, to
enable the RBOCs to obtain the necessary equipment support elsewhere. The
Company would remain obligated to comply with these agreements.
 
BACKLOG
 
     The Company's backlog, calculated as the aggregate of the sales price of
orders received from customers less revenue recognized, was approximately $4,100
million and $3,700 million on December 31, 1995 and December 31, 1994,
respectively (approximately 7% and 1% of which, respectively, represented
backlog of orders from AT&T). Approximately $200 million of orders included in
the December 31, 1995 backlog are scheduled for delivery after December 31,
1996. However, all orders are subject to possible rescheduling by customers.
Although the Company believes that the orders included in the backlog are firm,
some orders may be canceled by the customer without penalty, and the Company may
elect to permit cancellation of orders without penalty where management believes
that it is in the Company's best interest to do so. Not included in backlog at
December 31, 1995 is approximately $3,400 million for a long-term contract with
the Ministry of Post and Telecommunications of Saudi Arabia. Although this
contract is considered firm, it is excluded from backlog due to the annual
appropriations of the Saudi Arabian government.
 
     In recent years the Company's backlog as a percentage of revenues has
decreased principally as a result of reduced manufacturing cycle times and the
increased software content of orders allowing for the faster delivery and
installation of new systems. The Company believes that these advances have
allowed customers to deploy networks more rapidly than in the past and have
resulted in a reduction in the time between customer order and system
implementation, which has also affected the Company's backlog.
 
SOURCES AND AVAILABILITY OF MATERIALS
 
     The Company makes significant purchases of electronic components, copper,
silicon, precious metals, aluminum, and other materials and components from many
domestic and foreign sources. The Company has been able to obtain sufficient
materials and components from sources around the world to meet its needs. The
Company also develops and maintains alternative sources for essential materials
and components. Occasionally, special inventories of components are maintained
to minimize the effects of shortages.
 
                                       47
<PAGE>   51
 
PATENTS AND TRADEMARKS
 
     The Company owns approximately 8,000 patents in the United States and
11,000 in foreign countries. These foreign patents are counterparts of the
Company's United States patents. Many of the patents owned by the Company are
licensed to others and the Company is licensed to use certain patents owned by
others. In connection with the Separation, the Company has entered into an
extensive cross-licensing agreement with AT&T and NCR. See "Arrangements Between
the Company and AT&T -- Patent Licenses and Related Matters."
 
     The Company intends to market its products under its own name and mark,
except with respect to certain consumer products and business communications
systems, which may be marketed under the "AT&T" name alone for one year after
the Closing Date or in combination with the Company's name for a period of up to
four years after the Closing Date. In addition, certain leased products or
maintenance contracts may be marketed under the "AT&T" name for 66 months after
the Closing Date. See "Arrangements Between the Company and AT&T -- Brand
License and Related Matters."
 
     The Company considers its many trademarks to be valuable assets. Most of
its trademarks are registered throughout the world.
 
EMPLOYEES
 
     At December 31, 1995, the Company employed approximately 131,000 persons,
of whom 82% were located in the United States. Of these domestic employees, 47%
are represented by unions, primarily the Communications Workers of America and
the International Brotherhood of Electrical Workers. The Company's labor
agreements with these unions expire on May 30, 1998. As part of the Company's
restructuring efforts, and as announced January 2, 1996, the Company will
eliminate approximately 22,000 positions, of which approximately 11,000 are
management positions and 11,000 are occupational positions. Approximately 1,000
additional management employees are employed by businesses that the Company has
announced plans to sell. As of December 31, 1995, approximately 4,100 management
employees have accepted a voluntary severance package, the majority of whom will
leave the Company in early 1996. The Company expects approximately 70% of all
separations to be completed by the end of 1996 and the majority of the remaining
separations to be completed during 1997. See "The Company -- Strategic
Reorganization" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Strategic Reorganization." The Company considers
its relationships with its employees to be satisfactory.
 
LEGAL PROCEEDINGS
 
     In the normal course of business, the Company is 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, the
Company is unable to ascertain the ultimate aggregate amount of monetary
liability or financial impact with respect to these matters at December 31,
1995. While these matters could affect operating results of any one quarter when
resolved in future periods, it is management's opinion that after final
disposition, any monetary liability or financial impact to the Company beyond
that provided in the consolidated balance sheet at December 31, 1995 would not
be material to the Company's balance sheet, statement of income and cash flows.
 
ENVIRONMENTAL MATTERS
 
     The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities, including assessment and cleanup work, underway at
46 current and former manufacturing, laboratory and recycling facilities to
comply, or to determine compliance with, applicable environmental protection
laws. AT&T and its subsidiaries have been listed as PRPs at numerous "Superfund"
sites pursuant to CERCLA or comparable state statutes, either by a government
agency (which may have either sought
 
                                       48
<PAGE>   52
 
information concerning AT&T's connection to the site, or may have sought from
AT&T participation in site cleanup work or contribution toward the cost of site
cleanup), or by a private party seeking contribution to site cleanup costs.
Under the terms of the Separation and Distribution Agreement, the Company will
assume or indemnify AT&T for all liabilities associated with these sites. It is
often difficult to estimate the future impact of environmental matters,
including potential liabilities. Although the Company believes that its reserves
are adequate, there can be no assurance that the amount of capital expenditures
and other expenses which will be required to complete remedial actions and to
comply with applicable environmental laws will not exceed the amounts reflected
in the Company's reserves or will not have a material adverse effect on the
financial condition of the Company or the Company's results of operations.
 
     On July 31, 1991, the United States Environmental Protection Agency Region
III issued a complaint pursuant to Section 3008a of the Resource Conservation
and Recovery Act of 1976 alleging violations of various waste management
regulations at the Company's Richmond Works, in Richmond, Virginia. The
complaint seeks a total of $4,184,304 in penalties. The Company is contesting
both liability and the penalties.
 
     In addition, on July 31, 1991, the United States Environmental Protection
Agency filed a civil complaint in the U.S. District Court for the Southern
District of Illinois against AT&T (with respect to the Company's businesses) and
nine other parties seeking enforcement of its CERCLA Section 106 cleanup order,
issued in November 1990 for the NL Granite City Superfund site, in Granite,
Illinois. This complaint seeks past costs, civil penalties of $25,000 per day
and treble damages related to certain United States' costs. The Company is
contesting liability.
 
     During 1994, AT&T Nassau Metals Corporation ("Nassau"), a wholly owned
subsidiary of the Company, and the New York State Department of Environmental
Conservation (the "NYSDEC") were engaged in negotiations over a study and
cleanup of the Nassau plant located on Richmond Valley Road in Staten Island,
New York. During these negotiations, in June 1994, NYSDEC presented Nassau with
a draft consent order which included not only provisions for site investigation
and remediation but also a provision for payment of a $3.5 million penalty for
alleged violations of hazardous waste management regulations. No formal
proceeding has been commenced by NYSDEC. Negotiations and discussions regarding
the matter are continuing.
 
PROPERTIES
 
     At December 31, 1995, the Company operated 46 manufacturing and repair
sites occupying in excess of 20.0 million square feet, of which approximately
1.1 million square feet were leased. These sites were located in 19 countries.
In 1995, the Company closed, relocated or sold three manufacturing and repair
sites occupying in excess of 800,000 square feet, of which none were leased. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Strategic Reorganization."
 
     At December 31, 1995, the Company operated 106 warehouse sites occupying in
excess of 4.0 million square feet, substantially all of which were leased. These
sites were located in 19 countries.
 
     At December 31, 1995, the Company operated 718 office sites
(administration, sales, field service) occupying in excess of 17.0 million
square feet, substantially all of which were leased. These sites were located in
47 countries.
 
     At December 31, 1995, the Company operated additional sites in 15 cities
with significant research and development activities, occupying in excess of 9.0
million square feet, of which approximately 1.4 million square feet were leased.
These sites were located in two countries.
 
     In addition, the Company has plans to close or to discontinue the lease of
certain facilities. See "The Company -- Strategic Reorganization."
 
     For a summary of certain leases and subleases to be entered into in
connection with the Separation, see "Arrangements Between the Company and
AT&T -- Real Estate Agreements."
 
     The Company believes its plants and facilities are suitable and adequate,
and have sufficient productive capacity, to meet its current needs.
 
                                       49
<PAGE>   53
 
                                   MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
 
     Set forth below is certain information concerning the executive officers of
the Company and concerning the individuals who, prior to the Closing Date, are
expected to serve as directors of the Company. Seven additional directors who
are officers but not directors of AT&T are also to be elected to the Company
Board prior to the Closing Date. The Company Board will be divided into three
classes. Commencing with the annual meeting of stockholders to be held in April
1997, directors for each class will be elected at the annual meeting of
stockholders held in the year in which the term for such class expires and
thereafter will serve for a term of three years. See "Description of Capital
Stock -- Antitakeover Effects of Certain Provisions of the Certificate and
By-Laws." The Company currently has three directors, all of whom are AT&T
officers who will resign as directors prior to the Closing Date.
 
<TABLE>
<CAPTION>
               NAME                     AGE                POSITION AND OFFICES HELD
-----------------------------------  ---------    --------------------------------------------
<S>                                  <C>          <C>
Henry B. Schacht...................     61        Chairman of the Board Nominee and Chief
                                                  Executive Officer
Richard A. McGinn..................     49        President and Chief Operating Officer, and a
                                                  Director Nominee
Carla A. Hills.....................     61        Director Nominee
Drew Lewis.........................     64        Director Nominee
Donald S. Perkins..................     68        Director Nominee
Franklin A. Thomas.................     61        Director Nominee
Curtis R. Artis....................     48        Senior Vice President, Human Resources
John E. Berndt.....................     55        President, Multimedia Ventures &
                                                  Technologies
Gerald J. Butters..................     52        President, North American Region, Network
                                                  Systems
Joseph S. Colson, Jr...............     48        President, AT&T Affiliates, Network Systems
Curtis J. Crawford.................     48        President, Microelectronics
Carleton S. Fiorina................     41        Executive Vice President, Corporate
                                                  Operations
Homayoun Firouztash................     52        Vice President, Consumer Products
William B. Marx, Jr................     57        Senior Executive Vice President
William T. O'Shea..................     48        President, International, Network Systems
Donald K. Peterson.................     46        Executive Vice President and Chief Financial
                                                  Officer
Richard J. Rawson..................     43        Senior Vice President, General Counsel and
                                                  Secretary
Patricia F. Russo..................     43        President, Business Communications Systems
Daniel C. Stanzione................     51        President, Network Systems; President, Bell
                                                  Laboratories
</TABLE>
 
     Mr. Schacht was named Chief Executive Officer of the Company effective
February 1, 1996 and will become Chairman of the Board of the Company prior to
the Closing Date. He has been a member of the AT&T Board since 1981 but will
resign from the AT&T Board effective as of the Closing Date. Mr. Schacht is a
director of Cummins Engine Company, Inc. ("Cummins"), a position he has held
since 1977, and also was Chief Executive Officer of Cummins from 1973 to 1994
and Chairman of the Board of Cummins from 1977 to 1995. In addition, Mr. Schacht
is a director of Aluminum Company of America, and The Chase Manhattan Corp. and
its subsidiary, The Chase Manhattan Bank, N.A. Mr. Schacht's initial term will
expire at the annual meeting of stockholders to be held in 199 .
 
     Mr. McGinn was named President and Chief Operating Officer of the Company
effective February 1, 1996 and will become a director prior to the Closing Date.
Previously, he was Executive Vice President and Chief Executive Officer of the
AT&T Network Systems Group, a position to which he was named in October 1994.
From August 1993 to October 1994, Mr. McGinn was President and Chief Operating
Officer, AT&T
 
                                       50
<PAGE>   54
 
Network Systems Group, and, from August 1991 to August 1993, he was Senior Vice
President, AT&T Network Systems Group. Prior to that time, Mr. McGinn held
various senior management positions within AT&T. Mr. McGinn's initial term will
expire at the annual meeting of stockholders of the Company to be held in 199 .
 
     Ms. Hills will become a director prior to the Closing Date. Ms. Hills has
been a director of AT&T since 1993 but will resign from the AT&T Board effective
as of the Closing Date. She has been Chairman and Chief Executive Officer of
Hills & Company (international consultants) since 1993. She was the United
States Trade Representative, Executive Office of the President, from 1989 to
1993. In addition, she is a director of American International Group, Inc.,
Chevron Corporation, and Time Warner Inc. Ms. Hills' initial term will expire at
the annual meeting of stockholders of the Company to be held in 199 .
 
     Mr. Lewis will become a director prior to the Closing Date. Mr. Lewis has
been a director of AT&T since 1989, but will resign from the AT&T Board
effective as of the Closing Date. He has been Chairman and Chief Executive
Officer of Union Pacific Corporation since 1987. He is also a director of
American Express Company, FPL Group., Inc., Ford Motor Company, and Gannett Co.,
Inc. Mr. Lewis' initial term will expire at the annual meeting of stockholders
of the Company to be held in 199 .
 
     Mr. Perkins will become a director prior to the Closing Date. Mr. Perkins
has been a director of AT&T since 1979, but will resign from the AT&T Board
effective as of the Closing Date. From 1970 to 1980, Mr. Perkins served as the
Chairman and Chief Executive Officer of Jewel Companies, Inc., a diversified
retailer. From January through June 1995, Mr. Perkins served as Non-Executive
Chairman of Kmart Corp. In addition, Mr. Perkins is a director of Aon Corp.,
Cummins, Current Assets L.L.C., Illinova Corporation and its subsidiary,
Illinois Power Corporation, Inland Steel Industries, LaSalle Street Fund, The
Putnam Funds, Springs Industries, Inc. and Time Warner Inc. Mr. Perkins' initial
term will expire at the annual meeting of stockholders of the Company to be held
in 199 .
 
     Mr. Thomas will become a director prior to the Closing Date. Mr. Thomas has
been a director of AT&T since 1988, but will resign from the AT&T Board
effective as of the Closing Date. He has been President of The Ford Foundation
since 1979. He also is a director of the Aluminum Company of America, CBS Inc.,
Citicorp and its subsidiary, Citibank, N.A., Cummins and Pepsico, Inc. Mr.
Thomas' initial term will expire at the annual meeting of stockholders of the
Company to be held in 199 .
 
     Mr. Artis became Senior Vice President, Human Resources of the Company
effective February 1, 1996. Mr. Artis held the position of Vice President, Human
Resources for the AT&T Network Systems Group since August 1994. From December
1993 to August 1994, Mr. Artis was a Vice President of Corporate Human
Resources, AT&T. Prior to that time, Mr. Artis held various senior management
positions within AT&T.
 
     Mr. Berndt became President, Multimedia Ventures and Technologies of the
Company effective February 1, 1996. Since February of 1995, Mr. Berndt has held
the position of President, Multimedia Ventures and Technologies; AT&T Multimedia
Products Group. Mr. Berndt held the position of President, New Business
Development; AT&T Multimedia Products Group from August 1993 to February 1995.
Prior to that time, Mr. Berndt was President, Business Services; AT&T
Communications Services Group, a position he held from November 1991.
 
     Mr. Butters became President, North American Region, Network Systems, of
the Company effective February 1, 1996. Since January 1994, Mr. Butters has held
various positions within the AT&T Network Systems Group, including President,
North American Region (since January 1996), President, Global Public Networks,
Offer Business Unit (from January 1995 to January 1996), President, North
American Region, Customer Business Unit (from July 1994 to January 1995), and
Vice President, Strategic Business Development (from January 1994 to July 1994).
From January 1993 to January 1994, Mr. Butters held the position of President,
Northern Telecom, Inc. Mr. Butters was Executive Vice President, Sales and
Service, from February 1992 to January 1993 and Executive Vice President, Public
Networks, both of Northern Telecom, Inc., from January 1991 to February 1992.
 
     Mr. Colson became President, AT&T Business, Network Systems of the Company
effective February 1, 1996. Since April 1993, Mr. Colson has held the position
of President, AT&T Affiliates for the AT&T
 
                                       51
<PAGE>   55
 
Network Systems Group. From July 1990 to April 1993, Mr. Colson was the
Switching Systems Vice President, United States.
 
     Mr. Crawford became President, Microelectronics of the Company effective
February 1, 1996. Mr. Crawford held the position of President, AT&T
Microelectronics since July 1993. From August 1991 to July 1993, Mr. Crawford
was Vice President, AT&T Microelectronics.
 
     Ms. Fiorina became Executive Vice President, Corporate Operations of the
Company effective February 1, 1996. Previously, Ms. Fiorina held the positions
of President, North America (from January 1995 to January 1996) and President,
Atlantic and Canadian Region (from July 1994 to January 1995) within the AT&T
Network Systems Group. From February 1993 to July 1994, Ms. Fiorina was Vice
President, Strategy and Marketing Development for the AT&T Network Systems
Group. Prior to that time, Ms. Fiorina held various senior positions with AT&T
in business development and marketing.
 
     Mr. Firouztash became Vice President, Consumer Products, of the Company
effective February 1, 1996. From October 1995, Mr. Firouztash was Vice
President, Marketing, Sales and Product Management of the Consumer Products
Group of AT&T. From August 1994 to October 1995, Mr. Firouztash held the
position of Global Marketing and Sales Vice President of AT&T Consumer Products
Group. From September 1993 to August 1994, Mr. Firouztash held the position of
Group Vice President, Global Sales/Customer Service for Consumer Products Group.
Prior to that time, Mr. Firouztash was Chief Executive Officer -- Americas
Region of Control Data Corp., a position he held from January 1991 to January
1992, and Chief Executive Officer -- Western Europe Region of Control Data
Corp., a position he held from January 1990 to January 1992.
 
     Mr. Marx became Senior Executive Vice President of the Company effective
February 1, 1996. Since July 1989, Mr. Marx has held a number of senior
management positions within AT&T, most recently as Executive Vice President and
Chief Executive Officer, AT&T Multimedia Products Group, beginning October 1994
and, previously, as Executive Vice President and Chief Executive Officer, AT&T
Network Systems Group (from August 1993) and Group Executive, AT&T Network
Systems Group (from July 1989 to August 1993).
 
     Mr. O'Shea became President, International, Network Systems of the Company
effective February 1, 1996. Since July 1995 Mr. O'Shea has held the position of
President, International Regions and Professional Services of the AT&T Network
Systems Group. Previously, in 1995, Mr. O'Shea held the position of acting Chief
Executive Officer of AT&T Global Information Solutions Company (renamed NCR)
("AT&T GIS"). Mr. O'Shea was named Senior Vice President, Worldwide Marketing of
AT&T GIS in 1993. Prior to that time, Mr. O'Shea held the position of Senior
Vice President of the AT&T GIS Network Products Group.
 
     Mr. Peterson became Executive Vice President and Chief Financial Officer of
the Company effective February 1, 1996. Mr. Peterson has held the positions of
Vice President and Chief Financial Officer of the AT&T Communications Services
Group since September 1995. Prior to that time, Mr. Peterson held various senior
executive positions at Northern Telecom, Inc. which included President of Nortel
Communications Systems, Inc. (from January 1993 to September 1995), Vice
President of Finance of Northern Telecom, Inc. (from January 1991 to January
1993) and Group Vice President of Northern Telecom, Inc. (from September 1987 to
January 1991).
 
     Mr. Rawson became Senior Vice President, General Counsel and Secretary of
the Company effective February 1, 1996. Previously, Mr. Rawson was Vice
President, Law -- AT&T Network Systems Group, a position to which he was named
in September 1992. From July 1984 to September 1992, Mr. Rawson was legal
counsel for various business units within AT&T.
 
     Ms. Russo became President, Business Communications Systems of the Company
effective February 1, 1996. From May 1993 through January 1996, Ms. Russo held
the position of President, Global Business Communications Systems of AT&T. From
August 1992 to May 1993, Ms. Russo was Vice President, National Sales and
Service of AT&T Global Communications Systems. Prior to that time, Ms. Russo
held the position of Vice President, National Sales and Service for AT&T
Business Communications Systems. From
 
                                       52
<PAGE>   56
 
August 1990 to January 1992, Ms. Russo held the position of Vice President,
National Sales of AT&T Business Communications Services.
 
     Mr. Stanzione became President, Network Systems Group and President, Bell
Laboratories effective February 1, 1996. Mr. Stanzione had held the position of
President, AT&T Bell Laboratories since January 1995. Previously, Mr. Stanzione
held the positions of President, Global Public Networks (from July 1994 to
January 1995) and President, Switching Systems (from November 1993 to July 1994)
both units of the AT&T Network Systems Group. From April 1992 to November 1993,
Mr. Stanzione held the position of Group Technical Officer and Corporate
Information Officer, AT&T Network Systems Group and from January 1989 to April
1992 Mr. Stanzione was President, Operations Systems of the AT&T Network Systems
Group.
 
     It is expected that effective as of the Distribution, the seven directors
who are officers but not directors of AT&T will resign from the Company Board.
Prior to the Distribution, the Nominating Committee of the Company Board expects
to identify a number of additional candidates not affiliated with the Company or
AT&T for election by the Company Board.
 
ANNUAL MEETING
 
     The By-Laws provide that annual meetings of stockholders will be held at
the Company's principal office or at such other place and on such date as may be
fixed from time to time by resolution of the Company Board. The first annual
meeting for which proxies will be solicited from stockholders will be held on
April 16, 1997.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Company Board has established three committees: an Audit and Finance
Committee, a Benefits and Compensation Committee and a Nominating Committee.
Each of Ms. Hills, Mr. Lewis, Mr. Perkins and Mr. Thomas will serve on each of
the three Committees.
 
     The Audit and Finance Committee meets with management to consider the
adequacy of the internal controls and the objectivity of financial reporting.
The Audit and Finance Committee also meets with the independent auditors and
with appropriate financial personnel and internal auditors of the Company
regarding these matters. The Audit and Finance Committee recommends to the
Company Board the appointment of the independent auditors, subject to
ratification by the stockholders at the annual meeting. Both the internal
auditors and the independent auditors periodically will meet alone with the
Audit and Finance Committee and will have unrestricted access to the Audit and
Finance Committee. The Audit and Finance Committee also reviews the Company's
long-term plans and financings, and reports its recommendations to the full
Company Board for approval and to authorize action. The Audit and Finance
Committee will consist of directors who are not employees of the Company or
employees or directors of AT&T ("Non-Employee Directors"), together with the
Chief Executive Officer and the Chief Operating Officer, ex officio, neither of
whom will participate in Audit and Finance Committee meetings when audit matters
are discussed.             will serve as chair of the Audit and Finance
Committee.
 
     The Benefits and Compensation Committee administers management incentive
compensation plans, including the 1996 LTIP, and makes recommendations to the
Company Board with respect to the compensation of directors and officers of the
Company. The Benefits and Compensation Committee also supervises the Company's
employee benefit plans. The Benefits and Compensation Committee will consist of
Non-Employee Directors. It is expected that following the Distribution, the
Benefits and Compensation Committee will be reconstituted as the Executive,
Benefits and Compensation Committee, which, between meetings of the Company
Board, will be authorized to exercise all the powers and authority of the
Company Board in the management of the business and affairs of the Company,
except for powers reserved to the full board of directors by the DGCL. At that
time, it is expected that the Chief Executive Officer and the Chief Operating
Officer will become ex officio members of such committee, but will not
participate in Executive, Benefits and Compensation Committee meetings where
compensation or benefit matters are discussed.                   will serve as
chair of the Executive, Benefits and Compensation Committee.
 
                                       53
<PAGE>   57
 
     The duties of the Nominating Committee will be to recommend to the full
Company Board nominees for election as directors of the Company. The Nominating
Committee will consist of Non-Employee Directors.                   will serve
as chair of the Nominating Committee.
 
COMPENSATION OF DIRECTORS
 
     As of the Closing Date, all Non-Employee Directors will receive an annual
retainer of $55,000. The chair of each committee will receive an additional
annual retainer of $10,000. Directors will not receive separate meeting fees.
One-half each of the annual retainer, and the additional annual retainer for
committee chairs, will be paid in Common Stock.
 
     Pursuant to the Company's Deferred Compensation Plan for Directors,
Non-Employee Directors may defer all or a portion of the remainder of their
compensation to a deferred compensation account (the "Account"). Directors may
elect to defer all or part of the receipt of such compensation into a portion of
the Account, the value of which is measured from time to time by the value of
the Common Stock (the "Company Shares Portion") or into a cash portion of the
Account (the "Cash Portion"). The Company Shares Portion is credited on each
dividend payment date for Common Stock with a number of deferred shares of
Common Stock equivalent in market value to the amount of the quarterly dividend
on the shares then credited in the Account. The Cash Portion of the Account
earns interest, compounded quarterly, at an annual rate equal to the average
interest rate for ten-year United States Treasury notes for the previous
quarter, plus 5%.
 
     The Company also provides Non-Employee Directors with travel accident
insurance when on Company business. A Non-Employee Director may purchase life
insurance sponsored by the Company. The Company will share the premium expense
with the director; however, all the Company contributions will be returned to
the Company at the earlier of (a) the director's death or (b) the later of age
70 or 10 years from the policy's inception. This benefit will continue after the
Non-Employee Director's retirement from the Company Board.
 
     The current Non-Employee Directors of the Company who formerly were
directors of AT&T are eligible for an annual retirement benefit under the AT&T
Retirement Plan for Outside Directors, equal to their annual retainer at
retirement from the AT&T Board, provided they attain five years of service. Such
Plan will be assumed by the Company with respect to such directors. The
directors' years of service as directors of both AT&T and the Company will be
credited in the determination of years of service. The benefit begins at age 70
and is payable for life. Except as set forth in this paragraph, the Company does
not have a retirement plan for Non-Employee Directors.
 
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
 
     No present or future officer or director currently owns any shares of
Common Stock, all of which are currently owned by AT&T. Such directors and
officers will receive shares of Common Stock in the Distribution in respect of
shares of AT&T Common Stock held by them on the record date for the
Distribution. In addition, AT&T Stock Awards will be converted into comparable
awards based on Common Stock under the 1996 LTIP as described below. See
"-- 1996 Company Long Term Incentive Plan" and "Arrangements Between the Company
and AT&T -- Employee Benefits Agreement." The following table sets forth the
number of shares of AT&T Common Stock beneficially owned on             , 1996
by each of the Company's directors and director nominees, the executive officers
named in the Summary Compensation Table below and all directors and executive
officers of the Company as a group. Except as otherwise noted, the individual
director, director nominee or executive officer or their family members had sole
voting and investment power with respect to such securities.
 
                                       54
<PAGE>   58
 
<TABLE>
<CAPTION>
                                                                             NUMBER OF
                                                                              SHARES
                                                            BENEFICIALLY     DEFERRAL
                           NAME                               OWNED(1)       PLANS(2)        TOTAL
----------------------------------------------------------  ------------     ---------     ---------
<S>                                                         <C>              <C>           <C>
Henry P. Schacht..........................................
Richard A. McGinn.........................................             (3)
Carla A. Hills............................................
Drew Lewis................................................
Donald S. Perkins.........................................             (4)
Franklin A. Thomas........................................
Directors and Executive Officers as a Group (
  persons)................................................             (5)
</TABLE>
 
---------------
(1) No individual director, director nominee or named executive officer
     beneficially owns 1% or more of the AT&T Common Stock, nor do the directors
     and executive officers as a group.
 
(2) Reflects share units representing AT&T Common Stock held in elective
     deferred compensation accounts.
 
(3) Includes beneficial ownership of the following number of shares of AT&T
     Common Stock which may be acquired within 60 days pursuant to stock options
     awarded under employee incentive compensation plans of AT&T: Mr.
     Schacht -         ; Mr. McGinn -         ;              -         ;
                  -         ;              -         ; and all directors and
     executive officers as a group -         .
 
(4) Mr. Perkins as an investment company trustee also has shared voting and
     investment power over         shares of AT&T Common Stock.
 
(5) Includes beneficial ownership of           shares of AT&T Common Stock which
     may be acquired within 60 days pursuant to stock options awarded under
     employee incentive compensation plans as well as           shares over
     which they have sole or shared voting and investment power as trustees.
 
     Options to purchase Common Stock may be granted to directors, officers and
other key employees of the Company in the future under the 1996 LTIP. See
"-- 1996 Company Long Term Incentive Plan."
 
EXECUTIVE COMPENSATION
 
     The following table sets forth certain compensation information for the
chief executive officer and the four other executive officers of the Company as
of January 1, 1996 who, based on employment with AT&T and its subsidiaries, were
the most highly compensated for the year ended December 31, 1995. All of the
information set forth in this table reflects compensation earned by such
individuals for services with AT&T and its subsidiaries.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                              LONG-TERM COMPENSATION(2)
                                            ANNUAL COMPENSATION(2)                AWARDS           PAYOUTS
  ------------------------------------------------------------------------------------------------------------------
                                                                                                                ALL
                                                               OTHER       RESTRICTED                          OTHER
                                                               ANNUAL        STOCK                  LTIP      COMPEN-
           NAME AND                     SALARY     BONUS      COMPEN-       AWARD(S)    OPTIONS/   PAYOUTS   SATION(5)
     PRINCIPAL POSITION(1)      YEAR     ($)        ($)     SATION(3)($)      ($)       SARS(#)    ($)(4)       ($)
------------------------------------------------------------------------------------------------------------------
<S>                            <C>    <C>        <C>        <C>           <C>           <C>       <C>        <C>
  Henry B. Schacht(6)           1995
  Chairman of the Board and     1994
  Chief Executive Officer       1993

  Richard A. McGinn             1995
  President and Chief           1994
  Operating Officer             1993

                                1995
                                1994
                                1993

                                1995
                                1994
                                1993

                                1995
                                1994
                                1993
------------------------------------------------------------------------------------------------------------------
</TABLE>
 
                                       55
<PAGE>   59
 
---------------
(1) Includes Chief Executive Officer and the four other most highly compensated
    executive officers.
 
(2) Compensation deferred at the election of named officers is included in the
    category (e.g., bonus, LTIP payouts) and year it would have otherwise been
    reported had it not been deferred.
 
(3) Includes (a) payments of above-market interest on deferred compensation, (b)
    dividend equivalents paid with respect to long-term performance shares prior
    to end of three-year performance period, or other earnings on long-term
    incentive compensation paid during the year, (c) tax payment reimbursements,
    and (d) the value of personal benefits and perquisites.
 
(4) Includes distribution in 1995 to Mr. McGinn,           ,           and
              of performance shares whose three-year performance period ended
    December 31, 1994.
 
(5) In 1995, includes (a) AT&T contributions to savings plans (Mr. McGinn:
    $       ,        : $       ,        : $       and        : $       ), (b)
    dollar value of the benefit of premiums paid for split-dollar life insurance
    policies (unrelated to term life insurance coverage projected on an
    actuarial basis (Mr. McGinn: $       ,        : $       ,        : $
    and        : $       )), and (c) payments equal to lost AT&T savings match
    caused by IRS limitations (Mr. McGinn: $       ,        : $       ,        :
    $       and        : $       ).
 
(6) Mr. Schacht became Chief Executive Officer of the Company on February 1,
    1996. For a description of Mr. Schacht's 1995 and 1996 compensation
    arrangements, see "-- Other Employment Arrangements."
 
OPTION AND SAR GRANTS OF AT&T COMMON STOCK TO EXECUTIVE OFFICERS
 
     The following tables disclose information regarding stock options and stock
appreciation rights ("SARs") granted to the executive officers named in the
above Summary Compensation Table in respect of shares of AT&T Common Stock under
the AT&T 1987 Long Term Incentive Plan (the "1987 Plan") during 1995.
 
                  AGGREGATED OPTION/STOCK APPRECIATION RIGHTS
                     EXERCISES IN 1995 AND YEAR-END VALUES
 
<TABLE>
<CAPTION>
                                                                                                   VALUE OF
                                                                      UNEXERCISED                IN-THE-MONEY
                                                                     OPTIONS/SARS                OPTIONS/SARS
                                                                      AT YEAR END                 AT YEAR END
                                                                          (#)                         ($)
                            SHARES ACQUIRED   VALUE REALIZED   -------------------------   -------------------------
         NAME(1)            ON EXERCISE(#)         ($)         EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
--------------------------  ---------------   --------------   -------------------------   -------------------------
<S>                         <C>               <C>              <C>                         <C>
Henry B. Schacht..........
Richard A. McGinn.........
</TABLE>
 
---------------
(1) Includes Chief Executive Officer and the four other most highly compensated
    executive officers.
 
                  LONG-TERM INCENTIVE PLANS -- AWARDS IN 1995
 
<TABLE>
<CAPTION>
                                                                                ESTIMATED FUTURE PAYOUTS
                                                                                 OF PERFORMANCE SHARES
                                                                 PERFORMANCE     UNDER NON-STOCK PRICE
                                                    NUMBER OF    PERIOD UNTIL          BASED PLAN
                                                   PERFORMANCE    MATURATION             TARGET
                     NAME(1)                         SHARES       OR PAYOUT               (#)
-------------------------------------------------  -----------   ------------   ------------------------
<S>                                                <C>           <C>            <C>
Henry B. Schacht.................................
Richard A. McGinn................................
</TABLE>
 
---------------
(1) Includes Chief Executive Officer and the four other most highly compensated
    executive officers.
 
                                       56
<PAGE>   60
 
                             OPTION GRANTS IN 1995
 
<TABLE>
<CAPTION>
                                                                 INDIVIDUAL GRANTS
                                           --------------------------------------------------------------
                                           NUMBER OF
                                             SHARES                                              GRANT
                                           UNDERLYING    % OF TOTAL                               DATE
                                            OPTIONS       OPTIONS      EXERCISE                 PRESENT
                                            GRANTED      GRANTED TO     PRICE     EXPIRATION    VALUE(2)
                 NAME(1)                       #        EMPLOYEES(2)    ($/SH)       DATE        ($)(3)
-----------------------------------------  ----------   ------------   --------   ----------   ----------
<S>                                        <C>          <C>            <C>        <C>          <C>
Henry B. Schacht.........................
Richard A. McGinn........................
</TABLE>
 
---------------
(1) Includes Chief Executive Officer and the four other most highly compensated
    executive officers.
 
(2) Percent of total options granted based on total options granted to AT&T
    employees.
 
(3) In accordance with rules of the Securities and Exchange Commission (the
    "Commission"), the Black-Scholes option pricing model was chosen to estimate
    the grant date present value of the options set forth in this table. The use
    of this model should not be construed as an endorsement of its accuracy for
    valuing options. All stock option valuation models, including the
    Black-Scholes model, require a prediction about the future movement of the
    stock price. The real value of the options in this table depends upon the
    actual performance of the stock during the applicable period.
 
PENSION PLANS
 
     Prior to the Distribution, the Company's management employees will be
participants in AT&T's Management Pension Plan (the "AT&T Management Pension
Plan"). Effective at the time of the Distribution, the Company will adopt a
management pension plan (the "Company Management Pension Plan") that will
replicate, in all material respects, the AT&T Management Pension Plan and that
will be a non-contributory pension plan which covers all management employees,
including Mr. Schacht, Mr. McGinn,           ,           and           . The
Company also will adopt non-contributory supplementary pension plans which will
replicate in all material respects AT&T's supplementary pension plans. The
following is a summary description of the expected terms of the Company
Management Pension Plan. Participants will be given full credit under the
Company Management Pension Plan for service and compensation accrued under the
AT&T Management Pension Plan. The normal retirement age under the Company
Management Pension Plan is 65; however, retirement before age 65 can be elected
under certain conditions.
 
     Under the Company Management Pension Plan, annual pensions will be computed
on an adjusted career average pay basis. The adjusted career average pay formula
will be the sum of (a) 1.6% of the average annual pay for the six years ending
December 31, 1992, times the number of years of service prior to January 1,
1993, plus (b) 1.6% of pay subsequent to December 31, 1992. Only the basic
salary will be taken into account in the formula used to compute pension
amounts.
 
     Federal laws place limitations on pensions that may be paid from the
pension trust related to the Company Management Pension Plan. Pension amounts
based on the Company Management Pension Plan formula which exceed the applicable
limitations will be paid as an operating expense.
 
     Prior to the Distribution, the Company's employees will be participants in
AT&T's Non-Qualified Pension Plan (the "AT&T Non-Qualified Plan"). Effective at
the time of the Distribution, the Company will adopt a non-qualified pension
plan (the "Company Non-Qualified Plan") that will replicate, in all material
respects, the AT&T Non-Qualified Plan, and under which annual pensions for Mr.
Schacht, Mr. McGinn,             ,             and             and other senior
managers will be computed based primarily on the Company's short-term incentive
plan. Participants will be given full credit under the Company Non-Qualified
Plan for service and compensation under the AT&T Non-Qualified Plan.
 
     Under the Company Non-Qualified Plan, pension benefits generally will
commence at the same time as benefits under the Company Management Pension Plan.
The annual pension amounts payable under the
 
                                       57
<PAGE>   61
 
Company Non-Qualified Plan will be equal to the greater of the amounts computed
under the Basic or Alternate Formula described below.
 
Basic Formula:
 
     The sum of (a) 1.5% of the average of the actual annual bonus awards for
     the three-year period ending December 31, 1989, times the number of years
     of service prior to January 1, 1990, plus (b) 1.6% of the actual annual
     bonus awards subsequent to December 31, 1989.
 
Alternate Formula:
 
     The excess of (a) 1.7% of the adjusted career average pay, over (b) 0.8% of
     the covered compensation base, times years of service to retirement, minus
     the benefit calculated under the Company Management Pension Plan formula
     (without regard to limitations imposed by the IRS). For purposes of this
     formula, adjusted career average pay will be determined by dividing the sum
     of the employee's total adjusted career income by the employee's actual
     term of employment at retirement. Total adjusted career income is the sum
     of (A) and (B), where (A) is the sum of (i) employee's years of service
     prior to January 1, 1993, multiplied by the employee's average annual
     compensation (within the meaning of the Company Management Pension Plan)
     for the three-year period ending December 31, 1992, without regard to the
     limitations imposed by the Code, plus (ii) the employee's years of service
     prior to January 1, 1990, multiplied by the average of the employee's
     actual annual bonus awards for the three-year period ending December 31,
     1989, and (B) is the sum of the employee's actual compensation (within the
     meaning of the Company Management Pension Plan) after December 31, 1992,
     without regard to the limitations imposed by the Code, and actual annual
     bonus awards subsequent to December 31, 1989. The covered compensation base
     used in this formula is the average of the maximum wage amount on which an
     employee was liable for social security tax for each year beginning with
     1961 and ending with 1995. In 1995, the covered compensation base was
     $25,800.
 
     An Alternative Minimum Formula ("AMF") will apply to active senior managers
with five years of service who were participants in the predecessor to the AT&T
Non-Qualified Plan as of December 31, 1993. The annual pension amount payable
under the AMF will be equal to the greater of the amounts computed under
Formulas A and B plus an additional percent increase factor as described below:
 
Formula A:
 
     The sum of (a) 1.5% of the average of the total compensation for the
     three-year period ending December 31, 1992, times the number of years of
     service prior to January 1, 1993, plus (b) 1.6% of the total compensation
     from January 1, 1993, to December 31, 1993. For purposes of this Formula A,
     total compensation will be basic salary plus actual annual bonus awards.
     The pension amounts resulting from this Formula A will be reduced to
     reflect retirements prior to age 55.
 
Formula B:
 
     The excess of (a) 1.7% of the adjusted career average pay, over (b) 0.8% of
     the covered compensation base, times years of service to December 31, 1993.
     For purposes of this Formula B, adjusted career average pay is determined
     by dividing the sum of the employee's total adjusted career income used for
     purposes of Formula A, by the employee's actual term of employment to
     December 31, 1993. The covered compensation base used in this Formula B is
     the average of the maximum wage amounts on which an employee was liable for
     social security tax for each year beginning with 1959 and ending with 1993.
     In 1993, the covered compensation base was $22,800. The pension amounts
     resulting from this Formula B will be reduced to reflect retirements prior
     to age 60.
 
     An additional percent increase factor based on age and service is applied
to the pension amount resulting from the higher of Formula A or B. The total AMF
pension results in a fixed benefit and such amount will be reduced by the amount
payable under the Company Management Pension Plan. It is anticipated that after
1997, a senior manager's normal pension increases resulting from additional age
and service as well as possible
 
                                       58
<PAGE>   62
 
future pension plan amendments could cause the regular accrued pension benefit
to exceed the fixed AMF benefit. Pensions resulting from the AMF will be payable
under the Company Non-Qualified Plan.
 
     Prior to the Distribution, certain of the Company's employees also will be
participants in AT&T's Mid-Career Pension Pension (the "AT&T Mid-Career Pension
Plan"). Effective at the time of the Distribution, the Company will adopt a
mid-career pension pension (the "Company Mid-Career Pension Plan") that will
replicate, in all material respects, the AT&T Mid-Career Pension Plan.
Participants will be given full credit under the Company Mid-Career Pension Plan
for service and compensation under the AT&T Mid-Career Pension Plan. The Company
Mid-Career Pension Plan, will cover senior managers (including Mr. Schacht) and
certain other management employees who are hired at age 35 or over. For
specified managers retiring with at least five years in level, the Company
Mid-Career Pension Plan will provide additional pension credits equal to the
difference between age 35 and their maximum possible years of service attainable
at age 65, but not to exceed actual net credited service, at approximately
one-half the rate in the Company Management Pension Plan.
 
     Senior managers (including Mr. Schacht) are also covered by a supplemental
pension plan (the "Company Long Term Disability and Survivor Protection Plan")
which provides for a minimum pension of 15% of the sum of final base salary rate
plus the final actual annual bonus. All other Company pension plans are offsets
to this minimum pension.
 
     Pension amounts under any of the Company Management Pension Plan formula,
the Company Non-Qualified Plan, the Company Mid-Career Pension Plan or the
Company Long Term Disability and Survivor Protection Plan are not subject to
reductions for social security benefits or other offset amounts. If Mr. Schacht
continues in the position given above and retires at the normal retirement age
of 65, he would receive a pension payable under the Company Management Pension
Plan formula, the Company Non-Qualified Plan, the Company Mid-Career Pension
Plan and the Company Long Term Disability and Survivor Protection Plan (as
successors to the corresponding AT&T plans). For Mr. McGinn,             ,
            and             , the estimated annual pension amounts payable under
the Company Management Pension Plan formula and the Company Non-Qualified Plan
would be $          , $          , $          and $          , respectively.
Amounts shown are straight-life annuity amounts not reduced by a joint and
survivorship provision which is available to the officers named.
 
     The Company has reserved the right to purchase annuity contracts to satisfy
its unfunded obligations to any of these officers under the Company
Non-Qualified Plan. In the event the Company purchases an annuity contract for
any officer, the pension payments for such officer will vary from those set
forth above. In such event, there would be a tax gross-up payment to the officer
and annuity benefits paid by the annuity provider will be reduced to offset the
tax gross-up payment. The after-tax pension benefit will be the same as the
after-tax benefit the participant would otherwise have received under the
Company Non-Qualified Plan.
 
     Certain of the Company's non-qualified executive benefit plans will be
supported by a benefits protection trust, the assets of which are subject to the
claims of the Company's creditors. In the event of a "Change in Control" or
"Potential Change in Control" of the Company (as such terms are defined
therein), certain additional funds might be required to be contributed to such
trust to support benefits under such plans.
 
OTHER EMPLOYMENT ARRANGEMENTS
 
     Mr. Schacht became Chief Executive Officer of the Company on February 1,
1996. The following summarizes Mr. Schacht's compensation arrangement with the
Company for 1995 and 1996:                         .
 
1996 COMPANY LONG TERM INCENTIVE PLAN
 
     The Company intends to adopt, with the approval of AT&T in its capacity as
the sole stockholder of the Company, the 1996 LTIP. After the Distribution, the
1996 LTIP will be administered by the Executive, Benefits and Compensation
Committee of the Company Board. In order to ensure that compensation paid
pursuant to the 1996 LTIP can qualify as "performance-based compensation" not
subject to the limitation on
 
                                       59
<PAGE>   63
 
deductibility of certain executive compensation in excess of $1 million, the
Company intends to seek stockholder approval of the 1996 LTIP at either its 1997
or 1998 annual meeting of stockholders. Such stockholder approval is not
required for any other purpose. The following description of the 1996 LTIP is
qualified by reference to the full text thereof, a copy of which will be filed
as an exhibit to the Registration Statement. See "Available Information."
 
  Awards
 
     The 1996 LTIP provides for the grant of incentive stock options that
qualify under Section 422 of the Code ("ISOs") and non-statutory stock Options,
SARs, Restricted Stock Awards, Performance Awards, Other Stock Unit Awards (as
such terms are defined herein), and any other right, interest, or option
relating to shares of Common Stock or other securities of the Company
(collectively, "Awards"). No determination has yet been made as to the number of
employees of the Company who will be eligible to participate in the 1996 LTIP.
However, as described under "Arrangements Between the Company and
AT&T -- Employee Benefits Agreement," employees of the Company who hold AT&T
Stock Awards (approximately     persons as of           , 1996) are expected to 
receive in substitution therefor, following consummation of the Distribution, 
Awards under the 1996 LTIP (the "Substitute Awards").
 
  Shares Available
 
     The 1996 LTIP contains a formula for establishing an annual limit on the
number of shares of Common Stock which may be awarded (or with respect to which
non-stock Awards may be made) in any given calendar year, except that Substitute
Awards will not be counted against such limit. Subject to customary
anti-dilution adjustments, the total number of shares of Common Stock available
for grant under the 1996 LTIP in each calendar year is 1% of the total
outstanding shares of Common Stock as of the first day of such year for which
the 1996 LTIP is in effect (except that for 1996, the number of shares of Common
Stock outstanding immediately after the Offerings will be used); provided that
such number will be increased in any year by the number of shares of Common
Stock available for grant under the 1996 LTIP in previous years but not covered
by Awards granted thereunder in such years; and provided, further; that no more
than           shares of Common Stock will be cumulatively available for the
grant of ISOs. Any shares of Common Stock issued by the Company through the
assumption or substitution of outstanding grants from an acquired company will
not reduce the number of shares of Common Stock available for grants thereunder.
In addition, no one individual may be granted Awards with respect to more than
          shares in any one year (not including Substitute Awards). Any shares
of Common Stock issued under the 1996 LTIP (including in connection with
Substitute Awards) may consist, in whole or in part, of authorized and unissued
shares or treasury shares or shares purchased in the open market. If any shares
of Common Stock subject to any Award are forfeited or such Award otherwise
terminates without the issuance of such shares of Common Stock or of other
consideration in lieu of such shares, the shares subject to such Award, to the
extent of any such forfeiture or termination, will again be available for grant
under the 1996 LTIP. In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the shares of Common Stock, such adjustment will be made in the
aggregate number and class of shares which may be delivered under the 1996 LTIP,
in the individual limit described above, in the number, class and option price
of shares of Common Stock subject to outstanding Options thereunder, and in the
value of, or number or class of shares of Common Stock subject to, Awards as may
be determined to be appropriate by the Executive, Benefits and Compensation
Committee, in its sole discretion, provided that the number of shares of Common
Stock subject to any Award will always be a whole number.
 
  Executive, Benefits and Compensation Committee
 
     The Executive, Benefits and Compensation Committee, which is comprised of
Non-Employee Directors, none of whom may receive any Awards under the 1996 LTIP,
will administer the 1996 LTIP after the Distribution. See "-- Committees of the
Board of Directors." The Executive, Benefits and Compensation Committee will
have full power and authority, subject to such orders or resolutions not
inconsistent with the provisions of the 1996 LTIP as may from time to time be
adopted by the Company Board, (i) to select the
 
                                       60
<PAGE>   64
 
employees of the Company and its affiliates to whom Awards may from time to time
be granted (the "Participants"); (ii) to determine the type or types of Award to
be granted to each Participant; (iii) to determine the number of shares of
Common Stock to be covered by each Award; (iv) to determine the terms and
conditions, not inconsistent with the provisions of the 1996 LTIP of any Award;
(v) to determine whether, to what extent and under what circumstances Awards may
be settled in cash, shares of Common Stock or other property or canceled or
suspended; (vi) to determine whether, to what extent and under what
circumstances cash, shares of Common Stock and other property and other amounts
payable with respect to an Award will be deferred either automatically or at the
election of the Participant; (vii) to interpret and administer the 1996 LTIP and
any instrument or agreement entered into thereunder; (viii) to establish such
rules and regulations and appoint such agents as it may deem appropriate for the
proper administration thereof; and (ix) to make any other determination and take
any other action that the Executive, Benefits and Compensation Committee deems
necessary or desirable for administration of the 1996 LTIP.
 
  Substitute Awards
 
     Pursuant to the Employee Benefits Agreement, Substitute Awards will be
issued to employees of the Company following the Distribution in exchange for
AT&T Stock Awards. The terms and conditions of each Substitute Award, including,
without limitation, the time or times when, and the manner in which, each stock
Option or SAR constituting a Substitute Award will be exercisable, the duration
of the exercise period, the permitted method of exercise, settlement and
payment, the rules that will apply in the event of the termination of employment
of the employee, the events, if any, that may give rise to an employee's right
to accelerate the vesting or the time of exercise thereof and the vesting
provisions of any Restricted Stock Award or Performance Award constituting
Substitute Awards, will be the same as those of the surrendered or forfeited
AT&T Stock Award. See "Arrangements Between the Company and AT&T -- Employee
Benefits Agreement."
 
  Options; Stock Appreciation Rights
 
     Options to purchase Common Stock ("Options") may be granted under the 1996
LTIP, either alone or in addition to other Awards. Except in the case of
Substitute Awards, the purchase price per share of Common Stock purchasable
under an Option will be determined by the Executive, Benefits and Compensation
Committee, in its sole discretion; provided that such purchase price will not be
less than the Fair Market Value (as defined in the 1996 LTIP) of a share of
Common Stock on the date of the grant of the Option. The term of each Option
will be fixed by the Executive, Benefits and Compensation Committee in its sole
discretion; provided that no ISO will be exercisable after the expiration of 10
years from the date the Option is granted. Options will be exercisable at such
time or times as determined by the Executive, Benefits and Compensation
Committee at or subsequent to grant. Unless otherwise determined by the
Executive, Benefits and Compensation Committee at or subsequent to grant, no ISO
will be exercisable during the year ending on the day before the first
anniversary date of the granting of the ISO. Subject to the other provisions of
the 1996 LTIP and any applicable Award agreement, any Option may be exercised by
the Participant, in whole or in part, at such time or times, and the Participant
may make payment of the option price in such form or forms, including, without
limitation, payment by delivery of cash, shares of Common Stock or other
consideration (including, where permitted by law and the Executive, Benefits and
Compensation Committee, Awards) having a Fair Market Value on the exercise date
equal to the total option price, or by any combination of cash, shares of Common
Stock and other consideration as the Executive, Benefits and Compensation
Committee may specify in the applicable Award agreement.
 
     In accordance with rules and procedures established by the Executive,
Benefits and Compensation Committee, the aggregate Fair Market Value (determined
as of the time of grant) of the shares of Common Stock with respect to which
ISOs held by any Participant and exercisable for the first time by such
Participant during any calendar year under the 1996 LTIP (and under any other
benefit plans of the Company or of any parent or subsidiary corporation of the
Company) will not exceed $100,000 or, if different, the maximum limitation in
effect at the time of grant under Section 422 of the Code, or any successor
provision, and any regulations promulgated thereunder. In its sole discretion,
the Executive, Benefits and Compensation
 
                                       61
<PAGE>   65
 
Committee may provide, at the time of grant, that the shares to be issued upon
an Option's exercise will be in the form of restricted stock or other similar
securities, or may reserve the right so to provide after the time of grant. SARs
may be granted to Participants either alone or in addition to other Awards and
may, but need not, relate to a specific Option. The provisions of SARs need not
be the same with respect to each recipient. Any SAR related to an Option other
than an ISO may be granted at the same time such Option is granted or at any
time thereafter before exercise or expiration of such Option. Any SAR related to
an ISO must be granted at the same time such Option is granted. In the case of
any SAR related to any Option, the SAR or applicable portion thereof will
terminate and no longer be exercisable upon the termination or exercise of the
related Option, except that any SAR granted with respect to less than the full
number of shares of Common Stock covered by a related Option will not be reduced
except to the extent that the number of shares affected by the exercise or
termination of the related Option exceeds the number of shares not covered by
the SAR. Any Option related to any SAR will no longer be exercisable to the
extent the related SAR has been exercised. The Executive, Benefits and
Compensation Committee may impose such conditions or restrictions on the
exercise of any SAR as it may deem appropriate.
 
  Performance Shares
 
     Performance-based equity awards ("Performance Awards") may be issued to
Participants, for no cash consideration or for such minimum consideration as may
be required by applicable law, either alone or in addition to other Awards
granted under the 1996 LTIP. The performance criteria to be achieved during any
Performance Period (as defined in the 1996 LTIP) and the length of the
Performance Period will be determined by the Executive, Benefits and
Compensation Committee upon the grant of each Performance Award. With certain
exceptions, Performance Awards will be distributed only after the end of the
relevant Performance Period. Performance Awards may be paid in cash, shares of
Common Stock, other property or any combination thereof, in the sole discretion
of the Executive, Benefits and Compensation Committee at the time of payment.
The performance levels to be achieved for each Performance Period and the amount
of the Performance Award to be distributed will be conclusively determined by
the Executive, Benefits and Compensation Committee. Performance Awards may be
paid in a lump sum or in installments following the close of the Performance
Period or, in accordance with procedures established by the Executive, Benefits
and Compensation Committee, on a deferred basis.
 
  Other Stock Unit Awards
 
     Other Awards of shares of Common Stock and other Awards that are valued in
whole or in part by reference to, or are otherwise based on, shares of Common
Stock or other property ("Other Stock Unit Awards") may be granted to
Participants, either alone or in addition to other Awards. Other Stock Unit
Awards may be paid in shares of Common Stock, other securities of the Company,
cash or any other form of property as the Executive, Benefits and Compensation
Committee may determine. Subject to the provisions of the 1996 LTIP, the
Executive, Benefits and Compensation Committee will have sole and complete
authority to determine the employees of the Company and its affiliates to whom,
and the time or times at which, such Awards will be made, the number of shares
of Common Stock to be granted pursuant to such Awards, and all other conditions
of the Awards. The provisions of Other Stock Unit Awards need not be the same
with respect to each recipient.
 
     Shares of Common Stock (including securities convertible into shares of
Common Stock) subject to Other Stock Unit Awards may be issued for no cash
consideration or for such minimum consideration as may be required by applicable
law; shares of Common Stock (including securities convertible into such shares)
purchased pursuant to such a purchase right will be purchased for such
consideration as the Executive, Benefits and Compensation Committee may, in its
sole discretion, determine, which (other than in the case of Substitute Awards)
will not be less than the Fair Market Value of such shares of Common Stock or
other securities as of the date such purchase right is awarded.
 
                                       62
<PAGE>   66
 
  Restricted Shares
 
     Restricted stock awards ("Restricted Stock Awards") may be issued to
Participants, for no cash consideration or for such minimum consideration as may
be required by applicable law, either alone or in addition to other Awards
granted under the 1996 LTIP. The provisions of Restricted Stock Awards need not
be the same with respect to each recipient. Except as otherwise determined by
the Executive, Benefits and Compensation Committee at the time of grant, upon
termination of employment for any reason during the restriction period, all
Restricted Stock Awards still subject to restriction will be forfeited by the
Participant and reacquired by the Company; provided that, in the event of a
Participant's retirement, permanent disability, other termination of employment
or death, or in cases of special circumstances, the Executive, Benefits and
Compensation Committee may, in its sole discretion, when it finds that a waiver
would be in the best interests of the Company, waive, in whole or in part, any
or all remaining restrictions with respect to such Participant's Restricted
Stock Awards.
 
  Change in Control
 
     The 1996 LTIP provides that upon any Change in Control (as defined in the
1996 LTIP), unless the Executive, Benefits and Compensation Committee provides
otherwise at the time of grant: (i) each Option will become fully vested and
exercisable; (ii) each Restricted Stock Award will become fully vested and
transferrable; (iii) each Performance Award will be considered earned and
payable in full; (iv) all deferral limitations will lapse; and (v) each Option
holder generally will have the right to surrender his or her Option, within 60
days after the Change in Control, for a cash payment equal to the difference
between the Change in Control Price (as defined in the 1996 LTIP) and the
exercise price of such Option, multiplied by the number of shares subject to
such Option.
 
  Other Provisions
 
     The Company Board may amend, alter or discontinue the 1996 LTIP, but no
amendment, alteration, or discontinuation may be made that would impair rights
under an Award theretofore granted without the Participant's consent, or that,
without the approval of the stockholders, would (a) except pursuant to the
provisions providing for anti-dilution adjustments, increase the total number of
shares of Common Stock reserved thereunder; (b) change the employees or class of
employees eligible to participate therein; or (c) prevent the Company from
fulfilling its obligations with respect to Substitute Awards pursuant to the
Employee Benefits Agreement. The Executive, Benefits and Compensation Committee
may amend the terms of any Award theretofore granted, prospectively or
retroactively, but no such amendment may impair the rights of any Participant
without his or her consent. The Executive, Benefits and Compensation Committee
may also substitute new Awards for previously granted Awards, including, without
limitation, previously granted Options having higher Option prices.
 
     The Executive, Benefits and Compensation Committee will be authorized to
make adjustments in Performance Award criteria or in the terms and conditions of
other Awards in recognition of unusual or nonrecurring events affecting the
Company or its financial statements or changes in applicable laws, regulations
or accounting principles.
 
     Subject to the provisions of the 1996 LTIP and any Award agreement, the
recipient of an Award (including, without limitation, any deferred Award) may,
if so determined by the Executive, Benefits and Compensation Committee, be
entitled to receive, currently or on a deferred basis, interest or dividends, or
interest or dividend equivalents, with respect to the number of shares of Common
Stock covered by the Award, as determined by the Executive, Benefits and
Compensation Committee, in its sole discretion, and the Benefits and
Compensation Committee may provide that such amounts (if any) will be deemed to
have been reinvested in additional shares of Common Stock or otherwise
reinvested.
 
  The Company's Other Benefit Plans
 
     Pursuant to the Employee Benefits Agreement, the Company will create plans
for management and occupational employees of the Company that replicate in all
material respects AT&T's benefit plans. Except
 
                                       63
<PAGE>   67
 
as provided therein, the Employee Benefits Agreement does not preclude the
Company from discontinuing any plan, changing any plan or benefit or adopting
any new plan. See "Arrangements Between the Company and AT&T -- Employee
Benefits Agreement."
 
     In addition, the Company plans to investigate other programs for more
broad-based ownership of Common Stock by the Company's employees following the
Distribution.
 
RELATED TRANSACTIONS
 
     In addition to the transactions and other matters referred to in the
"Arrangements Between the Company and AT&T," the Company has engaged, and
expects to continue to engage, with AT&T and with affiliates of AT&T, in certain
ordinary course business transactions. Such transactions include certain
financing activities, including sales of lease receivables, with AT&T Capital
Corporation, a majority-owned subsidiary of AT&T. For a summary of such
transactions, see Note 12 of Notes to Consolidated Financial Statements included
elsewhere in this Prospectus.
 
                                       64
<PAGE>   68
 
                   ARRANGEMENTS BETWEEN THE COMPANY AND AT&T
 
     For the purposes of governing certain of the relationships between the
Company and AT&T (including NCR) following the Separation, the Offerings and the
Distribution, the Company, AT&T and NCR have entered into the Separation and
Distribution Agreement, and have entered into or, on or prior to the Closing
Date, will enter into the Ancillary Agreements to which they are parties
(collectively, the "Transaction Agreements"). The Ancillary Agreements include
the Interim Services and Systems Replication Agreement; the General Purchase
Agreement and the supplemental agreements related thereto; the Employee Benefits
Agreement; the Brand License Agreement; the Patent License Agreement and other
patent-related agreements; the Technology License Agreement and other
technology-related agreements; the Tax Sharing Agreement and other tax-related
agreements; certain agreements providing for the assignment of, and the
establishment of transitional arrangements with respect to, real property; and
agreements pursuant to which AT&T will provide communications services to the
Company and NCR will sell certain products to the Company. Certain of the
Transaction Agreements summarized below have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part and the summaries
of such agreements are qualified in their entirety by reference to the full text
of such agreements. See "Available Information." Capitalized terms used in this
section and not otherwise defined herein shall have their respective meanings
set forth in the Separation and Distribution Agreement (except that the term
"Company" is used in lieu of the term "Lucent").
 
SEPARATION AND DISTRIBUTION AGREEMENT
 
     The Separation and Distribution Agreement sets forth the agreements among
the Company, AT&T and NCR with respect to the principal corporate transactions
required to effect the Separation, the Offerings and the Distribution, and
certain other agreements governing the relationship among the parties
thereafter. Certain agreements specifying the series of transactions necessary
to effect the separation of Assets and Liabilities of the Company, AT&T and NCR
located outside the United States are contained in the Non-U.S. Plan.
 
  The Separation
 
     To effect the Separation, AT&T and NCR have transferred or agreed to
transfer, or to cause their respective subsidiaries to transfer, the Company
Assets to the Company. The Company has assumed or agreed to assume and has
agreed faithfully to perform and fulfill all the Company Liabilities in
accordance with their respective terms. Except as expressly set forth in the
Separation and Distribution Agreement or in any Ancillary Agreement, no party is
making any representation or warranty as to the assets, businesses or
liabilities transferred or assumed as part of the Separation, as to any consents
or approvals required in connection therewith, as to the value or freedom from
any Security Interests of any of the Assets transferred or as to the absence of
any defenses or freedom from counterclaim with respect to any claim of any
party, or as to the legal sufficiency of any assignment, document or instrument
delivered to convey title to any Asset transferred. Except as expressly set
forth in any Transaction Agreement, all Assets are being transferred on an "as
is," "where is" basis, and the respective transferees have agreed to bear the
economic and legal risks that the conveyance is insufficient to vest in the
transferee good and marketable title, free and clear of any Security Interest.
 
  The Distribution
 
     The Separation and Distribution Agreement provides that, subject to the
terms and conditions thereof, AT&T and the Company will take all reasonable
steps necessary and appropriate to cause all conditions to the Distribution to
be satisfied, and to effect the Distribution on the Distribution Date. The AT&T
Board will have the sole discretion to determine the date of consummation of the
Distribution at any time after the Closing Date and on or prior to December 31,
1996. AT&T has agreed to consummate the Distribution no later than December 31,
1996, subject to the satisfaction or waiver by the AT&T Board, in its sole
discretion, of the following conditions:
 
                                       65
<PAGE>   69
 
          (i) a private letter ruling from the IRS shall have been obtained, and
     shall continue in effect, to the effect that, among other things, the
     Distribution will qualify as a tax-free distribution for federal income tax
     purposes under Section 355 of the Code and the transfer to the Company of
     the Company Assets and the assumption by the Company of the Company
     Liabilities in connection with the Separation will not result in
     recognition of any gain or loss for federal income tax purposes to AT&T,
     the Company or AT&T's or the Company's shareholders, and such ruling shall
     be in form and substance satisfactory to AT&T, in its sole discretion;
 
          (ii) any material Governmental Approvals and Consents necessary to
     consummate the Distribution shall have been obtained and be in full force
     and effect;
 
          (iii) no order, injunction or decree issued by any court or agency of
     competent jurisdiction or other legal restraint or prohibition preventing
     the consummation of the Distribution shall be in effect, and no other event
     outside the control of AT&T shall have occurred or failed to occur that
     prevents the consummation of the Distribution; and
 
          (iv) no other events or developments shall have occurred subsequent to
     the Closing Date that, in the judgment of the AT&T Board, would result in
     the Distribution having a material adverse effect on AT&T or on the
     shareholders of AT&T.
 
In the event that any such condition is not satisfied or waived on or before
December 31, 1996, AT&T has agreed to consummate the Distribution as promptly as
practicable following the satisfaction or waiver of all such conditions. AT&T
may terminate the obligation to consummate the Distribution if the Distribution
has not occurred by December 31, 1997. See "-- Termination."
 
     The Company, AT&T and NCR have agreed that, after the Closing Date, none of
the parties will take, or permit any of its affiliates to take, any action which
reasonably could be expected to prevent the Distribution from qualifying as a
tax-free distribution within the meaning of Section 355 of the Code. The parties
have also agreed to take any reasonable actions necessary in order for the
Distribution to qualify as a tax-free distribution pursuant to Section 355 of
the Code. Without limiting the foregoing, after the Closing Date and on or prior
to the Distribution Date, the Company will not issue or grant, and will not
permit any member of the Company Group to issue or grant, directly or
indirectly, any shares of Common Stock or any rights, warrants, options or other
securities to purchase or acquire (whether upon conversion, exchange or
otherwise) any shares of Common Stock (whether or not then exercisable,
convertible or exchangeable).
 
  Retained Receivables
 
     Under the Separation and Distribution Agreement, AT&T has retained all the
Retained Receivables, consisting of certain receivables that arose in the
Company Business. The Retained Receivables have a face amount estimated for pro
forma purposes at approximately $2,000 million. The Separation and Distribution
Agreement provides that the Company will use its reasonable best efforts to
satisfy any conditions to the payment of any Retained Receivables and to fulfill
all obligations to the applicable account debtors related to such Retained
Receivables. Any payment made by an account debtor to the Company or any member
of the Company Group with respect to an account receivable will be applied to
any Retained Receivables attributable to that account debtor (and paid over to
AT&T) before they are applied to any other account receivable whenever arising
for such account debtor, subject to certain limited exceptions. In the
Separation and Distribution Agreement, the Company represents and warrants to
AT&T that each Retained Receivable constitutes a legal, valid and binding
obligation of the applicable account debtor enforceable against such account
debtor in accordance with its respective terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium and other similar
laws affecting the enforcement of creditors' rights generally, and is not
subject to any Security Interest or any other lien, claim, defense or right of
set-off.
 
  Releases and Indemnification
 
     The Separation and Distribution Agreement provides for a full and complete
release and discharge as of the Closing Date of all Liabilities existing or
arising from all acts and events occurring or failing to occur or
 
                                       66
<PAGE>   70
 
alleged to have occurred or to have failed to occur and all conditions existing
or alleged to have existed on or before the Closing Date, between or among the
Company or any member of the Company Group, on the one hand, and AT&T, NCR or
any member of the AT&T Services Group or the NCR Group, on the other hand
(including any contractual agreements or arrangements existing or alleged to
exist between or among any such members on or before the Closing Date), except
as expressly set forth in the Separation and Distribution Agreement.
 
     Except as provided in the Separation and Distribution Agreement, the
Company has agreed to indemnify, defend and hold harmless each of AT&T and NCR,
each member of the AT&T Group and the NCR Group, and each of their respective
directors, officers and employees, from and against all Liabilities relating to,
arising out of or resulting from (i) the failure of the Company or any member of
the Company Group or any other Person to pay, perform or otherwise promptly
discharge any Company Liabilities, any Environmental Liabilities of a Subsidiary
of the Company not directly assumed by the Company, or any Company Contract, in
accordance with their respective terms, (ii) the Company Business, any Company
Liability, the Environmental Liabilities referred to above or any Company
Contract, (iii) any breach by the Company or any member of the Company Group of
the Separation and Distribution Agreement or any of the Ancillary Agreements,
and (iv) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, with respect
to all information contained in this Prospectus or the Registration Statement of
which it forms a part. Also, in the Separation and Distribution Agreement, the
Company has indemnified the members of the AT&T Group, subject to limited
exceptions, against any claims of patent, copyright or trademark infringement or
trade secret misappropriation with respect to any product, software or other
material provided by or ordered from the Company Business (whether alone or in
combination with other items provided by the Company Business or third parties)
prior to the Offerings.
 
     AT&T has agreed to indemnify, defend and hold harmless the Company, each
member of the Company Group and each of their respective directors, officers and
employees from and against all Liabilities relating to, arising out of or
resulting from (i) the failure of AT&T or any member of the AT&T Group or any
other Person to pay, perform or otherwise promptly discharge any liabilities of
the AT&T Group other than the Company Liabilities or the NCR Covered
Liabilities, (ii) the AT&T Services Business or any Liability of the AT&T Group
other than the Company Liabilities and the NCR Covered Liabilities, and (iii)
any breach by AT&T or any member of the AT&T Services Group of the Separation
and Distribution Agreement or any of the Ancillary Agreements.
 
     NCR has agreed to indemnify, defend and hold harmless the Company, each
member of the Company Group and each of their respective directors, officers and
employees from and against all liabilities relating to, arising out of or
resulting from (i) the failure of NCR or any member of the NCR Group or any
other Person to pay, perform or otherwise promptly discharge any Exclusive NCR
Contingent Liability or any Shared NCR Percentage of any Shared Contingent
Liability, and (ii) any breach by NCR or any member of the NCR Group of the
Separation and Distribution Agreement or any of the Ancillary Agreements, or any
other agreement that is not contemplated to be terminated as of the Closing Date
pursuant to the Separation and Distribution Agreement.
 
     The Separation and Distribution Agreement also specifies certain procedures
with respect to claims subject to indemnification and related matters.
 
  Contingent Liabilities and Contingent Gains
 
     The Separation and Distribution Agreement provides for indemnification by
the Company, AT&T and NCR with respect to Contingent Liabilities primarily
relating to their respective businesses or otherwise assigned to them
("Exclusive Contingent Liabilities"), subject to the sharing provisions
described below. In the event the aggregate Value (as defined herein) of all
amounts paid by the Company, AT&T or NCR (in each case, together with any
members of its respective Group) in respect of any single Exclusive Contingent
Liability of such Group or any set or group of Related Exclusive Contingent
Liabilities of such Group is in
 
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<PAGE>   71
 
excess of $100 million, the Company, AT&T and NCR will share such portion in
excess of $100 million (the "Excess Portion") in accordance with the following
percentages:
 
          (i) if the Exclusive Contingent Liability primarily relates to the
     business of AT&T, AT&T will bear 75% of such Excess Portion, the Company
     will bear 22% of such Excess Portion, and NCR will bear 3% of such Excess
     Portion;
 
          (ii) if the Exclusive Contingent Liability primarily relates to the
     business of the Company, the Company will bear 50% of such Excess Portion,
     AT&T will bear 47% of such Excess Portion, and NCR will bear 3% of such
     Excess Portion;
 
          (iii) if the Exclusive Contingent Liability primarily relates to the
     business of NCR, NCR will bear 50% of such Excess Portion, AT&T will bear
     37% of such Excess Portion, and the Company will bear 13% of such Excess
     Portion.
 
     For purposes of the foregoing, the term "Value" is defined as the aggregate
amount of all cash payments, the fair market value of all non-cash payments and
the incremental cost of providing any goods or services made or provided in
respect of any Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, net of: (a) any Insurance Proceeds received or realized in respect
of the applicable Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, (b) any Tax benefits associated with such payments or the provision
of such goods or services (calculated in the manner specified in the Separation
and Distribution Agreement), (c) any amounts received pursuant to certain
specified third party agreements in respect of the Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities, (d) any other amounts
recovered (including by way of set off) from a third party in connection with
the applicable Action or threatened Action and (e) the amount of any reserve,
account payable or similar accrual in respect of the Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities, net of any offsetting
receivables in respect of such Exclusive Contingent Liability or Related
Exclusive Contingent Liabilities, in each case as reflected on the Company's
Balance Sheet or the audited consolidated balance sheet of AT&T, including the
notes thereto, as of December 31, 1995.
 
     As a result of the foregoing provisions, if the Value of amounts paid in
respect of any Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities of AT&T or NCR exceeds $100 million, the Company will be required to
pay 22% of the Excess Portion (in the case of any AT&T Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities) or 13% of the Excess
Portion (in the case of any NCR Exclusive Contingent Liability or Related
Exclusive Contingent Liabilities), notwithstanding the fact that the Exclusive
Contingent Liability or Related Exclusive Contingent Liabilities do not relate
to the business and operations of the Company or any other member of the Company
Group. Conversely, if the Value of amounts paid in respect of any Company
Exclusive Contingent Liability or Related Exclusive Contingent Liabilities
exceeds $100 million, the Company will be entitled to reimbursement from AT&T
and NCR of 50%, in the aggregate, of the Excess Portion, notwithstanding the
fact that the Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities do not relate to the business and operations of AT&T or NCR or the
members of their Groups.
 
     The Separation and Distribution Agreement also provides for the sharing of
Shared Contingent Liabilities, which are defined as (a) any Contingent
Liabilities that are not Exclusive AT&T Contingent Liabilities, Exclusive
Company Contingent Liabilities or Exclusive NCR Contingent Liabilities, (b) any
RBOC Liability, and (c) certain specifically identified Liabilities, including
certain Liabilities relating to terminated, divested or discontinued businesses
or operations of AT&T or its current or former Affiliates. With respect to any
Shared Contingent Liability, the parties have agreed that AT&T will be
responsible for 75%, the Company for 22% and NCR for 3% of such Shared
Contingent Liability. AT&T will assume the defense of, and may seek to settle or
compromise, any Third Party Claim that is a Shared Contingent Liability, and the
costs and expenses thereof will be included in the amount to be shared by the
parties.
 
     The Separation and Distribution Agreement provides that the Company, AT&T
and NCR will have the exclusive right to any benefit received with respect to
any Contingent Gain that primarily relates to the business of, or that is
expressly assigned to, the Company, AT&T or NCR, respectively (an "Exclusive
 
                                       68
<PAGE>   72
 
Contingent Gain"). Each of the Company, AT&T and NCR will have sole and
exclusive authority to manage, control and otherwise determine all matters
whatsoever with respect to an Exclusive Contingent Gain that primarily relates
to its respective business. The parties have agreed to share any benefit that
may be received from any Contingent Gain that is not an Exclusive Contingent
Gain (a "Shared Contingent Gain"), with AT&T receiving 75%, the Company
receiving 22% and NCR receiving 3% of any such benefit. The parties have agreed
that AT&T will have the sole and exclusive authority to manage, control and
otherwise determine all matters whatsoever with respect to any Shared Contingent
Gain. Pursuant to the Separation and Distribution Agreement, each of the Company
and NCR acknowledges that AT&T may elect not to pursue any Shared Contingent
Gain for any reason whatsoever (including a different assessment of the merits
of any Action, claim or right than the Company or NCR or any business reasons
that are in the best interests of AT&T or a member of the AT&T Services Group,
without regard to the best interests of any member of the Company Group or the
NCR Group) and that no member of the AT&T Group will have any liability to any
Person (including any member of the Company Group or the NCR Group) as a result
of any such determination.
 
     The Separation and Distribution Agreement provides for the establishment of
a Contingent Claims Committee and sets forth procedures for the purpose of
resolving disagreements among the parties as to Contingent Gains and Contingent
Liabilities.
 
  Dispute Resolution
 
     The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims that may arise between or among the parties.
These provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management (or
other mutually agreed) representatives of the parties. If such efforts are not
successful, any party may submit the dispute, controversy or claim to mandatory,
binding arbitration, subject to the provisions of the Separation and
Distribution Agreement. The Separation and Distribution Agreement contains
procedures for the selection of a sole arbitrator of the dispute, controversy or
claim and for the conduct of the arbitration hearing, including certain
limitations on discovery rights of the parties. These procedures are intended to
produce an expeditious resolution of any such dispute, controversy or claim.
 
     In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $100 million, or in the event that an arbitration
award in excess of $100 million is issued in any arbitration proceeding
commenced under the Separation and Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent jurisdiction and the arbitration provisions contained in the
Separation and Distribution Agreement will not apply. In the event that the
parties do not agree that the amount in controversy is in excess of $100
million, the Separation and Distribution Agreement provides for arbitration of
such disagreement.
 
  Certain Business Transactions
 
     The Separation and Distribution Agreement provides that no member of any
Group will have any duty to refrain from engaging in the same or similar
activities or lines of business as any member of any other Group, or from doing
business with any potential or actual supplier or customer of any member of any
other Group. The Separation and Distribution Agreement also provides for the
allocation of certain corporate opportunities following the Closing Date and
prior to the Distribution Date. During this period, none of the Company, AT&T or
NCR will have any duty to communicate or offer such opportunities to any of the
others and may pursue or acquire any such opportunity for itself or direct such
opportunity to any other Person, unless (a) the opportunity relates primarily to
the Company Business, the AT&T Services Business or the NCR Business, in which
case the party that acquires knowledge of the opportunity will generally be
required to communicate and offer the opportunity to the company to whose
business the opportunity primarily relates, or (b) the opportunity relates both
to the AT&T Services Business and the Company Business but not primarily to
either one, in which case such party will generally be required to communicate
and offer the opportunity to the Company. In the event the foregoing clause (a)
or (b) is applicable, no party, other than the party to whom
 
                                       69
<PAGE>   73
 
the opportunity must be offered in accordance with such clauses, will pursue or
acquire such opportunity for itself, or direct such opportunity to any other
Person, unless the party to whom the opportunity is required to be offered does
not within a reasonable period of time begin to pursue, or does not thereafter
continue to pursue, such opportunity diligently and in good faith.
 
  Ability to Terminate Certain Rights
 
     The Separation and Distribution Agreement provides that certain rights
granted to the Company and the members of the Company Group will be subject to
the following provisions. Except as otherwise expressly provided, in the event
that, at any time prior to February 1, 2001, the Company or any member of the
Company Group offers, furnishes or provides any Telecommunications Services of
the type offered by the AT&T Services Business as of the Closing Date, then AT&T
may, in its sole discretion: (a) terminate all or any portion of the rights
granted by AT&T under the Brand License Agreement; (b) terminate all or any
remaining portion of the purchase commitments made by AT&T and the members of
the AT&T Group in the General Purchase Agreement; (c) exercise the right to
require the Company to transfer to AT&T certain personnel, information,
technology and software under the Supplemental Agreements; (d) terminate all or
any portion of the rights to patents and technology of AT&T or any member of the
AT&T Group granted to the Company and the members of the Company Group pursuant
to the Patent License Agreement and the Technology License Agreement; and (e)
direct the Company and the members of the Company Group to reconvey to AT&T all
interests in any and all patents and technology in which the Company or any
member of the Company Group was granted an undivided one-half interest pursuant
to the Patent Assignments or the Technology Assignment and Joint Ownership
Agreements. The Company and the members of the Company Group will not be deemed
to offer, furnish or provide any Telecommunications Services (and the foregoing
provisions will not apply) solely by virtue of certain specified investments in
Persons that offer, furnish or provide Telecommunications Services or by virtue
of offering, furnishing or providing Telecommunications Services below a
specified de minimis amount.
 
  Provisions Relating to Third-Party Patent License Agreements
 
     The Separation and Distribution Agreement provides, subject to specified
exceptions, for the grant by AT&T to the Company and NCR of rights to share with
AT&T the patent license rights granted to AT&T under third-party patent license
agreements. To the extent this grant is not effective, AT&T will transfer the
patent license agreement to the Company (and the Company will seek equivalent
rights from the third party for AT&T and NCR) or, if such transfer is not
effective, AT&T will retain the patent license agreement (and AT&T will seek
equivalent rights from the third party for the Company and NCR).
 
  Proceeds; Expenses
 
     The Separation and Distribution Agreement provides that the Offerings will
be primary Offerings of the Common Stock and that the net proceeds of the
Offerings will be retained by the Company. See "Use of Proceeds." The Company
has agreed to pay all third party costs, fees and expenses relating to the
Offerings, all of the reimbursable expenses of the Underwriters pursuant to the
Underwriting Agreement, all of the costs of producing, printing, mailing and
otherwise distributing this Prospectus, as well as the Underwriters' discount as
provided in the Underwriting Agreement. See "Underwriting." Except as expressly
set forth in the Separation and Distribution Agreement or in any Ancillary
Agreement, whether or not the Offerings or the Distribution is consummated, all
third-party fees, costs and expenses paid or incurred in connection with the
Distribution will be paid by AT&T.
 
  Termination
 
     The Separation and Distribution Agreement may be terminated at any time
prior to the Distribution Date by the mutual consent of AT&T, NCR and the
Company, or by AT&T at any time prior to the Closing Date. In addition, the
obligations of AT&T and the Company to pursue or effect the Distribution may be
terminated by AT&T if the Distribution does not occur on or prior to December
31, 1997. If the Separation and Distribution Agreement is terminated prior to
the Closing Date, no party thereto (or any of its respective
 
                                       70
<PAGE>   74
 
directors or officers) will have any Liability or further obligation to any
other party. In the event of any termination of the Separation and Distribution
Agreement on or after the Closing Date, only the provisions of the Separation
and Distribution Agreement that obligate the parties to pursue the Distribution
will terminate and the other provisions of the Separation and Distribution
Agreement and each Ancillary Agreement will remain in full force and effect.
 
  Amendments and Waivers
 
     No provisions of the Separation and Distribution Agreement or any Ancillary
Agreement will be deemed waived, amended, supplemented or modified by any party,
unless such waiver, amendment, supplement or modification is in writing and
signed by the authorized representative against whom it is sought to enforce
such waiver, amendment, supplement or modification. The Company has agreed and
acknowledged on behalf of itself and each other member of the Company Group that
(a) AT&T and NCR may enter into a separation and distribution agreement and
other agreements and instruments in connection with the NCR Distribution or
otherwise providing for certain arrangements between AT&T and NCR and that no
consent of any member of the Company Group will be required in connection
therewith, (b) certain transfers of Assets and Liabilities may occur between
members of the AT&T Services Group and the NCR Group and that no consent of any
member of the Company Group will be required in connection therewith, (c) AT&T
will have no obligation to proceed with the NCR Distribution, and (d) except as
otherwise set forth, all of the rights and obligations of the NCR Group will
continue regardless of whether NCR is an Affiliate of AT&T. Effective
immediately on notice to the Company, without any further action required by any
member of the Company Group, AT&T may assume any Asset or Liability of any
member of the NCR Group under the Separation and Distribution Agreement or under
any Ancillary Agreement (and any rights of any member of the NCR Group in
connection therewith) and all members of the NCR Group will thereupon
automatically be released therefrom.
 
  Further Assurances
 
     In addition to the actions specifically provided for elsewhere in the
Separation and Distribution Agreement, each of the parties has agreed to use its
reasonable best efforts, prior to, on and after the Closing Date, to take, or
cause to be taken, all actions, and to do, or cause to be done, all things,
reasonably necessary, proper or advisable under applicable laws, regulations and
agreements to consummate and make effective the transactions contemplated by the
Separation and Distribution Agreement and the Ancillary Agreements.
 
INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT
 
     The Company, AT&T and NCR have entered into an Interim Services and Systems
Replication Agreement (the "Interim Services and Systems Replication
Agreement"), governing the provision by each to one or more of the others, on an
interim basis, of certain data processing and telecommunications services
(including voice telecommunications and data transmission), and certain
corporate support services (including accounting, financial management, tax,
payroll, stockholder and public relations, legal, human resources
administration, procurement, real estate management and other administrative
functions), each as specified and on the terms set forth therein and in the
schedules thereto. Specified charges for such services are generally intended to
allow the providing company to recover the fully allocated direct costs of
providing the services, plus all out-of-pocket costs and expenses, but without
any profit. The Interim Services and System Replication Agreement also provides
for the provision of certain additional services identified from time to time
after the Closing Date that a party reasonably believes were inadvertently or
unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the Separation and Distribution Agreement
(so long as the provision of such services would not significantly disrupt the
providing party's operations).
 
     In addition, the Interim Services and Systems Replication Agreement
provides for the replication and transfer, from each party to one or more of the
others, of certain computer systems, including hardware, software, data storage
or maintenance and support components, specified therein and in the schedules
thereto. The computer systems that will be replicated or transferred include
specified computer systems that are used
 
                                       71
<PAGE>   75
 
to provide administrative support services to the Company or for business
applications specific to the Company's business. Except where otherwise
specified, the costs and expenses of separating or replicating a system are
intended to be borne by the companies in proportion to their prior usage of the
system. Costs and expenses of purchasing new hardware or obtaining new software
licenses will be borne by the Company purchasing the new hardware or licensing
the new software.
 
PURCHASE AGREEMENTS
 
     The Company and AT&T have entered into a General Purchase Agreement (the
"General Purchase Agreement") and various related and supplemental agreements
pursuant thereto (the "Supplemental Agreements"). The General Purchase Agreement
governs transactions pursuant to which the company provides Products, Licensed
Materials and Services (as such terms are defined in the General Purchase
Agreement) to AT&T and certain designated AT&T affiliates (each an "Ordering
Company"). The Products, Licensed Materials and Services include those related
to switching, signaling, transmission, power and operations support systems. In
the General Purchase Agreement, AT&T has committed that payments made to the
Company (commencing January 1, 1996) for purchases of Products, Licensed
Materials and Services by all Ordering Companies will total at least $3,000
million cumulatively for the calendar years 1996, 1997 and 1998. If that
commitment is not fulfilled by December 31, 1998, certain interest will be
payable determined by reference to the amount of the shortfall. Such interest
payment is the sole remedy for any shortfall in such commitment. Under the
General Purchase Agreement, on or prior to the Closing Date, AT&T will prepay to
the Company $500 million, which will be applied to accounts receivable owed by
AT&T covering purchases of Products, Licensed Materials and Services that are
due and payable on or after January 1, 1997.
 
     The General Purchase Agreement also contains provisions governing (i)
ordering and delivery, (ii) payment terms, (iii) certain intellectual property
matters, (iv) product warranties, (v) product support and documentation, (vi)
engineering, installation, maintenance and other services, and (vii) consulting
services. The General Purchase Agreement has a five-year term, which will be
automatically extended for additional one-year periods unless either party
provides the other party one year's prior written notice of its desire to permit
the General Purchase Agreement to expire without further extension of its term.
 
     The Supplemental Agreements set forth the specific terms and conditions,
including pricing, applicable to the provision by the Company to AT&T of the
particular Products, Licensed Materials and Services covered by each
Supplemental Agreement. Under certain circumstances, including a Change of
Control of the Company that AT&T determines will have a material adverse impact
on particular AT&T programs, AT&T will have the right to require the Company to
transfer to AT&T certain personnel and certain information, technology and
software used by the Company in connection with specified Products, Licensed
Materials and Services provided by the Company to AT&T. The pricing terms for
the Products, Licensed Materials and Services covered by the Supplemental
Agreements reflect negotiated prices taking into account the size of AT&T's
purchase commitment and AT&T's position as one of the Company's largest
customers. Any purchases by AT&T Wireless Services, Inc. ("AT&T Wireless") under
separate agreements with the Company will also be included in determining
whether AT&T's $3,000 million commitment under the General Purchase Agreement is
met.
 
EMPLOYEE BENEFITS AGREEMENT
 
     AT&T and the Company have entered into an Employee Benefits Agreement,
dated as of February 1, 1996 (the "Employee Benefits Agreement") that governs
the employee benefit obligations of the Company, including both compensation and
benefits, with respect to active employees and retirees assigned to the Company.
Pursuant to the Employee Benefits Agreement, the Company assumes and agrees to
pay, perform, fulfill and discharge, in accordance with their respective terms,
all Liabilities to, or relating to, former employees of AT&T or its affiliates
who will be employed by the Company and its affiliates and certain former
employees of AT&T or its affiliates (including retirees) who either were
employed in the Company Business or who otherwise are assigned to the Company
for purposes of allocating employee benefit obligations (including all retirees
of Bell Labs). Until the Distribution Date, the employees and former employees
assigned to the Company will continue to participate in AT&T's pension and other
employee benefit plans,
 
                                       72
<PAGE>   76
 
although the Company will bear its allocable share of the costs of benefits and
administration of such plans. Effective immediately after the Distribution, the
Company will establish its own pension and employee benefit plans, which
generally will be the same as AT&T's plans as in effect at that time. The
Employee Benefits Agreement does not preclude the Company from discontinuing or
changing such plans at any time thereafter, with certain exceptions noted below.
The Company's plans generally will assume all liabilities under AT&T's plans to
employees and former employees assigned to the Company, and certain assets
funding such liabilities, including, assets held in trusts funding benefits
under Voluntary Employee Beneficiary Associations (VEBAs), will be transferred
from trusts and other funding vehicles associated with AT&T's plans to the
corresponding trusts and other funding vehicles associated with the Company's
plans.
 
     Assets of trusts under qualified pension plans will be divided, immediately
after the Distribution Date, between the trusts for AT&T qualified pension plans
and the new Company qualified pension plans. Each such trust will receive the
legally required funding minimum and, if greater, a sufficient amount of
additional trust assets to ensure continued compliance with the existing AT&T
pension funding policy. Any trust assets in excess of the funding policy level
will be divided equally between the trusts of AT&T and the Company for such
qualified pension plans. Consistent with existing collective bargaining
agreements and applicable law, there will be a specified period of portability
of benefits under certain pension and other employee benefit plans for
occupational employees who move from AT&T to the Company or from the Company to
AT&T after the Distribution Date. For management employees, there will be a
limited period of portability of such benefits after the Distribution Date if
such employees move between the companies. In addition, during a transitional
period, AT&T or its affiliates will provide certain benefit plan administrative
services, investment management services, and actuarial services to the Company
and will share the administration of contracts with third parties to support
certain welfare benefit plans of both AT&T and the Company. During the period of
joint administration of welfare benefit plans, changes to the plans may only be
made in accordance with procedures specified in the Employee Benefits Agreement
so that any such changes will not materially increase the costs of the other
company.
 
  AT&T Stock Awards
 
     General.  Pursuant to the Employee Benefits Agreement, the Company will
issue Substitute Awards under the 1996 LTIP in substitution for awards
(collectively, "AT&T Stock Awards") under the 1987 Plan and under other
stock-based plans of AT&T as of the Distribution Date and held by individuals
employed by the Company as of such date (the "Company Employees"). With certain
exceptions, AT&T Stock Awards held by individuals employed by AT&T as of the
Distribution Date and AT&T Stock Awards held by individuals who will not
continue their employment after the Distribution Date with any of AT&T, the
Company or any of their subsidiaries, including individuals who have retired
prior to such date, will remain outstanding as AT&T Stock Awards, with an
appropriate antidilution adjustment to reflect the Distribution.
 
     In the case of AT&T Stock Awards consisting of stock options, the
Substitute Award will provide for the purchase of a number of shares of the
Common Stock equal to the number of shares of AT&T Common Stock subject to such
AT&T Stock Award as of the Distribution Date, multiplied by the Ratio (as
defined herein), rounded down to the nearest whole share. The per share exercise
price of the Substitute Award will equal the per share exercise price of such
AT&T Stock Award as of the Distribution Date divided by the Ratio. The Company
will pay the holder of the Substitute Award cash in lieu of any fractional
share. The Substitute Award for each AT&T Stock Award consisting of performance
shares, stock units, restricted stock or restricted stock units will be a new
award consisting of Company performance shares, stock units, restricted stock or
restricted stock units, respectively, representing a number of shares of Common
Stock equal to the number of shares of AT&T Common Stock represented by such
AT&T Stock Award multiplied by the Ratio rounded down to the nearest whole
share. The Company will pay to the holder of such Substitute Award cash in lieu
of any fractional share. The other terms and conditions of each Substitute
Award, will be the same as those of the surrendered AT&T Stock Award. The
"Ratio" means the amount obtained by dividing (i) the average of the daily high
and low per share prices of the AT&T Common Stock as listed on the NYSE during
each of the five trading days immediately preceding the ex-dividend date for the
Distribution by (ii) the average of the daily high and low per share prices of
the Common Stock as listed on the NYSE during each of the five trading days
immediately preceding the ex-dividend date for the Distribution.
 
                                       73
<PAGE>   77
 
  Shares Subject to Substitute Awards
 
     It is not possible to specify how many shares of Common Stock will be
subject to Substitute Awards. It is expected that some AT&T Stock Awards
consisting of stock options and SARs held by Company Employees will be
exercised, other AT&T Stock Awards will vest and other AT&T Stock Awards could
be granted, prior to the Distribution Date. In addition, the remaining balance
of unexercised AT&T Stock Awards will be converted into Substitute Awards by
reference to the Ratio, which will not be known until after the Distribution is
completed. Stockholders of the Company are, however, likely to experience some
dilutive impact from the above-described adjustments.
 
  Treatment of AT&T Stock Awards Pending the Distribution
 
     Pending the Distribution, AT&T Stock Awards held by Company Employees will
remain outstanding as AT&T Stock Awards. Pursuant to the Employee Benefits
Agreement, however, the Company will pay AT&T (i) upon the exercise of an AT&T
Stock Award consisting of stock options by a Company Employee whether prior to,
on or after the Distribution, in an amount equal to the excess, if any, of the
Market Value (as defined below) of the purchased shares on the date of exercise
of such option or the date of such purchase, as applicable, over the price paid
for such shares; and (ii) upon the vesting or delivery of shares of AT&T Common
Stock pursuant to an Award (other than an option) held by a Company Employee in
an amount equal to the Market Value of such AT&T Common Stock on the date of
such vesting or delivery. The "Market Value" of a share of AT&T Common Stock on
a given date means the average of the high and the low per share price of the
AT&T Common Stock as listed on the NYSE on such date, or if there is no trading
on the NYSE on such date, on the most recent previous date on which such trading
takes place.
 
  Outstanding AT&T Stock Awards Held by Employees of the Company
 
     As of             , 1996, there were approximately           million shares
of AT&T Common Stock subject to options for AT&T Common Stock and approximately
     million shares of AT&T Common Stock represented by other AT&T Stock Awards
in each case held by Company Employees.
 
BRAND LICENSE AND RELATED MATTERS
 
     The Company and AT&T have entered into a license agreement (the "Brand
License Agreement") pursuant to which the Company will have rights, on a
royalty-free basis, to continue to use the AT&T brand (including the AT&T globe
design) for specified transition periods following the Closing Date. Under the
Brand License Agreement, the Company will be entitled to use the AT&T brand,
alone or in combination with the Company's brand, for the sale of consumer
products and services and business communications systems and services for a
period of one year following the Closing Date. After the initial one-year
period, the Company will be entitled to continue to use the AT&T brand on these
products, systems and services, but only in combination with the Company's
brand, for an additional three-year period. The right to use the AT&T brand,
alone or in combination with the Company's brand, in connection with certain
leased products or maintenance contracts will extend for 66 months after the
Closing Date. The Brand License Agreement permits the Company to use the AT&T
brand on the Company's other products, systems and services until the earlier of
the Distribution or six months after the Closing Date. In addition, the Company
may use the AT&T brand after these time periods to the extent necessary to
deplete pre-existing inventory. Subject to certain conditions set forth in the
Brand License Agreement, the Company may also extend these rights to use the
AT&T brand to authorized dealers of the Company's products, systems and
services.
 
     The Brand License Agreement provides that the Company will comply with
specified quality, customer care and marketing standards in connection with the
use of the AT&T brand. It also provides that neither the Company nor any of its
authorized dealers will, during the period it is using the AT&T brand, provide,
offer or market telecommunications services provided by any person other than
AT&T (with certain exceptions, including to permit specified authorized dealers
to continue existing practices). AT&T has agreed in the Brand License Agreement
that, for a period of one year after the Closing Date, it will not license the
AT&T brand or trade dress to third parties (other than AT&T's affiliates) for
use in connection with products or
 
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<PAGE>   78
 
services that compete with the Company's consumer products and services or
business communications systems and services. AT&T may terminate the Brand
License Agreement in the event of a significant breach (as defined therein),
including in the event of a change of control of the Company.
 
     Pursuant to separate assignments, AT&T has also assigned to the Company all
rights in specified other trademarks, service marks and trade dress used in the
Company's business.
 
PATENT LICENSES AND RELATED MATTERS
 
     The Separation and Distribution Agreement provides that, on or prior to the
Closing Date, the Company, AT&T and NCR will execute and deliver assignments and
other agreements, including a patent license agreement, related to patents
currently owned or controlled by AT&T and its subsidiaries. The patent
assignments will divide ownership of patents, patent applications and foreign
counterparts among the Company, AT&T and NCR, with the substantial portion of
those currently owned or controlled by AT&T and its subsidiaries (other than
NCR) being assigned to the Company. A small number of the patents assigned to
the Company will be jointly owned with either AT&T or NCR. Certain of the
patents that the Company will jointly own with AT&T will be subject to a joint
ownership agreement under which each of the Company and AT&T will have full
ownership rights in the patents. The other patents that the Company will jointly
own with AT&T, and the patents that the Company will jointly own with NCR, will
be subject to defensive protection agreements with AT&T and NCR, respectively,
under which the Company will hold most ownership rights in the patents
exclusively. Under these defensive protection agreements, AT&T or NCR, as the
case may be, will have the ability, subject to specified restrictions, to assert
infringement claims under the patents against companies that assert patent
infringement claims against them, and will have consent rights in the event the
Company wishes to license the patents to certain third parties or for certain
fields of use under specified circumstances. The defensive protection agreements
also provide for one-time payments from AT&T and NCR to the Company.
 
     The patent license agreement to be entered into by the Company, AT&T and
NCR provides for royalty-free cross-licenses to each company, under each of the
other company's patents that are covered by the licenses, to use, lease, sell
and import any and all products and services of the businesses in which the
licensed company (including specified related companies) is now or hereafter
engaged. The cross-licenses also permit each company, subject to specified
limitations, to have third parties make items under the other companies'
patents, as well as to pass through to customers certain rights under the other
companies' patents with respect to products and services furnished to customers
by the licensed company. In addition, the rights granted to the Company and AT&T
include the right to license third parties under each of the other company's
patents to the extent necessary to meet existing patent licensing obligations
and AT&T has the right, subject to specified restrictions and procedures, to
seek sublicensing of a limited number of identified patents to be assigned to
the Company.
 
     The cross-licenses between the Company and AT&T cover all of each company's
patents, including patents issued on patent applications filed on or before
December 31, 1996, except for certain patents and patents on filed applications
owned or controlled by AT&T Wireless. The cross-licenses between the Company and
NCR cover all of each company's patents, including patents issued on patent
applications filed on or before December 31, 1999.
 
TECHNOLOGY LICENSES AND RELATED MATTERS
 
     The Separation and Distribution Agreement provides that, on or prior to the
Closing Date, the Company, AT&T and NCR will execute and deliver assignments and
other agreements, including the Technology License Agreement, related to
technology currently owned or controlled by AT&T and its subsidiaries.
Technology includes copyrights, mask works and other intellectual property other
than trademarks, trade names, trade dress, service marks and patent rights. The
technology assignments will divide ownership of technology among the Company,
AT&T and NCR, with the Company and AT&T owning technology that was developed by
or for, or purchased by, the Company's business or AT&T's services business,
respectively, and NCR owning technology that was developed by or for, or
purchased by, NCR. Technology that is not
 
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<PAGE>   79
 
covered by any of these categories will be owned jointly by the Company and AT&T
or, in the case of certain specified technology, owned jointly by the Company,
AT&T and NCR.
 
     The Technology License Agreement to be entered into by the Company, AT&T
and NCR provides for royalty-free cross-licenses to each company to use the
other companies' technology existing as of the Closing Date, except for
specified portions of each company's technology as to which use by the other
companies is restricted or prohibited.
 
TAX AGREEMENTS
 
  Tax Allocation Agreements
 
     The parties have entered into agreements to govern the allocation of
consolidated or combined federal and state and local income tax liability (the
"Tax Allocation Agreements") among AT&T, the Company, NCR and all other domestic
subsidiaries of AT&T for the period before the Distribution Date. No party will
pay an amount of income tax greater than the income tax it would have paid had
it filed its income tax return as a separate entity (prior to credits), except
in cases in which the consolidated or combined group as a whole realizes a
detriment from consolidation or combination. The Tax Allocation Agreements also
provide that profitable entities will compensate loss entities to the extent
that the losses are utilized in the consolidated tax return. No loss entity,
however, will be compensated for an amount of losses in excess of the amount of
losses that it would have shown had it filed its income tax return separately.
Consolidated or combined credits allowed against tax on a consolidated or
combined income tax return will be allocated to each entity in proportion to the
creditable expenditures by such entity (or, in the case of credits not based on
expenditures, in proportion to its contribution to such credits). To the extent
that the consolidated or combined group is subject to alternative minimum tax
("AMT"), such AMT will be allocated proportionately among those members of the
group that would have owed AMT had they filed their income tax return
separately.
 
     Tax Sharing Agreement
 
     The Tax Sharing Agreement, by and among the Company, AT&T and NCR (the "Tax
Sharing Agreement"), governs contingent tax liabilities and benefits, tax
contests and other tax matters with respect to tax returns filed with respect to
tax periods, in the case of the Company, ending or deemed to end on or before
the Distribution Date. Under the Tax Sharing Agreement, Adjustments (as defined
in the Tax Sharing Agreement) to Taxes that are clearly attributable to the
business of one party will be borne solely by that party. Adjustments to all
other Tax liabilities will be borne 75% by AT&T, 22% by the Company and 3% by
NCR.
 
     Notwithstanding the above, if as a result of the acquisition of all or a
portion of the capital stock or assets of the Company, the Distribution fails to
qualify as a tax-free distribution under Section 355 of the Code, then the
Company will be liable for any and all increases in Tax attributable thereto.
 
REAL ESTATE AGREEMENTS
 
     AT&T, the Company and NCR have executed a series of instruments that assign
AT&T's worldwide real estate portfolio, consisting of both owned and leased
property, among the parties. Generally, such real estate was assigned by
reference to which party was the dominant tenant in the applicable facility. The
parties also have agreed to share, pursuant to intercompany leases, subleases
and sub-subleases, certain facilities, consisting predominantly of office space
and laboratory sites.
 
     With certain exceptions the terms of such leases, subleases and
sub-subleases are substantially the same regardless of which company is tenant
or landlord. In the case of owned real estate to be leased, the lease terms will
be either two or three years, except that a limited number of leases may be
terminated on 90 days' notice by the tenant. In the case of subleases or
sub-subleases of property, the lease term will generally coincide with the
remaining term of the primary lease or sublease, respectively. In the case of
owned property, rent payments are generally determined by reference to
prevailing market rents or previously specified internal budget levels. In the
case of subleases of third-party leases, or sub-subleases, rent payments are
generally
 
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<PAGE>   80
 
determined by reference to the rent specified in the underlying lease or
sublease, plus an administrative fee. The leases, subleases and sub-subleases
provide generally that owner, landlord or sub-landlord will provide property
services for specified fees.
 
OTHER AGREEMENTS
 
     AT&T and the Company have entered into the Virtual Telecommunications
Network Service Agreement pursuant to which the Company has committed to
purchase a minimum of $62.5 million of telecommunication services from AT&T over
a three-year term at specified tariffs. In addition, NCR and the Company have
entered into the Volume Purchase Agreement under which the Company has committed
to purchase at least $150 million of products and services from NCR by December
31, 1998.
 
                             PRINCIPAL STOCKHOLDER
 
     Prior to the Offerings, all of the outstanding shares of Common Stock will
be owned by AT&T. After the Offerings, AT&T will own approximately      %
(     % if the U.S. Underwriters exercise their overallotment option in full) of
the Common Stock then outstanding. Except as described above, the Company is not
aware of any person or group that will beneficially own more than 5% of the
outstanding shares of Common Stock following the Offerings.
 
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<PAGE>   81
 
                          DESCRIPTION OF CAPITAL STOCK
 
AUTHORIZED CAPITAL STOCK
 
     Immediately after the Offerings, the Company's authorized capital stock
will consist of           shares of preferred stock, par value $1.00 per share
(the "Preferred Stock"), and           shares of Common Stock. Immediately
following the Offerings, approximately           shares of Common Stock will be
outstanding. All of the shares of Common Stock that will be outstanding
immediately following the Offerings, including the shares of Common Stock sold
in the Offerings, will be validly issued, fully paid and nonassessable.
 
COMMON STOCK
 
     The holders of Common Stock will be entitled to one vote for each share on
all matters voted on by stockholders, including elections of directors, and,
except as otherwise required by law or provided in any resolution adopted by the
Company Board with respect to any series of Preferred Stock, the holders of such
shares will possess all voting power. The Certificate does not provide for
cumulative voting in the election of directors. Subject to any preferential
rights of any outstanding series of Preferred Stock created by the Company Board
from time to time, the holders of Common Stock will be entitled to such
dividends as may be declared from time to time by the Company Board from funds
available therefor, and upon liquidation will be entitled to receive pro rata
all assets of the Company available for distribution to such holders. See
"Dividend Policy."
 
PREFERRED STOCK
 
     The Certificate authorizes the Company Board to establish one or more
series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Company Board may thereafter (except where otherwise provided in the
applicable certificate of designation) increase or decrease (but not below the
number of shares thereof then outstanding), (iii) whether dividends, if any,
will be cumulative or noncumulative, and, in the case of shares of any series
having cumulative dividend rights, the date or dates or method of determining
the date or dates from which dividends on the shares of such series shall be
cumulative, (iv) the rate of any dividends (or method of determining such
dividends) payable to the holders of the shares of such series, any conditions
upon which such dividends will be paid and the date or dates or the method for
determining the date or dates upon which such dividends will be payable; (v) the
redemption rights and price or prices, if any, for shares of the series, (vi)
the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series, (vii) the amounts payable on and the
preferences, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, (viii) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
the Company or any other corporation, and, if so, the specification of such
other class or series or such other security, the conversion or exchange price
or prices or rate or rates, any adjustments thereof, the date or dates as of
which such shares will be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made, (ix) restrictions
on the issuance of shares of the same series or of any other class or series,
(x) the voting rights, if any, of the holders of the shares of the series, and
(xi) any other relative rights, preferences and limitations of such series.
 
     The Company believes that the ability of the Company Board to issue one or
more series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs which might arise. The authorized shares of Preferred Stock, as
well as shares of Common Stock, will be available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which the Company's securities may be listed or traded. The NYSE currently
requires stockholder approval as a prerequisite to listing shares in several
instances, including where the present or potential issuance of shares could
result in an increase in the number of shares of common stock, or in the amount
of voting securities, outstanding of at least 20%. If the approval of the
Company's stockholders is not required for
 
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<PAGE>   82
 
the issuance of shares of Preferred Stock or Common Stock, the Board may
determine not to seek stockholder approval.
 
     Although the Company Board has no intention at the present time of doing
so, it could issue a series of Preferred Stock that could, depending on the
terms of such series, impede the completion of a merger, tender offer or other
takeover attempt. The Company Board will make any determination to issue such
shares based on its judgment as to the best interests of the Company and its
stockholders. The Company Board, in so acting, could issue Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquirer may be able to change the composition of the Company Board, including a
tender offer or other transaction that some, or a majority, of the Company's
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
 
     As of the Closing Date,      Junior Preferred Shares (as defined herein)
will be reserved for issuance upon exercise of the Rights. See "-- Rights Plan."
 
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BY-LAWS
 
  Board of Directors
 
     The Certificate provides that except as otherwise fixed by or pursuant to
the provisions of a Certificate of Designations setting forth the rights of the
holders of any class or series of Preferred Stock, the number of the directors
of the Company will be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the total number of directors which the
Company would have if there were no vacancies (the "Whole Board") (but shall not
be less than three). The directors, other than those who may be elected by the
holders of Preferred Stock, will be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible, one class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1997, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1998 and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1999, with each director to
hold office until its successor is duly elected and qualified. Commencing with
the 1997 annual meeting of stockholders, directors elected to succeed directors
whose terms then expire will be elected for a term of office to expire at the
third succeeding annual meeting of stockholders after their election, with each
director to hold office until such person's successor is duly elected and
qualified.
 
     The Certificate provides that except as otherwise provided for or fixed by
or pursuant to a Certificate of Designations setting forth the rights of the
holders of any class or series of Preferred Stock, newly created directorships
resulting from any increase in the number of directors and any vacancies on the
Company Board resulting from death, resignation, disqualification, removal or
other cause will be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the
Company Board, and not by the stockholders. Any director elected in accordance
with the preceding sentence will hold office for the remainder of the full term
of the class of directors in which the new directorship was created or the
vacancy occurred and until such director's successor shall have been duly
elected and qualified. No decrease in the number of directors constituting the
Company Board will shorten the term of any incumbent director. Subject to the
rights of holders of Preferred Stock, any director may be removed from office
only for cause by the affirmative vote of the holders of at least a majority of
the voting power of all Voting Stock then outstanding, voting together as a
single class; provided, however, that prior to the Trigger Date (as defined
herein), any director or directors may be removed from office by the affirmative
vote of the holders of at least 80% of the voting power of all Voting Stock then
outstanding, voting together as a single class.
 
     These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of the Company Board by filling the
vacancies created by removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections of directors
for any individual or group to gain control of the Company Board. Accordingly,
these provisions could discourage a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of the Company.
 
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<PAGE>   83
 
  No Stockholder Action by Written Consent; Special Meetings
 
     The Certificate and By-Laws provide that as of the time at which AT&T and
its affiliates cease to be the beneficial owner of an aggregate of at least a
majority of the then outstanding shares of Common Stock (the "Trigger Date"),
any action required or permitted to be taken by the stockholders of the Company
must be effected at a duly called annual or special meeting of such holders and
may not be effected by any consent in writing by such holders. Effective as of
the Trigger Date, except as otherwise required by law and subject to the rights
of the holders of any Preferred Stock, special meetings of stockholders of the
Company for any purpose or purposes may be called only by the Company Board
pursuant to a resolution stating the purpose or purposes thereof approved by a
majority of the Whole Board or by the Chairman of the Company Board and,
effective as of the Trigger Date, any power of stockholders to call a special
meeting is specifically denied. No business other than that stated in the notice
shall be transacted at any special meeting. In addition, prior to the Trigger
Date, the Company will call a special meeting of stockholders promptly upon
request by AT&T, or any of its affiliates, in each case, if such entity is a
stockholder of the Company. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by the Company Board or the Chairman of the Board.
 
  Advance Notice Procedures
 
     The By-Laws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or to bring other business
before an annual meeting of stockholders of the Company (the "Stockholder Notice
Procedure"). The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Chairman of the Board, or by a
stockholder who has given timely written notice to the Secretary of the Company
prior to the meeting at which directors are to be elected, will be eligible for
election as directors of the Company. The Stockholder Notice Procedure also
provides that at an annual meeting only such business may be conducted as has
been brought before the meeting by, or at the direction of, the Chairman of the
Board or the Company Board, or by a stockholder who has given timely written
notice to the Secretary of the Company of such stockholder's intention to bring
such business before such meeting. Under the Stockholder Notice Procedure, for
notice of stockholder nominations to be made at an annual meeting to be timely,
such notice must be received by the Company not later than the close of business
on the 60th calendar day nor earlier than the close of business on the 90th
calendar day prior to the first anniversary of the preceding year's annual
meeting (except that, in the event that the date of the annual meeting is more
than 30 calendar days before or more than 60 calendar days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 90th calendar day prior to such
annual meeting and not later than the close of business on the later of the 60th
calendar day prior to such annual meeting or the 10th calendar day following the
day on which public announcement of a meeting date is first made by the
Company).
 
     Notwithstanding the foregoing, in the event that the number of directors to
be elected to the Company Board is increased and there is no public announcement
by the Company naming all of the nominees for director or specifying the size of
the increased Company Board at least 70 calendar days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice also
will be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered not later than the
close of business on the 10th calendar day following the day on which such
public announcement is first made by the Company. Under the Stockholder Notice
Procedure, for notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected to be timely, such notice must be
received by the Company not earlier than the close of business on the 90th
calendar day prior to such special meeting and not later than the close of
business on the later of the 60th calendar day prior to such special meeting or
the 10th calendar day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Company Board to be elected at such meeting.
 
     In addition, under the Stockholder Notice Procedure, a stockholder's notice
to the Company proposing to nominate a person for election as a director or
relating to the conduct of business other than the nomination of directors must
contain certain specified information. If the chairman of a meeting determines
that an individual was not nominated, or other business was not brought before
the meeting, in accordance with the
 
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<PAGE>   84
 
Stockholder Notice Procedure, such individual will not be eligible for election
as a director, or such business will not be conducted at such meeting, as the
case may be.
 
     The Stockholder Notice Procedure does not apply to AT&T and its affiliates
prior to the Trigger Date.
 
  Amendment
 
     The Certificate provides that the affirmative vote of the holders of at
least 80% of the Voting Stock, voting together as a single class, is required to
amend provisions of the Certificate relating to stockholder action without a
meeting; the calling of special meetings; the number, election and term of the
Company's directors; the filling of vacancies; and the removal of directors. The
Certificate further provides that the related By-Laws described above (including
the Stockholder Notice Procedure) may be amended only by the Company Board or by
the affirmative vote of the holders of at least 80% of the voting power of the
outstanding shares of Voting Stock, voting together as a single class.
 
  Rights Plan
 
     The Company Board currently expects to adopt a Share Purchase Rights Plan
(the "Rights Plan") on or prior to the Closing Date. Pursuant to the Rights
Plan, the Company Board will cause to be issued one preferred share purchase
right (a "Right") for each outstanding share of Common Stock. Each Right will
entitle the registered holder to purchase from the Company one one-hundredth of
a share of a new series of junior preferred stock, par value $.01 per share (the
"Junior Preferred Shares"), of the Company at a price of $     (the "Purchase
Price"), subject to adjustment. The description and terms of the Rights will be
set forth in a Rights Agreement (the "Rights Agreement"), between the Company
and the designated Rights Agent (the "Rights Agent"). The description set forth
below is intended as a summary only and is qualified in its entirety by
reference to the form of the Rights Agreement, which will be filed as an exhibit
to the Registration Statement. See "Available Information."
 
     Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") have acquired beneficial ownership of 10% or more of the outstanding
shares of Common Stock or (ii) 10 business days (or such later date as may be
determined by action of the Company Board prior to such time as any person
becomes an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of 10% or more of
such outstanding shares of Common Stock (the earlier of such dates being called
the "Rights Distribution Date"), the Rights will be evidenced by the
certificates representing the Common Stock.
 
     The Rights Agreement will provide that, until the Rights Distribution Date
(or earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the Common Stock. Until the Rights Distribution
Date (or earlier redemption or expiration of the Rights), the Common Stock
certificates will contain a notation incorporating the Rights Agreement by
reference. As soon as practicable following the Rights Distribution Date,
separate certificates evidencing the Rights (the "Right Certificates") will be
mailed to holders of record of the Common Stock as of the close of business on
the Rights Distribution Date and such separate Right Certificates alone will
evidence the Rights.
 
     The Rights will not be exercisable until the Rights Distribution Date. The
Rights will expire on the 10th anniversary of the date of issuance (the "Final
Expiration Date"), unless the Final Expiration Date is extended or unless the
Rights are earlier redeemed or exchanged by the Company, in each case, as
summarized below.
 
     In the event that any person or group of affiliated or associated persons
become an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will thereafter have the right to receive upon
exercise that number of shares of Common Stock having a market value of two
times the exercise price of the Right. In the event that the Company is acquired
in a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold after a person or group of
affiliated or associated persons
 
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<PAGE>   85
 
becomes an Acquiring Person, proper provision will be made so that each holder
of a Right will thereafter have the right to receive, upon the exercise thereof
at the then-current exercise price of the Right, that number of shares of common
stock of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Right.
 
     At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the outstanding
Common Stock and prior to the acquisition by such person or group of 50% or more
of the outstanding Common Stock, the Company Board may exchange the Rights
(other than Rights owned by such person or group which have become void), in
whole or in part, at an exchange ratio of one share of Common Stock, or one
one-hundredth of a Junior Preferred Share (or of a share of a class or series of
the Preferred Stock having equivalent rights, preferences and privileges), per
Right (subject to adjustment).
 
     At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the outstanding
Common Stock, the Company Board may redeem the Rights in whole, but not in part,
at a price of $.01 per Right (the "Redemption Price"). The redemption of the
Rights may be made effective at such time on such basis and with such conditions
as the Company Board, in its sole discretion, may establish. Immediately upon
any redemption of the Rights, the right to exercise the rights will terminate
and the only right of the holders of the Rights will be eligible to receive the
Redemption Price.
 
     The terms of the Rights may be amended by the Company Board without the
consent of the holders of the Rights; provided, however, that, from and after
such time as any person or group of affiliated or associated persons becomes an
Acquiring Person, no such amendment may adversely affect the interests of the
holders of the Rights.
 
     Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
 
     The number of outstanding Rights and the number of one one-hundredths of a
Junior Preferred Share issuable upon exercise of each Right also will be subject
to adjustment in the event of a stock split of the Common Stock or a stock
dividend on the Common Stock payable in Common Stock or subdivisions,
consolidations or combinations of the Common Stock occurring, in any such case,
prior to the Rights Distribution Date.
 
     The Purchase Price payable, and the number of Junior Preferred Shares or
other securities or property issuable, upon exercise of the Rights will be
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Junior Preferred Shares, (ii) upon the grant to holders of the Junior Preferred
Shares of certain rights or warrants to subscribe for or purchase Junior
Preferred Shares at a price, or securities convertible into Junior Preferred
Shares with a conversion price, less than the then-current market price of the
Junior Preferred Shares or (iii) upon the distribution to holders of the Junior
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or dividends
payable in Junior Preferred Shares) or of subscription rights or warrants (other
than those referred to above).
 
     With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional Junior Preferred Shares will be
issued (other than fractions which are integral multiples of one one-hundredth
of a Junior Preferred Share, which may, at the election of the Company, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Junior Preferred Shares on the
last trading day prior to the date of exercise.
 
     Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $1.00 per share but will be entitled
to an aggregate dividend of 100 times the dividend declared per share of Common
Stock. In the event of liquidation, the holders of the Junior Preferred Shares
will be entitled to a minimum preferential liquidation payment of $100 per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of Common Stock. Each Junior Preferred Share will have 100 votes voting
together with the
 
                                       82
<PAGE>   86
 
Common Stock. Finally, in the event of any merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each Junior Preferred
Share will be entitled to receive 100 times the amount received per Common
Stock. These rights are protected by customary anti-dilution provisions.
 
     Due to the nature of the Junior Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a Junior Preferred
Share purchasable upon exercise of each Right should approximate the value of
one share of Common Stock.
 
     The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
the Company on terms not approved by the Company Board. The Rights should not
interfere with any merger or other business combination approved by the Company
Board prior to the time that a person or group has acquired beneficial ownership
of 10% percent or more of the Common Stock since the Rights may be redeemed by
the Company at the Redemption Price until such time.
 
     The Rights contain certain provisions to exclude AT&T and its affiliates
from the operative provisions thereof.
 
DELAWARE BUSINESS COMBINATION STATUTE
 
     Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include (x) any person that
is the owner of 15% or more of the outstanding voting stock of the corporation,
or is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within three
years immediately prior to the date of determination and (y) the affiliates and
associates of any such person.
 
     Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. However,
AT&T and its affiliates are excluded from the definition of "interested
stockholder" pursuant to the terms of Section 203. The provisions of Section 203
may encourage persons interested in acquiring the Company to negotiate in
advance with the Company Board, since the stockholder approval requirement would
be avoided if a majority of the directors then in office approves either the
business combination or the transaction which results in any such person
becoming an interested shareholder. Such provisions also may have the effect of
preventing changes in the management of the Company. It is possible that such
provisions could make it more difficult to accomplish transactions which the
Company's stockholders may otherwise deem to be in their best interests.
 
LIABILITY OF DIRECTORS; INDEMNIFICATION
 
     The Certificate provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except, if required by the DGCL as
amended from time to time, for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit. Neither the amendment
nor repeal of such provision will eliminate or
 
                                       83
<PAGE>   87
 
reduce the effect of such provision in respect of any matter occurring, or any
cause of action, suit or claim that, but for such provision, would accrue or
arise prior to such amendment or repeal.
 
     While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Certificate will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
 
     The Certificate provides that each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person, or a person of whom such person is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, will be indemnified and held harmless by
the Company to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss reasonably incurred or
suffered by such person in connection therewith. Such right to indemnification
includes the right to have the Company pay the expenses incurred in defending
any such proceeding in advance of its final disposition, subject to the
provisions of the DGCL. Such rights are not exclusive of any other right which
any person may have or thereafter acquire under any statute, provision of the
Certificate, By-Law, agreement, vote of stockholders or disinterested directors
or otherwise. No repeal or modification of such provision will in any way
diminish or adversely affect the rights of any director, officer, employee or
agent of the Company thereunder in respect of any occurrence or matter arising
prior to any such repeal or modification. The Certificate also specifically
authorizes the Company to maintain insurance and to grant similar
indemnification rights to employees or agents of the Company.
 
TRANSFER AGENT AND REGISTRAR
 
                 will be the transfer agent and registrar for the Common Stock.
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Of the           shares of Common Stock to be outstanding as of the Closing
Date (          shares if the U.S. Underwriters exercise their overallotment
option in full) the      shares of Common Stock sold in the Offerings (
shares if the U.S. Underwriters exercise their overallotment option in full)
will be freely tradable without restriction under the Securities Act of 1933, as
amended (the "1933 Act"), except for any such shares which be may acquired by an
affiliate of the Company (an "Affiliate"), as that term is defined in Rule 144
promulgated under the 1933 Act ("Rule 144"). AT&T has announced that, subject to
certain conditions, AT&T intends to distribute to its shareholders by December
31, 1996 all of the Common Stock of the Company owned by AT&T by means of the
Distribution. Shares of Common Stock distributed to AT&T shareholders in the
Distribution generally will be freely transferable, except for shares of Common
Stock received by persons who may be deemed to be Affiliates. Persons who may be
deemed to be Affiliates generally include individuals or entities that control,
are controlled by, or are under common control with, the Company and may include
directors and certain officers of the Company as well as significant
stockholders of the Company, if any. Persons who are Affiliates will be
permitted to sell the shares of Common Stock that are issued in the Offerings or
that they receive in the Distribution only pursuant to an effective registration
statement under the 1933 Act or an exemption from the registration requirements
of the 1933 Act, including exemptions provided by Rule 144.
 
     The shares of Common Stock held by AT&T are deemed "restricted securities"
as defined in Rule 144, and may not be sold other than through registration
under the 1933 Act or pursuant to an exemption from the regulations thereunder,
including exceptions provided by Rule 144. The Company and AT&T have agreed not
 
                                       84
<PAGE>   88
 
to (i) offer, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other agreement
that transfers, in whole or in part, the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or other securities, in cash
or otherwise for a period of    days after the date of this Prospectus, without
the prior written consent of the Underwriters. See "Underwriting."
 
     Under the 1996 LTIP, the Company will issue Substitute Awards in
substitution for AT&T Stock Awards outstanding under various AT&T employee
benefit plans. See "Arrangements Between the Company and AT&T -- Employee
Benefits Agreement". In addition to such Substitute Awards, the Company may
grant shares of Common Stock and non-stock awards pursuant to the 1996 LTIP
subject to certain restrictions. See "Management -- 1996 Company Long Term
Incentive Plan." The Company currently expects to file in 1996 a registration
statement under the 1933 Act to register shares reserved for issuance under the
1996 LTIP. Shares issued pursuant to Awards after the effective date of such
registration statement (other than shares issued to Affiliates) generally will
be freely tradeable without restriction or further registration under the 1933
Act.
 
                                       85
<PAGE>   89
 
                                  UNDERWRITING
 
     Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters
named below for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as U.S.
Representatives, and the International Underwriters named below for whom Morgan
Stanley & Co. International Limited, Goldman, Sachs International and Merrill
Lynch International Limited are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective numbers of shares of Common Stock set forth opposite
the names of such Underwriters below:
 
<TABLE>
<CAPTION>
                                                                             NUMBER
                                      NAME                                 OF SHARES
        -----------------------------------------------------------------  ----------
        <S>                                                                <C>
        U.S. Underwriters:
          Morgan Stanley & Co. Incorporated..............................
          Goldman, Sachs & Co. ..........................................
          Merrill Lynch, Pierce, Fenner & Smith Incorporated.............
             Subtotal....................................................
                                                                           ----------
        International Underwriters:
          Morgan Stanley & Co. International Limited.....................
          Goldman Sachs International....................................
          Merrill Lynch International Limited............................
             Subtotal....................................................
                                                                           ----------
                  Total..................................................
                                                                           ==========
</TABLE>
 
     The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock offered hereby (other than those covered by the U.S.
Underwriters' overallotment option described below) if any such shares are
taken.
 
     Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (a)
it is not purchasing any U.S. Shares (as defined herein) for the account of
anyone other than a United States or Canadian Person (as defined herein) and (b)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
of the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions: (i) it is not purchasing any International Shares (as
defined herein) for the account of any United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any International Shares or distribute any prospectus relating to the
International Shares in the United States or in any province or territory of
Canada or to any United States or Canadian Person. The foregoing limitations do
not apply to stabilization transactions or to certain other transactions
specified in the Agreement between U.S. and International Underwriters. As used
herein, "United States or Canadian Person" means any national or resident of the
United States or of any province or territory of Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof (other
than a branch located outside the United States and Canada of any United
 
                                       86
<PAGE>   90
 
States or Canadian Person) and includes any United States or Canadian branch of
a person who is otherwise not a United States or Canadian Person. All shares of
Common Stock to be purchased by the U.S. Underwriters and the International
Underwriters are referred to herein as the "U.S. Shares" and the "International
Shares," respectively.
 
     Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares sold shall be the Price to Public set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
 
     Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in any
province or territory of Canada in contravention of the securities laws thereof
and has represented that any offer of Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
shares of Common Stock a notice stating in substance that, by purchasing such
Common Stock, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any of such Common Stock in
any province or territory of Canada or to, or for the benefit of, any resident
of any province or territory of Canada in contravention of the securities laws
thereof and that any offer of Common Stock in Canada will be made only pursuant
to an exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer is made, and that such dealer will
deliver to any other dealer to whom it sells any of such Common Stock a notice
to the foregoing effect.
 
     Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and during the period of six months after the date hereof will not offer
to sell any shares of Common Stock to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995 (the "U.K. Regulations"); (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the U.K. Regulations with respect to anything done by it
in relation to the shares of Common Stock offered hereby in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock, other than any
document which consists of, or is a part of, listing particulars, supplementary
listing particulars or any other document required or permitted to be published
by listing rules under Article IV of the Financial Services Act 1986, if that
person is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1995, or is a person to whom
the document may otherwise lawfully be issued or passed on.
 
     The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $          per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $          per share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
 
     Application has been made to have the Common Stock approved for quotation
on the NYSE under the symbol "          ".
 
     Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to           additional shares of Common Stock at the
public offering price set forth on the cover page hereof, less underwriting
discounts and commissions. The U.S. Underwriters may exercise such option to
purchase solely for the purpose of covering
 
                                       87
<PAGE>   91
 
overallotments, if any, made in connection with the offering of the shares of
Common Stock offered hereby. To the extent such option is exercised, each U.S.
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such U.S. Underwriter's name in the preceding table bears to the
total number of shares of Common Stock offered by the U.S. Underwriters in the
Offerings.
 
     The Company has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, it will not (a) register for sale or offer, issue,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (b) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clause (a) or (b) of
this sentence is to be settled by delivery of Common Stock or other securities,
in cash or otherwise, for a period of      days after the date of this
Prospectus, other than: (i) the shares of Common Stock offered hereby; (ii) any
shares of Common Stock issued upon the exercise of an option or warrant or the
conversion of a security outstanding on the date of this Prospectus; and (iii)
any shares of Common Stock issued pursuant to existing employee benefit plans of
the Company (including in connection with any Substitute Awards). In addition,
except as set forth above, AT&T has agreed not to (a) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (b) enter into any swap or other agreement that transfers, in whole or in
part, the economic consequences of ownership of Common Stock, whether any such
transaction described in clause (a) or (b) of this sentence is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, for a period
of      days after the date of this Prospectus without the prior written consent
of Morgan Stanley & Co. Incorporated.
 
     The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
 
     The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the 1933 Act.
 
     From time to time, each of Morgan Stanley & Co. Incorporated, Goldman,
Sachs & Co. and Merrill Lynch & Co. provide certain financial advisory services
to each of the Company and AT&T.
 
PRICING OF THE OFFERING
 
     Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price were the sales,
earnings and certain other pro forma financial and operating information of the
Company in recent periods, the future prospects of the Company and its industry
in general, and certain ratios and market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of the Company.
 
                                 LEGAL MATTERS
 
     The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Richard J. Rawson, Senior Vice
President and General Counsel of the Company, and by Wachtell, Lipton, Rosen &
Katz, New York, New York. Certain legal matters will be passed upon for the
Underwriters by Davis Polk & Wardwell, New York, New York.
 
                                       88
<PAGE>   92
 
                                    EXPERTS
 
     The audited financial statements and financial statement schedules included
in this Prospectus and in the Registration Statement of which this Prospectus
forms a part have been audited by Coopers & Lybrand L.L.P., independent
auditors, as indicated in their report with respect thereto and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
 
                             AVAILABLE INFORMATION
 
     The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the 1933 Act with respect to the Common
Stock offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which have been omitted in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete, and, in each instance, reference is made to the copy of the document
filed as an exhibit to the Registration Statement. The Registration Statement
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and at
the Commission's regional offices at Suite 1400, Northwest Atrium Center, 500
West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center (13th
Floor), New York, New York 10048. Copies of such material can also be obtained
from the Commission at prescribed rates through its Public Reference Section at
450 Fifth Street, N.W., Washington, D.C. 20549.
 
     The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934 (the "1934 Act"). As a result of the
Offerings, the Company will become subject to the informational requirements of
the 1934 Act. The Company will fulfill its obligations with respect to such
requirements by filing periodic reports and other information with the
Commission. In addition, the Company intends to furnish to its stockholders
annual reports containing consolidated financial statements examined by an
independent public accounting firm.
 
                                       89
<PAGE>   93
 
                            LUCENT TECHNOLOGIES INC.
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Report of Independent Auditors........................................................   F-2
Consolidated Statements of Operations for the three years ended December 31, 1995.....   F-3
Consolidated Balance Sheets at December 31, 1995 and 1994.............................   F-4
Consolidated Statements of Changes in Stockholder's Equity for the three years ended
  December 31, 1995...................................................................   F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1995.....   F-6
Notes to Consolidated Financial Statements............................................   F-7
Schedule of Valuation and Qualifying Accounts.........................................   S-1
</TABLE>
 
                                       F-1
<PAGE>   94
 
                         REPORT OF INDEPENDENT AUDITORS
 
To the Stockholder of Lucent Technologies Inc.:
 
     We have audited the consolidated financial statements and the financial
statement schedule of Lucent Technologies Inc. and subsidiaries (the "Company")
listed in the index on page F-1 of this S-1. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule 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 Lucent
Technologies Inc. and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations, changes in their stockholder's equity
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. In
addition, in our opinion the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
 
     As discussed in Note 3 to the consolidated financial statements, in 1993
the Company changed its methods of accounting for postretirement benefits,
postemployment benefits and income taxes.
 
Coopers & Lybrand L.L.P.
 
1301 Avenue of the Americas
New York, New York
January 25, 1996
(Note 14 is dated February 1, 1996)
 
                                       F-2
<PAGE>   95
 
                   LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31
                                                                -------------------------------
                                                                1995(1)      1994        1993
                                                                -------     -------     -------
                                                                          IN MILLIONS
                                                                (EXCEPT PER SHARE AMOUNTS)
<S>                                                             <C>         <C>         <C>
REVENUES (includes $2,119 in 1995, $2,137 in 1994, and $1,967
  in 1993 from AT&T) (Note 12)................................  $21,413     $19,765     $17,734
COSTS.........................................................   12,945      11,337      10,088
                                                                -------     -------     -------
GROSS MARGIN..................................................    8,468       8,428       7,646
                                                                -------     -------     -------
OPERATING EXPENSES
Selling, general and administrative expenses (Note 12)........    7,083       5,360       5,016
Research and development expenses.............................    2,385       2,097       1,961
                                                                -------     -------     -------
TOTAL OPERATING EXPENSES......................................    9,468       7,457       6,977
                                                                -------     -------     -------
OPERATING INCOME (LOSS).......................................   (1,000)        971         669
Other income -- net (Note 4)..................................      164          83         193
Interest expense (includes $215 in 1995, $133 in 1994, and
  $115 in 1993 to AT&T) (Note 7)..............................      280         200         196
                                                                -------     -------     -------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECTS OF
  ACCOUNTING CHANGES..........................................   (1,116)        854         666
Provision (benefit) for income taxes (Note 6).................     (263)        331         208
                                                                -------     -------     -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECTS OF ACCOUNTING
  CHANGES.....................................................     (853)        523         458
Cumulative effects of accounting changes, net of taxes (Note
  3)..........................................................       --          --      (4,208)
                                                                -------     -------     -------
NET INCOME (LOSS).............................................  $  (853)    $   523     $(3,750)
                                                                =======     =======     =======
UNAUDITED PRO FORMA NET INCOME (LOSS) PER COMMON SHARE (Note
  1)..........................................................  $           $           $
                                                                =======     =======     =======
</TABLE>
 
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
 
---------------
(1) 1995 includes pre-tax charge of $2,801 ($1,847 after taxes), to cover
    restructuring costs of $2,613 and asset impairment and other charges of
    $188. (See Note 5.)
 
                                       F-3
<PAGE>   96
 
                   LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                            AT DECEMBER 31
                                                                        ----------------------
                                                                         1995           1994
                                                                        -------        -------
                                                                             IN MILLIONS
<S>                                                                     <C>            <C>
ASSETS
Cash and cash equivalents (Note 14)...................................  $   448        $   580
Accounts receivable, less allowances of $248 in 1995, and $206 in
  1994................................................................    5,354          4,191
Inventories (Note 4)..................................................    3,222          2,405
Deferred income taxes -- net (Note 6).................................    1,482          1,028
Other current assets..................................................      173            288
                                                                        -------        -------
TOTAL CURRENT ASSETS..................................................   10,679          8,492
Property, plant and equipment -- net (Note 4).........................    4,338          4,676
Prepaid pension costs (Note 8)........................................    2,522          2,252
Deferred income taxes -- net (Note 6).................................      872            685
Capitalized software..................................................      387            420
Other assets..........................................................      924            815
                                                                        -------        -------
TOTAL ASSETS..........................................................  $19,722        $17,340
                                                                        =======        =======
LIABILITIES
Accounts payable......................................................  $ 1,229        $   945
Payroll and benefit-related liabilities...............................    3,026          1,931
Postretirement and postemployment benefit liabilities (Notes 3 and
  9)..................................................................      227            594
Debt sharing amount in anticipation of assumption of the Commercial
  Paper Program (Notes 7 and 14)......................................    3,842          2,961
Debt maturing within one year.........................................       49             49
Other current liabilities.............................................    2,690          1,766
                                                                        -------        -------
TOTAL CURRENT LIABILITIES.............................................   11,063          8,246
Postretirement and postemployment benefit liabilities (Notes 3 and
  9)..................................................................    5,569          5,566
Long-term debt........................................................      123            154
Other liabilities.....................................................    1,533            898
Commitments and contingencies (Note 13)
                                                                        -------        -------
TOTAL LIABILITIES.....................................................   18,288         14,864
TOTAL STOCKHOLDER'S EQUITY............................................    1,434          2,476
                                                                        -------        -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............................  $19,722        $17,340
                                                                        =======        =======
</TABLE>
 
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
 
                                       F-4
<PAGE>   97
 
                   LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
 
<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31
                                                                      -------------------------
                                                                       1995     1994     1993
                                                                      ------   ------   -------
                                                                             IN MILLIONS
<S>                                                                   <C>      <C>      <C>
Balance -- Beginning of Year........................................  $2,476   $2,580   $ 3,098
  Net income (loss).................................................    (853)     523    (3,750)
  Transfers from (to) AT&T (Note 12)................................    (125)    (729)    3,216
  Foreign currency translation......................................     (64)     102        16
                                                                      ------   ------   -------
Balance -- End of Year..............................................  $1,434   $2,476   $ 2,580
                                                                      ======   ======   =======
</TABLE>
 
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
 
                                       F-5
<PAGE>   98
 
                   LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31
                                                                -------------------------------
                                                                 1995        1994        1993
                                                                -------     -------     -------
                                                                          IN MILLIONS
<S>                                                             <C>         <C>         <C>
OPERATING ACTIVITIES
Net income (loss).............................................  $  (853)    $   523     $(3,750)
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Business restructuring charge...............................    2,613          --          --
  Asset impairment and other charges..........................      188          --          --
  Cumulative effects of accounting changes....................       --          --       4,208
  Depreciation and amortization...............................    1,493       1,311       1,213
  Deferred income taxes.......................................     (653)        338          64
  Provision for uncollectibles................................       69          83          68
  Other adjustments for noncash items, net....................     (103)       (177)       (375)
  Increase in accounts receivable.............................   (1,203)       (159)       (645)
  Increase in inventories.....................................   (1,089)        (26)       (409)
  Increase in accounts payable................................      271         291          42
  Net (increase) decrease in other operating assets and
     liabilities..............................................     (241)       (564)     (1,656)
                                                                -------     -------     -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...........      492       1,620      (1,240)
                                                                -------     -------     -------
INVESTING ACTIVITIES
Capital expenditures..........................................   (1,277)       (878)       (577)
Proceeds from sale or disposal of property, plant and
  equipment...................................................      118          15          38
Net (increase) decrease in investments........................      (86)        252         (45)
(Acquisitions) dispositions, net of cash acquired.............       10         119        (170)
Other investing activities, net...............................     (107)        (75)       (333)
                                                                -------     -------     -------
NET CASH USED IN INVESTING ACTIVITIES.........................   (1,342)       (567)     (1,087)
                                                                -------     -------     -------
FINANCING ACTIVITIES
Repayments of long-term debt..................................      (46)        (22)       (109)
Increase (decrease) in debt sharing amount....................      881          53        (624)
Transfers from (to) AT&T......................................     (125)       (729)      3,216
Decrease in short-term borrowings -- net......................       --         (84)         (1)
                                                                -------     -------     -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES...........      710        (782)      2,482
                                                                -------     -------     -------
Effect of exchange rate changes on cash.......................        8          13          (5)
                                                                -------     -------     -------
Net increase (decrease) in cash and cash equivalents..........     (132)        284         150
Cash and cash equivalents at beginning of year................      580         296         146
                                                                -------     -------     -------
Cash and cash equivalents at end of year......................  $   448     $   580     $   296
                                                                =======     =======     =======
</TABLE>
 
     Interest paid was $281, $204 and $306 during 1995, 1994 and 1993,
respectively. Income taxes paid were $315, $8 and $109, during 1995, 1994 and
1993 respectively.
 
     The notes on pages F-7 through F-23 are an integral part of the
consolidated financial statements.
 
                                       F-6
<PAGE>   99
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                             (DOLLARS IN MILLIONS)
 
1. BACKGROUND AND BASIS OF PRESENTATION
 
  BACKGROUND
 
     Lucent Technologies Inc. (the "Company") is currently a wholly owned
subsidiary of AT&T. On September 20, 1995, AT&T announced its intention to
create a separate company comprised of the AT&T business and operations that now
comprise the Company, and the associated assets and liabilities of such
businesses and operations and Bell Laboratories (the "Separation"). AT&T also
announced its intention to distribute to its shareholders by December 31, 1996,
subject to certain conditions, all of its interest in the Company following the
Offerings (the "Distribution"). The Company was incorporated on November 29,
1995 with 1,000 shares of Common Stock, without par value, authorized and
outstanding, all of which are owned by AT&T. Beginning February 1, 1996, AT&T is
planning to transfer to the Company substantially all of the assets and
liabilities related to the Company's operations, except that AT&T is retaining
approximately $2,000 in accounts receivable.
 
  BASIS OF PRESENTATION
 
     The consolidated financial statements reflect the results of operations,
financial position, changes in stockholder's equity and cash flows of the
businesses that will be transferred to the Company from AT&T in the Separation
(the "Company Businesses") as if the Company were a separate entity for all
periods presented. The consolidated financial statements have been prepared
using the historical basis in the assets and liabilities and historical results
of operations related to the Company Businesses. Changes in stockholder's equity
represent the net income of the Company plus net cash transfers to or from AT&T.
Additionally, the consolidated financial statements include allocations of
certain AT&T corporate headquarters assets (including prepaid pension assets),
liabilities (including debt and benefit obligations, pension and postretirement
benefits), and expenses relating to the Company Businesses that will be
transferred to the Company from AT&T. Management believes these allocations are
reasonable. All material intercompany transactions and balances between the
Company Businesses have been eliminated.
 
     The liabilities of the Company include outstanding direct third-party
indebtedness and the amounts of debt and related interest expense determined
under the Debt Sharing Agreement discussed in Note 7.
 
     Interest expense shown in the consolidated financial statements reflects
the interest expense associated with the aggregate borrowings for each period
presented principally using AT&T's average commercial paper rates for the
applicable period. General corporate overhead related to AT&T's corporate
headquarters and common support divisions has been allocated to the Company
based on the ratio of the Company's external costs and expenses to AT&T's
external costs and expenses. Management believes these allocations are
reasonable. However, the costs of these services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the Company
had performed these functions as a stand-alone entity. Subsequent to the
Separation, the Company will perform these functions using its own resources or
purchased services and will be responsible for the costs and expenses associated
with the management of a public corporation. Additionally, income taxes are
calculated on a separate tax return basis.
 
     The Company's financial statements include the costs experienced by the
AT&T pension and postretirement benefit plans for employees and retirees for
whom the Company will assume responsibility.
 
     The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in stockholder's
equity and cash flows of the Company in the future or what they would have been
had it been a separate, stand-alone entity during the periods presented.
 
                                       F-7
<PAGE>   100
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1. BACKGROUND AND BASIS OF PRESENTATION -- (CONTINUED)

  EARNINGS (LOSS) PER COMMON SHARE
 
     Historical earnings per share have not been presented because they would
not be meaningful. The Company has 1,000 shares of Common Stock outstanding, all
of which are owned by AT&T. Pro forma earnings (loss) per common share is
calculated based on earnings after giving effect to the sale of           shares
of Common Stock in the Offerings, divided by the number of shares of Common
Stock to be outstanding after the Offerings. (Because the offering price and
number of shares of Common Stock to be sold under the Offerings have not yet
been determined, unaudited pro forma earnings (loss) per share have not been
presented. These determinations will be made prior to the effective date of this
Prospectus and unaudited pro forma earnings (loss) per share will be furnished
by amendment and reflected in the definitive Prospectus.)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  CONSOLIDATION
 
     The consolidated financial statements include all majority-owned
subsidiaries of the Company. Investments in which the Company exercises
significant influence but which it does not control (generally a 20% - 50%
ownership interest) are accounted for under the equity method of accounting.
Investments in which the Company has less than a 20% ownership interest are
accounted for under the cost method of accounting.
 
  USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
long-term contracts, allowance for uncollectible accounts receivable, inventory
obsolescence, product warranty, depreciation, employee benefit plans, taxes,
restructuring reserves and contingencies.
 
  CURRENCY TRANSLATION
 
     For operations outside the United States that prepare financial statements
in currencies other than the United States dollar, income statement amounts are
translated at average exchange rates during the year, and assets and liabilities
are translated at year-end exchange rates. These translation adjustments are
included as a separate component of stockholder's equity.
 
  REVENUE RECOGNITION
 
     Revenue is generally recognized on the sales of products or services when
the products are delivered or the services performed, all substantial
contractual obligations have been satisfied, and the collection of the resulting
receivable is deemed probable. Revenue from sales of software products is
generally recognized upon product delivery, acceptance, and completion of all
significant vendor obligations. Revenue from rental sales is recognized
proportionately over the contract period. Revenues and estimated profits on
long-term construction type contracts are recognized under the percentage of
completion method of accounting using either a units of delivery or a cost to
cost methodology. Revisions of profit estimates are reflected in the period in
which the facts that require the revision to the estimate become known. Any
losses on contracts are immediately recognized when determinable.
 
  RESEARCH AND DEVELOPMENT COSTS
 
     Research and development costs are charged to expense as incurred except
for costs incurred for the development of computer software that will be sold,
leased or otherwise marketed which are capitalized when
 
                                       F-8
<PAGE>   101
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

technological feasibility has been established. These capitalized costs are
subject to an ongoing assessment of recoverability based upon anticipated future
revenues and changes in hardware and software technologies. Costs capitalized
include direct labor and related overhead.
 
     Amortization of capitalized software development costs begins when the
product is available for general release. Amortization is provided on a
product-by-product basis on either the straight-line method over periods not
exceeding two years or the sales ratio method. Unamortized capitalized software
development costs determined to be in excess of net realizable value of the
product are expensed at the date of such determination.
 
  DERIVATIVE FINANCIAL INSTRUMENTS
 
     The Company uses various financial instruments, including derivative
financial instruments, for purposes other than trading. The Company does not
enter into derivative financial instruments for speculative purposes.
Derivatives, used as part of the Company's risk management strategy, must be
designated at inception as a hedge, and measured for effectiveness both at
inception and on an ongoing basis. For qualifying foreign currency hedges, the
gains and losses are deferred and recognized as adjustments of carrying amounts
when the underlying hedged transaction is recorded. Interest rate swap
agreements involve the periodic exchange of payments without the exchange of the
underlying principal or notional amounts. Net payments are recognized as an
adjustment to income or expense of the underlying hedged transaction. Gains and
losses on interest rate swap agreements that do not qualify as hedges are
recorded at fair value and recognized in other income or expense. If the Company
terminates a 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.
 
  INCOME TAXES
 
     Historically, the Company's operations have been included in the
consolidated income tax returns filed by AT&T. Income tax expense in the
Company's consolidated financial statements has been calculated on a separate
tax return basis.
 
  INVESTMENT TAX CREDITS
 
     For financial reporting purposes, investment tax credits are amortized as a
reduction to the provision for income taxes over the useful lives of the
property that produced the credits.
 
  CASH AND CASH EQUIVALENTS
 
     All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
 
  INVENTORIES
 
     Inventories are stated at the lower of cost or market (i.e., net realizable
value or replacement cost). Cost includes material, labor and manufacturing
overhead. Cost is determined principally on a first-in, first-out ("FIFO")
basis. Inventories also include unbilled costs and fees on contracts in process
net of progress payments.
 
  PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is determined primarily using the unit method. The
group method is used for certain facilities and equipment, except factory
machinery which is depreciated using the unit method. When assets that were
depreciated using the unit
 
                                       F-9
<PAGE>   102
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
method are sold, the gains or losses are included in operating results. When
assets that were depreciated using the group method are sold or retired, the
original cost is deducted from the plant account and from accumulated
depreciation and any proceeds are applied against accumulated depreciation.
 
     Accelerated depreciation methods are used for certain high technology
computer processing equipment. All other facilities and equipment are
depreciated on a straight-line basis over their estimated useful lives.
 
  GOODWILL
 
     Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over the periods benefited, principally in
the range of 10 to 15 years. Goodwill is 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 immediately.
 
3. CHANGES IN ACCOUNTING PRINCIPLES
 
  POSTRETIREMENT BENEFITS
 
     AT&T adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective January 1, 1993. This standard requires
accrual of estimated future retiree benefits during the years employees are
working and accumulating these benefits. Previously, health care benefits were
expensed as claims were incurred and life insurance benefits were expensed as
plans were funded. AT&T recorded a one-time pretax charge for the unfunded
portions of these liabilities of $11,317 ($7,023 after taxes).
 
     For purposes of preparing these consolidated financial statements,
estimates were made (see Note 9) of the Company's share of the unfunded portions
of postretirement benefit obligations and a one-time pretax charge of $6,142
($3,722 after taxes) was recorded. This change in accounting does not affect
cash flows.
 
  POSTEMPLOYMENT BENEFITS
 
     AT&T also adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1993. Analogous to SFAS No. 106, this standard
requires the Company to accrue for estimated future postemployment benefits,
including separation payments, during the years employees are working and
accumulating these benefits, and for disability payments when the disabilities
occur. Before this change in accounting, costs for separations were recognized
when approved and disability benefits were recognized when paid. AT&T recorded a
one-time pretax charge for the unprovided portion of these liabilities of $1,809
($1,128 after taxes).
 
     For purposes of preparing these consolidated financial statements,
estimates were made of the Company's share of the unprovided portion of
postemployment liabilities and a one-time pretax charge of $875 ($530 after
taxes) was recorded. This change reduced operating income by $139 and net income
by $84. This change in accounting does not affect cash flows.
 
  INCOME TAXES
 
     The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1993. Among other provisions, this standard requires the computation
of deferred tax amounts using the enacted corporate income tax rates for the
years in which the taxes will be paid or refunds received. Before this change in
accounting, deferred tax accounts reflected rates in effect when the deferrals
were made.
 
                                      F-10
<PAGE>   103
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. CHANGES IN ACCOUNTING PRINCIPLES -- (CONTINUED)

     The change in calculating deferred tax amounts required by this standard
resulted in a one-time benefit of $44 in the first quarter of 1993. This change
in accounting does not affect cash flows. This change will only affect net
income in future periods if applicable tax rates change.
 
  IMPAIRMENT OF LONG-LIVED ASSETS
 
     Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of the standard did not materially impact
the Company's consolidated results of operations, financial condition or cash
flows because this was essentially the method the Company used in the past to
measure and record asset impairments. The 1995 restructuring and other charges
did include recognition of asset impairments.
 
  STOCK-BASED COMPENSATION
 
     In 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," will be
adopted. This standard establishes a fair value method for accounting for or
disclosing stock-based compensation plans. This standard will be adopted by
disclosing the pro forma consolidated net income and earnings per share amounts
assuming the fair value method was effective on January 1, 1995. The adoption of
this standard will not impact consolidated results of operations, financial
position, or cash flows.
 
4. SUPPLEMENTARY FINANCIAL INFORMATION
 
SUPPLEMENTARY INCOME STATEMENT INFORMATION
 
<TABLE>
<CAPTION>
                                                                       1995      1994     1993
                                                                      ------     ----     ----
<S>                                                                   <C>        <C>      <C>
INCLUDED IN COSTS
Amortization of software development costs..........................  $  312     $345     $314
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Amortization of goodwill............................................  $   40     $ 31     $ 22
INCLUDED IN COSTS AND OPERATING EXPENSES
Depreciation and amortization of property, plant and equipment......  $1,109     $891     $836
OTHER INCOME
Interest income.....................................................  $   44     $ 24     $ 20
Minority interests in (earnings) losses of subsidiaries.............     (20)     (14)      21
Net equity (losses) earnings from investments.......................     (25)      21       29
Increase in cash surrender value of life insurance..................      40       30       32
Gain/loss on foreign currency transactions..........................     (26)     (48)     (13)
Miscellaneous -- net................................................     151       70      104
                                                                      ------     ----     ----
Total other income -- net...........................................  $  164     $ 83     $193
                                                                      ======     ====     ====
</TABLE>
 
                                      F-11
<PAGE>   104
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4. SUPPLEMENTARY FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTARY BALANCE SHEET INFORMATION
 
<TABLE>
<CAPTION>
                                                                            1995        1994
                                                                          --------     -------
<S>                                                                       <C>          <C>
INVENTORIES
Completed goods.........................................................  $  1,673     $ 1,297
Unbilled costs and fees on contracts in process (net of progress
  payments of $355 in 1995).............................................       371          43
Work in process and raw materials.......................................     1,178       1,065
                                                                          --------     -------
Inventories.............................................................  $  3,222     $ 2,405
                                                                          ========     =======
PROPERTY, PLANT AND EQUIPMENT -- NET
Land and improvements...................................................  $    273     $   258
Buildings and improvements..............................................     2,668       2,613
Machinery, electronic and other equipment...............................     8,096       8,355
Total property, plant and equipment.....................................    11,037      11,226
Less: Accumulated depreciation..........................................    (6,699)     (6,550)
                                                                          --------     -------
Property, plant and equipment -- net....................................  $  4,338     $ 4,676
                                                                          ========     =======
</TABLE>
 
5. BUSINESS RESTRUCTURING AND OTHER CHARGES
 
     In the fourth quarter of 1995, a pre-tax charge of $2,801 was recorded to
cover restructuring costs of $2,613 and asset impairment and other charges of
$188. The Company's fourth quarter restructuring plans include restructuring its
consumer products business to implement major process improvements in how it
designs, manufactures and distributes those products, including closing all of
its Company-owned retail phone center stores, consolidating and reengineering
numerous corporate and business unit operations during the next two years, and
selling its Microelectronics interconnect business and Paradyne business.
Accordingly, the fourth quarter restructuring charge of $2,613 included the
separation costs for nearly 22,000 employees, comprised of about 11,000
management and 11,000 occupational employees. Approximately 1,000 additional
management employees are employed by businesses that the Company has announced
plans to sell. As of December 31, 1995, approximately 4,100 management employees
have accepted a voluntary severance package and the majority of these employees
will leave the Company in early 1996. The Company expects approximately 70% of
all separations to be completed by the end of 1996, with the majority of the
remaining separations being completed during 1997. The restructuring charge also
included costs associated with early termination of building leases and asset
write-downs as part of the plan to sell certain businesses and restructure its
operations.
 
     The pre-tax total of the fourth quarter charge for restructuring,
impairments and other charges of $2,801 for 1995 was recorded as $892 of costs,
$1,645 of selling, general and administrative expenses, and $264 of research and
development expenses. The charges include $1,509 for employee separations; $627
for asset write-downs; $202 for closing, selling and consolidating facilities;
and $463 for other items. The total charges reduced net income by approximately
$1,847. Of the total combined charges, $1,788 will result in payment of cash in
the future. Approximately $1,013 of the charge related to noncash items. There
were no restructuring charges in 1994. The 1993 restructuring charges of $56
were fully utilized at December 31, 1995.
 
                                      F-12
<PAGE>   105
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. INCOME TAXES
 
     The following table presents the principal reasons for the difference
between the effective tax rate and the United States federal statutory income
tax rate:
 
<TABLE>
<CAPTION>
                                                                 1995        1994        1993
                                                                -------     -------     -------
<S>                                                             <C>         <C>         <C>
U.S. federal statutory income tax rate........................       35%         35%         35%
                                                                -------     -------     -------
Federal income tax provision (benefit) at statutory rate......  $  (391)    $   299     $   233
State and local income taxes, net of federal income tax
  effect......................................................      (56)         27          26
Amortization of intangibles...................................       29          12           6
Foreign rate differential.....................................       66         (64)        (17)
Taxes on repatriated and other foreign income.................       74         100          38
Research credits..............................................       (3)        (27)        (20)
Effect of tax rate change on deferred tax assets..............       --          --         (54)
Other differences -- net......................................       18         (16)         (4)
                                                                -------     -------     -------
Provision (benefit) for income taxes..........................  $  (263)    $   331     $   208
                                                                =======     =======     =======
Effective income tax rate.....................................     23.6%       38.8%       31.3%
</TABLE>
 
     The following table presents the U.S. and foreign components of income
before income taxes and the provision for income taxes:
 
<TABLE>
<CAPTION>
                                                                  1995         1994       1993
                                                                 -------       ----       ----
<S>                                                              <C>           <C>        <C>
INCOME (LOSS) BEFORE INCOME TAXES
United States..................................................  $(1,231)      $475       $452
Foreign........................................................      115        379        214
                                                                 -------       ----       ----
                                                                 $(1,116)      $854       $666
                                                                 =======       ====       ====
PROVISION (BENEFIT) FOR INCOME TAXES
CURRENT
Federal........................................................  $   205       $(96)      $ 59
State and local................................................       44        (34)         8
Foreign........................................................      141        123         77
                                                                 -------       ----       ----
                                                                     390         (7)       144
                                                                 -------       ----       ----
DEFERRED
Federal........................................................     (523)       267         34
State and local................................................     (130)        76         32
Foreign........................................................        1         (4)        (1)
                                                                 -------       ----       ----
                                                                    (652)       339         65
Deferred investment tax credits................................       (1)        (1)        (1)
                                                                 -------       ----       ----
Provision (benefit) for income taxes...........................  $  (263)      $331       $208
                                                                 =======       ====       ====
</TABLE>
 
     The foreign deferred income tax provision is shown net of valuation
allowance increases of $46 and $39 in 1995 and 1993, respectively, and a
valuation allowance decrease of $27 in 1994.
 
     Deferred income tax liabilities are taxes the Company expects to pay in
future periods. Similarly, deferred income tax assets are taxes recognized for
expected reductions in taxes payable. Deferred income taxes arise
 
                                      F-13
<PAGE>   106
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. INCOME TAXES -- (CONTINUED)

because of differences in the book and tax bases of certain assets and
liabilities. Deferred income tax assets/ liabilities consist of the following:
 
<TABLE>
<CAPTION>
                                                                            1995        1994
                                                                           -------     -------
<S>                                                                        <C>         <C>
CURRENT DEFERRED INCOME TAX ASSETS:
  Business restructuring.................................................  $   519     $    57
  Employee pensions and other benefits...................................      516         540
  Reserves and allowances................................................      537         474
  Valuation allowance....................................................     (117)         --
  Other..................................................................      143          45
                                                                           -------     -------
Total current deferred income tax assets.................................    1,598       1,116
                                                                           -------     -------
CURRENT DEFERRED INCOME TAX LIABILITIES:
  Other..................................................................  $   116     $    88
                                                                           -------     -------
Total current deferred income tax liabilities............................  $   116     $    88
                                                                           -------     -------
Net current deferred income tax assets...................................  $ 1,482     $ 1,028
                                                                           =======     =======
LONG-TERM DEFERRED INCOME TAX ASSETS:
  Employee pensions and other benefits, net..............................  $ 1,425     $ 1,478
  Business restructuring.................................................      267          68
  Net operating losses/credit carryforwards..............................       28          96
  Reserves and allowances................................................        9          31
  Valuation allowance....................................................      (25)        (96)
  Other..................................................................      270         199
                                                                           -------     -------
Total long-term deferred income tax assets...............................    1,974       1,776
                                                                           -------     -------
LONG-TERM DEFERRED INCOME TAX LIABILITIES:
  Property, plant and equipment..........................................  $   738     $   806
  Other..................................................................      364         285
                                                                           -------     -------
Total long-term deferred income tax liabilities..........................    1,102       1,091
                                                                           -------     -------
Net long-term deferred income tax assets.................................  $   872     $   685
                                                                           =======     =======
</TABLE>
 
     The Company has not provided for United States federal income taxes or
foreign withholding taxes on $1,004 and $765 of undistributed earnings of its
non-United States subsidiaries as of December 31, 1995 and December 31, 1994,
respectively, because such earnings are intended to be reinvested indefinitely.
Such earnings may be repatriated only when it is advantageous to do so, at which
time applicable taxes would be provided for on the amount of the earnings
remitted. It is not practicable to determine the amount of applicable taxes.
 
7. DEBT SHARING AGREEMENT
 
     The amounts of debt and interest expense included in the Company's
financial statements have been determined under the provisions of a debt sharing
agreement with AT&T. The amount of debt and related interest shared by the
Company reflect the cost of financing the Company's assets and operations. The
agreement is effective from January 1, 1991 through December 31, 1995. The
amount of debt shared by the Company in each of those years represents
approximately 55% of the Company's total expected capital structure. Interest on
this debt is based on the average commercial paper rates incurred by AT&T in
each of
 
                                      F-14
<PAGE>   107
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7. DEBT SHARING AGREEMENT -- (CONTINUED)
the years. The rates were 6.2%, 4.5% and 4.4% for 1995, 1994 and 1993,
respectively, and interest amounted to $215, $133 and $115 for each of the
respective years.
 
8. EMPLOYEE BENEFIT PLANS
 
     At the Distribution, the Company will assume responsibility for pension and
post-retirement benefits for retirees whose last work assignment was a unit of
the Company, for other retirees assigned to the Company and for the employees of
the Company. Until the Distribution, the Company's financial statements will
include the costs experienced by the AT&T plans for employees and retirees for
whom the Company will assume responsibility.
 
  PENSION PLANS
 
     The majority of the Company's employees participate in AT&T's
noncontributory defined benefit plans. Benefits for management employees are
principally based on career-average pay. Benefits for occupational employees are
not directly pay-related. 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 Distribution, the Company will establish separate
defined benefit plans for the employees and retirees of the Company. Pension
assets will be transferred from AT&T's pension trust to the Company's pension
trust pursuant to a specified formula. For purposes of preparing these financial
statements, estimates were made, as of December 31, 1995, of the assets and
pension obligations that will be transferred to the Company. As of December 31,
1995, the projected benefit obligation is estimated at $23,410 and the assets to
be transferred are estimated at $29,092. The actual amounts transferred will be
measured at the Distribution date, using the same methodology, and will likely
be different from these estimates. The estimated December 31, 1995 assets and
pension obligations were also the basis for estimating the Company's assets and
pension obligations for 1994 and 1993.
 
     As of December 31, 1995 and 1994, AT&T had a prepaid pension asset of
$4,664 and $4,151, respectively. Based on the estimates described in this note,
the Company's share of the prepaid pension asset as of December 31, 1995 and
1994 is $2,522 and $2,252, respectively.
 
     Pension cost is computed using the projected unit credit method. The
Company recorded pension income related to the AT&T plans of $135, $288 and $284
in 1995, 1994 and 1993, respectively. The 1995 consolidated statement of
operations includes a charge of $97 for curtailment loss.
 
  SAVINGS PLANS
 
     The majority of the Company's employees are eligible to participate in
savings plans sponsored by AT&T. The plans allow employees to contribute a
portion of their pre-tax and/or after-tax income in accordance with specified
guidelines. AT&T matches a certain percentage of employee contributions, up to
certain limits. The Company's expense related to the AT&T savings plans was $196
in 1995, $178 in 1994 and $167 in 1993. The Company expects to establish similar
plans following the Distribution.
 
9. POSTRETIREMENT BENEFITS
 
     The majority of the Company's employees and retirees participate in AT&T's
benefit plans for retirees, which currently include health care benefits, life
insurance coverage and telephone concessions.
 
     Immediately following the Distribution, the Company will establish separate
postretirement benefit plans for the employees and retirees of the Company.
Postretirement benefit assets will be transferred from AT&T to the Company based
on methods and assumptions that have been agreed to by both companies. For
purposes of preparing these financial statements, estimates were made, as of
December 31, 1995, of the assets and
 
                                      F-15
<PAGE>   108
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. POSTRETIREMENT BENEFITS -- (CONTINUED)

postretirement benefit obligations that will be transferred to the Company. As
of December 31, 1995, the accumulated postretirement benefit obligation is
estimated at $8,368 and the assets to be transferred are estimated at $3,462.
The actual amounts transferred will be measured at the Distribution date, using
the same methodology, and will likely be different from these estimates. The
estimated December 31, 1995 assets and postretirement benefit obligations were
also the basis for estimating the Company's assets and postretirement benefit
obligations for 1994 and 1993.
 
     As of December 31, 1995 and 1994, AT&T had an accrued postretirement
benefit liability of $7,389 and $7,816, respectively. Based on the estimates
described in this note, the Company's share of the accrued postretirement
benefit liability as of December 31, 1995 and 1994 is $4,635 and $5,006,
respectively.
 
     The Company recorded postretirement benefit expense related to the AT&T
plans of $468, $461 and $529 in 1995, 1994 and 1993, respectively. It is
estimated that increasing the assumed health care cost trend rate by 1% would
raise the Company's portion of the accumulated postretirement benefit obligation
as of December 31, 1995 by $423 and 1995 postretirement benefit costs by $35.
 
10. SEGMENT INFORMATION
 
  INDUSTRY SEGMENT
 
     The Company operates in the global telecommunications networking industry
segment. This segment includes systems, software and products used for voice
data and video communications.
 
  GEOGRAPHIC SEGMENTS
 
     Transfers between geographic areas are on terms and conditions comparable
with sales to external customers. The methods followed in developing the
geographic area data require the use of estimation techniques and do not take
into account the extent to which product development, manufacturing and
marketing depend upon each other. Thus the information may not be indicative of
results if the geographic areas were independent organizations.
 
                                      F-16
<PAGE>   109
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. SEGMENT INFORMATION -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                     1995      1994      1993
                                                                    -------   -------   -------
<S>                                                                 <C>       <C>       <C>
REVENUES
United States.....................................................  $17,826   $17,207   $16,213
Other geographic areas............................................    3,587     2,558     1,521
                                                                    -------   -------   -------
                                                                    $21,413   $19,765   $17,734
                                                                    =======   =======   =======
TRANSFERS BETWEEN GEOGRAPHIC AREAS (ELIMINATED IN CONSOLIDATION)
United States.....................................................  $ 1,081   $ 1,338   $   946
Other geographic areas............................................      911     1,041       892
                                                                    -------   -------   -------
                                                                    $ 1,992   $ 2,379   $ 1,838
                                                                    =======   =======   =======
OPERATING INCOME (LOSS)
United States.....................................................  $  (679)  $ 1,697   $ 1,097
Other geographic areas............................................      (67)       (5)     (242)
Corporate, eliminations and nonoperating..........................     (370)     (838)     (189)
                                                                    -------   -------   -------
Income (loss) before income taxes.................................  $(1,116)  $   854   $   666
                                                                    =======   =======   =======
ASSETS
United States.....................................................  $15,043   $14,114   $14,955
Other geographic areas............................................    4,696     3,493     2,289
Corporate assets..................................................      738       696       458
Eliminations......................................................     (755)     (963)     (593)
                                                                    -------   -------   -------
                                                                    $19,722   $17,340   $17,109
                                                                    =======   =======   =======
</TABLE>
 
     Corporate assets are principally cash and temporary cash investments. Data
on other geographic areas pertain to operations that are located outside the
United States. Revenues from all international activities, including those in
the table and exports, provided 23.3%, 19.1%, and 16.9% of consolidated revenues
in 1995, 1994 and 1993, respectively.
 
  CONCENTRATIONS
 
     Historically, the Company has relied on a limited number of customers for a
substantial portion of its total revenues. In terms of total revenues, the
Company's largest customer has been AT&T, although other large customers may
purchase more of any particular system or product line. The Company expects that
a significant portion of its future revenues will continue to be generated by a
limited number of customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could materially
adversely affect the Company's operating results. The Company does not have a
concentration of available sources of supply materials, labor, services or other
rights that, if suddenly eliminated, could severely impact its operations.
 
11. FINANCIAL INSTRUMENTS
 
     In the normal course of business, AT&T has entered into various financial
instruments, including derivative financial instruments, for purposes other than
trading. A portion of such financial instruments related to the Company's
Businesses have, as between AT&T and the Company, been assumed by the Company.
Derivative financial instruments are not entered into for speculative purposes.
These instruments include letters of credit, commitments to extend credit,
guarantees of debt and foreign currency exchange
 
                                      F-17
<PAGE>   110
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. FINANCIAL INSTRUMENTS -- (CONTINUED)

contracts. Unless otherwise noted, the Company generally does not require
collateral to support these financial instruments.
 
     By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties, and the maximum potential loss may
exceed the amount recognized in the balance sheet. The contract or notional
amount of the financial instruments reflects the maximum amount of the Company's
commitments to extend credit or the extent of involvement that the Company has
in particular classes of financial instruments. At December 31, 1995 and 1994,
the Company's maximum exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
financial guarantees is represented by the amount drawn and outstanding on those
instruments. For forward and futures contracts, and option contracts, the
contract or notional amounts do not represent exposure to credit loss.
 
     At December 31, 1995 and 1994, in management's opinion, there was no
significant risk of loss in the event of nonperformance of the counterparties to
these financial instruments. Exposure to credit risk is controlled through
credit approvals, credit limits and monitoring procedures and management
believes that the reserves for losses are adequate. The Company had no
significant exposure to any individual customer or counterparty at December 31,
1995 and December 31, 1994. Letters of credit, commitments to extend credit and
guarantees of debt may exist or expire without being drawn upon. Therefore, the
total notional or contract amounts do not necessarily represent future cash
flows.
 
     Requests for providing commitments to extend credit and financial
guarantees are reviewed and approved by the senior management of the Company.
Management conducts regular reviews of all outstanding commitments, letters of
credit and financial guarantees, and the results of these reviews are considered
in assessing the adequacy of the Company's reserve for possible credit and
guarantee losses.
 
     For the years ended December 31, 1995 and December 31, 1994, no interest
rate cap agreements had been entered into for the benefit of the Company. The
Company may, in the future, enter into these or other types of derivative
transactions as it judges prudent for the proper management of its business.
 
  LETTERS OF CREDIT
 
     Letters of credit are purchased guarantees that ensure the Company's
performance or payment to third parties in accordance with specified terms and
conditions.
 
  COMMITMENTS TO EXTEND CREDIT
 
     Commitments to extend credit are legally binding, conditional agreements
generally having fixed expiration or termination dates and specified interest
rates and purposes.
 
  GUARANTEES OF DEBT
 
     From time to time, the Company guarantees the financing for product
purchases by customers and the debt of certain unconsolidated joint ventures.
Requests for providing such guarantees are reviewed and approved by the senior
management of the Company. The Company seeks to limit its exposure to credit
risks in any single country or region. Certain financial guarantees are backed
by amounts held in trust for the Company.
 
  FOREIGN CURRENCY EXCHANGE CONTRACTS
 
     Foreign currency exchange contracts, including forward, option and swap
contracts are used to manage exposure to changes in currency exchange rates,
principally Dutch guilders, Deutsche marks, and Japanese yen. Some of the
contracts involve the exchange of two foreign currencies, according to local
needs in foreign
 
                                      F-18
<PAGE>   111
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. FINANCIAL INSTRUMENTS -- (CONTINUED)

subsidiaries. The use of derivative financial instruments allows the Company to
reduce its exposure to the risk that the eventual dollar net cash inflows and
outflows resulting from the sale of products to foreign customers and purchases
from foreign suppliers will be adversely affected by changes in exchange rates.
The foreign exchange contracts hedge firmly committed or forecasted purchases
and sales. These transactions are generally expected to occur in less than one
year. Gains and losses are deferred in other current assets and liabilities for
firmly committed sales and purchases. Deferred gains and losses are recognized
as adjustments to the underlying hedged transactions when the future sales or
purchases are recognized, or immediately, if the commitment is canceled. Gains
and losses on foreign exchange contracts that hedge forecasted transactions are
recognized in other income as the exchange rates change. At December 31, 1995
and 1994, deferred unrealized gains were $8 and $3 and deferred unrealized
losses were $6 and $7, respectively.
 
 FAIR VALUE OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
 
     The tables below present the valuation methods and the carrying or notional
amounts and estimated fair values 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 the instruments. The Company's
exposure is limited to the fair value of the contracts with a positive fair
value at the reporting date plus interest receivable, if any, at the reporting
date.
 
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENT                            VALUATION METHOD
<S>                                             <C>
Short-term debt.............................    The carrying amount is a reasonable estimate
                                                of fair value.
Letters of credit...........................    Fees paid to obtain the obligations.
Guarantees of debt..........................    Costs to terminate agreements.
Commitments to extend credit................    Costs to terminate agreements.
Foreign currency exchange contracts.........    Market quotes.
</TABLE>
 
<TABLE>
<CAPTION>
                                                                1995                    1994
                                                         -------------------     -------------------
                                                         CARRYING      FAIR      CARRYING      FAIR
                                                          AMOUNT      VALUE       AMOUNT      VALUE
                                                         --------     ------     --------     ------
<S>                                                      <C>          <C>        <C>          <C>
ON BALANCE SHEET
Liabilities:
Debt sharing amount in anticipation of assumption of
  the commercial paper program.........................   $3,842      $3,842      $2,961      $2,961
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                       AMOUNTS DRAWN
                                                            1995          1994           DOWN AND
                                                          CONTRACT/     CONTRACT/       OUTSTANDING
                                                          NOTIONAL      NOTIONAL      ---------------
                                                           AMOUNT        AMOUNT       1995      1994
                                                          ---------     ---------     -----     -----
<S>                                                       <C>           <C>           <C>       <C>
DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS
Foreign exchange:.......................................
  Forward contracts.....................................   $ 1,086        $ 790
  Swap contracts........................................        --          118
  Option contracts......................................         4           --
Letters of credit.......................................       659          640
Commitments to extend credit............................        16          119       $  13     $  34
Guarantees of debt......................................       598          368         296       280
</TABLE>
 
                                      F-19
<PAGE>   112
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. FINANCIAL INSTRUMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                         CARRYING AMOUNT             FAIR VALUE
                                                      ---------------------     ---------------------
                                                       ASSET      LIABILITY      ASSET      LIABILITY
                                                      -------     ---------     -------     ---------
<S>                                                   <C>         <C>           <C>         <C>
1995
Foreign exchange forward contracts..................  $    16      $     10     $    11      $     15
Letters of credit...................................       --            --           2            --

1994
Foreign exchange forward contracts..................  $     7      $     12     $     9      $     28
Foreign exchange swap contracts.....................       --             5           5             4
Letters of credit...................................       --            --           1            --
</TABLE>
 
12. TRANSACTIONS WITH AT&T
 
     For the years 1995, 1994 and 1993, the Company had $2,119, $2,137, and
$1,967, respectively, of revenues from AT&T. At December 31, 1995 and 1994, the
related receivables amounted to $291 and $81, respectively.
 
     AT&T has allocated general corporate overhead expenses amounting to $372,
$358 and $312 in 1995, 1994 and 1993, respectively. Additionally, the Company
incurred expenses for long distance services provided by AT&T of $80, $93 and
$92 for the years ended December 31, 1995, 1994 and 1993, respectively. Amounts
payable to AT&T were $25 at December 31, 1995 and 1994.
 
     Rights, title and interest in certain lease receivables for business
communication equipment are sold at a discount to AT&T's finance subsidiary,
AT&T Capital Corporation. The Company acts as an agent to bill and collect such
receivables. The Company has agreed to repurchase certain of these lease
receivables in the event of a default thereon. At December 31, 1995 and 1994,
$206 and $208, respectively, of such receivables had recourse to the Company in
the event of default.
 
     In connection with the Separation, AT&T has agreed to prepay prior to the
closing of the Offerings $500 to the Company, which amount will be applied to
accounts receivable from AT&T that are due and payable on or after January 1,
1997 for the purchase of products, services and licensed materials from the
Company.
 
13. COMMITMENTS AND CONTINGENCIES
 
     In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims, including proceedings under government laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 1995 cannot be ascertained.
While these matters could affect the operating results of any one quarter when
resolved in future periods, management believes that after final disposition,
any monetary liability or financial impact to the Company beyond that provided
for at year-end would not be material to the annual consolidated financial
statements.
 
     The Company leases land, buildings and equipment through contracts that
expire in various years, through 2025. Rental expense under operating leases was
$209 in 1995, $183 in 1994 and $202 in 1993. The table below shows the future
minimum lease payments due under noncancelable operating leases at December 31,
1995. Such payments total $245.
 
<TABLE>
<CAPTION>
                                                                                            LATER
                                          1996      1997      1998      1999      2000      YEARS
                                          -----     -----     -----     -----     -----     -----
<S>                                       <C>       <C>       <C>       <C>       <C>       <C>
Operating leases........................   $85       $59       $40       $26       $13       $22
</TABLE>
 
                                      F-20
<PAGE>   113
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. SUBSEQUENT EVENTS
 
     In connection with the Separation and Distribution, the Company, AT&T and
NCR Corporation, a wholly owned subsidiary ("NCR"), executed and delivered the
Separation and Distribution Agreement, dated as of February 1, 1996 (the
"Separation and Distribution Agreement"), and certain related agreements which
are summarized below. This summary is qualified in all respects by the terms of
the Separation and Distribution Agreement and such related agreements.
 
          SEPARATION AND DISTRIBUTION AGREEMENT
 
     Pursuant to the Separation and Distribution Agreement, AT&T will transfer
to the Company substantially all of the assets and liabilities associated with
the Company's Business, other than accounts receivable having a face amount of
approximately $2,000.
 
     The Separation and Distribution Agreement, among other things, provides
that the Company will indemnify AT&T and NCR for all liabilities relating to the
Company's business and operations and for all contingent liabilities relating to
the Company's business and operations or otherwise assigned to the Company. In
addition, the Separation and Distribution Agreement provides for the sharing of
contingent liabilities not allocated to one of the parties, in the following
proportions: AT&T: 75%, the Company: 22%, and NCR: 3%. The Separation and
Distribution Agreement also provides that each party will share specified
portions of contingent liabilities related to the business of any of the other
parties that exceed specified levels.
 
          EMPLOYEE BENEFITS AGREEMENT
 
     The Company entered into an agreement which governs its employee benefit
obligations with respect to actual employees as well as retirees assigned to the
Company. This agreement provides that, from the Separation until the
Distribution, the Company will be a "Participating Company" in AT&T employee
benefit plans and will bear its allocable share of costs for benefits and
administration under these plans. Immediately after the Distribution, pension
plan assets will be divided between AT&T pension plans and the Company's pension
plans so that each plan will receive the legally required minimum and a
sufficient amount of additional assets to ensure continued compliance with the
existing AT&T pension funding policy. Any trust assets in excess of the funding
policy level will be divided equally between the trusts of AT&T and the Company
with respect to such qualified plans. Liability under the AT&T plans relating to
the Company's employees or retirees will be assumed by the Company's plans.
 
          FEDERAL, STATE AND LOCAL TAX ALLOCATION AGREEMENTS
 
     The Company has entered into agreements with AT&T and its other domestic
subsidiaries that apply to income taxes attributable to the period from the
Company's incorporation through the Distribution. The agreements set forth
principles to be applied in allocating tax liability among those entities filing
returns on a consolidated or combined basis.
 
          TAX SHARING AGREEMENT
 
     The Company has entered into an agreement with AT&T and NCR that governs
contingent tax liabilities and benefits, tax contests and other tax matters with
respect to tax periods ending or deemed to end on the date of the Distribution.
Under such agreement, adjustments to taxes that are clearly attributable to the
business of one party will be borne solely by that party. Adjustments to all
other tax liabilities generally will be borne 75% by AT&T, 22% by the Company
and 3% by NCR.
 
          GENERAL PURCHASE AGREEMENT
 
     The Company and AT&T have entered into the General Purchase Agreement and
various related and supplemental agreements which govern transactions pursuant
to which the Company provides products,
 
                                      F-21
<PAGE>   114
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. SUBSEQUENT EVENTS -- (CONTINUED)
licensed materials and services to AT&T and certain designated AT&T affiliates.
AT&T commits therein that payments made to the Company (commencing January 1,
1996) for purchases of products, licensed materials and services by AT&T and
such designated affiliates will total at least $3,000 cumulatively for the
calendar years 1996, 1997 and 1998.
 
          INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT; REAL ESTATE
SHARING
 
     The Company, AT&T and NCR have entered into an agreement governing the
provision by each to one or more of the others on an interim basis of certain
data processing and telecommunications services and certain corporate support
services on specified terms. Specified charges are generally intended to allow
the providing company to recover the fully allocated direct costs of providing
the services, plus all out-of-pocket costs and expenses, but without any profit.
Such agreement also provides for the replication and transfer of certain
computer systems on specified terms. AT&T, the Company and NCR also have entered
into various leases and sublease arrangements for the sharing of certain
facilities for a transitional period on commercial terms.
 
          BRAND LICENSE AGREEMENT
 
     The Company and AT&T have entered into the Brand License Agreement,
pursuant to which the Company will have rights, on a royalty-free basis, to
continue to use the AT&T brand for specified transition periods following the
closing of the Offerings. Under the Brand License Agreement, the Company will be
entitled to use the AT&T brand, alone or in combination with the Company's
brand, for the sale of consumer products and services and business
communications systems and services for a period of one year following the
closing of the Offerings. After the initial one-year period, the Company will be
entitled to continue to use the AT&T brand on these products, systems and
services, but only in combination with the Company's brand, for an additional
three-year period. The right to use the AT&T brand, alone or in combination with
the Company's brand, in connection with certain leased products or maintenance
contracts will extend for 66 months after the closing of the Offerings. The
Brand License Agreement permits the Company to use the AT&T brand on the
Company's other products, systems and services until the earlier of the
Distribution or six months after the closing of the Offerings. In addition, the
Company may use the AT&T brand after these time periods to the extent necessary
to deplete pre-existing inventory.
 
          FINANCING
 
     The Company entered into a Competitive Advance and Revolving Credit
Facility Agreement, dated as of February 1, 1996, with Chemical Bank, as agent
(the "Initial Working Capital Facility"), pursuant to which the Company may
borrow up to $1,000 subject to the terms and conditions thereof. In addition,
AT&T intends to issue up to approximately $4,000 of short-term debt under a
commercial paper facility ("Commercial Paper Program"), which will be assumed by
the Company in respect of the debt sharing amount under the Debt Sharing
Agreement.
 
          ACQUISITIONS OF CERTAIN PHILIPS OPERATIONS
 
     On February 7, 1996, the Company will acquire several operations of Philips
Electronics, N.V. for approximately $260. This acquisition augments the
Company's global position in the development, manufacturing and marketing of
Synchronous Digital Hierarchy, Global System Mobile and Fixed Wireless Systems.
This acquisition is not expected to have a material impact on the Company's
results of operations.
 
                                      F-22
<PAGE>   115
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. SUBSEQUENT EVENTS -- (CONTINUED)
          LONG TERM INCENTIVE PLAN
 
     The Company intends to adopt the 1996 Long Term Incentive Plan, under which
stock options, stock appreciation rights ("SARs") and other awards would be
granted. Details of the Plan are described elsewhere in this prospectus. No
grants under this Plan have been made at December 31, 1995.
 
     Under AT&T's Long Term Incentive Program, certain employees of the Company
are eligible for the grant of stock options, SARs, either in tandem with stock
options or free standing, and other awards. Pending AT&T's distribution of all
of its interest in the Company, AT&T stock awards held by Company employees will
remain outstanding as AT&T stock awards. If any such AT&T stock options are
exercised or any such AT&T stock awards vest or are delivered, the Company will
reimburse AT&T for the difference between the exercise price and AT&T's common
stock market price on the date of exercise, in the case of stock options, and
for the market value of AT&T common stock on the date of vesting or delivery, in
the case of stock awards.
 
     Immediately following the Distribution, outstanding awards under the AT&T
Long Term Incentive Program held by Company employees will be replaced by
substitute awards under the Company's 1996 Stock Plan. The substitute awards
will have the same ratio of the exercise price per option to the market value
per share, the same aggregate difference between market value and exercise price
and the same vesting provisions, option periods and other terms and conditions
as the AT&T options and SARs they replace. The formula for determining the total
number of substitute awards to be issued to Company employees depends on an
average of the respective market values of AT&T's and the Company's common stock
during the five trading days immediately preceding the ex-dividend date for the
Distribution. The formula is a fraction, with the average market value of AT&T's
common stock as the numerator and with the average market value of the Company's
common stock as the denominator, multiplied by the number of AT&T stock options,
SARs and other stock awards held by Company employees at the Distribution date.
Accordingly, the Company cannot currently determine the number of shares of its
common stock that will be subject to substitute awards after the Distribution.
 
     At December 31, 1995, there were approximately        million shares of
AT&T common stock subject to options, SARs, performance shares and other stock
awards held by Company employees.
 
15. QUARTERLY INFORMATION (UNAUDITED)
 
<TABLE>
<CAPTION>
                                              FIRST      SECOND      THIRD      FOURTH(1)   TOTAL
                                              ------     -------     ------     ------     -------
<S>                                           <C>        <C>         <C>        <C>        <C>
1995
Total revenues..............................  $4,159     $ 5,083     $4,744     $7,427     $21,413
Gross margin................................   1,850       2,251      2,042      2,325       8,468
Net income (loss)...........................     (18)        163         17     (1,015)       (853)
1994
Total revenues..............................  $4,052     $ 4,665     $4,776     $6,272     $19,765
Gross margin................................   1,740       2,028      2,006      2,654     $ 8,428
Net income (loss)...........................     (29)         90         53        409         523
</TABLE>
 
---------------
(1) 1995 includes pre-tax charges of $2,801 ($1,847 after taxes), to cover
    restructuring costs of $2,613 and asset impairment and other charges of
    $188. (See Note 5.)
 
                                      F-23
<PAGE>   116

 
              [Alternate Cover Page for International Prospectus]

PROSPECTUS (Subject to Completion)
Issued February 5, 1996
 
                                              Shares
 
                              LUCENT TECHNOLOGIES         [LOGO]

                                  COMMON STOCK
                            ------------------------
 
OF THE         SHARES OF COMMON STOCK BEING OFFERED,         SHARES ARE BEING
OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
    UNDERWRITERS AND         SHARES ARE BEING OFFERED INITIALLY IN THE
    UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. ALL OF THE SHARES
       OF COMMON STOCK ARE BEING OFFERED BY LUCENT TECHNOLOGIES INC.,
       WHICH IS CURRENTLY A WHOLLY OWNED SUBSIDIARY OF AT&T CORP. PRIOR
        TO THE OFFERINGS, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
        STOCK. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
           OFFERING PRICE WILL BE BETWEEN $      AND $      PER
           SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF THE
              FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC
                               OFFERING PRICE.
 
AFTER THE OFFERINGS, AT&T WILL OWN APPROXIMATELY     % (    % IF THE U.S.
UNDERWRITERS EXERCISE THEIR OVERALLOTMENT OPTION IN FULL) OF THE COMMON STOCK.
  AT&T HAS ANNOUNCED ITS INTENTION, SUBJECT TO SATISFACTION OF CERTAIN
  CONDITIONS, TO DIVEST ITS OWNERSHIP INTEREST IN THE COMPANY BY DECEMBER
    31, 1996 BY MEANS OF A TAX-FREE DISTRIBUTION TO ITS SHAREHOLDERS. SEE
                 "ARRANGEMENTS BETWEEN THE COMPANY AND AT&T."
                            ------------------------
 
    APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK ON THE NEW YORK STOCK
                       EXCHANGE UNDER THE SYMBOL "    ."
                            ------------------------
 
   SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR INFORMATION CONCERNING CERTAIN
          FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
                            ------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
       EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
           SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
            COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
                     PROSPECTUS. ANY REPRESENTATION TO THE
                        CONTRARY IS A CRIMINAL OFFENSE.
 
      --------------------------------------------------------------------------
 
                             PRICE $       A SHARE
 
                                ----------------
 
<TABLE>
<CAPTION>
                                                          UNDERWRITING
                                        PRICE TO         DISCOUNTS AND        PROCEEDS TO
                                         PUBLIC          COMMISSIONS(1)      THE COMPANY(2)
                                    ----------------    ----------------    ----------------
<S>                                 <C>                 <C>                 <C>
Per Share.....................             $                   $                   $
Total(3)......................             $                   $                   $
</TABLE>
 
------------
    (1) The Company has agreed to indemnify the Underwriters against certain
        liabilities, including liabilities under the Securities Act of 1933, as
        amended.
 
    (2) Before deducting expenses payable by the Company estimated at
        $          .
 
    (3) The Company has granted to the U.S. Underwriters an option, exercisable
        within 30 days of the date hereof, to purchase up to an aggregate of
                  additional shares of Common Stock at the Price to Public less
        Underwriting Discounts and Commissions for the purpose of covering
        overallotments, if any. If the U.S. Underwriters exercise such option in
        full, the total Price to Public, Underwriting Discounts and Commissions
        and Proceeds to the Company will be $        , $        and $        ,
        respectively. See "Underwriting."
                            ------------------------
 
    The shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the shares will be made on or about            , 1996 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in same-day funds.
                            ------------------------
 
                           Joint Global Coordinators
MORGAN STANLEY & CO.                                        GOLDMAN, SACHS & CO.
           Incorporated
                            ------------------------
 
MORGAN STANLEY & CO.                                 GOLDMAN SACHS INTERNATIONAL
           International
 
                      MERRILL LYNCH INTERNATIONAL LIMITED
 
          , 1996
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.

<PAGE>   117
 
                 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
 
     NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
                            ------------------------
 
     UNTIL               , 1996 (25 DAYS AFTER COMMENCEMENT OF THE OFFERINGS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
                            ------------------------
 
     For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Common Stock or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.
 
     In this Prospectus references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
                            ------------------------
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                         PAGE
                                         -----
<S>                                      <C>
Prospectus Summary....................       3
Risk Factors..........................       9
The Company...........................      16
Use of Proceeds.......................      19
Dividend Policy.......................      19
Certain Transactions in Connection
  with the Offerings..................      20
Capitalization........................      22
Selected Financial Data...............      23
Pro Forma Condensed Financial
  Statements..........................      24
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................      26
Business..............................      35
Management............................      54
Arrangements Between the Company and
  AT&T................................      70
Principal Stockholder.................      85
Description of Capital Stock..........      86
Shares Eligible for Future Sale.......      92
Certain United States Tax Consequences
  to Non-United States Holders........      93
Underwriting..........................      95
Legal Matters.........................      98
Experts...............................      98
Available Information.................      98
Index to Financial Statements.........     F-1
</TABLE>
 
                            ------------------------
 
     IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
                            ------------------------
 
     This Prospectus contains trademarks, service marks or registered marks of
the Company, AT&T, their respective subsidiaries, and other companies, as
indicated.
                            ------------------------
 
                                       I-2
<PAGE>   118
 
                 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
 
                     CERTAIN UNITED STATES TAX CONSEQUENCES
                          TO NON-UNITED STATES HOLDERS
 
     The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
Common Stock applicable to Non-United States Holders of such Common Stock. For
the purpose of this discussion, a "Non-United States Holder" is any holder that
is, as to the United States, a foreign corporation, a non-resident alien
individual, a foreign partnership or a non-resident fiduciary of a foreign
estate or trust as such terms are defined in the Code. This discussion does not
deal with all aspects of United States federal income and estate taxation and
does not deal with foreign, state and local tax consequences that may be
relevant to Non-United States Holders in light of their personal circumstances.
Furthermore, the following discussion is based on current provisions of the Code
and administrative and judicial interpretations as of the date hereof, all of
which are subject to change. PROSPECTIVE FOREIGN INVESTORS ARE URGED TO CONSULT
THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-UNITED STATES INCOME AND OTHER TAX CONSEQUENCES OF OWNING AND DISPOSING OF
COMMON STOCK.
 
DIVIDENDS
 
     Generally, any dividend paid to a Non-United States Holder of Common Stock
will be subject to United States withholding tax either at a rate of 30% of the
gross amount of the dividend or such lower rate as may be specified by an
applicable tax treaty. Under current United States Treasury Regulations (the
"U.S. Regulations"), dividends paid to an address outside the United States are
presumed to be paid to a resident of such country (absent knowledge that such
presumption is not warranted) for purposes of the withholding discussed above
and, under the current interpretation of the U.S. Regulations, for purposes of
determining applicability of a tax treaty rate. However, under proposed U.S.
Regulations not currently in effect, a Non-United States Holder of Common Stock
who wishes to claim the benefit of an applicable treaty rate would be required
to satisfy applicable certification and other requirements. Dividends received
by a Non-United States Holder that are effectively connected with a United
States trade or business conducted by such Non-United States Holder are exempt
from such withholding tax. However, such effectively connected dividends, net of
certain deductions and credits, are taxed at the same graduated rates applicable
to United States person. A Non-United States Holder may claim exemption from
withholding under the effectively connected income exception by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected With the
Conduct of Business in the United States) each year with the Company or its
paying agent prior to the payment of the dividends for such year.
 
     In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
 
     A Non-United States Holder of Common Stock eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the IRS. In the event that dividends from the Company are not out of
current or accumulated earnings and profits (see "Dividend Policy"), a
Non-United States Holder of Common Stock may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the IRS.
 
GAIN OR DISPOSITION OF COMMON STOCK
 
     A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his Common Stock unless: (i) such gain is effectively connected with a United
States trade or business of the Non-United States Holder; (ii) the Non-United
States Holder is an individual who holds such Common Stock as a capital asset
and who is present in the
 
                                       I-3
<PAGE>   119
 
                 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
 
United States for a period or periods aggregating 183 days or more during the
calendar year in which such sale or disposition occurs and certain other
conditions are met; or (iii) the Company is or has been a "United States real
property holding corporation" for federal income tax purposes at any time within
the shorter of the five-year period preceding such disposition or such holder's
holding period. The Company has determined that it is not and does not believe
that it will become a "United States real property holding corporation" for
federal income tax purposes.
 
BACKUP WITHHOLDING AND INFORMATION REPORTING
 
     Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
 
     Dividends paid to a Non-United States Holder at an address within the
United States may be subject to backup withholding at a rate of 31% if the
Non-United States Holder fails to establish that it is entitled to an exemption
or to provide a correct taxpayer identification number and other information to
the payer. Backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States (unless the
payer has knowledge that the payee is a U.S. person).
 
     The payment of the proceeds of the disposition of Common Stock to or
through the United States office of a broker is subject to information reporting
and backup withholding at a rate of 31% unless the holder certified its
non-United States status under penalties of perjury or otherwise establishes an
exemption. Generally, the payment of the proceeds of the disposition by a
Non-United States Holder of Common Stock outside the United States through a
foreign office of a broker will not be subject to backup withholding. However,
information reporting requirements (but not backup withholding) will apply to a
payment of disposition proceeds outside the United States through an office
outside the United States of a broker that is (a) a United States person, (b) a
United States "controlled foreign corporation" for U.S. tax purposes or (c) a
foreign person 50% or more of whose gross income for certain periods is from the
conduct of a United States trade or business unless such broker has documentary
evidence in its files of the owner's foreign status and has no actual knowledge
to the contrary or the holder otherwise establishes an exemption.
 
     Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
 
ESTATE TAX
 
     An individual Non-United States Holder who owns Common Stock at the time of
his death or has made certain lifetime transfers of an interest in Common Stock
will be required to include the value of such Common Stock in such holder's
gross estate for United States federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
 
                                       I-4
<PAGE>   120
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All amounts are estimated except the
Securities and Exchange Commission (the "Commission") registration fee, the
National Association of Securities Dealers, Inc. ("NASD") registration fee and
the New York Stock Exchange listing fee.
 
<TABLE>
<CAPTION>
                                                                            PAYABLE BY
                                                                          THE REGISTRANT
                                                                          --------------
        <S>                                                               <C>
        SEC registration fee............................................    $   34,483
        NASD registration fee...........................................        10,500
        New York Stock Exchange listing fee.............................       *
        Blue Sky fees and expenses......................................       *
        Accounting fees and expenses....................................       *
        Legal fees and expenses.........................................       *
        Printing and engraving expenses.................................       *
        Miscellaneous fees and expenses.................................       *
                                                                              --------
                  Total.................................................    $  *
</TABLE>
 
---------------
* To be provided by amendment.
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation, a
"derivative action") if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, if they had no reasonable
cause to believe their conduct was unlawful. A similar standard is applicable in
the case of derivative actions, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with the defense or
settlement of such actions, and the statute requires court approval before there
can be any indemnification where the person seeking indemnification has been
found liable to the corporation. The statute provides that it is not exclusive
of other indemnification that may be granted by a corporation's bylaws,
disinterested director vote, stockholder vote, agreement or otherwise.
 
     The Restated Certificate of Incorporation of the Company (the
"Certificate") provides that each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person, or a person of whom such person is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, will be indemnified and held harmless by
the Company to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss reasonably incurred or
suffered by such person in connection therewith. Such right to indemnification
includes the right to have the Company pay the expenses incurred in defending
any such proceeding in advance of its final disposition, subject to the
provisions of the DGCL. Such rights are not exclusive of any other right which
any person may have or
 
                                      II-1
<PAGE>   121
 
thereafter acquire under any statute, provision of the Certificate, By-Law,
agreement, vote of stockholders or disinterested directors or otherwise. No
repeal or modification of such provision will in any way diminish or adversely
affect the rights of any director, officer, employee or agent of the Company
thereunder in respect of any occurrence or matter arising prior to any such
repeal or modification. The Certificate also specifically authorizes the Company
to maintain insurance and to grant similar indemnification rights to employees
or agents of the Company.
 
     The DGCL permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) payments of unlawful dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit.
 
     The Certificate provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except, if required by the DGCL as
amended from time to time, for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit. Neither the amendment
nor repeal of such provision will eliminate or reduce the effect of such
provision in respect of any matter occurring, or any cause of action, suit or
claim that, but for such provision, would accrue or arise prior to such
amendment or repeal.
 
     The Underwriting Agreements provide for indemnification by the Underwriters
of the registrant, its Directors and officers, and by the registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Act, and affords certain rights of contribution with respect thereto.
 
     The Separation and Distribution Agreement by and among the Company, AT&T
Corp. ("AT&T") and NCR Corporation ("NCR") provides for indemnification by the
Company of AT&T and its directors, officers and employees for certain
liabilities, including liabilities under the Act.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     Not applicable.
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     (a) Exhibits.
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                       DESCRIPTION
------   ------------------------------------------------------------------------------------
<S>      <C>
  1.1    Form of Underwriting Agreement.*
  3.1    Form of Restated Certificate of Incorporation of the Company.
  3.2    Form of By-Laws of the Company.
  4.1    Form of the Company's Common Stock certificate.*
  5.1    Opinions re: legality of shares being registered.*
 10.1    Separation and Distribution Agreement by and among the Company, AT&T and NCR, dated
         as of February 1, 1996.
 10.2    Employee Benefits Agreement by and between AT&T and the Company, dated as of
         February 1, 1996.*
 10.3    General Purchase Agreement by and between AT&T and the Company, dated as of February
         1, 1996.
 10.4    Interim Services and Systems Replication Agreement by and among AT&T, the Company
         and NCR, dated as of February 1, 1996.
 10.5    Brand License Agreement by and between the Company and AT&T, dated as of February 1,
         1996.
</TABLE>
 
                                      II-2
<PAGE>   122
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                       DESCRIPTION
------   ------------------------------------------------------------------------------------
<S>      <C>
 10.6    Tax Sharing Agreement by and among the Company, AT&T and NCR, dated as of February
         1, 1996.
 11.1    Statement re: Computation of Per Share Earnings.*
 21.1    Subsidiaries of the Company.*
 23.1    Consent of Coopers & Lybrand L.L.P.
 27.1    Financial Data Schedule.
 99.1    Consent of Carla A. Hills to be named as a director nominee.
 99.2    Consent of Drew Lewis to be named as a director nominee.
 99.3    Consent of Richard A. McGinn to be named as a director nominee.
 99.4    Consent of Donald S. Perkins to be named as a director nominee.
 99.5    Consent of Henry B. Schacht to be named as a director nominee.
 99.6    Consent of Franklin A. Thomas to be named as a director nominee.
</TABLE>
 
---------------
 
     * To be filed by amendment.
 
     (b) Financial Statement Schedules.
 
     The following financial statement schedules are filed herewith:
 
        Schedule of Valuation and Qualifying Accounts.
 
     Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
 
ITEM 17. UNDERTAKINGS
 
     The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing of the Offerings specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
 
     Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
 
     The undersigned registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Act, the
     information omitted from the form of prospectus filed as part of this
     Registration Statement in reliance upon Rule 430A and contained in a form
     of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
     497(h) under the Act shall be deemed to be part of this Registration
     Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Act, each
     post-effective amendment that contains a form of prospectus shall be deemed
     to be a new Registration Statement relating to the securities offered
     therein, and the offering of such securities at that time shall be deemed
     to be the initial bona fide offering thereof.
 
                                      II-3
<PAGE>   123
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 5th day of February, 1996.
 
                                          LUCENT TECHNOLOGIES INC.
 
                                          By      /s/  HENRY B. SCHACHT
                                            ------------------------------------
                                                      Henry B. Schacht
                                                  Chief Executive Officer
 
     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                 SIGNATURES                                TITLE                     DATE
---------------------------------------------   ----------------------------  -------------------
<S>                                             <C>                           <C>
                /s/  HENRY B. SCHACHT             Chief Executive Officer     February 5, 1996
---------------------------------------------
              Henry B. Schacht

               /s/  DONALD K. PETERSON          Chief Financial Officer and   February 5, 1996
---------------------------------------------     Chief Accounting Officer
             Donald K. Peterson

             /s/  PAMELA F. CRAVEN                        Director            February 5, 1996
---------------------------------------------
              Pamela F. Craven

                 /s/  MAUREEN B. TART                     Director            February 5, 1996
---------------------------------------------
               Maureen B. Tart

                /s/  MARILYN J. WASSER                    Director            February 5, 1996
---------------------------------------------
              Marilyn J. Wasser
</TABLE>
 
                                      II-4
<PAGE>   124
 
                                                                     SCHEDULE II
 
                            LUCENT TECHNOLOGIES INC.
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                  IN MILLIONS
 
<TABLE>
<CAPTION>
                                                          COLUMN C
                                                  -------------------------
                                   COLUMN B               ADDITIONS                             COLUMN E
                                 ------------     -------------------------                    ----------
           COLUMN A               BALANCE AT      CHARGED TO     CHARGED TO      COLUMN D      BALANCE AT
-------------------------------   BEGINNING        COSTS &         OTHER        ----------        END
          DESCRIPTION             OF PERIOD        EXPENSES       ACCOUNTS      DEDUCTIONS     OF PERIOD
-------------------------------  ------------     ----------     ----------     ----------     ----------
<S>                              <C>              <C>            <C>            <C>            <C>
Year 1995
  Allowance for Doubtful
     Accounts..................       206               94            (3)            49             248
  Reserves related to business
     restructuring and facility
     consolidation.............       133            1,774             0              0           1,907
  Deferred tax asset valuation
     allowance.................        96               46             0              0             142
  Inventory valuation
     reserves..................       591              136             0            133             594
Year 1994
  Allowance for Doubtful
     Accounts..................       143               82            17             36             206
  Reserves related to business
     restructuring and facility
     consolidation.............       205                0            26             98             133
  Deferred tax asset valuation
     allowance.................       123                0             0             27              96
  Inventory valuation
     reserves..................       523              164             0             96             591
Year 1993
  Allowance for Doubtful
     Accounts..................       139               67            (2)            61             143
  Reserves related to business
     restructuring and facility
     consolidation.............       233               56           (53)            31             205
  Deferred tax asset valuation
     allowance.................        84               39             0              0             123
  Inventory valuation
     reserves..................       484              153             0            114             523
</TABLE>
 
                                       S-1
<PAGE>   125
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                       DESCRIPTION
------   ------------------------------------------------------------------------------------
<S>      <C>
  1.1    Form of Underwriting Agreement.*
  3.1    Form of Restated Certificate of Incorporation of the Company.
  3.2    Form of By-Laws of the Company.
  4.1    Form of the Company's Common Stock certificate.*
  5.1    Opinions re: legality of shares being registered.*
 10.1    Separation and Distribution Agreement by and among the Company, AT&T and NCR, dated
         as of February 1, 1996.
 10.2    Employee Benefits Agreement by and between AT&T and the Company, dated as of
         February 1, 1996.*
 10.3    General Purchase Agreement by and between AT&T and the Company, dated as of February
         1, 1996.
 10.4    Interim Services and Systems Replication Agreement by and among AT&T, the Company
         and NCR, dated as of February 1, 1996.
 10.5    Brand License Agreement by and between the Company and AT&T, dated as of February 1,
         1996.
 10.6    Tax Sharing Agreement by and among the Company, AT&T and NCR, dated as of February
         1, 1996.
 11.1    Statement re: Computation of Per Share Earnings.*
 21.1    Subsidiaries of the Company.*
 23.1    Consent of Coopers & Lybrand L.L.P.
 27.1    Financial Data Schedule.
 99.1    Consent of Carla A. Hills to be named as a director nominee.
 99.2    Consent of Drew Lewis to be named as a director nominee.
 99.3    Consent of Richard A. McGinn to be named as a director nominee.
 99.4    Consent of Donald S. Perkins to be named as a director nominee.
 99.5    Consent of Henry B. Schacht to be named as a director nominee.
 99.6    Consent of Franklin A. Thomas to be named as a director nominee.
</TABLE>
 
---------------
 
     * To be filed by amendment.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 523537}]
{"company-data": {"conformed-name": "LUCENT TECHNOLOGIES INC", "cik": "0001006240", "assigned-sic": "", "irs-number": "223408857", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-00703", "film-number": "96511294"}, "business-address": {"street1": "600 MOUNTAIN AVE", "city": "MURRAY HILL", "state": "NJ", "zip": "07974", "phone": "9085828500"}, "mail-address": {"street1": "600 MOUNTAIN AVE", "city": "MURRAY HILL", "state": "NJ", "zip": "07974"}, "former-company": {"former-conformed-name": "NS MPG INC", "date-changed": "19960124"}}
1
 
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1996
 
                                                     REGISTRATION NO. 33-
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                            ------------------------
 
                            LUCENT TECHNOLOGIES INC.
             (Exact name of registrant as specified in its charter)
DELAWARE                            3661                           22-3408857
 (State or other jurisdiction of     (Primary Standard Industrial            (I.R.S. Employer
  incorporation or organization)     Classification Code Number)           Identification No.)
600 MOUNTAIN AVENUE
                             MURRAY HILL, NJ 07974
                                 (908) 582-8500
              (Address, including zip code, and telephone number,
       including area code, of registrant's principal executive offices)
 
                               RICHARD J. RAWSON
                    SENIOR VICE PRESIDENT & GENERAL COUNSEL
                              600 MOUNTAIN AVENUE
                             MURRAY HILL, NJ 07974
                                 (201) 606-2810
           (Name, address, including zip code, and telephone number,
                   including area code, of agent for service)
 
                                   Copies to:
 
      STEVEN A. ROSENBLUM                              CHARLES S. WHITMAN III
WACHTELL, LIPTON, ROSEN & KATZ                          DAVIS POLK & WARDWELL
      51 WEST 52ND STREET                               450 LEXINGTON AVENUE
      NEW YORK, NY 10019                                 NEW YORK, NY 10020
 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
  As soon as practicable after this registration statement becomes effective.
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box.  / /
 
                        CALCULATION OF REGISTRATION FEE
 

===========================================================================================================
                                                          PROPOSED          PROPOSED
TITLE OF EACH CLASS                                       MAXIMUM            MAXIMUM
OF SECURITIES                         AMOUNT TO BE     OFFERING PRICE       AGGREGATE         AMOUNT OF
TO BE REGISTERED                     REGISTERED(1)      PER UNIT(2)     OFFERING PRICE(2)  REGISTRATION FEE
-----------------------------------------------------------------------------------------------------------
Common Stock, par value              )
  $.01 per share..................   )                                    $100,000,000         $34,483
----------------------------------   )
Preferred Share Purchase             )
  Rights(3).......................   )
-----------------------------------------------------------------------------------------------------------
Total.............................                                        $100,000,000         $34,483
===========================================================================================================
(1) Includes           shares to be sold pursuant to the overallotment option
    granted to the U.S. Underwriters.
(2) Estimated solely for purposes of determining the registration fee pursuant
    to Rule 457(o) promulgated under the Securities Act of 1933.
(3) Rights initially will trade together with the Common Stock. The value
    attributable to the Rights, if any, is reflected in the market price of the
    Common Stock.
 
     THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
2
 
                            LUCENT TECHNOLOGIES INC.
 
         CROSS-REFERENCE SHEET PURSUANT TO REGULATION S-K, ITEM 501(b)
ITEM                                                                LOCATION
 NO.                                                              IN PROSPECTUS
------                                              ------------------------------------------
I.  Forepart of the Registration Statement and
        Outside Front Cover Page of Prospectus....  Outside Front Cover Page
   II.  Inside Front and Outside Back Cover
        Pages of Prospectus.......................  Inside Front Cover Page; Table of Contents
  III.  Summary Information, Risk Factors and
        Ratio of Earnings to Fixed Charges........  Prospectus Summary; Risk Factors;
                                                    The Company
   IV.  Use of Proceeds...........................  Use of Proceeds
    V.  Determination of Offering Price...........  Underwriting
   VI.  Dilution..................................  Not Applicable
  VII.  Selling Security Holders..................  Not Applicable
 VIII.  Plan of Distribution......................  Outside Front Cover Page; Underwriting
   IX.  Description of Securities to be
        Registered................................  Outside Front Cover Page; Description of
                                                    Capital Stock
    X.  Interests of Named Experts and Counsel....  Not Applicable
   XI.  Information with respect to the
        Registrant................................  Outside Front Cover Page; Prospectus
                                                    Summary; Risk Factors; The Company; Use of
                                                    Proceeds; Dividend Policy; Certain
                                                    Transactions in Connection with the
                                                    Offerings; Capitalization; Selected
                                                    Financial Data; Pro Forma Condensed
                                                    Financial Statements; Management's
                                                    Discussion and Analysis of Financial
                                                    Condition and Results of Operations;
                                                    Business; Management; Arrangements Between
                                                    the Company and AT&T; Principal
                                                    Stockholder; Description of Capital Stock;
                                                    Shares Eligible for Future Sale; Financial
                                                    Statements
  XII.  Disclosure of Commission Position on
        Indemnification for Securities Act
        Liabilities...............................  Not Applicable
3
 
                                EXPLANATORY NOTE
 
     This Registration Statement contains two forms of prospectus: one to be
used in connection with a United States and Canadian offering (the "U.S.
Prospectus") and one to be used in connection with a concurrent offering outside
the United States and Canada (the "International Prospectus"). The prospectuses
are identical in all respects except for the front cover page and the inside
front cover page. In addition, the International Prospectus contains a section
entitled "Certain United States Tax Consequences to Non-United States Holders."
Pages included in the International Prospectus and not in the U.S. Prospectus
are marked "Alternate Page for International Prospectus."
4
 
PROSPECTUS (Subject to Completion)
Issued February 5, 1996
                                              Shares

                              LUCENT TECHNOLOGIES           [LOGO]

                                  COMMON STOCK
                            ------------------------
OF THE         SHARES OF COMMON STOCK BEING OFFERED,         SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS
    AND         SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES
    AND CANADA BY THE INTERNATIONAL UNDERWRITERS. ALL OF THE SHARES OF
       COMMON STOCK ARE BEING OFFERED BY LUCENT TECHNOLOGIES INC., WHICH
       IS CURRENTLY A WHOLLY OWNED SUBSIDIARY OF AT&T CORP. PRIOR TO THE
        OFFERINGS, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK.
        IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
           PRICE WILL BE BETWEEN $      AND $      PER SHARE. SEE
           "UNDERWRITING" FOR A DISCUSSION OF THE FACTORS
              CONSIDERED IN DETERMINING THE INITIAL PUBLIC
                               OFFERING PRICE.
 
AFTER THE OFFERINGS, AT&T WILL OWN APPROXIMATELY     % (    % IF THE U.S.
UNDERWRITERS EXERCISE THEIR OVERALLOTMENT OPTION IN FULL) OF THE COMMON STOCK.
  AT&T HAS ANNOUNCED ITS INTENTION, SUBJECT TO SATISFACTION OF CERTAIN
  CONDITIONS, TO DIVEST ITS OWNERSHIP INTEREST IN THE COMPANY BY DECEMBER
    31, 1996 BY MEANS OF A TAX-FREE DISTRIBUTION TO ITS SHAREHOLDERS. SEE
                 "ARRANGEMENTS BETWEEN THE COMPANY AND AT&T."
                            ------------------------
 
    APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK ON THE NEW YORK STOCK
                       EXCHANGE UNDER THE SYMBOL "    ."
                            ------------------------
 
   SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR INFORMATION CONCERNING CERTAIN
          FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
                            ------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
       EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
           SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
            COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
                 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
                             IS A CRIMINAL OFFENSE.
 
      --------------------------------------------------------------------------
 
                             PRICE $       A SHARE
 
                                ----------------
UNDERWRITING
                                        PRICE TO         DISCOUNTS AND        PROCEEDS TO
                                         PUBLIC          COMMISSIONS(1)      THE COMPANY(2)
                                    ----------------    ----------------    ----------------
Per Share.....................             $                   $                   $
Total(3)......................             $                   $                   $
------------
    (1) The Company has agreed to indemnify the Underwriters against certain
        liabilities, including liabilities under the Securities Act of 1933, as
        amended.
 
    (2) Before deducting expenses payable by the Company estimated at
        $          .
 
    (3) The Company has granted to the U.S. Underwriters an option, exercisable
        within 30 days of the date hereof, to purchase up to an aggregate of
                additional shares of Common Stock at the Price to Public less
        Underwriting Discounts and Commissions for the purpose of covering
        overallotments, if any. If the U.S. Underwriters exercise such option in
        full, the total Price to Public, Underwriting Discounts and Commissions
        and Proceeds to the Company will be $        , $        and $        ,
        respectively. See "Underwriting."
                            ------------------------
 
     The shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the shares will be made on or about             , 1996 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in same-day funds.
                            ------------------------
 
                           Joint Global Coordinators
MORGAN STANLEY & CO.                                        GOLDMAN, SACHS & CO.
           Incorporated
                            ------------------------
 
MORGAN STANLEY & CO.                                        GOLDMAN, SACHS & CO.
            Incorporated
 
                              MERRILL LYNCH & CO.
 
          , 1996
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
5
 
     NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
                            ------------------------
 
     UNTIL               , 1996 (25 DAYS AFTER COMMENCEMENT OF THE OFFERINGS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
                            ------------------------
 
     For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Common Stock or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.
 
     In this Prospectus references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
                            ------------------------
 
                               TABLE OF CONTENTS
PAGE
                                         -----
Prospectus Summary....................       3
Risk Factors..........................       9
The Company...........................      15
Use of Proceeds.......................      17
Dividend Policy.......................      17
Certain Transactions in Connection
  with the Offerings..................      18
Capitalization........................      20
Selected Financial Data...............      21
Pro Forma Condensed Financial
  Statements..........................      22
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................      23
Business..............................      33
Management............................      50
Arrangements Between the Company and
  AT&T................................      65
Principal Stockholder.................      77
Description of Capital Stock..........      78
Shares Eligible for Future Sale.......      84
Underwriting..........................      86
Legal Matters.........................      88
Experts...............................      89
Available Information.................      89
Index to Financial Statements.........     F-1
------------------------
 
     IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
                            ------------------------
 
     This Prospectus contains trademarks, service marks or registered marks of
the Company, AT&T Corp. ("AT&T"), their respective subsidiaries, and other
companies, as indicated.
 
                                        2
6
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information set forth elsewhere in this
Prospectus. As used herein, references to the "Company" include the historical
operating results and activities of, and assets and liabilities assigned to, the
businesses and operations which comprise the Company as of the date hereof.
Unless otherwise indicated, all data in this Prospectus are based on the
assumption that the U.S. Underwriters do not exercise their overallotment
option.
                            ------------------------
 
                                  THE COMPANY
 
     Lucent Technologies Inc. (the "Company") is one of the world's leading
designers, developers and manufacturers of telecommunications systems, software
and products. The Company is a global market leader in the sale of public
telecommunications systems, and is a supplier of systems or software to 23 of
the world's 25 largest network operators. The Company is also a global market
leader in the sale of business communications systems and in the sale of
microelectronic components for communications applications to manufacturers of
communications systems and computers. Further, the Company is the largest
supplier in the United States of telecommunications products for consumers. In
addition, the Company has provided engineering, installation, maintenance or
operations support services to over 250 network operators in 75 countries, over
1.4 million business locations in the United States, and approximately 100,000
business locations in over 90 other countries. The Company's research and
development activities are conducted through Bell Laboratories ("Bell Labs"),
one of the world's foremost industrial research and development organizations.
 
     The Company's revenues of $21.4 billion for the year ended December 31,
1995, were generated from the sale of systems for network operators (54% of
total revenues), business communications systems (24%), microelectronic products
(9%), consumer products (8%), and other systems and products, including
integrated systems for the United States government (5%). In 1995, approximately
77% of the Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports).
 
     Systems for Network Operators.  The Company's systems and software enable
network operators to provide wireline and wireless local, long distance and
international voice, data and video communications services. The Company's
switching, transmission and cable systems are packaged and customized with
application software, operations support systems and associated professional
services, and range in size from small rural telephone systems to some of the
world's largest wireline and wireless networks. The Company's network operator
customers include local, long distance and international telecommunications
companies and cable television companies. The Company has a wireline local
access installed base of approximately 110 million lines, representing
approximately 58% of the United States and 13% of the worldwide installed base.
The Company's wireless systems are in operation in nine of the top ten United
States Metropolitan Statistical Areas ("MSAs").
 
     Business Communications Systems.  The Company's business systems are
primarily customer premises-based telecommunications systems which are used in
networks that enable businesses to communicate within and between locations. The
Company has the largest installed base in the United States of private branch
exchanges ("PBXs"), key systems, structured cabling systems and voice processing
systems. In addition, the Company's direct sales, installation and maintenance
force works with business customers to integrate the Company's hardware and
software into customized applications such as call centers, which support such
customer services as banking by telephone and airline reservations.
 
     Microelectronics.  The Company's microelectronic components include
high-performance integrated circuits ("ICs"), electronic power systems and
optoelectronic components for communications applications. These microelectronic
products are important components of many of the Company's own systems and
products. The Company also supplies these components to other manufacturers of
communications systems and computers. The Company is a market leader in several
IC product areas critical to communications applications, including digital
signal processors ("DSPs") for digital cellular telephones and standard-cell
application specific integrated circuits ("ASICs"). At December 31, 1995, the
Company's DSPs were included in more than half of the world's digital cellular
telephones.
 
                                        3
7
 
     Consumer Products.  The Company offers a wide range of corded, cordless and
cellular telephones, telephone answering systems and related accessories in the
United States for consumers and small businesses. For the nine months ended
September 30, 1995, the Company sold 31% of the corded telephones, 28% of the
cordless telephones and 34% of the telephone answering systems sold in the
United States, approximately double the market share of any single competitor in
each of these categories.
 
                               INDUSTRY OVERVIEW
 
     The global telecommunications networking industry includes systems,
software and products used for voice, data and video communications. This
industry has undergone significant transformation and growth since the
mid-1980's as a result of changes in domestic and international public policy,
technological innovations and economic factors. The Company believes that these
forces will intensify, and that the number of customers and the complexity of
the networks they demand will increase. In addition, the Company believes that
these networks will increasingly become multifunctional in nature, supporting
simultaneous wireline or wireless access to any combination of voice, data and
video communications services, thus reducing the operating costs associated with
separate networks. The Company further believes that the traditionally distinct
technology platforms supporting voice and data will converge, as will those
platforms for the traditionally separate wireline and wireless networks. In the
Company's view, significant industry growth areas will include wireless access,
multifunctional systems and networking software. The Company further believes
that the principal building blocks of the industry are and will continue to be
software, microelectronics and product innovation in advanced digital switching
and transmission platforms, supported by a competency in and a knowledge of
telecommunications networking.
 
                                    STRATEGY
 
     The Company believes that the global public policy, technological and
economic forces transforming the telecommunications industry are creating
opportunities for the Company to capitalize on its competency in and knowledge
of networking, software and microelectronics. The Company intends to utilize the
research and development capabilities of Bell Labs, its broad and well
established product lines and its strong global customer relationships with
leading network operators and major businesses to remain a leader in
telecommunications networking and to capitalize on the growing convergence of
voice and data and of wireline and wireless networks. Further, the Company is
increasing its focus on customers in the United States and internationally who
consider AT&T as a competitor or potential competitor and therefore have been
reluctant to rely on AT&T as a strategic supplier. The Company believes that
growth opportunities will be available in both developed and developing
countries, and that a significant portion of its growth will derive from the
sale of telecommunications networking systems outside the United States. The
Company intends to focus its efforts globally on wireless networks,
multifunctional systems and networking software.
 
     Wireless Networks.  The Company's strategy is to provide network operators
and businesses with complete, flexible wireless networks which will complement
or, in the case of systems for network operators, compete over time with
wireline networks. The Company's sales of wireless infrastructure systems have
grown as a percent of total revenues from 6.1% in 1993 to 10.3% in 1995. The
Company's wireless infrastructure systems for mobile and fixed access are
designed to support leading air interface standards around the world. The
Company believes that its recent advances and innovations in microelectronics
and software will produce further enhancements to its wireless communications
systems.
 
     Multifunctional Systems.  The Company's strategy is to provide network
operators and businesses with flexible integrated multifunctional systems that
will enable them to enhance their networks to support simultaneously wireline or
wireless access to any combination of voice, data and video communications. The
Company intends to continue to utilize its expertise in digital switching,
digital transmission, optical technologies and telecommunications networking
software to provide these systems.
 
                                        4
8
 
     Networking Software.  The Company's strategy is to use its software
expertise to enable network operators and businesses to continue to offer their
customers new and differentiating services. Further, the Company intends to
continue to offer telecommunications networking software that simplifies the
operation of networks and automates labor intensive network management and
provisioning tasks to reduce operating expenses and improve network efficiency.
The Company is pursuing these objectives through its research and development
activities at Bell Labs, where, in 1995, approximately two-thirds of the
technical staff were engaged in software-related activities.
 
     The Company intends to pursue the above strategies globally through a
strong management emphasis on the rapid commercialization of customer-focused
technological innovations. The Company believes that, as an independent entity,
it will have a greater ability to pursue these strategies by defining its own
priorities and maintaining a focus on its customers. In response to its
establishment as a stand-alone entity, the Company has undertaken a
comprehensive review of all of its operations, including its organizational
structure, products and markets, with a view toward maximizing its return on
investments. In connection with this review, the Company adopted a strategic
reorganization plan and recorded pre-tax restructuring charges of $2,613
million, and other charges for asset impairments and other items of $188
million, in the fourth quarter of 1995. See "The Company -- Strategic
Reorganization" and "Business -- Strategy."
 
                              SEPARATION FROM AT&T
 
     The Company is currently a wholly owned subsidiary of AT&T. On September
20, 1995, AT&T announced its intention to create a separate company composed of
the AT&T businesses and operations that now comprise the Company, and the
associated assets and liabilities of such businesses and operations (the
"Separation"). AT&T also announced its intention to distribute to its
shareholders by December 31, 1996, subject to certain conditions, all of its
interest in the Company following the Offerings (the "Distribution"). See "The
Company -- Conditions to the Distribution." After the completion of the
Offerings and prior to the Distribution, AT&T will own approximately      % of
the outstanding shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company (     % if the U.S. Underwriters exercise their
overallotment option in full). The Company, AT&T and, in certain cases, NCR
Corporation ("NCR") have entered into or will, on or prior to the consummation
of the Offerings (the "Closing Date"), enter into certain agreements providing
for the Separation and governing various interim and ongoing relationships
between and among the three companies, including an agreement between the
Company and AT&T providing for the purchase of products, licensed materials and
services from the Company. See "Arrangements Between the Company and AT&T."
 
                                        5
9
 
                                 THE OFFERINGS
Common Stock Offered
  U.S. Offering..............................            shares
  International Offering.....................            shares
     Total Offerings.........................            shares(1)
Common Stock to be outstanding
  immediately after the Offerings............            shares(1)(2)
Common Stock to be held by AT&T
  immediately after the Offerings............            shares(1)
Use of Proceeds..............................  The net proceeds to the Company from the
                                               Offerings are estimated to be approximately
                                               $     million ($     million if the U.S.
                                               Underwriters exercise their overallotment
                                               option in full). Such proceeds will be used
                                               to repay approximately $     million of
                                               indebtedness outstanding under the Working
                                               Capital Facility (as defined herein) and for
                                               general corporate purposes. See "Use of
                                               Proceeds."
Dividend Policy..............................  It is anticipated that, subject to the
                                               Company's financial results and declaration
                                               by the Company's Board of Directors (the
                                               "Company Board"), the Company initially will
                                               pay a quarterly dividend of $     per share
                                               of Common Stock, beginning with a dividend
                                               payable in the third quarter of 1996, in
                                               respect of the operations of the Company in
                                               the second quarter of 1996 (which is
                                               equivalent to an annual dividend of
                                               approximately $.12 per share of common stock
                                               of AT&T ("AT&T Common Stock") outstanding at
                                               the Closing Date). If the Company does not
                                               have sufficient earnings and profits for
                                               federal income tax purposes prior to the
                                               Distribution, dividends paid on the Common
                                               Stock prior to the Distribution would be
                                               treated for federal income tax purposes as
                                               non-taxable return of capital to the extent
                                               of the holder's basis in the Common Stock and
                                               as a capital gain to the extent of any excess
                                               over such basis. See "Dividend Policy."
NYSE Symbol..................................
Rights.......................................  One Right (as defined herein) will be
                                               attached to each share of Common Stock sold
                                               in the Offerings. See "Description of Capital
                                               Stock -- Antitakeover Effects of Certain
                                               Provisions of the Certificate and By-Laws."
---------------
(1) Does not include up to           shares of Common Stock which the U.S.
    Underwriters have the option to purchase solely to cover overallotments. If
    the U.S. Underwriters exercise their overallotment option in full,
              shares of Common Stock will be outstanding after the Offerings.
 
(2) Does not include shares of Common Stock that will be issuable upon exercise
    of employee stock options, (not all of which will be immediately
    exercisable) and other Common Stock-based employee benefit awards that will
    be issued at the time of the Distribution under the Company's 1996 Long Term
    Incentive Plan (the "1996 LTIP") in substitution for AT&T Stock Awards (as
    defined herein). See "Management -- Executive Compensation" and
    "Arrangements Between the Company and AT&T -- Employee Benefits Agreement."
 
                                        6
10
 
                             SUMMARY FINANCIAL DATA
 
     The following table presents summary selected historical financial data of
the Company. The information set forth below should be read in conjunction with
"Pro Forma Condensed Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements and notes thereto included elsewhere in this Prospectus.
The consolidated statement of operations data set forth below for each of the
three years ended December 31, 1995 and the consolidated balance sheet data at
December 31, 1995 and 1994 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this
Prospectus, and should be read in conjunction with those financial statements
and the notes thereto. The consolidated statement of operations data for each of
the two years ended December 31, 1992 and the consolidated balance sheet data at
December 31, 1993, 1992 and 1991 are derived from unaudited consolidated
financial statements not included in this Prospectus.
 
     The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate, stand-alone entity during the periods covered. Per share
data for net income and dividends have not been presented because the Company's
business was operated through divisions of AT&T for the periods presented. See
"Risk Factors -- Limited Relevance of Historical Financial Information."
YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------------
                                                1995       1994       1993       1992       1991
                                              --------   --------   --------   --------   --------
                                                                               (UNAUDITED) (UNAUDITED)
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA
  Revenues..................................  $ 21,413   $ 19,765   $ 17,734   $ 17,312   $ 16,312
  Costs(1)..................................    12,945     11,337     10,088     10,383      9,385
     Gross margin...........................     8,468      8,428      7,646      6,929      6,927
  Operating expenses
     Selling, general and administrative
       expenses(1)(2).......................     7,083      5,360      5,016      4,814      6,241
     Research and development expenses(1)...     2,385      2,097      1,961      1,711      1,996
  Operating income (loss)...................    (1,000)       971        669        404     (1,310)
  Income (loss) before income taxes and
     cumulative effects of accounting
     changes................................    (1,116)       854        666        302     (1,529)
  Cumulative effects of accounting
     changes................................        --         --     (4,208)        --         --
  Net income (loss)(1)......................      (853)       523     (3,750)       194       (975)
AT DECEMBER 31,
                                              ----------------------------------------------------
                                                1995       1994       1993       1992       1991
                                              --------   --------   --------   --------   --------
                                                                    (UNAUDITED) (UNAUDITED) (UNAUDITED)
                                                                 (IN MILLIONS)
BALANCE SHEET DATA
  Total assets..............................  $ 19,722   $ 17,340   $ 17,109   $ 14,466   $ 13,855
  Total debt................................     4,014      3,164      3,195      3,942      4,871
  Stockholder's equity......................     1,434      2,476      2,580      3,098      3,827
---------------
(1) 1995 includes pre-tax restructuring and other charges of $2,801 ($1,847
    after taxes) recorded as $892 of costs, $1,645 of selling, general and
    administrative expenses and $264 of research and development expenses. (See
    Note 5 of Notes to Consolidated Financial Statements.)
 
(2) 1991 includes pre-tax restructuring and other charges of $1,006 ($612 after
    taxes).
 
                                        7
11
 
                SUMMARY PRO FORMA CONDENSED FINANCIAL STATEMENTS
 
     The following unaudited pro forma condensed balance sheet data at December
31, 1995 for the Company give effect to (i) the Offerings, assuming an initial
public offering price of $     per share (the mid-point of the range set forth
on the cover page of this Prospectus), (ii) the retention by AT&T of accounts
receivable having a face amount estimated for pro forma purposes at
approximately $2,000 million and (iii) the prepayment by AT&T of $500 million to
be applied to accounts receivable from AT&T that are due and payable on or after
January 1, 1997 for the purchase of products, licensed materials and services
from the Company (such retention of accounts receivable and prepayment are
referred to herein as the "Related Transactions"). See "Certain Transactions in
Connection with the Offerings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview." The unaudited pro
forma balance sheet data was prepared assuming that the Offerings and the
Related Transactions had occurred on December 31, 1995.
 
     The unaudited pro forma financial data presented below do not purport to
represent what the financial position actually would have been had the Offerings
and the Related Transactions occurred on the date referred to above or to
project the Company's financial position for any future date. The unaudited pro
forma data and adjustments should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
 
     For unaudited pro forma statement of operations purposes no adjustments are
required except to reflect the number of shares of Common Stock to be
outstanding after the Offerings. On a pro forma basis, net loss per share for
the year ended December 31, 1995 would be $       based on           shares of
Common Stock outstanding.
AT DECEMBER 31, 1995
                                                                --------------------------------------
                                                                             ADJUSTMENTS    PRO FORMA
                                                                HISTORICAL   (UNAUDITED)   (UNAUDITED)
                                                                ----------   -----------   -----------
                                                                            (IN MILLIONS)
BALANCE SHEET DATA
  Total assets................................................   $  19,722    $   1,400     $  21,122
  Working capital.............................................        (384)       1,400         1,016
  Total debt..................................................       4,014           --         4,014
  Stockholders' equity........................................       1,434          900         2,334
8
12
 
                                  RISK FACTORS
 
     Purchasers of shares of Common Stock should carefully consider and evaluate
all of the information set forth in this Prospectus, including the risk factors
listed below. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and "Arrangements Between the Company and
AT&T" for a description of other factors generally affecting the Company's
business.
 
RISK OF NONCOMPLETION OF THE DISTRIBUTION
 
     AT&T has announced that, subject to certain conditions, AT&T intends to
distribute to its shareholders by December 31, 1996 all of the Common Stock
owned by AT&T following the Offerings. See "The Company -- Conditions to the
Distribution" and "Arrangements Between the Company and AT&T -- Separation and
Distribution Agreement." No assurance can be given that such conditions will be
satisfied or waived, or that the Distribution will occur. As described herein,
one of AT&T's principal reasons for deciding to effect the Distribution was to
eliminate what AT&T perceived as a growing adverse impact on the Company's
relationship with its customers and potential customers as a result of the
Company's affiliation with AT&T. Although AT&T expects to effect the
Distribution, it is likely that the failure of the Distribution to occur in the
time frame contemplated or at all would materially adversely affect the Company.
See "The Company -- Background of the Separation and Distribution."
 
CONTROL BY AT&T PENDING THE DISTRIBUTION; ONGOING RELATIONSHIP WITH AT&T
 
     Prior to the Distribution, AT&T will control the Company and will continue
to be able to elect the entire Company Board and to determine the outcome of
corporate actions requiring stockholder approval. After the completion of the
Offerings and prior to the Distribution, AT&T will own approximately   % of the
outstanding shares of Common Stock (  % if the U.S. Underwriters exercise their
overallotment option in full). See "Principal Stockholder."
 
     The Company currently has, and after the Offerings and the Distribution
will continue to have, a variety of contractual relationships with AT&T and its
affiliates, including a multi-year purchase agreement, under which AT&T will
remain one of the Company's largest customers. There can be no assurance that
existing and potential customers will not be deterred by the existence of these
relationships or by the historical ties between the Company and AT&T. See
"Arrangements Between the Company and AT&T."
 
SHARES ELIGIBLE FOR FUTURE SALE
 
     The planned Distribution would involve the distribution of an aggregate of
          shares of Common Stock to the shareholders of AT&T by December 31,
1996. Substantially all of such shares would be eligible for immediate resale in
the public market. The Company is unable to predict whether substantial amounts
of Common Stock will be sold in the open market in anticipation of, or
following, the Distribution. Any sales of substantial amounts of Common Stock in
the public market, or the perception that such sales might occur, whether as a
result of the Distribution or otherwise, could materially adversely affect the
market price of the Common Stock. See "Shares Eligible for Future Sale."
 
COMPETITION
 
     The Company currently faces significant competition in its markets and
expects that the level of price and product competition will increase. In
addition, as a result of both the trend toward global expansion by foreign and
domestic competitors and technological and public policy changes, the Company
anticipates that new and different competitors will enter its markets. These
competitors may include entrants from the telecommunications, software and data
networking industries. Existing competitors have, and new competitors may have,
strong financial capability, technological expertise and well-recognized brand
names. Depending on the continuing pace of global expansion by domestic and
foreign competitors, the nature of their product offerings and prices, and the
extent to which they benefit from foreign market subsidies, as well as the new
types of product offerings from companies in other industries and the timing and
circumstances of the entry of these
 
                                        9
13
 
competitors into the Company's markets, the Company's future revenues and net
income could be materially adversely affected. See "Business."
 
     In addition, the Regional Bell Operating Companies (the "RBOCs")
historically have been prohibited from manufacturing telecommunications
equipment by the terms of the Modification of Final Judgment (the "MFJ") entered
into in connection with the divestiture of the RBOCs by AT&T in 1984. The RBOCs
are major customers of the Company. Legislation passed by the United States
Congress, and currently awaiting signature by the President (the
"Telecommunications Legislation"), contains provisions that would permit the
RBOCs, subject to satisfying certain conditions, to manufacture
telecommunications equipment. It is possible that, assuming the
Telecommunications Legislation is enacted, one or more RBOCs may decide to
manufacture telecommunications equipment, to design and provide
telecommunications software, or to form alliances with other manufacturers. Any
of these developments could result in increased competition for the Company and
reduce the RBOCs' purchases from the Company.
 
DEPENDENCE ON NEW PRODUCT DEVELOPMENT
 
     The markets for the Company's principal products are characterized by
rapidly changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating telecommunications
systems for network operators and business customers. The Company's operating
results will depend to a significant extent on its ability to continue to
introduce new systems, software and services successfully on a timely basis and
to reduce costs of existing systems, software and services. The success of these
and other new offerings is dependent on several factors, including proper
identification of customer needs, cost, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. There can be no assurance that the Company will successfully
identify new product or service opportunities and develop and bring new systems,
software and services to market in a timely manner, or that products or
technologies developed by others will not render the Company's offerings
obsolete or noncompetitive. Any such development could have a material adverse
effect on the Company's future competitive position and results of operations.
In addition, new technological innovations generally require a substantial
investment before any assurance is available as to their commercial viability,
including, in some cases, certification by international and domestic
standards-setting bodies. See "Business." There can be no assurance that any of
the technologies in which the Company is focusing its research and development
investments will achieve broad acceptance in the marketplace, and the lack of
such market acceptance could have a material adverse effect on the Company's
future competitive position and results of operations.
 
     In addition, there can be no assurance that the Company will be able to
attract and retain the highly skilled technical personnel necessary to enable
the Company to develop new products, systems and software successfully.
 
ENVIRONMENTAL MATTERS
 
     The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States, these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities, including assessment and cleanup work, underway at
46 current and former manufacturing, laboratory and recycling facilities to
comply, or to determine compliance, with applicable environmental protection
laws. AT&T and its subsidiaries have been listed as potentially responsible
parties ("PRPs") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes, either by a government agency (which may have either
sought information concerning AT&T's connection to the site, or may have sought
from AT&T participation in site cleanup work or contribution toward the cost of
site cleanup), or by a private party seeking contribution to site cleanup costs.
Under the terms of the Separation and Distribution Agreement (as defined
herein), the Company will assume or indemnify AT&T for all liabilities
associated with these sites. It is often difficult to estimate the future impact
of environmental matters, including potential liabilities. Although the Company
believes that its reserves are adequate, there can be no assurance that the
amount of capital
 
                                       10
14
 
expenditures and other expenses which will be required to complete remedial
actions and to comply with applicable environmental laws will not exceed the
amounts reflected in the Company's reserves or will not have a material adverse
effect on the financial condition of the Company or on the Company's results of
operations.
 
RISK OF INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
 
     The Company relies on patent, trademark, trade secret and copyright laws
both to protect its proprietary technology and to protect the Company against
claims from others. Although the Company believes that it has direct
intellectual property rights or rights under cross-licensing arrangements
covering substantially all of its material technologies, given the technological
complexity of its systems and products, there can be no assurance that claims of
infringement will not be asserted against the Company or against the Company's
customers in connection with their use of the Company's systems and products,
nor can there be any assurance as to the outcome of any such claims. See
"Arrangements Between the Company and AT&T -- Patent Licenses and Related
Matters" and "-- Technology Licenses and Related Matters."
 
RELIANCE ON MAJOR CUSTOMERS
 
     Historically, the Company has relied on a limited number of customers for a
substantial portion of its total revenues. In terms of total revenues, the
Company's largest customer has been AT&T, although other large customers may
purchase more of any particular system or product line. The contribution of AT&T
to the Company's total revenues and percentage of total revenues for the years
ended December 31, 1995, 1994 and 1993 was $2,119 million (9.9%), $2,137 million
(10.8%) and $1,967 million (11.1%), respectively. Except as set forth in the
General Purchase Agreement and the Supplemental Agreements (each as defined
herein) entered into between the Company and AT&T, following the Offerings AT&T
is not obligated to make any minimum level of future purchases from the Company
or to provide the Company with binding forecasts of product purchases for any
future period. Pursuant to the General Purchase Agreement, AT&T and its
designated affiliates have committed to purchase an aggregate of at least $3,000
million of products, licensed materials and services from the Company during the
three-year period ending December 31, 1998. See "Arrangements Between the
Company and AT&T -- Purchase Agreements."
 
     In addition, sales to approximately ten network operators (including AT&T),
some of which may vary from year to year, constituted approximately 38%, 41% and
42% of total revenues in the years ended December 31, 1995, 1994 and 1993,
respectively. The Company has diversified its customer base in the past several
years and expects this trend to continue. Nevertheless, the Company expects that
a significant portion of its future revenues will continue to be generated by a
limited number of customers. See "Business." The loss of any of these customers
or any substantial reduction in orders by any of these customers could
materially adversely affect the Company's operating results. The United States
government is, in the aggregate, also a large customer of the Company. Given the
current pressures on the government to reduce its overall level of spending,
there can be no assurance that government purchases from the Company will not
decrease in the future.
 
MULTI-YEAR CONTRACTS
 
     The Company has several significant contracts for the sale of
infrastructure systems to network operators which extend over a multi-year
period. In certain cases, these contracts relate to new technologies which may
not have been deployed previously on a large scale commercial basis, and there
can be no assurance that these contracts can be completed on a timely basis, in
accordance with the customer's technical specifications or without significant
cost overruns. Certain of the Company's multi-year contracts also contain
demanding installation and maintenance requirements, in addition to other
performance criteria relating to timing, unit cost requirements and compliance
with government regulations, which, if not satisfied, could subject the Company
to substantial penalties, damages or non-payment, or could result in contract
termination. There can be no assurance of the Company's ability to satisfy these
requirements completely, without losses. In addition, specific terms of such
contracts may cause revenues under these agreements to fluctuate. The Company
expects that multi-year contracts it may enter into in the future may give rise
to similar uncertainties.
 
                                       11
15
 
SEASONALITY; OUTLOOK FOR FIRST QUARTER OF 1996
 
     The Company's business is highly seasonal, with revenue and net income
concentrated in the fourth quarter of the year. Consequently, during the three
quarters ending in March, June and September, the Company historically has not
been as profitable as in the quarter ending in December, and the Company
traditionally incurs losses in the first quarter. Such seasonality also causes
the Company's cash flow requirements to vary greatly from quarter to quarter.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Variability in the Company's Business." In 1996, the Company
expects that its net income for the first quarter will show a loss and that such
loss may be greater than that for the equivalent period in 1995.
 
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
 
     The Company has never operated as a stand-alone company. After the
Offerings and prior to the Distribution, the Company will continue to be a
subsidiary of AT&T, but will operate as a stand-alone company, and AT&T will
have no obligation to provide assistance to the Company or any of its
subsidiaries except as described in "Arrangements Between the Company and AT&T."
 
     In anticipation of being established as a stand-alone entity, the Company
has reviewed its business and operations and is implementing certain
organizational changes. See "The Company -- Strategic Reorganization." The
Company believes that these changes, when implemented, will have a positive
impact. However, there can be no assurance that this positive impact will be
realized or that these changes will not have an adverse impact on the Company's
future revenues and net income.
 
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
 
     The financial information included herein may not necessarily reflect the
results of operations, financial position and cash flows of the Company in the
future or what the results of operations, financial position and cash flows
would have been had the Company been a separate, stand-alone entity during the
periods presented. The financial information included herein does not reflect
many significant changes that will occur in the funding and operations of the
Company as a result of the Separation and the Offerings. In addition, the
consolidated financial statements of the Company include certain assets,
liabilities, revenues and expenses which were not historically recorded at the
level of, but are associated with, the businesses transferred to the Company.
See "Certain Transactions in Connection with the Offerings," "Pro Forma
Condensed Financial Statements," including the discussion of the assumptions
reflected therein, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
 
CHANGE OF COMPANY BRAND NAME
 
     In connection with the Separation, the Company will, rapidly in the case of
some products and over specified periods of time in the case of other products,
change the trademarks and trade names under which it conducts its business. The
Company believes that its sale of business communications systems to small
businesses and sales of consumer products have benefitted from the use of the
"AT&T" brand name. The impact of the change in trademarks and trade names and
other changes (including, without limitation, restrictions on the use of the
"AT&T" brand name and related trade dress) on the Company's business and
operations cannot be fully predicted. See "Arrangements Between the Company and
AT&T -- Brand License and Related Matters."
 
FUTURE CAPITAL REQUIREMENTS
 
     The Company's working capital requirements and cash flow provided by
operating activities can vary greatly from quarter to quarter, depending on the
volume of production, the timing of deliveries, the build-up of inventories, and
the payment terms offered to customers. In the past, the Company's working
capital needs have been satisfied pursuant to AT&T's corporate-wide cash
management policies. However, AT&T is no longer providing funds to finance the
Company's operations.
 
                                       12
16
 
     The Company believes that the proceeds of the Offerings, along with the
Working Capital Facility, cash flow from operations and long- and short-term
debt financings, will be sufficient to satisfy its future working capital,
capital expenditure, research and development and debt service requirements,
including debt service requirements on the Commercial Paper Program (as defined
herein). The Company intends to file, prior to the Closing Date, a shelf
registration statement to register the offering of up to $          of long-term
debt. Although the Company believes that it will be able to access the capital
markets on terms and in amounts that will be satisfactory to it, there can be no
assurance that the Company will be successful in this regard. The Company has
not yet been assigned a senior debt rating by any nationally-recognized
statistical rating organization. The historical financial statements of the
Company reflect an interest rate applicable to short-term debt of AT&T. The
Company expects that it will incur long-term debt as well as short-term debt,
and that its cost of capital will be higher than that reflected in the Company's
historical financial statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition, Liquidity
and Capital Resources."
 
     Network operators, domestically and internationally, increasingly have
required their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
The ability of the Company to arrange or provide financing, without AT&T's
support, will depend on a number of factors, including the Company's capital
structure and level of available credit. There can be no assurance that the
Company will be able to continue to arrange or provide such financing following
the Offerings on terms and conditions, and in amounts, that will be satisfactory
to such network operators. Any such inability of the Company to arrange or
provide financing in accordance with its past practices could have a material
adverse effect on the Company's financial condition and results of operations.
 
RISK OF INTERNATIONAL GROWTH AND FOREIGN EXCHANGE
 
     The Company intends to continue to pursue growth opportunities in
international markets. In many international markets, long-standing
relationships between potential customers of the Company and their local
providers, and protective regulations, including local content requirements and
type approvals, create barriers to entry. In addition, pursuit of such
international growth opportunities may require significant investments for an
extended period before returns on such investments, if any, are realized. Such
projects and investments could be adversely affected by reversals or delays in
the opening of foreign markets to new competitors, exchange controls, currency
fluctuations, investment policies, repatriation of cash, nationalization, social
and political risks, taxation, and other factors, depending on the country in
which such opportunity arises. In addition, the laws and policies of the United
States affecting foreign trade, investment and taxation could also adversely
affect such projects and investments. There can be no assurance that the Company
will be able to overcome these barriers.
 
     A significant change in the value of the dollar against the currency of one
or more countries where the Company recognizes substantial revenue or earnings
may materially adversely affect the Company's results. The Company attempts to
mitigate any such effects through the use of foreign currency contracts,
although there can be no assurances that such attempts will be successful.
 
CERTAIN ANTITAKEOVER EFFECTS
 
     The Restated Certificate of Incorporation of the Company (the
"Certificate") and the By-Laws of the Company (the "By-Laws"), the Rights, and
applicable provisions of the Delaware General Corporation Law (the "DGCL"),
contain several provisions that may make more difficult the acquisition of
control of the Company without the approval of the Company Board. Certain
provisions of the Certificate and the By-Laws, among other things, (i) classify
the Company Board into three classes, each of which (after an initial transition
period) will serve for staggered three-year periods; (ii) provide that a
director of the Company may be removed by the stockholders only for cause; (iii)
provide that only the Company Board or the Chairman of the Board of the Company
may call special meetings of the stockholders; (iv) provide that the
stockholders may take action only at a meeting of the stockholders; (v) provide
that stockholders must comply with certain advance notice procedures in order to
nominate candidates for election to the Company Board or to place stockholders'
proposals on the agenda for consideration at meetings of the stockholders; and
(vi) provide that
 
                                       13
17
 
the stockholders may amend or repeal any of the foregoing provisions of the
Certificate or the By-Laws only by a vote of 80% of the stock entitled to vote
generally in the election of directors (the "Voting Stock"). The Rights would
cause substantial dilution to a person or group that attempts to acquire the
Company on terms not approved in advance by the Company Board. With certain
exceptions, Section 203 of the DGCL ("Section 203") imposes certain restrictions
on mergers and other business combinations between the Company and any holder of
15% or more of the Common Stock. Some of the provisions described above do not
apply to, or otherwise contain exceptions for, AT&T as long as AT&T beneficially
owns a majority of the Common Stock. See "Description of Capital
Stock -- Antitakeover Effects of Certain Provisions of the Certificate and
By-Laws" and " -- Delaware Business Combination Statute."
 
ABSENCE OF A PUBLIC MARKET FOR THE COMMON STOCK
 
     Prior to the Offerings, there has been no public market for the Common
Stock. Although the Company intends to file an application to list the Common
Stock on The New York Stock Exchange, Inc. (the "NYSE"), there can be no
assurance that an active public market for the Common Stock will develop or that
the price at which the Common Stock will trade will not be lower than the
initial public offering price. The initial public offering price will be
determined through negotiations between the Company and the Underwriters. See
"Underwriting."
 
                                       14
18
 
                                  THE COMPANY
 
     The Company is one of the world's leading designers, developers and
manufacturers of telecommunications systems, software and products. The Company
is a global market leader in the sale of public telecommunications systems, and
is a supplier of systems or software to 23 of the world's 25 largest network
operators. The Company is also a global market leader in the sale of business
communications systems and in the sale of microelectronic components for
communications applications to manufacturers of communications systems and
computers. Further, the Company is the largest supplier in the United States of
telecommunications products for consumers. In addition, the Company has provided
engineering, installation, maintenance or operations support services to over
250 network operators in 75 countries, over 1.4 million business locations in
the United States and approximately 100,000 business locations in over 90 other
countries. The Company's research and development activities are conducted
through Bell Labs, one of the world's foremost industrial research and
development organizations.
 
     The Company's revenues of $21.4 billion for the year ended December 31,
1995 were generated from the sale of systems for network operators (54% of total
revenues), business communications systems (24%), microelectronic products (9%),
consumer products (8%) and other systems and products, including integrated
systems for the United States government (5%). In 1995, approximately 77% of the
Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports).
 
     The Company was incorporated in Delaware in November 1995. The Company has
its principal executive offices at 600 Mountain Avenue, Murray Hill, New Jersey
07974. Its telephone number at such offices is (908) 582-8500.
 
BACKGROUND OF THE SEPARATION AND DISTRIBUTION
 
     The Company is a wholly owned subsidiary of AT&T. Historically, AT&T has
viewed its strategy of vertical integration, combining communications equipment,
communications services and other businesses, as a source of strength in
addressing the challenges and opportunities presented by the environment in
which it has done business. However, changes in customer needs and demands,
public policy and technology are creating a new industry structure in which,
increasingly, the advantages of this vertical integration strategy are
outweighed by its costs and disadvantages. As a result of the industry
restructuring over the past decade, new actual and potential competitors of AT&T
have been created by the growth of companies formerly affiliated with AT&T and
by the expansion of other domestic and international companies, both
geographically and in terms of scope of services provided. These changes have
resulted in a situation in which many of the actual and potential customers of
the Company are or will be competitors of AT&T's communications services
business. As a result, the obstacles currently faced by the Company in marketing
its products to competitors and potential competitors of AT&T's communications
services business have become severe and are expected to continue to intensify.
For these reasons, AT&T has announced that, subject to certain conditions, AT&T
intends to distribute to its shareholders by December 31, 1996 all of the Common
Stock owned by AT&T after the Offerings. See "Risk Factors -- Risk of
Noncompletion of the Distribution."
 
     After the completion of the Offerings and prior to the Distribution, AT&T
will own approximately      % of the outstanding shares of Common Stock (     %
if the U.S. Underwriters exercise their overallotment option in full). The
Company and AT&T have entered into certain agreements providing for the
Separation and the provision by AT&T of certain interim services to the Company.
See "Arrangements Between the Company and AT&T."
 
CONDITIONS TO THE DISTRIBUTION
 
     The Distribution is subject to the satisfaction, or waiver by the Board of
Directors of AT&T (the "AT&T Board"), in its sole discretion, of the following
conditions: (i) a private letter ruling from the Internal Revenue Service (the
"IRS") shall have been obtained, and shall continue in effect, to the effect
that, among other things, the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the transfer to the Company
of assets and the assumption by the Company of liabilities in connection with
the Separation will not result in
 
                                       15
19
 
recognition of any gain or loss for federal income tax purposes to AT&T, the
Company or AT&T's or the Company's shareholders, and such ruling shall be in
form and substance satisfactory to AT&T, in its sole discretion; (ii) any
material Governmental Approvals and Consents (as such terms are defined in the
Separation and Distribution Agreement) necessary to consummate the Distribution
shall have been obtained and shall be in full force and effect; (iii) no order,
injunction or decree issued by any court or agency of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of the
Distribution shall be in effect, and no other event outside the control of AT&T
shall have occurred or failed to occur that prevents the consummation of the
Distribution; and (iv) no other events or developments shall have occurred
subsequent to the Closing Date that, in the judgment of the AT&T Board, would
result in the Distribution having a material adverse effect on AT&T or on the
shareholders of AT&T. The AT&T Board will have the sole discretion to determine
the date of consummation of the Distribution (the "Distribution Date") at any
time after the Closing Date and on or prior to December 31, 1996. AT&T has
agreed to consummate the Distribution no later than December 31, 1996, subject
to the satisfaction, or waiver by the AT&T Board, in its sole discretion, of the
conditions set forth above. In the event that any such condition shall not have
been satisfied or waived on or before December 31, 1996, AT&T has agreed to
consummate the Distribution as promptly as practicable following the
satisfaction or waiver of all such conditions. AT&T may terminate the obligation
to consummate the Distribution if the Distribution has not occurred by December
31, 1997. See "Risk Factors -- Risk of Noncompletion of the Distribution" and
"Arrangements Between the Company and AT&T -- Separation and Distribution
Agreement."
 
STRATEGIC REORGANIZATION
 
     The Company historically has operated as part of AT&T. The Separation will
establish the Company as a stand-alone entity with objectives separate from
those of AT&T. The Company intends to focus its resources and management
emphasis on the technologies and markets it views as critical to its long-term
success as a stand-alone entity. The Company therefore has undertaken a
comprehensive review of all of its operations, including its organizational
structure, products and markets, with a view toward maximizing its return on
investments. In connection with this review, the Company adopted a strategic
reorganization plan and recorded a pre-tax restructuring charge of $2,613
million in the fourth quarter of 1995. In addition, in the fourth quarter of
1995, the Company recorded a charge of $188 million for asset impairments and
other items.
 
     As part of these efforts, and as announced January 2, 1996, the Company
will eliminate approximately 22,000 positions, of which approximately 11,000 are
management positions and 11,000 occupational positions. Approximately 1,000
additional management employees are employed by businesses that the Company has
announced plans to sell. As of December 31, 1995, approximately 4,100 management
employees have accepted a voluntary severance package, the majority of whom will
leave the Company in early 1996. The Company expects approximately 70% of all
separations to be completed by the end of 1996 and the majority of the remaining
separations to be completed during 1997. These reductions are the result of the
Company's decisions to form a single corporate structure that eliminated
duplicative management and streamlined administrative functions, and to
outsource certain corporate functions.
 
     The Company's reorganization efforts also include a plan to close all of
the Company's 338 retail stores (the "Phone Center Stores"), most of which are
expected to be closed by May 1996. In addition, the Company plans to consolidate
certain international facilities and redeploy internationally certain sales
support functions for international customers that previously were performed in
the United States. In conjunction with these work force reduction and
consolidation efforts, the Company intends to reduce its leased space from
approximately 19 million square feet to approximately 14 million square feet and
to reduce its owned space from approximately 37 million square feet to
approximately 28 million square feet.
 
     As part of the redefinition of its objectives, the Company intends to focus
its investments on its core technologies, primarily through expanded and
targeted research and development efforts. Consequently, the Company has decided
to sell and exit tangential product lines and markets, including the
manufacturing of certain data communications equipment, backplanes and printed
circuit boards. In 1995, revenues associated with operations that the Company
has exited or expects to exit in connection with these reorganization efforts
 
                                       16
20
 
accounted for approximately 4.6% of the Company's total revenues. Where
appropriate, the Company will pursue core technologies through strategic
acquisitions, partnerships or joint ventures. For example, the Company has
entered into an agreement to acquire, subject to specified conditions, certain
telecommunications assets of certain of Philips Electronics N.V.'s ("Philips")
subsidiaries, primarily in France and Germany (the "Philips Businesses"). This
acquisition is designed to permit the Company to expand its global line of
systems which support non-United States standards for mobile and fixed wireless
access and digital optical transport.
 
     Finally, in addition to seeking to control expenses, the Company is
instituting processes designed to reduce the costs and time required to develop
and bring to market new systems, software and products. The Company intends to
create product realization centers at which it will locate Bell Labs developers
with product managers and manufacturing teams. The Company's development efforts
will be oriented toward scaleable and reusable software and microelectronic
technologies that it intends to incorporate into products addressing multiple
marketplaces.
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the Offerings are estimated to be
approximately $     million ($       million if the U.S. Underwriters exercise
their overallotment option in full) after deducting estimated underwriting
discounts and commissions and offering expenses, assuming an initial public
offering price of $     per share, the mid-point of the range set forth on the
cover page of this Prospectus. Such proceeds will be used to repay approximately
$     million of indebtedness under the Working Capital Facility and for general
corporate purposes.
 
                                DIVIDEND POLICY
 
     It is anticipated that, following the Offerings, the Company initially will
declare and pay cash dividends at the quarterly rate of $     per share of
Common Stock, beginning with a dividend payable in the third quarter of 1996; in
respect of the operations of the Company in the second quarter of 1996 (which is
equivalent to an annual dividend of approximately $.12 per share of AT&T Common
Stock outstanding at the Closing Date). The declaration of dividends by the
Company and the amount thereof will, however, be in the discretion of the
Company Board and will depend upon the Company's results of operations,
financial condition, cash requirements, future prospects and other factors
deemed relevant by the Company Board.
 
     There is no assurance that the Company will have earnings and profits for
federal income tax purposes until the Distribution. To the extent the Company
does not have sufficient earnings and profits, dividends paid on the Common
Stock prior to the Distribution would be treated for federal income tax purposes
as a non-taxable return of capital to the extent of the holder's basis in the
Common Stock and as a capital gain to the extent of any excess over such basis.
Dividends paid to corporate holders that are treated as return of capital or
capital gains would not qualify for the intercorporate dividends-received
deduction. See "Risk Factors -- Risk of Noncompletion of the Distribution."
 
                                       17
21
 
             CERTAIN TRANSACTIONS IN CONNECTION WITH THE OFFERINGS
 
     The Company is currently a wholly owned subsidiary of AT&T. Prior to
February 1, 1996, AT&T conducted the Company's businesses through various
divisions and subsidiaries. Beginning February 1, 1996, AT&T began effectuating
the Separation by transferring to the Company the assets and liabilities related
to such businesses, except that AT&T is retaining accounts receivable having a
face amount estimated for pro forma purposes at approximately $2,000 million.
The Company believes that the Separation will be substantially completed,
including the transfer of substantially all of such assets and liabilities, by
the Closing Date. To the extent certain transfers will not be accomplished until
after the Offerings or the Distribution, the Company and AT&T have agreed on the
timing and terms of such transfers. See "Arrangements Between the Company and
AT&T -- Separation and Distribution Agreement" and "-- Employee Benefits
Agreement." The Separation and the transactions being undertaken in connection
therewith, including the Offerings and the Distribution, are being effected
pursuant to a Separation and Distribution Agreement, dated as of February 1,
1996, by and among the Company, AT&T and NCR (the "Separation and Distribution
Agreement"). AT&T has announced that, subject to certain conditions, AT&T
intends to distribute to its shareholders by December 31, 1996 all of the Common
Stock of the Company owned by AT&T following the Offerings. See "Arrangements
Between the Company and AT&T -- Separation and Distribution Agreement."
 
     In addition, as contemplated by the Separation and Distribution Agreement,
the Company, AT&T and, in certain cases, NCR have entered into or will, on or
prior to the Closing Date, enter into certain ancillary agreements which govern
various interim and ongoing relationships between and among the three companies
(the "Ancillary Agreements"). The Ancillary Agreements include agreements with
respect to employee benefit arrangements, intellectual property arrangements,
the provision of interim services, tax sharing and various commercial
arrangements, including the sale of equipment by the Company to AT&T. Pursuant
to the General Purchase Agreement, AT&T and its designated affiliates have
committed to purchase an aggregate of at least $3,000 million of products,
licensed materials and services from the Company during the three-year period
ending December 31, 1998. AT&T has also agreed to prepay $500 million to the
Company, on or prior to the Closing Date, to be applied to accounts receivable
from AT&T that are due and payable on or after January 1, 1997 for the purchase
of products, licensed materials and services from the Company. See "Arrangements
Between the Company and AT&T."
 
     As reflected in the audited consolidated balance sheets for the Company at
December 31, 1995 and 1994, the Company has had limited direct third-party
indebtedness and historically has relied on internally generated funds and funds
provided by AT&T to finance its operations. However, AT&T is no longer providing
funds to finance the Company's operations. The Company has entered into a
Competitive Advance and Revolving Credit Facility Agreement, dated as of
February 1, 1996, with Chemical Bank, as Agent (the "Initial Working Capital
Facility"), pursuant to which the Company may borrow up to $1,000 million,
subject to the terms and conditions thereof. Prior to the Offerings, the Company
expects to enter into a credit agreement pursuant to which the Company may
borrow up to $3,000 million, subject to the terms and conditions thereof, which
would replace the Initial Working Capital Facility (the "Working Capital
Facility"). The Company expects to repay all or a portion of the amounts drawn
under the Working Capital Facility with a portion of the proceeds of the
Offerings. In addition, prior to the Closing Date, AT&T intends to issue up to
$4,000 million of short-term debt under a commercial paper facility (the
"Commercial Paper Program") which will be assumed by the Company, subject to
certain conditions, at the Closing Date. It is contemplated that AT&T will
retain as of the Closing Date the proceeds of all borrowings under the
Commercial Paper Program and that AT&T will be released from all of its
obligations thereunder, with the result that the Company will become the obligor
thereunder. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview." The Commercial Paper Program will be
supported by a back-up credit facility with third-party financial institutions.
 
     In deciding upon the initial capitalization of the Company, a number of
factors were considered, including the Company's pro forma debt to capital
ratio, the Company's prospective financing requirements, the Company's desired
credit rating, the Company's working capital and capital expenditure
requirements and the Company's need to procure bid and performance bonds, to
arrange or provide customer financing, to
 
                                       18
22
 
engage in hedging transactions and to attain required self-insurance levels. The
Company believes that the proceeds of the Offerings, as well as the Working
Capital Facility, cash flow from operations and short- and long-term debt
financings, will be sufficient to satisfy its future working capital, capital
expenditure, research and development and debt service requirements, including
debt service requirements on the Commercial Paper Program. The Company also
believes that it will be able to procure bid and performance bonds, to arrange
or provide customer financing as necessary, and to engage in hedging
transactions, on commercially acceptable terms. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition, Liquidity and Capital Resources" and "Risk Factors -- Future Capital
Requirements."
 
                                       19
23
 
                                 CAPITALIZATION
 
     Set forth below is the historical capitalization of the Company at December
31, 1995 and on a pro forma basis to give effect to the Offerings (assuming an
initial public offering price of $          per share, the mid-point of the
range set forth on the cover page of this Prospectus) and the Related
Transactions. The unaudited pro forma balance sheet set forth below should be
read in conjunction with the unaudited pro forma condensed financial statements
of the Company and the historical financial statements of the Company appearing
elsewhere in this Prospectus. For an explanation of the adjustments made in
order to derive the unaudited pro forma information below, see "Certain
Transactions in Connection with the Offerings" and "Pro Forma Condensed
Financial Statements."
AT DECEMBER 31, 1995
                                                                    ---------------------------
                                                                                      PRO FORMA
                                                                    HISTORICAL        (UNAUDITED)
                                                                    -----------       ---------
                                                                           (IN MILLIONS)
SHORT-TERM DEBT:
  Debt maturing within one year...................................    $    49          $    49
  Debt sharing amount in anticipation of assumption of the
     Commercial Paper Program.....................................      3,842            3,842
                                                                     --------         ------- -
          Total short-term debt...................................    $ 3,891          $ 3,891
                                                                     ========         ========
LONG-TERM DEBT (INCLUDING CAPITAL LEASES).........................    $   123          $   123
STOCKHOLDER'S EQUITY..............................................      1,434            2,334
                                                                     --------         ------- -
TOTAL CAPITALIZATION..............................................    $ 1,557          $ 2,457
                                                                     ========         ========
20
24
 
                            SELECTED FINANCIAL DATA
 
     The following table presents selected historical financial data of the
Company. The information set forth below should be read in conjunction with "Pro
Forma Condensed Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements and notes thereto included elsewhere in this Prospectus. The
consolidated statement of operations data set forth below for each of the three
years ended December 31, 1995 and the consolidated balance sheet data at
December 31, 1995 and 1994 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this
Prospectus, and should be read in conjunction with those financial statements
and the notes thereto. The consolidated statement of operations data for each of
the two years ended December 31, 1992 and the consolidated balance sheet data at
December 31, 1993, 1992 and 1991 are derived from unaudited consolidated
financial statements not included in this Prospectus.
 
     The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate, stand-alone entity during the periods covered. Per share
data for net income and dividends have not been presented because the Company's
businesses were operated through various divisions and subsidiaries of AT&T for
the periods presented. See "Risk Factors -- Limited Relevance of Historical
Financial Information."
YEAR ENDED DECEMBER 31,
                                            -------------------------------------------------------------
                                              1995       1994        1993          1992          1991
                                            --------   --------   -----------   -----------   -----------
                                                                                (UNAUDITED)   (UNAUDITED)
                                                                    (IN MILLIONS)
STATEMENT OF OPERATIONS DATA
  Revenues................................  $ 21,413   $ 19,765    $   17,734    $  17,312     $  16,312
  Costs(1)................................    12,945     11,337        10,088       10,383         9,385
     Gross margin.........................     8,468      8,428         7,646        6,929         6,927
  Operating expenses
     Selling, general and administrative
       expenses(1)(2).....................     7,083      5,360         5,016        4,814         6,241
     Research and development
       expenses(1)........................     2,385      2,097         1,961        1,711         1,996
  Operating income (loss).................    (1,000)       971           669          404        (1,310)
  Income (loss) before income taxes and
     cumulative effects of accounting
     changes..............................    (1,116)       854           666          302        (1,529)
  Cumulative effects of accounting
     changes..............................        --         --        (4,208)          --            --
  Net income (loss)(1)....................      (853)       523        (3,750)         194          (975)
AT DECEMBER 31,
                                            -------------------------------------------------------------
                                              1995       1994        1993          1992          1991
                                            --------   --------   -----------   -----------   -----------
                                                                     (UNAUDITED)(UNAUDITED)   (UNAUDITED)
                                                                    (IN MILLIONS)
BALANCE SHEET DATA
  Total assets............................  $ 19,722   $ 17,340    $   17,109    $  14,466     $  13,855
  Total debt..............................     4,014      3,164         3,195        3,942         4,871
  Stockholder's equity....................     1,434      2,476         2,580        3,098         3,827
---------------
(1) 1995 includes pre-tax restructuring and other charges of $2,801 ($1,847
    after taxes) recorded as $892 of costs, $1,645 of selling, general and
    administrative expenses and $264 of research and development expenses. (See
    Note 5 of Notes to Consolidated Financial Statements).
 
(2) 1991 includes pre-tax restructuring and other charges of $1,006 ($612 after
    taxes).
 
                                       21
25
 
                    PRO FORMA CONDENSED FINANCIAL STATEMENTS
 
     The unaudited pro forma condensed balance sheet at December 31, 1995, set
forth below, has been prepared assuming that the Offerings and the Related
Transactions occurred on such date. THE UNAUDITED PRO FORMA BALANCE SHEET
PRESENTED BELOW DOES NOT PURPORT TO REPRESENT WHAT THE COMPANY'S FINANCIAL
POSITION ACTUALLY WOULD HAVE BEEN HAD THE OFFERINGS AND THE RELATED TRANSACTIONS
OCCURRED ON THE DATE INDICATED OR TO PROJECT THE COMPANY'S FINANCIAL POSITION
FOR ANY FUTURE DATE. The unaudited pro forma adjustments are based upon
available information and certain assumptions that the Company believes are
reasonable. The unaudited pro forma balance sheet should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the historical financial statements of the Company and the
notes thereto appearing elsewhere in this Prospectus.
 
     For unaudited pro forma statement of operations purposes, no adjustments
are required except to reflect the number of shares of Common Stock outstanding
after the Offerings. On a pro forma basis net loss per share for the year ended
December 31, 1995 would be $          based on           shares of Common Stock
outstanding.
AT DECEMBER 31, 1995
                                                          ---------------------------------------------
                                                                          ADJUSTMENTS        PRO FORMA
                                                          HISTORICAL      (UNAUDITED)       (UNAUDITED)
                                                          ----------     --------------     -----------
                                                                          (IN MILLIONS)
ASSETS
Cash and cash equivalents...............................   $    448         $  3,400(1)(2)    $ 3,848
Accounts receivable -- net..............................      5,354           (2,000)(3)        3,354
Inventories.............................................      3,222                             3,222
Deferred income taxes -- net............................      1,482                             1,482
Other current assets....................................        173                               173
                                                          ----------     --------------     -----------
     Total current assets...............................     10,679            1,400           12,079
Property, plant and equipment -- net....................      4,338                             4,338
Prepaid pension costs...................................      2,522                             2,522
Deferred income taxes -- net............................        872                               872
Capitalized software....................................        387                               387
Other assets............................................        924                               924
                                                          ----------     --------------     -----------
     Total assets.......................................   $ 19,722         $  1,400          $21,122
                                                            =======      ===========        =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................   $  1,229         $                 $ 1,229
Payroll and benefit-related liabilities.................      3,026                             3,026
Postretirement and postemployment benefit liabilities...        227                               227
Debt sharing amount in anticipation of assumption of the
  Commercial Paper Program(4)...........................      3,842                             3,842
Debt maturing within one year...........................         49                                49
Other current liabilities...............................      2,690                             2,690
                                                          ----------                        -----------
  Total current liabilities.............................     11,063                            11,063
Postretirement and postemployment benefit liabilities...      5,569                             5,569
Long-term debt..........................................        123                               123
Other liabilities.......................................      1,533              500(2)         2,033
                                                          ----------     --------------     -----------
  Total liabilities.....................................     18,288              500           18,788
Total stockholders' equity..............................      1,434              900(1)(3)      2,334
                                                          ----------     --------------     -----------
          Total liabilities and stockholders' equity....   $ 19,722         $  1,400          $21,122
                                                            =======      ===========        =========
---------------
(1) Reflects the sale of             shares in the Offerings assuming a purchase
    price of $       per share (the mid-point of the range set forth on the
    cover page of this Prospectus). As set forth under "Use of Proceeds," the
    Company expects to use the proceeds of the Offerings to repay approximately
    $           million of indebtedness under the Working Capital Facility and 
    for general corporate purposes.
 
(2) Gives effect to the prepayment by AT&T of $500 to be applied to accounts
    receivable from AT&T that are due and payable on or after January 1, 1997
    for the purchase of products, licensed materials and services from the
    Company.
 
(3) Reflects the retention by AT&T of customer accounts receivable having a face
    amount estimated for pro forma purposes at approximately $2,000.
 
(4) See "Certain Transactions in Connection with the Offerings."
 
                                       22
26
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     The Company is currently a wholly owned subsidiary of AT&T. Prior to
February 1, 1996, AT&T conducted the Company's businesses through various
divisions and subsidiaries. Beginning February 1, 1996, AT&T began effectuating
the Separation by transferring to the Company the assets and liabilities related
to such businesses, except that AT&T is retaining accounts receivable having a
face amount estimated for pro forma purposes at approximately $2,000 million.
The Company believes that the Separation will be substantially completed,
including the transfer of substantially all of such assets and liabilities, by
the Closing Date. To the extent certain transfers cannot be accomplished until
after the Offerings or the Distribution, the Company and AT&T have agreed on the
timing and terms of such transfers. See "Arrangements Between the Company and
AT&T -- Separation and Distribution Agreement" and "-- Employee Benefits
Agreement." The Separation and the transactions being undertaken in connection
therewith, including the Offerings and the Distribution, are being effected
pursuant to the Separation and Distribution Agreement. AT&T has announced that,
subject to certain conditions, AT&T intends to distribute to its shareholders by
December 31, 1996 all of the Common Stock of the Company owned by AT&T following
the Offerings. See "Arrangements Between the Company and AT&T -- Separation and
Distribution Agreement."
 
     After the completion of the Offerings and prior to the Distribution, AT&T
will own approximately      % of the outstanding shares of Common Stock (     %
if the U.S. Underwriters exercise their overallotment option in full). The
Company and AT&T and, in certain cases, NCR have entered into or will, on or
prior to the Closing Date, enter into certain agreements providing for the
Separation and governing various interim and ongoing relationships between and
among the three companies, including an agreement between the Company and AT&T
providing for the purchase of products, licensed materials and services from the
Company. See "Arrangements Between the Company and AT&T."
 
     The consolidated financial statements of the Company, which are discussed
below, reflect the results of operations, financial position and cash flows of
the businesses transferred to the Company from AT&T in the Separation. As a
result, the consolidated financial statements of the Company have been carved
out from the financial statements of AT&T using the historical results of
operations and historical basis of the assets and liabilities of such
businesses. Additionally, the consolidated financial statements of the Company
include certain assets, liabilities, revenues and expenses which were not
historically recorded at the level of, but are primarily associated with, such
businesses. Management believes the assumptions underlying the Company's
financial statements to be reasonable.
 
     The financial information included herein, however, may not necessarily
reflect the results of operations, financial position and cash flows of the
Company in the future or what the results of operations, financial position and
cash flows would have been had the Company been a separate, stand-alone entity
during the periods presented. This is due to the historical operation of the
Company as part of the larger AT&T enterprise. The financial information
included herein does not reflect the many significant changes that will occur in
the funding and operations of the Company as a result of the Separation and the
Offerings.
 
     As set forth in the financial information included herein, interest expense
reflects interest associated with the aggregate borrowings for each period
presented primarily using AT&T's average commercial paper rates. In the future,
the Company expects to have a combination of long-term and short-term debt and,
accordingly, expects that interest expenses will be higher than those
historically reflected. General corporate overhead related to AT&T's corporate
headquarters and common support divisions has been allocated to the Company
based on the ratio of the Company's external costs and expenses to AT&T's
external costs and expenses. This allocation of AT&T's general corporate
overhead expense may not reflect the Company's actual general corporate overhead
expense as a separate entity. Also, certain expenses incurred by the Company
were for services received from AT&T under direct contracting arrangements.
Although management believes the allocations and the charges for such services
to be reasonable, the costs of these services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the Company
had been
 
                                       23
27
 
an independent entity and had otherwise contracted for or managed these
functions. Subsequent to the Separation, the Company will manage these functions
using its own resources or contract with third parties to perform these services
and, in addition, will be responsible for the costs and expenses associated with
the management of a public corporation. In addition, income taxes were
calculated as if the Company filed separate tax returns. However, AT&T was
managing its tax position for the benefit of its entire portfolio of businesses,
and its tax strategies are not necessarily reflective of the tax strategies that
the Company would have followed or will follow as a stand-alone entity.
 
     Prior to the Separation, the businesses transferred to the Company were
funded through AT&T and the Company had limited indebtedness to third parties.
The Company plans to assume, as of the Closing Date, approximately $4,000
million of direct short-term debt under the Commercial Paper Program. To the
extent that the aggregate amount of indebtedness of the Company shown in the
consolidated financial statements exceeds the direct third-party indebtedness of
the businesses transferred to the Company, such amount is reflected in the
consolidated financial statements as debt and shown as "Debt sharing amount in
anticipation of assumption of the Commercial Paper Program." This debt is
classified as short-term debt, consistent with the expectation that the Company
will assume, at the Closing Date, the commercial paper issued under the
Commercial Paper Program.
 
STRATEGIC REORGANIZATION
 
     The Company historically has operated as part of AT&T. The Separation will
establish the Company as a stand-alone entity with objectives separate from
those of AT&T. The Company intends to focus its resources on the technologies
and markets it views as critical to its long-term success as a stand-alone
entity. The Company therefore has undertaken a comprehensive review of all of
its operations, including its organizational structure, products and markets,
with a view toward maximizing its return on investments. In connection with this
review, the Company adopted a strategic reorganization plan and recorded a
pre-tax restructuring charge of $2,613 million in the fourth quarter of 1995, in
addition to charges of $188 million for asset impairments and other items.
 
     The total restructuring and other charges of $2,801 million ($1,847 million
after taxes) for 1995 was recorded as $892 million of costs, $1,645 million of
selling, general and administrative expenses, and $264 million of research and
development expenses. The charges included $1,509 million for employee
separation and other related items, $627 million for asset write-downs, $202
million for closing, selling and consolidating facilities and $463 million for
other items. Of the total charges, $1,788 million will result in future cash
payments and $1,013 million of the charges related to noncash items.
 
     As part of these efforts, and as announced January 2, 1996, the Company
will eliminate approximately 22,000 positions, of which approximately 11,000 are
management positions and 11,000 are occupational positions. Approximately 1,000
additional management employees are employed by operations that the Company has
announced plans to sell. As of December 31, 1995, approximately 4,100 management
employees have accepted a voluntary severance package, the majority of whom will
leave the Company in early 1996. The Company expects approximately 70% of all
separations to be completed by the end of 1996 and the majority of the remaining
separations to be completed during 1997. These reductions are the result of the
Company's decisions to form a single corporate structure that eliminates
duplicative management and streamlines administrative functions, and to
outsource certain corporate functions.
 
     The Company's reorganization efforts also include a plan to close all of
the Company's 338 Phone Center Stores, most of which are expected to be closed
by May 1996, and to distribute its consumer products only through national,
regional and catalog retailers and network operators. In addition, the Company
plans to consolidate certain international facilities and redeploy
internationally certain sales support functions for international customers that
were previously performed in the United States.
 
     As part of the redefinition of its objectives, the Company intends to focus
its investments on its core technologies, primarily through expanded and
targeted research and development efforts. Consequently, the Company has decided
to sell and exit tangential product lines and markets, including its Paradyne
subsidiary which manufactures certain data communications equipment, and its
microelectronics interconnect products
 
                                       24
28
 
business which manufactures backplanes and printed circuit boards. In 1995,
revenues associated with operations that the Company has exited or expects to
exit in connection with these reorganization efforts accounted for approximately
4.6% of the Company's total revenues. When appropriate, the Company will pursue
core technologies through strategic acquisitions, partnerships or joint
ventures. For example, the Company has entered into an agreement to acquire,
subject to specified conditions, certain telecommunications assets of the
Philips Businesses. This acquisition is designed to permit the Company to expand
its global line of systems which support non-United States standards for mobile
and fixed wireless access and digital optical transport.
 
     The restructuring charges also included costs associated with early
termination of building leases, the closing, sale or consolidation of certain
owned facilities and asset write-downs as part of the plan to sell certain
businesses and to restructure certain operations.
 
VARIABILITY IN THE COMPANY'S BUSINESS
 
     There are a number of factors that contribute to variability in the
Company's business. This variability can produce wide fluctuations in revenues
and earnings quarter to quarter, and in some cases year to year. Variability is
not a new trend and the Company expects it to continue, and possibly intensify.
Notwithstanding this variability, the Company has increased both revenues and
earnings (absent restructuring and other charges). The factors contributing to
variability include seasonality, multi-year contracts and associated revenue
recognition.
 
  Seasonality
 
     The following table sets forth the unaudited total revenues, gross margin
and net income of the Company on a quarterly basis for each of the two years
ended December 31, 1995:
FIRST      SECOND     THIRD      FOURTH         TOTAL
                                        ------     ------     ------     -------       -------
                                                            (IN MILLIONS)
1995
    Total revenues....................  $4,159     $5,083     $4,744     $ 7,427       $21,413
    Gross margin......................   1,850      2,251      2,042       2,325(1)      8,468(1)
    Net income (loss).................     (18)       163         17      (1,015)(2)      (853)(2)
    1994
    Total revenues....................   4,052      4,665      4,776       6,272        19,765
    Gross margin......................   1,740      2,028      2,006       2,654         8,428
    Net income (loss).................     (29)        90         53         409           523
---------------
(1) Includes restructuring charges of $892 of costs.
 
(2) Includes restructuring and other charges of $2,801 ($1,847 after taxes).
 
     Like most telecommunications systems manufacturers, the Company's sales are
highly seasonal. Most of the Company's large customers delay a large and growing
percentage of their capital expenditures until the fourth quarter due to
cautious capital spending against budgets, while still seeking year-end tax
benefits. A focus on project completion by year-end also supports this buying
behavior. The Company has responded to this customer capital spending trend in
various ways that assure product availability and the necessary sales focus
during a critical quarterly period. Further, the Company has placed an increased
focus on the completion of software releases by mid-year to allow for commercial
availability and delivery in the fourth quarter. These software releases require
significant research and development expenditures early in the year, with
minimal offsetting revenues, but are key contributors to the Company's profits
during the fourth quarter. The Company's promotional and sales incentive
programs also tend to focus on the fourth quarter to sustain marketing support
during this period. Additionally, sales of consumer products in the retail
markets are generally stronger in the fourth quarter, corresponding to holiday
buying. In contrast, adverse weather conditions and incomplete customer budget
plans, as well as the impact of customer vacation schedules on
 
                                       25
29
 
deployment and purchasing plans, tend particularly to depress Company revenues
during the first and third quarters.
 
     As a result of growing competitive pressures among network operators (which
have led to an increasing emphasis on return on investment and the budgeting
process), along with the increasing prominence of software as a percentage of
the Company's revenues, the trend toward seasonality has been increasing over
the past three years.
 
     Due to the foregoing factors, the Company's revenues and net income are
strongest in the fourth quarter of each year, representing 34.7% and 31.7% of
consolidated revenues and 83.7% (before restructuring and other charges) and
78.2% of net income in 1995 and 1994, respectively. Software sales were higher
in the fourth quarter of 1995 than those in the comparable quarter in 1994.
Consequently, the Company's results of operations for the first three quarters
of each year have in the aggregate been significantly less profitable than the
fourth quarter and the Company has frequently experienced net losses in the
first quarter.
 
  Multi-Year Contracts and Associated Revenue Recognition
 
     In recent years, the purchasing behavior of the Company's large customers
has increasingly been characterized by the use of fewer, larger contracts. This
trend is expected to intensify, and contributes to the variability of the
Company's results. Such larger purchase contracts typically involve longer
negotiating cycles, require the dedication of substantial amounts of working
capital and other Company resources, and in general require investments which
may substantially precede recognition of associated revenues. Moreover, in
return for larger, longer-term purchase commitments, customers often demand more
stringent acceptance criteria, which can also cause revenue recognition delays.
Certain multi-year contracts may relate to new technologies which may not have
been previously deployed on a large-scale commercial basis. The Company may
incur significant initial cost overruns and losses on such contracts which would
be recognized in the quarter in which they became ascertainable. Further profit
estimates on such contracts are revised periodically over the lives of the
contracts, and such revisions can have a significant impact on reported earnings
in any one quarter.
 
     The Company has managed this particular aspect of variability by
significantly reducing its product development, manufacturing and system
deployment intervals. The Company has also invested in project management tools
and disciplines to enhance its ability to execute successfully. Additionally,
the Company has worked to deploy its resources against the highest-value
projects. In part to manage the fluctuations produced by this buying behavior,
the Company has diversified its customer base, both in the United States and
internationally, and has developed relationships with other sets of customers
(including, for example, competitive access providers ("CAPs"), cable television
network operators and computer manufacturers).
 
     Revenue recognition for work on multi-year contracts is based upon the
specific terms and conditions of each contract. These terms and conditions may
vary markedly depending upon the nature of the technology being purchased and
the development cycles of such technology, the specific requirements of the
customer, delivery, deployment schedules and acceptance criteria. Therefore, the
amount of purchases actually contracted for or deployed in a period may differ
substantially from the revenues realized for the same period.
 
                                       26
30
 
GENERAL
 
     The following table sets forth the Company's revenues by product line, and
the approximate percentage of total revenues represented thereby, for each of
the three years ended December 31, 1995:
1995                1994                1993
                                           ---------------     ---------------     ---------------
($ IN MILLIONS)
  Systems for Network Operators..........  $11,459      54%    $10,841      55%    $ 9,367      53%
  Business Communications Systems........    5,144      24       4,557      23       3,982      22
  Microelectronic Products...............    1,864       9       1,461       7       1,323       8
  Consumer Products......................    1,787       8       1,924      10       1,816      10
  Other Systems and Products.............    1,159       5         982       5       1,246       7
                                           -------     ---     -------     ---     -------     ---
     Total...............................  $21,413     100%    $19,765     100%    $17,734     100%
                                           =======     ===     =======     ===     =======     ===
The following table sets forth a summary of costs and expenses as a
percentage of revenues for each of the three years ended December 31, 1995, and
for the year ended December 31, 1995 as adjusted to exclude the restructuring
and other charges:
1995          1995      1994      1993
                                                         -------------     -----     -----     -----
                                                         (AS ADJUSTED)
Revenues...............................................      100.0%        100.0%    100.0%    100.0%
Costs..................................................       56.3          60.5      57.4      56.9
                                                           -------          ----      ----      ----
  Gross margin.........................................       43.7          39.5      42.6      43.1
Operating expenses
  Selling, general and administrative
     expenses..........................................       25.4          33.1      27.1      28.3
  Research and development expenses....................        9.9          11.1      10.6      11.0
                                                           -------          ----      ----      ----
Operating income (loss)................................        8.4%         (4.7%)     4.9%      3.8%
                                                           =======          ====      ====      ====
1995 VERSUS 1994
 
     Revenues grew in the Company's three largest product lines in 1995 compared
with 1994, causing total revenues to increase $1,648 million or 8.3%. Growth in
revenues from customers outside the United States (international and export)
provided 74.5% of the increase in revenues. International revenues (which
include export revenues) represented 23.3% of total revenues in 1995 compared to
19.1% of total revenues in 1994.
 
     Revenues from systems for network operators were $11,459 million, an
increase of $618 million or 5.7% in 1995 compared with 1994. Sales of wireless
infrastructure to network operators accounted for approximately 15% of total
sales to network operators. Sales in the United States were essentially flat,
which the Company attributes to delays in spending by network operators and
their growing reluctance to purchase from a potential competitor. However,
domestic sales of wireless infrastructure increased approximately 19%. Revenues
from systems for network operators outside the United States increased
approximately 28% in 1995 compared with 1994. These increases were due primarily
to increases in sales of wireless infrastructure of approximately 14%, to
increases in sales of switching and transmission systems, including software, of
approximately 22%, and to revenues under a contract awarded in 1994 to design
and build a fully digital telecommunications network in Saudi Arabia.
 
     Revenues from business communications systems of $5,144 million increased
$587 million or 12.9% in 1995 compared with 1994, primarily due to strong United
States and international product sales growth. Service revenues increased due to
growth in maintenance contracts and higher installation revenues associated with
the increased sales. United States revenues grew approximately 10%, primarily
due to increased sales of DEFINITY(R) products, including upgrades, and sales of
INTUITY(TM) voice messaging products. This increase was offset in part by the
continuing decline in the rental base, reflecting the Company's emphasis on the
sale
 
                                       27
31
 
rather than rental of its products. International revenues grew approximately
36%, primarily due to sales of the Company's SYSTIMAX(R) structured cabling
systems and higher sales through international distributors.
 
     Sales of microelectronic products of $1,864 million increased $403 million
or 27.6% in 1995 compared with 1994, due to higher sales of ICs both inside and
outside the United States. Most of this growth derived from sales to customers
outside the United States. Included in microelectronic products are sales of the
Company's interconnect products business which the Company plans to sell.
 
     Revenues from consumer product sales (including sales through the Phone
Center Stores, which the Company plans to close) were $1,787 million, a decline
of $137 million or 7.1% in 1995 compared with 1994. The decrease in 1995
revenues was primarily due to the expected continuing decline in the customer
base for rental revenues for telephones and declines in product sales related to
discontinued product lines, partially offset by strong consumer demand for
cordless telephones.
 
     Revenues from sales of other systems and products of $1,159 million in 1995
increased $177 million or 18.0% compared with 1994, due to higher royalties.
Sales of other systems and products include revenues from the Company's Paradyne
subsidiary, which the Company plans to sell.
 
     Costs of $12,945 million increased $1,608 million or 14.2% in 1995 compared
with 1994. Excluding the restructuring and other charges of $892 million, costs
grew $716 million or 6.3%, reflecting the higher volume of sales and services.
Gross margin decreased to 39.5% in 1995 from 42.6% in 1994, due to restructuring
and other charges. Excluding these charges, gross margin increased to 43.7% in
1995 from 1994, due to increased sales of higher margin software products to
network operators, offset in part by the erosion of high margin rental revenues.
 
     Research and development expenses of $2,385 million increased $288 million
or 13.7% in 1995 compared with 1994. This increase was due to restructuring
charges of $264 million (which were principally related to the reduction in
administrative support functions at Bell Labs and disposal of research and
development assets related to changing technologies), as well as development
work associated with software, wireless access and type approval and
certification of products for local markets. Research and development expenses
represented 11.1% of revenues in 1995 compared with 10.6% of revenues in 1994.
Excluding the charges, research and development expenses represented 9.9% of
revenues in 1995. Consistent with the Company's strategy, the Company expects
that research and development expenses, as an absolute amount and as a
percentage of revenues, will increase in 1996.
 
     Selling, general and administrative expenses of $7,083 million increased
$1,723 million or 32.1% in 1995 compared with 1994. This increase was due to
$1,645 million in restructuring and other charges and increased spending on
sales and sales support efforts, including expenses relating to growth in
international revenues. Selling, general and administrative expenses were 33.1%
of revenues in 1995, an increase from 27.1% of revenues in 1994, reflecting the
restructuring charges (which were principally related to the reduction in
personnel in administrative and corporate support functions and at Phone Center
Stores). Excluding the charges, selling general and administrative expenses were
25.4% of revenues in 1995, reflecting cost containment efforts.
 
     Interest expense in 1995 was $280 million, an increase of $80 million or
40% compared with 1994. The increase was due primarily to higher average debt
levels and higher interest rates in 1995 compared with 1994.
 
     Other income -- net increased $81 million to $164 million in 1995 compared
with 1994, primarily due to gains on investments in 1995.
 
     The effective income tax rate of 23.6% in 1995 decreased from 38.8% in
1994, primarily due to the nondeductibility of certain of the 1995 restructuring
and other charges, which resulted in a net loss for 1995.
 
     For 1995, the Company had a net loss of $853 million, reflecting $2,801
million ($1,847 million after taxes) of restructuring and other charges.
Excluding the charges, net income was $994 million, an increase of $471 million,
or 90.1%, compared to 1994.
 
                                       28
32
 
1994 VERSUS 1993
 
     Revenues grew in each of the Company's four main product lines in 1994
compared with 1993, causing revenue to increase $2,031 million or 11.5%. Growth
in revenues from customers outside of the United States provided approximately
38% of the increase. International revenues represented 19.1% of total revenues
in 1994 compared with 16.9% in 1993.
 
     Revenues from systems for network operators rose $1,474 million or 15.7% to
$10,841 million in 1994 compared with 1993. Approximately 16% of the revenue
growth was the result of AG Communications Systems Corporation being accounted
for on a consolidated basis after the Company increased its ownership to 80%
from 49%. Sales of wireless infrastructure to network operators accounted for
approximately 14% of total sales to network operators. Sales in the United
States increased 15%. The increases also resulted from an increase in wireless
sales of approximately 55%, and an increase in sales of switching and
transmission systems, including software, of approximately 13%. Revenues from
systems for network operators outside the United States increased approximately
19%. These increases were due primarily to increases in wireless sales of
approximately 49% and to increases in sales of switching and transmission
systems, including software, of approximately 7%.
 
     Revenues from business communications systems were $4,557 million, an
increase of $575 million or 14.4% in 1994 compared with 1993 due to strong
United States and international product sales growth. Service revenues increased
due to growth in maintenance contracts and higher installation revenues
associated with the increased sales. Partially offsetting these increases was
the erosion of the rental base which continued to drive rental revenues down.
United States revenues grew approximately 10% primarily due to increased sales
of DEFINITY products, including upgrades to accommodate expansion in the number
of area codes, sales of INTUITY CONVERSANT(R) voice processing products and
sales of INTUITY AUDIX(R) voice messaging products. International revenues grew
approximately 53% primarily due to the implementation of the Company's global
growth strategy which included acquisitions in Europe.
 
     Revenues from microelectronic products of $1,461 million increased $138
million or 10.4% in 1994 compared with 1993 due to higher sales of ICs and
electronic power systems to customers outside of the United States.
 
     Revenues from consumer products were $1,924 million, an increase of $108
million or 5.9% in 1994 compared with 1993. The increase in 1994 sales was due
primarily to strong consumer sales of cellular and cordless phones, partially
offset by the continuing decline in rental revenues for telephones.
 
     Revenues from sales of other systems and products were $982 million in
1994, a decrease of $264 million or 21.2% compared with 1993. The decrease
results from a decline in sales of special design products for the United States
government due to reductions in defense spending.
 
     Costs of $11,337 million increased $1,249 million, or 12.4% in 1994
compared with 1993. The increase is due to the higher volume of sales and
services. The gross margin percentage declined to 42.6% in 1994 from 43.1% in
1993. Increases in gross margins for most major product lines were more than
offset by a lower gross margin for consumer products due to the erosion of the
rental base.
 
     Research and development expenses of $2,097 million increased $136 million
or 6.9% in 1994 compared with 1993, as a result of work related to wireless
system technology and type approval and certification of products for local
standards. Research and development expenses represented 10.6% of 1994 revenues,
as compared with 11.1% of revenues in 1993.
 
     Selling, general and administrative expenses of $5,360 million increased
$344 million, or 6.9% in 1994 compared with 1993. The increase was largely due
to increased spending on sales and sales support efforts, as well as for
expenses related to global growth. Selling, general and administrative expenses
as a percentage of revenues decreased to 27.1% in 1994 from 28.3% in 1993,
reflecting cost containment efforts.
 
     Other income -- net in 1994 was $83 million compared to $193 million in
1993. The decrease of $110 million in 1994 compared with 1993 relates primarily
to a charge of $38 million in 1994 for the closing of
 
                                       29
33
 
a hand-held tablet communication device business and higher losses on foreign
currency. See Note 4 of Notes to Consolidated Financial Statements.
 
     Interest expense of $200 million in 1994 was approximately the same as in
1993, due primarily to lower interest rates on higher average borrowings in 1994
compared to 1993.
 
     The effective income tax rate was 38.8% in 1994, compared with 31.3% in
1993. The lower effective tax rate in 1993 relates primarily to a net tax
benefit recorded in 1993 to increase the Company's net deferred tax assets to
reflect the increase in the federal income tax rate from 34% to 35%.
 
     The adoption of three accounting standards, effective January 1, 1993,
issued by the Financial Standards Accounting Board resulted in an after-tax
charge of $4,208 million in 1993, representing the cumulative effect of these
accounting changes.
 
     Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions," requires accrual of
estimated future retiree benefits during the years in which employees are
working and accumulating these benefits. Previously, health care benefits were
expensed as claims were incurred and life insurance benefits were expensed as
plans were funded. A one-time after-tax charge for the unfunded portions of
these liabilities of $3,722 million was recorded in 1993 as a cumulative effect
of accounting change upon adoption of this standard.
 
     SFAS No. 112, "Employers' Accounting for Postemployment Benefits," requires
the Company to accrue for estimated future postemployment benefits, including
separation payments, during the years in which employees are working and
accumulating these benefits, and for disability payments when the disabilities
occur. Previously, costs for separations were recognized when approved and
disability benefits were recognized when paid. The Company recognized a $530
million after-tax charge upon adoption of this standard.
 
     SFAS No. 109, "Accounting for Income Taxes," requires, among other
provisions, the computation of deferred tax amounts using the enacted corporate
income tax rates for the years in which the taxes will be paid or refunds
received. A cumulative effect of accounting change benefit of $44 million was
recognized in 1993 related to adopting this standard.
 
     Reported net income increased $4,273 million for the year ended December
31, 1994 compared with the year ended December 31, 1993, primarily due to the
$4,208 million net charge for the accounting changes discussed above. Excluding
the cumulative effect of the accounting changes in 1993, net income increased
$65 million, or 14.2% for the year ended December 31, 1994 compared with the
year ended December 31, 1993.
 
ENVIRONMENTAL
 
     The Company's current and historical operations are subject to a wide range
of environmental protection laws. The Company has remedial and investigatory
activities underway at 46 current and former facilities. In addition, AT&T and
its subsidiaries have been named a PRP at numerous "Superfund" sites pursuant to
CERCLA or comparable state statutes. Under the Separation and Distribution
Agreement, the Company will assume or indemnify AT&T for all liabilities
associated with these sites. The Company has accrued for such liabilities when
it is probable that such liability will be incurred and the amount of such costs
can be reasonably estimated. However, it is often difficult to estimate the
future impact of environmental matters, including potential liabilities.
Although the Company believes that its reserves are adequate, there can be no
assurance that the amount of capital expenditures and other expenses relating to
remedial actions and compliance with applicable environmental laws will not
exceed the amounts reflected in the Company's reserves or will not have a
material adverse effect on the financial condition of the Company or the
Company's results of operations.
 
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 
     The Company generated (used) cash flow from operations of $492 million,
$1,620 million and $(1,240) million for the years ended 1995, 1994 and 1993,
respectively. The decline in cash flow provided by operations
 
                                       30
34
 
in 1995 compared to 1994 was primarily due to the higher accounts receivable
balance at year-end 1995, reflecting significantly higher fourth quarter sales,
and higher inventory balances, as work in process for long-term contracts
increased. The improvement in cash flow from operations in 1994 compared with
1993 was due to lower levels of contributions to trusts for retiree benefits in
1994.
 
     Fluctuations in the amount of inventories, accounts receivable and accounts
payable are principally associated with the level and timing of business
volumes. In 1995, the Company's inventory turnover ratio decreased slightly to
3.4 times from 3.5 times in 1994. Accounts receivable were outstanding an
average of 81 days in 1995, compared with 76 days in 1994, reflecting the
increase in fourth quarter revenues in 1995.
 
     Cash flow used in investing activities was $1,342 million, $567 million and
$1,087 million in 1995, 1994 and 1993, respectively. Capital expenditures, the
largest component, were $1,277 million, $878 million and $577 million for the
years ended 1995, 1994 and 1993, respectively. Capital expenditures generally
relate to expenditures for equipment and facilities used in manufacturing and
research and development, including expansion of manufacturing capacity, and
expenditures for cost reduction efforts and international growth. For example,
in 1995 capital expenditures included construction of a new facility to
consolidate the Company's operations relating to systems for network operators
and expansion of manufacturing capacity for ICs and wireless equipment.
 
     Net cash provided by (used in) financing activities was $710 million,
$(782) million, and $2,482 million for the years ended 1995, 1994 and 1993,
respectively. The Company historically has relied on AT&T to provide financing
for its operations. The cash flows from financing activities reflected herein
principally reflect changes in the Company's assumed capital structure. These
cash flows are not necessarily indicative of the cash flows that would have
resulted if the Company were a stand-alone entity.
 
     Prepaid pension costs are increasing as returns on pension plan assets
exceed pension benefits earned during the year plus interest cost on the
projected benefit obligation.
 
     In the normal course of business the Company uses various financial
instruments, including derivative financial instruments, for purposes other than
trading. The Company does not use derivative financial instruments for
speculative purposes. These instruments include commitments to extend credit,
letters of credit, guarantees of debt, interest rate swap and cap agreements,
and foreign currency exchange contracts. Foreign currency exchange contracts are
used to mitigate foreign currency exposure. As is customary for these types of
instruments, collateral is generally not required to support these financial
instruments. The Separation and Distribution Agreement provides that, as between
the Company and AT&T, the Company has assumed all liabilities under or otherwise
relating to derivatives and similar obligations primarily related to the
Company's business. Initially, AT&T may continue to perform obligations under
such derivatives and similar obligations on behalf of the Company but all
amounts paid to or received from third parties will be charged to, or paid over
or credited to, the Company, as the case may be.
 
     By their nature all such instruments involve risk including the credit risk
of nonperformance by counterparties, and the Company's maximum potential loss
may exceed the amount recognized in the Company's balance sheet. However, at
both December 31, 1995 and 1994, in management's opinion there was no
significant risk of loss in the event of nonperformance of the counterparties to
these financial instruments. The Company controls its exposure to credit risk
through credit approvals, credit limits and monitoring procedures, and
management believes that reserves for losses are adequate. The Company does not
have any significant exposure to any individual customer or counterparty, nor
have any major concentration of credit risk related to any financial
instruments.
 
     The ratio of total debt to total capital (debt plus equity) was 73.7% at
December 31, 1995, compared to 56.1% at December 31, 1994. The increase reflects
the lower level of equity due to the restructuring and other charges taken in
1995. The Offerings and the other Related Transactions result in a pro forma
debt to capital ratio for the Company as of December 31, 1995 of approximately
63.2%. If the U.S. Underwriters exercise their overallotment option in full, the
pro forma debt to capital ratio as of December 31, 1995 will be approximately
     %.
 
     For the reasons described under "-- Variability in the Company's Business,"
the Company's working capital requirements and cash flow provided by operating
activities can vary greatly from quarter to quarter, depending on the volume of
production, the timing of deliveries and the payment terms offered to customers.
 
                                       31
35
 
In the past, the Company's working capital needs have been satisfied as part of
AT&T's corporate-wide cash management policies. However, AT&T is no longer
providing funds to finance the Company's operations.
 
     The Company estimates that the future cash expenditures to implement the
restructuring programs will be approximately $1,788 million and will be paid
primarily in 1996. Such expenditures are expected to be funded through cash
flows from operations and working capital. As part of the Separation, AT&T is
retaining accounts receivable that arose in the business of the Company having a
face amount estimated for pro forma purposes at approximately $2,000 million. To
meet its working capital needs, the Company has entered into the Initial Working
Capital Facility, pursuant to which the Company may borrow up to $1,000 million,
subject to the terms and conditions thereof. Prior to the Closing Date, the
Company expects to replace the Initial Working Capital Facility with the Working
Capital Facility, pursuant to which the Company would be able to borrow up to
$3,000 million. The Company expects to repay approximately $     million of the
amounts drawn under the Working Capital Facility with a portion of the proceeds
of the Offerings. Borrowings under the Initial Working Capital Facility will
bear interest at rates based from time to time on (i) the London interbank
offered rate plus 0.15% or, in certain cases plus or minus such spread as may be
agreed to between the Company and the lender, (ii) the rate for certificates of
deposits of major United States money center banks plus 0.275%, (iii) a fixed
competitive bid rate or (iv) a floating rate equal to the higher of the agents'
prime lending rate and the overnight Federal Funds rate as chosen by the
Company.
 
     In addition, AT&T will issue approximately $4,000 million of short-term
debt under the Commercial Paper Program, which will be assumed by the Company,
subject to certain conditions, at the Closing Date. The Commercial Paper Program
will be supported by a back-up credit facility with third-party financial
institutions. It is contemplated that AT&T will retain the proceeds of all
borrowings under the Commercial Paper Program and that, on the Closing Date,
AT&T will be released from all of its obligations thereunder, with the result
that the Company will become the obligor thereunder. Pursuant to the General
Purchase Agreement, AT&T has agreed to prepay $500 million to the Company, on or
prior to the Closing Date, to be applied to accounts receivable from AT&T that
are due and payable on or after January 1, 1997 for the purchase of products,
licensed materials and services from the Company. See "Use of Proceeds" and "Pro
Forma Condensed Financial Statements."
 
     The Company believes that the proceeds of the Offerings, as well as the
Working Capital Facility, cash flow from operating and short- and long-term debt
financings, will be sufficient to satisfy its future working capital, capital
expenditure, research and development, and debt service requirements, including
debt service requirements on the Commercial Paper Program. The Company intends
to file, prior to the Closing Date, a shelf registration statement to register
the offering of up to $               of long-term debt. The Company further
believes that it will be able to access the capital markets on terms and in
amounts that will be satisfactory to it, although there can be no assurance that
will be the case. The Company believes that it will be able to obtain bid and
performance bonds, to arrange or provide customer financing as necessary, and to
engage in hedging transactions on commercially acceptable terms.
 
RECENT PRONOUNCEMENTS
 
     Effective on October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of ." This standard requires the Company to review long-lived assets and certain
identifiable intangibles held and used for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of this standard did not have a material impact on the
Company's results of operations, financial condition or cash flows because this
was essentially the method the Company used in the past to measure and record
asset impairments. The 1995 restructuring and other charges did include
recognition of asset impairments.
 
     In 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," will be
adopted. This standard establishes a fair value method for accounting for or
disclosing stock-based compensation plans. This standard will be adopted in 1996
by disclosing the pro forma consolidated net income and earnings per share
amounts assuming the fair value method was effective on January 1, 1995. The
adoption of this standard will not affect the Company's results of operations,
financial position or cash flows.
 
                                       32
36
 
                                    BUSINESS
 
     The Company is one of the world's leading designers, developers and
manufacturers of telecommunications systems, software and products. The Company
is a global market leader in the sale of public telecommunications systems, and
is a supplier of systems and software to 23 of the world's 25 largest network
operators. The Company is also a global market leader in the sale of business
communications systems and in the sale of microelectronic components for
communications applications to manufacturers of communications systems and
computers. Further, the Company is the largest supplier in the United States of
telecommunications products for consumers. In addition, the Company has provided
engineering, installation, maintenance or operation support services to over 250
network operators in 75 countries, over 1.4 million business locations in the
United States and approximately 100,000 business locations in over 90 other
countries. The Company's research and development activities are conducted
through Bell Labs, one of the world's foremost industrial research and
development organizations.
 
     The Company's revenues of $21.4 billion for the year ended December 31,
1995, were generated from the sale of systems for network operators (54% of
total revenues), business communications systems (24%), microelectronic products
(9%), consumer products (8%), and other systems and products, including
integrated systems for the United States government (5%). In 1995, approximately
77% of the Company's revenue was generated from sales in the United States and
approximately 23% internationally (including exports).
 
     The following table sets forth the revenues by product line for each of the
five years ended December 31:
1995      1994      1993      1992      1991
                                                   -------   -------   -------   -------   -------
                                                                    (IN MILLIONS)
Systems for Network Operators..................  $11,459   $10,841   $ 9,367   $ 9,616   $ 9,028
  Business Communications Systems................    5,144     4,557     3,982     3,689     3,610
  Microelectronic Products.......................    1,864     1,461     1,323     1,167       781
  Consumer Products..............................    1,787     1,924     1,816     1,934     1,934
  Other Systems and Products.....................    1,159       982     1,246       906       959
                                                   -------   -------   -------   -------   -------
     Total.......................................  $21,413   $19,765   $17,734   $17,312   $16,312
                                                   =======   =======   =======   =======   =======
INDUSTRY OVERVIEW
 
     The global telecommunications networking industry includes systems,
software and products used for voice, data and video communications. This
industry has undergone significant transformation and growth since the
mid-1980's as a result of changes in domestic and international public policy,
technological innovations and economic factors. The Company believes that these
forces will intensify, and that the number of customers and the complexity of
the networks they demand will increase. In addition, the Company believes that
these networks will increasingly become multifunctional in nature, supporting
simultaneous wireline or wireless access to any combination of voice, data and
video communications services, thus reducing the operating costs associated with
separate networks. The Company further believes that the traditionally distinct
technology platforms supporting voice and data will converge, as will those
platforms for the traditionally separate wireline and wireless networks. In the
Company's view, significant industry growth areas will include wireless access,
multifunctional systems and networking software. The Company further believes
that the principal building blocks of the industry are and will continue to be
software, microelectronics and product innovation in advanced digital switching
and transmission platforms, supported by a competency in and a knowledge of
telecommunications networking.
 
  Public Policy Changes
 
     Changes in the public policy affecting telecommunications services have
increased, and are expected to further increase, the number of network operators
and, therefore, the demand for telecommunications network systems and products
worldwide. In the United States, changes in federal and state regulations have
created a
 
                                       33
37
 
number of new network operators and fostered competition between both new and
established network operators. For example, in 1995, the Federal Communications
Commission (the "FCC") auctioned additional spectrum for wireless
communications, thus potentially doubling the number of operators licensed to
compete in each MSA from two to four. The FCC has also announced plans to
auction additional spectrum in 1996. Changes in FCC regulations governing
interconnections have created the opportunity for CAPs to enter the market. Over
the past several years, certain state public utility commissions have removed
the prohibition on competition in intra-LATA long distance services, thereby
opening these markets to a number of competitors.
 
     More broadly, the United States Congress has passed the Telecommunications
Legislation, currently awaiting signature by the President, which, subject to
certain conditions, would permit local and long distance telecommunications
companies, cable television companies and electric utility companies to compete
with each other to provide local and long distance telephony and video services.
The Company believes that the Telecommunications Legislation (assuming it is
enacted), together with these other government initiatives, will increase the
demand for systems, software and services as network operators respond to the
changing competitive environment by constructing new or enhancing existing
networks.
 
     Over the last few years, the governments of a number of developed and
developing countries have privatized their state-owned telecommunications
monopolies. In most instances, as part of the privatization, such governments
have imposed service requirements on the newly privatized network operators
resulting in an acceleration of capital expenditures on networking systems,
software and services. In addition, certain governments have granted licenses to
new network operators to compete with the traditional network operators in their
countries. The Company expects the trend toward telecommunications service
competition to continue.
 
  Technological Innovation
 
     Telecommunications networking has undergone several technological
transformations, including the ongoing evolution from voice-centric to
multifunctional applications of any combination of voice, data and video, from
hardware-enabled to software-enabled and from wireline-only to an environment
where wireline and wireless interoperate. In addition, technological platforms
that support telecommunications networking and data networking have begun to
converge. To support the changing demands occasioned by these transformations,
networks are becoming more software intensive and the microelectronic content of
networking systems and end-user products is increasing.
 
     These changes have added significantly to the number of services that
network operators can offer. Increasingly, network operators and business
customers are demanding multifunctional networks that can simultaneously support
any combination of voice, data and video services accessible from wireline and
wireless terminal devices. For example, telecommunications service providers are
beginning to offer multifunctional services, such as integrated services digital
network ("ISDN") which allows for the dynamic allocation of bandwidth between,
and the simultaneous transmission of any combination of voice, data and video,
and individual call routing, which permits the user to easily designate and
change the wireline or wireless telephone number to which their calls should be
directed. In addition, cable television operators are beginning to expand beyond
one-way broadcast to provide interactive services, and have announced their
intent to provide telephony and high speed data services.
 
     The Company believes that traditionally distinct telecommunications
networks and data networks increasingly will be built on the same technological
platforms. The Company further believes that the convergence between voice and
data networking will continue as a result of the further adoption of common
technologies such as optical transmission and asynchronous transfer mode ("ATM")
switching.
 
  Economic Factors
 
     The Company expects network operators and business enterprises in general
to pursue growth opportunities through acquisition and investment around the
world. Multinational enterprises are demanding telecommunications systems and
services in foreign locations similar to those to which they are accustomed in
their home market. To attract these businesses and their investments, countries
are under pressure to upgrade their
 
                                       34
38
 
communications infrastructure. In developing countries there is greater demand
from citizens for an increase in teledensity (the number of telephones per
capita) following increases in their standard of living.
 
     Network operators around the world are under increased pressure to increase
revenues and operating margins. As a result, they are demanding new networking
systems and software which permit them to satisfy end-user demands and reduce
operating expenses through the automation of previously labor intensive
activities or other increases in the efficiency of their networks.
 
STRATEGY
 
     The Company believes that the global public policy, technological and
economic forces transforming the telecommunications industry are creating
opportunities for the Company to capitalize on its competency in and knowledge
of networking, software and microelectronics. The Company intends to utilize the
research and development capabilities of Bell Labs, its broad and well
established product lines and its strong global customer relationships with
leading network operators and major businesses to remain a leader in
telecommunications networking and to capitalize on the growing convergence of
voice and data and of wireline and wireless networks. Further, the Company is
increasing its focus on customers in the United States and internationally who
consider AT&T as a competitor or potential competitor and therefore have been
reluctant to rely on AT&T as a strategic supplier. The Company believes that
growth opportunities will be available in both developed and developing
countries, and that a significant portion of its growth will derive from the
sale of telecommunications networking systems outside the United States. The
Company intends to focus its efforts globally on wireless networks,
multifunctional systems and networking software.
 
     The Company intends to pursue the above strategies through a strong
management emphasis on the rapid commercialization of customer-focused
technological innovations. See "The Company -- Strategic Reorganization." The
Company believes that, as an independent entity, it will have a greater ability
to pursue these strategies by defining its own priorities and maintaining a
focus on its customers.
 
  Wireless Networks
 
     Wireless communications is a fast growing segment of the global
telecommunications market with the number of global subscribers increasing from
16 million in 1991 to 53 million in 1994. From 1993 to 1995, the Company's sales
of wireless infrastructure systems grew as a percent of total revenues from 6.1%
to 10.3%. New and upgraded digital wireless networks are being deployed by
network operators to meet the mobility needs of end-users, to expand their
networks into areas unserved by traditional telephony services and to provide a
wireless alternative to traditional wireline network access. In addition,
businesses are deploying wireless telecommunications systems and data networks
to improve the flexibility and connectivity of their office designs.
 
     An important element of the Company's strategy is to provide network
operators and businesses with complete, flexible wireless networks which will
complement, and, in the case of network operators, compete over time with
wireline networks. As a result, the Company's networks are designed to
interoperate with existing local networks and to be upgraded with new software,
thereby enabling network operators to offer new services or to change standards
as end-user demand dictates. To accomplish this, the Company's wireless
infrastructure systems, which utilize the 5ESS(R)-2000 switch (the "5ESS
switch"), are compatible with the following air interface standards: advanced
mobile telephone service ("AMPS"), the analog standard which is currently the
leading standard in North America; global systems for mobile communications
("GSM"), the pan-European digital standard; cellular digital packet data
("CDPD"), a leading standard for data transmission in North America; and the
emerging digital standards code division multiple access ("CDMA") and time
division multiple access ("TDMA"). The Company believes that its implementation
of CDMA technology provides superior digital voice quality, greater capacity
utilization and allows for lower power handsets than other wireless
technologies. The Company currently is deploying what will be the first national
CDMA network in the United States and one of the world's largest AMPS networks
in Korea. The Company has recently entered the GSM market with the pending
acquisition of the Philips Businesses and with the award
 
                                       35
39
 
from the Ministry of Post and Telecommunications of Saudi Arabia to build an
infrastructure system based on the GSM standard which, when completed, will be
one of the world's largest GSM-based networks.
 
     For business customers, the Company's strategy is to respond to its
customers' needs for mobility by offering wireless voice and data communication
networks within a building or campus. The Company has sought to accomplish this
by applying its radio frequency expertise to traditional PBX and local area
networking ("LAN") applications. For example, the Company was the first to offer
enhanced PBX and key system products which will support both traditional and
cordless handsets. Further, the Company recently announced its FREEWORKS(TM)
family of wireless business systems which includes a cellular PBX.
 
     The Company believes that enhancements to wireless communications will
continue to be generated by microelectronic advances and software innovations.
The Company will seek to remain in the forefront of these technologies by
building upon its Bell Labs expertise through continued research and development
investments in DSPs and networking software.
 
  Multifunctional Systems
 
     Network operators are demanding networks that allow them to expand the
breadth of their service offerings, and businesses are demanding networks which
allow them to integrate voice and data communications within and between their
facilities.
 
     The Company intends to utilize its expertise in digital switching, digital
transmission and optical technologies to continue to enable network operators
and businesses to deploy multifunctional networks which simultaneously can
support any combination of voice, data and video communications through various
combinations of copper, coaxial, wireless and fiber transmission media. An
important element of the Company's strategy is to seek to remain in the
forefront of these innovations by continuing its investments in critical
software and microelectronic technologies. The Company is also seeking to
capitalize on the convergence of voice and data networks with the 5E10 software
release, the introduction of its wide area network GLOBEVIEW(R)-2000, an ATM
switch for network operators, and its recently introduced MultiMedia
Communications eXchange ("MMCX") for business customers, which integrates PBX
and LAN capabilities.
 
  Networking Software
 
     As part of its strategy the Company seeks to continue to build upon its
software expertise as networks become more software intensive. Networking
software is used to create, provision and manage services and to support the
efficient, cost-effective operation of networks. Networking software is also
used by network operators and businesses to offer new services which will
differentiate them in the marketplace and which will automate labor intensive
service management and provisioning tasks. The Company is pursuing these
objectives through its research and development activities at Bell Labs, where,
in 1995, approximately two-thirds of the technical staff were engaged in
software-related activities. The Company's intelligent network and application
software enables network operators to offer a broad array of enhanced and
differentiated services such as toll free calling (800 service in the United
States) and call waiting. In addition, the Company is a leader in operation
support systems for telephone networks with systems like its Advanced System for
Operations Support ("ASOS"), which is one of the first systems to enable network
operators to manage the work flow, planning, surveillance, provisioning and
continuous testing of their multifunctional networks. Further, the Company
intends to continue to develop customized business applications like call
centers, which permit the routing and administration of a large volume of
incoming calls and the integration with business databases of customer and
product information.
 
  International Growth
 
     The Company believes that the opportunities described above will be
available in both developed and developing countries and that a significant
portion of its growth will derive from the sale of telecommunications networking
systems, software and services outside the United States. Many of the network
operators and businesses that are pursuing international opportunities are well
established and well capitalized companies
 
                                       36
40
 
with whom the Company has strong relations. The Company intends to pursue global
opportunities in a focused and disciplined approach to build upon the successes
the Company has achieved and will involve the withdrawal from areas where future
profitability is deemed questionable. The Company intends to utilize a
combination of joint ventures and direct investments to achieve its goals in
this area.
 
SYSTEMS FOR NETWORK OPERATORS
 
     The Company designs, develops, manufactures and services systems and
software which enable network operators to provide wireline and wireless local,
long distance and international voice, data and video services and cable
television service. The Company's networks, which include switching,
transmission and cable systems, are packaged and customized with application
software, operations support systems and associated professional services.
 
  Systems and Services
 
     Telecommunications Networking Systems.  The Company designs, develops,
manufactures and services advanced telecommunications networking systems, which
include equipment, software and associated professional services. These systems
connect, route, manage and store voice, data and video in any combination, and
are used for: wireline access; local and long distance switching; intelligent
network services and signaling; wireless communications, including both cellular
and personal communications services ("PCS"); and high-speed, broadband
multifunctional communications.
 
     The Company is one of the world's largest suppliers in each of the five
broad elements that comprise telecommunications networks: switching systems,
which route information through the network; transmission systems, which provide
the communications path through the network that carries information between
points in the network; operation support systems, which enable service providers
to manage the work flow, planning, surveillance, management, provisioning and
continuous testing of their networks; intelligent network/ application software,
which enables service providers to offer a broad array of enhanced and
differentiated services; and cable systems, which provide the transport media
between points in a network. These systems collectively comprise the
infrastructure that enables telecommunications network operators to provide
traditional narrowband voice and data services and that enables both new and
traditional network operators to offer broadband multifunctional services.
 
     The Company has a wireline local access installed base (the number of
access lines serviced by switches manufactured by the Company) of approximately
110 million lines, representing approximately 58% of the United States and 13%
of the total worldwide installed base. The Company's primary switching products
are the 5ESS switch for local and long distance switching and international
gateways, and the 4ESS(TM) Digital Switch (the "4ESS switch") for long distance
and international switching.
 
     The 5ESS switch is the most reliable switch in the industry, with an
average supplier-attributable time out of service of less than two minutes per
year. The 5ESS switch is in service in 49 countries with more than 72 million
access lines sold. In recent years, substantially all of the newly installed
access lines have been digital, providing the base for the evolution to ISDN and
other multifunctional services. From 1988 to 1994, the 5ESS switch was installed
by United States network operators to service over 40% of their new central
office lines, many to replace older analog installations.
 
     The 5ESS switch is used throughout the world to provide a combination of
network applications, including local and long distance switching and
international gateways, operator services, network signaling, intelligent
networking and wireless switching. As of September 1995, the 5ESS switch, with
the Company's 5E10 software, has enabled network operators to offer simultaneous
wireline and wireless, local, long distance and international services as well
as any combination of voice, data and video.
 
     The 4ESS switch, which was developed for and is primarily deployed in
AT&T's network, is used to provide domestic and international long distance
switching. The 4ESS switch can handle over 775,000 peak hour calls.
 
                                       37
41
 
     The Company designs, develops, manufactures and services a broad range of
transmission access and transport systems. Network operators use these systems
to transport any combination of voice, data and video between subscribers and
the central office or between points within a network engaged in local, national
or international communications. In 1992, the Company's transmission systems
business was awarded the Malcolm Baldrige National Quality Award.
 
     World standards for transmission systems have undergone rapid technological
progress in recent years. The new standards, known as Synchronous Optical
Network ("SONET") in North America and SDH in other markets, maximize
transmission capability and simplify network management for network operators.
The Company markets systems supporting both standards and is one of the largest
suppliers of SONET-based systems. As part of the pending acquisition of the
Philips Businesses, the Company has agreed to acquire, subject to certain
conditions, Philips' SDH transmission product line. This acquisition is intended
to broaden the Company's SDH product catalog.
 
     The Company offers a broad line of transmission access systems for the
provision of a wide range of services, including traditional telecommunications
service and broadband multifunctional services, in which it was the first
supplier. Transmission access systems transport information between the
subscriber and the central office. The Company's products include SLC(R)-2000, a
hybrid fiber/copper pair system, and HFC-2000(TM), a hybrid fiber/coaxial
system, both of which extend fiber-based optical transmission into the local
loop. The Company's products also include the SDV-2000, a switched digital video
system which extends fiber to the curb, and ASOS, one of the first operations
support system which enables network operators to manage the work flow,
planning, surveillance, provisioning and continuous testing of their
multifunctional networks.
 
     The Company's transmission transport systems are utilized for high capacity
communications between points within a communications network. These products
are primarily digital and provide for the movement of any combination of voice,
data, and video across fiber, coaxial and microwave based media. The Company's
products include fiber transport systems (FT 2000), digital multiplexer systems
(DDM 2000) and the digital access and cross connect systems (DACS(TM) family of
products).
 
     The Company's operation support systems enhance a network operator's
ability to activate, manage and maintain its networks. These systems
continuously monitor network performance and activity level, and allow for rapid
trouble identification, load balancing and planning for network utilization. The
Company's systems support the efforts of network operators to reduce operating
costs and minimize labor by automating previously labor intensive tasks.
 
     The Company's network management systems offer a broad array of modular
software, including element managers designed for traditional telephony, video
and wireless; network managers that monitor, test and optimize the utilization
of a network; service managers that manage work flow; and business managers that
include customer service systems. For example, the Company's NetMinder system is
an advanced network management routing system that mitigates network congestion
through efficient call routing and completion which is utilized by leading
domestic and international network operators.
 
     The Company's A-I-NET(R) intelligent network products enable network
operators to offer new services that can be created, deployed or managed by
themselves, the Company, or third parties. Services created with A-I-NET
products include toll free calling (800 service in the United States), call
forwarding, call waiting, voice dialing and messaging.
 
     The Company has recently introduced products to address the growing demand
for emerging broadband multifunctional services which permit the simultaneous
transmission of any combination of voice, data and video. In 1994, the Company
introduced its GLOBEVIEW-2000 Broadband System, which is one of the highest
capacity ATM switches offered for use in public networks. More than 100
GLOBEVIEW-2000 Broadband Systems are currently installed at more than 25
customers in nine countries, including local network operators such as Ameritech
Corporation, GTE Corporation and BellSouth Corporation; long distance network
operators such as AT&T; cable television operators such as Time Warner Inc. and
Cablevision Systems Corporation; and foreign network operators such as British
Telecommunications plc,
 
                                       38
42
 
Kokushin Denshin Denwa Co. Ltd. of Japan and the network operator that is
currently the sole broadband service provider in China.
 
     In addition, the Company designs, develops, manufactures and services cable
systems, which include optical fiber, fiber optic cable, electronic wire and
cable and apparatus for both fiber and copper cable systems. The Company's cable
systems are used to connect various devices in a network and terminal devices to
public and private networks. These cable systems are deployed for outside plant
and central office wiring, and for traditional telephony, cable television,
wireless networks and broadband applications.
 
     The Company is one of the world's largest suppliers of fiber optic cable
systems, high strength, high performance fiber for underseas cablers and outside
plant turnkey systems, which are generally large capital projects in emerging
markets for the engineering and construction of telecommunications
infrastructure. The Company's TRUEWAVE(TM) optical fiber enables network
operators to reduce their costs by increasing the distance between optical
amplifiers. In addition, the Company offers customers their choice of any
combination of fiber and cable design.
 
     Wireless Network Systems.  The Company designs, develops, manufactures and
services wireless network infrastructure systems, which include the 5ESS switch,
base stations, wireless network software and operation support systems. These
systems provide network operators with the capability to offer a wide range of
cellular and other wireless communications services, including PCS, wireless
data and fixed wireless access. The Company's sales of wireless infrastructure
systems have grown as a percent of total revenues from 6.1% in 1993 to 10.3% in
1995.
 
     The Company's wireless systems are in operation in nine of the top ten
United States MSAs. The Company's primary wireless system is the AUTOPLEX(R)
System 1000 product family, which includes the Series II base station, which has
a higher call handling capacity per single control complex than any other base
station on the market. The base station contains the radio transceiver that
establishes wireless communications with a mobile telephone. Base stations are
arranged geographically so that mobile customers can be "handed off" seamlessly
from one base station to the next as they travel. The network intelligence to
accomplish this is housed in the Company's Mobile Switching Center, which
includes the 5ESS switch and which connects the base stations to the public
telephone network. The Company also offers base stations for start-up
applications and smaller markets, a minicell product for rural and international
markets and a microcell for congested, high traffic areas.
 
     Wireless technology is evolving from analog to digital. The Company
provides networks based on a variety of the leading air interface standards:
AMPS, CDMA, TDMA and GSM. The Company believes that its implementation of CDMA
technology provides superior digital voice quality and greater capacity
utilization, and allows for the utilization of lower power handsets than other
wireless technologies. As part of the pending acquisition of the Philips
Businesses and in furtherance of its goal to enhance its international
operations in this area, the Company has agreed, subject to certain conditions,
to acquire Philips' GSM research, design, development, manufacturing, marketing
and sales capabilities. The Company is deploying what will be the first national
CDMA network in the United States, one of the world's largest AMPS networks in
Korea, and one of the world's largest GSM-based networks in Saudi Arabia.
 
     In addition, the Company designs, develops, manufactures and services fixed
wireless access systems. The Company offers Wireless Subscriber Systems, which
support the AMPS standard, and the new AIRLOOP(R) Wireless Local Loop system,
which utilizes CDMA technology. Also, as part of the pending acquisition of the
Philips Businesses, the Company has agreed, subject to certain conditions, to
acquire Philips' fixed wireless system, which is based on the DECT (digital
enhanced cordless telephone) standard. All three systems enable network
operators to expand their networks in markets where traditional wireline systems
are not cost justified, and to provide telephone services as an alternative to
traditional network operators.
 
     The Company designs, develops, manufactures, and services CDPD-based
wireless data systems which enable wireless network operators to offer data
services as an overlay to their existing analog voice infrastructure without
acquiring additional spectrum or upgrading to a digital network. These systems
offer the increased reliability and efficiency of switched digital packet data
systems.
 
                                       39
43
 
     Due to the complexity of wireless systems, the Company also offers a broad
range of professional services, which include project management, site
acquisition, radio frequency engineering, microwave relocation, construction
management, cellular optimization and wireless data support.
 
  Markets
 
     The principal customers for the Company's systems are network operators
that provide wireline and wireless local, long distance and international
telecommunications services. The Company's systems for network operators are
installed to expand the capacity and features offered by existing networks, to
replace older technology in existing networks and to establish new networks for
entrants into deregulated or previously unserved markets. See "Risk
Factors -- Reliance on Major Customers."
 
     As a result of structural, public policy and technological changes, since
the mid-1980's the telecommunications industry has undergone a period of
significant growth in the number of lines in service and applications offered.
In developed markets, deregulation has permitted new market entrants to
construct networks in previously monopolistic markets. In response, existing
network operators have expanded beyond traditional franchises and are offering
new services. In emerging markets, privatization, competition and economic
expansion have increased demand for networking systems. At the same time,
technological advances also have increased demand by reducing operating costs
and facilitating new applications, including multifunctional services.
 
     Changes in customer needs and demands, public policy and technology are
creating a new industry structure in which many of the actual and potential
customers of the Company are or will be competitors of AT&T's communications
services business. As a result, the obstacles currently faced by the Company in
marketing its products to competitors and potential competitors of AT&T's
communications services business have become severe and are expected to continue
to intensify. For these reasons, AT&T has announced that, subject to certain
conditions, it intends to effect the Distribution.
 
     The Company markets and sells its products worldwide primarily through a
direct sales force due to the complexity of these systems. Most of the Company's
sales of systems for network operators are made pursuant to general purchase
agreements, which establish the terms and conditions and provide for price
determination to be made on a contract bid basis. In addition, certain of the
large infrastructure projects are conducted under long-term, fixed-price
contracts. See "Risk Factors -- Multi-Year Contracts" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Variability in the Company's Business."
 
     As a result of the increased complexity of systems for network operators
and the high cost of developing and maintaining in-house expertise, network
operators demand complete, integrated and turn-key projects. Network operators
increasingly are seeking overall network or systems solutions that require an
increased software content which would enable them to deploy rapidly new and
differentiable services. In response, the Company has formed an organization
focused on turn-key network engineering projects for both public and private
sector customers. The Company markets integrated solutions whereby the Company
assumes full responsibility for the project, and engineers, designs and installs
the network, including equipment and software manufactured by both the Company
and third parties. In certain cases, operation of the network through contract
also may be included in the project.
 
     Increasingly, as a result of the financial demands of major network
deployments, network operators are looking to their suppliers to arrange for
financing. The ability to provide financing is a requirement to conduct business
in certain emerging markets. As a result, the Company works with its customers
to structure and place financing packages. See "Risk Factors -- Future Capital
Requirements."
 
     In order to market its product line worldwide, the Company has established
wholly owned subsidiaries and joint ventures with local companies in 16
countries. This approach also helps the Company meet local content regulations,
reduce its foreign exchange exposure and establish a local identity and employee
base.
 
  Competition
 
     The Company believes that it enjoys a strong competitive position due to
its broad product line, large installed base, strong relationship with key
customers, technological expertise and new product development capabilities. The
primary competitors in the market for telecommunications systems, in addition to
the
 
                                       40
44
 
Company, are four very large European and North American companies which have
substantial technological and financial resources and which offer similar broad
product catalogs. These competitors are Alcatel Alsthom, Northern Telecom
Limited, Siemens AG and Telefonaktiebolaget LM Ericsson. In 1994, the Company
and these four competitors collectively accounted for over 35% of the world's
public network systems sales, of which the Company's sales of systems for
network operators accounted for 8%.
 
     In addition, in all of the Company's product areas other than switching,
the Company faces significant competition from companies which do business in
one or a number of such product areas. For example, in wireless systems,
Motorola, Inc. and Nokia Corporation, both of which are very large companies
with substantial technological and financial resources, are significant
competitors. In transmission and cable systems, the markets are highly
fragmented and include hundreds of smaller competitors.
 
BUSINESS COMMUNICATIONS SYSTEMS
 
     The Company designs, develops, manufactures and services telecommunications
systems and products for large and small business customers, home offices and
government agencies. The Company's business communications systems can be
upgraded regularly with new software releases, can support local and wide area
voice and data networking and are often integral components of global enterprise
networks. The Company's systems primarily are customer premises-based private
switching systems and products, call center systems, voice processing systems,
which include voice messaging and voice response systems, and the associated
application software and professional support services.
 
     The Company is the market leader in customer premises-based
telecommunication systems in the United States with the largest aggregate
installed base of PBXs, key systems, structured cabling systems and voice
processing systems. The Company serves over 1.4 million business locations in
the United States and approximately 100,000 business locations in over 90 other
countries.
 
  Systems and Services
 
     The Company's core business communications system products are private
switching systems, generally PBXs and key systems, usually located at the
customer's premises, that permit a number of local telephones or terminals to
communicate with one another, with or without use of the public telephone
network. The Company offers the DEFINITY communications system family of
products for large customers and the wired and wireless MERLIN LEGEND(R) and
PARTNER(R) systems for smaller businesses and home offices. The DEFINITY
Enterprise Communication Server provides real-time voice and mixed-media call
processing. The recently announced FREEWORKS family of business mobility
solutions includes the DEFINITY Cellular Business System, which enables in- and
out-of-building mobility with standard cellular phones.
 
     The Company's messaging and response systems store and forward voice, data
and images and conduct initial call processing, which integrates PBX and
computer functions. In addition, the Company is the technological leader in the
development of speech recognition algorithms, which have been incorporated into
both public and private call processing applications, such as operator services.
The Company's principal systems include the INTUITY AUDIX and DEFINITY AUDIX
voice messaging systems for use with the Company's or a competitor's PBX;
INTUITY CONVERSANT, a multi-lingual interactive voice response system which can
recognize speech in nine languages/dialects; and the INTUITY Multimedia
Messaging System, a system that combines voice messaging and voice-response
technology into a single desktop application.
 
     The Company is the United States market leader in the sale of call center
systems, integrating the hardware and software associated with computing,
telephony, and multifunctional messaging and response applications. Call centers
are the initial entry point for customers to access a business' telephone sales
and support operation. The Company's systems permit the routing and
administration of a large volume of incoming calls, and the integration with
business databases of customer and product information. The Company's call
center systems are used by companies in diverse industries such as financial
services, retailing and transportation. The call center environment in which
these companies operate is characterized by hundreds of telephone service agents
located in geographically dispersed networked sites, processing tens of
 
                                       41
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thousands of calls per hour. For example, using these systems, businesses can
provide their customers with the ability to check balances or order status, to
place orders, and to receive additional information and support. The Company has
the ability to build customized systems integrating a variety of products,
including both newly purchased equipment and equipment manufactured by third
parties.
 
     In October 1995, the Company introduced the MMCX, the industry's first
multifunctional product to deliver real-time business calling features such as
conferencing, transfer, call coverage, and add/drop to switched voice or data
networking. The MMCX allows customers to migrate their existing network to
multifunction capabilities. This enables the customer to support new
applications and transport technologies, such as ATM.
 
     In addition, subsequent to its introduction in 1989, the Company's SYSTIMAX
structured wiring system for business customers, which provides broadband
multifunctional LAN interconnections within a building or campus, has grown into
the global market leader. These systems are comprised of fiber optic and copper
cable and associated apparatus.
 
     The Company offers a wide range of professional service options, including
remote diagnostics, a variety of on-demand services and dedicated on-site
technicians. Their on-demand services involve routine testing and diagnostics,
maintenance and repair, moves and rearrangements, and software and hardware
upgrade installations.
 
     The Company believes that a key competitive advantage is its remote
diagnostics and repair capability, which permits the Company to monitor, test,
maintain and resolve problems from its regional service centers. Many of the
Company's systems are designed with intelligent software which establishes a
real-time link between the customer premises and a regional service center's
expert system. This permits the customer to reduce its system down-time and
enables the Company to automate many maintenance and repair tasks.
 
  Markets
 
     The Company markets its systems to large and small businesses and
government agencies. In the United States, the Company markets its systems
through the industry's largest direct sales force. Outside the United States,
the Company markets its systems directly and through a network of dealers and
distributors. The Company's systems are deployed in applications for customer
sales and service, conferencing and collaboration, mobility and distributed work
force, messaging and enterprise networking. The Company fields a large group of
application specialists to design call center, distance learning and other
customized applications.
 
     The Company considers its close working relationships with its customers
and its knowledge of their individual business needs to be important
contributors to its success. The Company's sales historically have been
facilitated by system upgrades, which provide a migration path to new
applications, and new system sales to its existing customer base.
 
     The Company believes that the premises-based communications market is
transforming from distinct voice and data networks to single multifunctional
networks that will be able to support any combination of voice, video and data
communications simultaneously. The Company is designing certain business
communications systems to enable its customers to simplify their premises
networks by combining separate voice, video and data networks into a single
architecture. The Company's development efforts are being focused on extending
the ubiquity and ease of use of today's voice calls to multifunctional
communications, and on reducing the costs associated with the administration and
maintenance of the customer's network.
 
     The Company has entered into alliances with Lotus Development Corporation,
to enable multimedia messaging in the Lotus Notes* environment, and with Novell,
Inc. to extend multimedia messaging and computer/telephony integration, and was
one of the founders with International Business Machines Corporation, Apple
Computer, Inc., and Siemens AG of VERSIT*, an industry consortium organized to
ensure the interoperability of multivendor multimedia applications.
 
---------------
 
* Lotus Notes is a registered trademark of Lotus Development Corporation; VERSIT
  is a trademark of the consortium's founders.
 
                                       42
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  Competition
 
     The Company competes principally with three other large companies with
substantial technological and financial resources in the sale of business
communication systems. These competitors are Northern Telecom Limited, Siemens
AG (through its subsidiary Siemens Rolm Communications, Inc.) and Alcatel
Alsthom. Together with the Company, in 1994 these four competitors accounted for
approximately 40% of the sales of business communications systems globally, with
the Company accounting for approximately 8%. In addition, as the market
transforms to multifunctional systems, the Company expects that it also may
encounter competition from companies that design and manufacture data network
equipment.
 
     The Company believes that key competitive factors in this market are
service support, the ability to upgrade existing systems for new applications,
price and reliability.
 
MICROELECTRONICS PRODUCTS
 
     The Company designs, manufactures and sells ICs, electronic power systems
and optoelectronic components for communications applications. These
microelectronic products are important components of many of the Company's own
systems and products. The Company also supplies these components to other
manufacturers of communications systems and computers. The Company is a market
leader in several IC product areas critical to communications applications,
including DSPs for digital cellular phones and standard-cell ASICs. At December
31, 1995, the Company's DSPs were included in more than half of the world's
digital cellular telephones.
 
  Products
 
     The Company's ICs are designed to provide advanced communications and
control functions for a wide variety of electronic products and systems. The
Company focuses on IC products that are used in communications and computing and
that require high-performance and low power chip architectures; complex
large-scale chip design in digital, analog and mixed-signal technologies; DSP
architectures and algorithms; high-frequency and high-voltage technologies; and
high speed data and signal processing. The Company offers a wide variety of
standard, semi-custom and custom products for cellular equipment, communications
networks, computers and computer peripherals, modems and consumer communications
products. Products include DSPs, ASICs, field programmable gate arrays and
communications ICs. The Company's products are manufactured using a variety of
technologies, from low-power, low-voltage submicron CMOS (complementary metal
oxide semiconductors) to high-frequency and high-voltage bipolar processes. The
Company's Orlando IC factory was awarded the Shingo Prize for excellence in
manufacturing in 1994.
 
     The Company designs, develops and manufactures energy systems, electronic
power supplies and associated magnetic components for the telecommunications and
electronic data processing industries. These products serve applications ranging
from modems for personal computers to large telephone central offices. Products
include DC/DC converters, AC/DC switching power supplies, transformers,
inductors and energy systems that provide alarm, control, and backup power
management. The Company's Dallas electronic power systems factory was awarded
the Shingo Prize in 1992. In 1994, the Company was the first U.S. manufacturer
to be awarded the Deming Prize for quality for its electronic power systems
business.
 
     The Company designs, develops and manufactures optoelectronic products
which convert electricity to light (emitters) and light to electricity
(detectors), thereby facilitating optical transmission of information. These
products include semiconductor lasers, photodetectors, integrated transmitters
and receivers, and advanced-technology erbium-doped fiber amplifiers. The
Company provides these products worldwide to manufacturers serving the
telecommunications, cable television and network computing markets.
Optoelectronic products extend the transmission capacity of fiber to meet the
requirements of such applications as video-on-demand, interactive video,
teleconferencing, image transmission and remote database searching. The Company
markets a number of advanced products, including critical optoelectronic
components that support telecommunication transmission; long-wavelength optical
data modules for data networking; and analog lasers for use in cable television
fiber optic transmission. The Company believes that its optoelectronic products
have
 
                                       43
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higher photonics reliability than those of its competitors due to their low
field failure rate and the Company's evaluation methodologies in manufacturing
that allow the detection and elimination of early failures.
 
     The Company seeks to respond to the pace of technological change by
improving its manufacturing process technologies and developing advanced design
tools and low-cost assembly and test capabilities. In addition to using the
capabilities of Bell Labs, the Company has established close, working relations
with customers to conceive, research, develop and design new products jointly.
To support these relationships, the Company maintains a presence in the form of
research, design, manufacturing and sales offices in over 15 countries. As a
result of these relationships, the Company has been able to develop a number of
technological innovations for its customers. For example, in order to help
reduce customers' time to market, in 1994 the Company developed the first DSP
products with on-chip flash memory. These products allow customers to load,
test, and reload development software in actual prototype systems.
 
     The Company also designs and manufactures printed circuit boards and
backplanes. The Company expects to exit this business and has offered these
operations for sale.
 
  Markets
 
     The Company's microelectronic products are sold globally to manufacturers
of communications systems and computers. In addition, the Company's energy power
systems are sold directly to U.S. and foreign telephone companies. The Company's
customers are competing in markets characterized by rapid technological changes,
decreasing product life cycles, price competition and increased user
applications. These markets have experienced significant expansion in the number
and types of products they offer to end-users, particularly in personal
computing and portable access communication devices. As a result, the Company's
customers continue to demand components which are smaller, require less power,
are more complex, provide greater functionality, and are produced with shorter
design cycles and less manufacturing lead time.
 
     In 1995, the Company also introduced a GSM hardware platform based upon a
highly integrated multiple-chip design for digital cellular phones that performs
all the key handset functions between the microphone and the antenna in both
voice and data services. The Company also sells the associated software product
elements necessary to support the GSM standard.
 
     In 1995, more than half of the Company's microelectronic production was
sold to customers other than the Company. The Company's microelectronic products
are also key components of its systems for network operators, business
communications systems, and consumer products. The Company's microelectronics
products compete with products of third-party manufacturers for inclusion in the
Company's systems and products.
 
  Competition
 
     The Company believes that its success is due to technological leadership,
product leadership, and close relationships with key customers. The market for
microelectronic products is global and generally highly fragmented. The
Company's competitors differ widely among product categories. The Company's
competitors in certain IC product categories include Motorola, Inc. and Texas
Instruments Incorporated; in electronic power systems include Astec Industries,
Inc. and Unitech plc (through its subsidiary, NEMEC-Lambda); and in
optoelectronics include Fujitsu Limited and Northern Telecom Limited.
 
     The Company believes that key competitive factors in the microelectronics
marketplace are the early involvement in customers' future application
requirements, the speed of product and technological innovation, price, customer
service, and manufacturing capacity. Other important competitive factors include
quality, reliability and local manufacturing presence.
 
CONSUMER PRODUCTS
 
     The Company designs, manufactures, services and leases communications
products for consumer, small office and home office use. For the nine months
ended September 30, 1995, the Company sold 31% of the
 
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corded telephones, 28% of the cordless telephones and 34% of the telephone
answering systems sold in the United States, approximately double the market
share of any single competitor in each of these categories.
 
  Products
 
     The Company has a broad catalog of telephone products for the consumer
market. Cordless telephones are the Company's primary consumer product line, to
which the Company has continued to make improvements and innovations. The
Company was the first in the industry to introduce cordless telephones with 25
channel capability, which reduces interference. The Company also offers a broad
line of analog, digital, stand-alone and integrated telephone answering systems,
which are offered in corded and cordless versions. The Company's main corded
product is the TRIMLINE(R) telephone, with more than 88 million units sold over
the last 30 years. The Company sold over 2.5 million TRIMLINE telephones in
1995.
 
     The Company offers a broad range of cellular products which support all of
the major United States cellular standards. The Company has captured
approximately 5% of the United States market for cellular products since
entering the market in 1992. The Company's product development efforts are
focused on developing flexible, digital wireless handsets capable of supporting
all of the major standards for cellular and PCS service in the United States.
 
     The Company is implementing a common design for its consumer products,
which includes a common look, feel, feature placement and feature use. As part
of this process, the Company expects to reduce the number of different
components and casings used in its product line. The Company believes this
uniformity will reduce costs, reinforce its brand identity, and increase
manufacturing flexibility. Under the Brand License Agreement (as defined
herein), the Company has the right to market certain consumer products under the
"AT&T" name alone, and in combination with the Company's name, each for certain
specified periods. See "Arrangements Between the Company and AT&T -- Brand
License and Related Matters."
 
  Markets
 
     The Company distributes its products in the United States through
approximately 900 retailers representing over 17,000 retail outlets, including
such national retailers as Wal-Mart Stores, Inc., Sears, Roebuck and Co.,
Circuit City Stores, Inc., Best Buy Co., Inc. and Service Merchandise Company.
The Company also sells its products through the Phone Center Stores. As part of
the Company's reorganization efforts, the Company plans to close all 338 of the
Phone Center Stores by May 1996. See "The Company -- Strategic Reorganization."
The Company also offers consumers a rental option for selected products, and
currently serves over 5 million rental customers.
 
  Competition
 
     The Company believes that its position in the consumer communications
products industry is due to the quality and reliability of its products, the
"AT&T" brand name, its strong distribution channels and its broad product line.
The Company's competitors in consumer products are traditional consumer
electronic manufacturers. The industry is characterized by significant
consolidation within each product category, although the principal competitors
in each are different. In traditional telephone products, the Company's
principal competitors are Thomson Consumer Electronics (marketing under the GE
brand), U.S. Electronics, Inc. (marketing under the BellSouth brand), Panasonic
Co., USA and Sony Corporation which, together with the Company, accounted for
over 70% of market sales in the first three quarters of 1995, of which the
Company accounted for 31%.
 
OTHER SYSTEMS AND PRODUCTS
 
     The Company designs, develops and manufactures advanced technology systems
which support the United States federal government's need for specially designed
integrated systems for military and civilian use. The Company offers a full
range of products on a direct funding basis from the United States government.
These systems focus on undersea sensor systems, information processing and
secure communications. The
 
                                       45
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funded research has generated commercial by-products in lightwave transmission
equipment, wireless communications systems and multifunctional compression
algorithms.
 
     The Company, through its subsidiary, Paradyne, also designs and
manufactures modems and other data communications equipment for communications
and computing. The Company has offered for sale this subsidiary.
 
BELL LABORATORIES
 
     The Company has been and will continue to be supported by the technological
expertise provided by Bell Labs, one of the world's foremost industrial research
and development organizations. All of the operations of Bell Labs which support
the businesses of the Company, and basic research capability, which together
comprise approximately 75% of the total resources of Bell Labs, will be a part
of the Company. The remaining approximately 25% of the resources of Bell Labs
that historically have supported AT&T's communications services business will be
retained by AT&T. Bell Labs has made significant discoveries and advances in
communications science and technology, software design and engineering, and
networking. These contributions include the invention of the transistor and the
design and development of ICs and many types of lasers. Areas of Bell Labs
research and development work in recent years include: networking software;
lightwave transmission, which offers greater transmission capacity than other
transmission systems; electronic switching technology, which enables rapid call
processing, increased reliability and reduced network costs; microelectronics
components, which bring the latest advantages of very large scale integration to
the full range of products offered by the Company.
 
     Since its founding in 1925, on average, one patent has been issued per day
to Bell Labs. Further, seven Bell Labs scientists have received the Nobel Prize
for physics, seven have received the United States National Medal of Science,
and five have received the National Medal of Technology. In addition, Bell Labs
was the first institution to be awarded the National Medal of Technology.
 
     Bell Labs is thoroughly integrated with the Company's operating units in
design, development and manufacturing engineering. In general, substantially all
of Bell Labs' development staff are aligned with specific operating units. In
addition, its research, standards, architecture work and software consulting are
core functions structured to support all of the Company's operating units.
 
     Bell Labs' research and development activities continue to focus on the
core technologies critical to the Company's success, which are software, network
design and engineering, microelectronics and photonics.
 
     Bell Labs is a leader in software research, development and engineering for
communications applications. In 1969, it produced the UNIX* operating system, in
1972, the C and, in 1983, the C++ programming languages, and, recently, PLAN
9(TM), a distributed operating system that advances client/server applications
over public as well as private networks. In addition, since the early 1980's
Bell Labs' innovations in fault-tolerant software have enabled the Company to
achieve a level of system reliability with off-the-shelf commercial processors
that allows the Company to reduce its reliance on custom microprocessors.
 
     Bell Labs has contributed many innovations in voice quality, and is a
leader in the development of digital signal processing. In the 1990's Bell Labs
has developed a number of innovative algorithms for high-quality speech and
audio at low-bit rates, for high-definition television, and for data, image, and
video compression in multifunctional communications. These innovations have
contributed to the Company's implementation of speech processing applications
which include text-to-speech synthesis, speech recognition and automatic
translation of speech from one language to another.
 
     Bell Labs has led in the development of software-based networking
technologies that support the Company's systems and products. Since the 1970's,
Bell Labs' inventions have included automated network management and cellular
mobile communications. Recently, it has developed systems for digital cellular,
 
---------------
 
* UNIX is a registered trademark licensed exclusively by Novell, Inc.
 
                                       46
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PCS, mobile computing and wireless LANs. Bell Labs' research in ATM led to the
Company's offering of the first large ATM switch in 1993, and is presently
focusing on ATM offerings for office and home applications.
 
     The microelectronics industry began with Bell Labs' invention of the
transistor. Bell Labs' innovations in IC design and manufacturing include
molecular beam epitaxy in 1968, which is the technique used to build
semiconductors one atomic layer at a time.
 
     Similarly, Bell Labs' advances extended from the first semiconductor lasers
that could operate at room temperature to the microlasers used in today's
broadband multifunctional transmission systems, and from early optical fiber
research to today's optical amplifiers and TRUEWAVE fiber. Current photonic
research includes work on passive optical networks, photonic switching and
quantum wire lasers.
 
RESEARCH AND DEVELOPMENT
 
     The Company's research and product development costs charged to expense
were $2,121 million (excluding the 1995 restructuring and other charges), $2,097
million and $1,961 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Historically, the Company has targeted approximately 1% of its
revenues to fund basic research activities.
 
MFJ AGREEMENTS
 
     Certain agreements associated with the implementation of the MFJ impose
obligations concerning AT&T's manufacturing support of RBOC equipment needs,
including advance notice of AT&T's discontinuance of support for certain
equipment, and, in that event, the transfer to the RBOCs of necessary technical
resources, including, under certain circumstances, software source codes, to
enable the RBOCs to obtain the necessary equipment support elsewhere. The
Company would remain obligated to comply with these agreements.
 
BACKLOG
 
     The Company's backlog, calculated as the aggregate of the sales price of
orders received from customers less revenue recognized, was approximately $4,100
million and $3,700 million on December 31, 1995 and December 31, 1994,
respectively (approximately 7% and 1% of which, respectively, represented
backlog of orders from AT&T). Approximately $200 million of orders included in
the December 31, 1995 backlog are scheduled for delivery after December 31,
1996. However, all orders are subject to possible rescheduling by customers.
Although the Company believes that the orders included in the backlog are firm,
some orders may be canceled by the customer without penalty, and the Company may
elect to permit cancellation of orders without penalty where management believes
that it is in the Company's best interest to do so. Not included in backlog at
December 31, 1995 is approximately $3,400 million for a long-term contract with
the Ministry of Post and Telecommunications of Saudi Arabia. Although this
contract is considered firm, it is excluded from backlog due to the annual
appropriations of the Saudi Arabian government.
 
     In recent years the Company's backlog as a percentage of revenues has
decreased principally as a result of reduced manufacturing cycle times and the
increased software content of orders allowing for the faster delivery and
installation of new systems. The Company believes that these advances have
allowed customers to deploy networks more rapidly than in the past and have
resulted in a reduction in the time between customer order and system
implementation, which has also affected the Company's backlog.
 
SOURCES AND AVAILABILITY OF MATERIALS
 
     The Company makes significant purchases of electronic components, copper,
silicon, precious metals, aluminum, and other materials and components from many
domestic and foreign sources. The Company has been able to obtain sufficient
materials and components from sources around the world to meet its needs. The
Company also develops and maintains alternative sources for essential materials
and components. Occasionally, special inventories of components are maintained
to minimize the effects of shortages.
 
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PATENTS AND TRADEMARKS
 
     The Company owns approximately 8,000 patents in the United States and
11,000 in foreign countries. These foreign patents are counterparts of the
Company's United States patents. Many of the patents owned by the Company are
licensed to others and the Company is licensed to use certain patents owned by
others. In connection with the Separation, the Company has entered into an
extensive cross-licensing agreement with AT&T and NCR. See "Arrangements Between
the Company and AT&T -- Patent Licenses and Related Matters."
 
     The Company intends to market its products under its own name and mark,
except with respect to certain consumer products and business communications
systems, which may be marketed under the "AT&T" name alone for one year after
the Closing Date or in combination with the Company's name for a period of up to
four years after the Closing Date. In addition, certain leased products or
maintenance contracts may be marketed under the "AT&T" name for 66 months after
the Closing Date. See "Arrangements Between the Company and AT&T -- Brand
License and Related Matters."
 
     The Company considers its many trademarks to be valuable assets. Most of
its trademarks are registered throughout the world.
 
EMPLOYEES
 
     At December 31, 1995, the Company employed approximately 131,000 persons,
of whom 82% were located in the United States. Of these domestic employees, 47%
are represented by unions, primarily the Communications Workers of America and
the International Brotherhood of Electrical Workers. The Company's labor
agreements with these unions expire on May 30, 1998. As part of the Company's
restructuring efforts, and as announced January 2, 1996, the Company will
eliminate approximately 22,000 positions, of which approximately 11,000 are
management positions and 11,000 are occupational positions. Approximately 1,000
additional management employees are employed by businesses that the Company has
announced plans to sell. As of December 31, 1995, approximately 4,100 management
employees have accepted a voluntary severance package, the majority of whom will
leave the Company in early 1996. The Company expects approximately 70% of all
separations to be completed by the end of 1996 and the majority of the remaining
separations to be completed during 1997. See "The Company -- Strategic
Reorganization" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Strategic Reorganization." The Company considers
its relationships with its employees to be satisfactory.
 
LEGAL PROCEEDINGS
 
     In the normal course of business, the Company is 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, the
Company is unable to ascertain the ultimate aggregate amount of monetary
liability or financial impact with respect to these matters at December 31,
1995. While these matters could affect operating results of any one quarter when
resolved in future periods, it is management's opinion that after final
disposition, any monetary liability or financial impact to the Company beyond
that provided in the consolidated balance sheet at December 31, 1995 would not
be material to the Company's balance sheet, statement of income and cash flows.
 
ENVIRONMENTAL MATTERS
 
     The Company's current and historical manufacturing and research operations
are subject to a wide range of environmental protection laws in the United
States and other countries. In the United States these laws often require
parties to fund remedial action regardless of fault. The Company has remedial
and investigatory activities, including assessment and cleanup work, underway at
46 current and former manufacturing, laboratory and recycling facilities to
comply, or to determine compliance with, applicable environmental protection
laws. AT&T and its subsidiaries have been listed as PRPs at numerous "Superfund"
sites pursuant to CERCLA or comparable state statutes, either by a government
agency (which may have either sought
 
                                       48
52
 
information concerning AT&T's connection to the site, or may have sought from
AT&T participation in site cleanup work or contribution toward the cost of site
cleanup), or by a private party seeking contribution to site cleanup costs.
Under the terms of the Separation and Distribution Agreement, the Company will
assume or indemnify AT&T for all liabilities associated with these sites. It is
often difficult to estimate the future impact of environmental matters,
including potential liabilities. Although the Company believes that its reserves
are adequate, there can be no assurance that the amount of capital expenditures
and other expenses which will be required to complete remedial actions and to
comply with applicable environmental laws will not exceed the amounts reflected
in the Company's reserves or will not have a material adverse effect on the
financial condition of the Company or the Company's results of operations.
 
     On July 31, 1991, the United States Environmental Protection Agency Region
III issued a complaint pursuant to Section 3008a of the Resource Conservation
and Recovery Act of 1976 alleging violations of various waste management
regulations at the Company's Richmond Works, in Richmond, Virginia. The
complaint seeks a total of $4,184,304 in penalties. The Company is contesting
both liability and the penalties.
 
     In addition, on July 31, 1991, the United States Environmental Protection
Agency filed a civil complaint in the U.S. District Court for the Southern
District of Illinois against AT&T (with respect to the Company's businesses) and
nine other parties seeking enforcement of its CERCLA Section 106 cleanup order,
issued in November 1990 for the NL Granite City Superfund site, in Granite,
Illinois. This complaint seeks past costs, civil penalties of $25,000 per day
and treble damages related to certain United States' costs. The Company is
contesting liability.
 
     During 1994, AT&T Nassau Metals Corporation ("Nassau"), a wholly owned
subsidiary of the Company, and the New York State Department of Environmental
Conservation (the "NYSDEC") were engaged in negotiations over a study and
cleanup of the Nassau plant located on Richmond Valley Road in Staten Island,
New York. During these negotiations, in June 1994, NYSDEC presented Nassau with
a draft consent order which included not only provisions for site investigation
and remediation but also a provision for payment of a $3.5 million penalty for
alleged violations of hazardous waste management regulations. No formal
proceeding has been commenced by NYSDEC. Negotiations and discussions regarding
the matter are continuing.
 
PROPERTIES
 
     At December 31, 1995, the Company operated 46 manufacturing and repair
sites occupying in excess of 20.0 million square feet, of which approximately
1.1 million square feet were leased. These sites were located in 19 countries.
In 1995, the Company closed, relocated or sold three manufacturing and repair
sites occupying in excess of 800,000 square feet, of which none were leased. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Strategic Reorganization."
 
     At December 31, 1995, the Company operated 106 warehouse sites occupying in
excess of 4.0 million square feet, substantially all of which were leased. These
sites were located in 19 countries.
 
     At December 31, 1995, the Company operated 718 office sites
(administration, sales, field service) occupying in excess of 17.0 million
square feet, substantially all of which were leased. These sites were located in
47 countries.
 
     At December 31, 1995, the Company operated additional sites in 15 cities
with significant research and development activities, occupying in excess of 9.0
million square feet, of which approximately 1.4 million square feet were leased.
These sites were located in two countries.
 
     In addition, the Company has plans to close or to discontinue the lease of
certain facilities. See "The Company -- Strategic Reorganization."
 
     For a summary of certain leases and subleases to be entered into in
connection with the Separation, see "Arrangements Between the Company and
AT&T -- Real Estate Agreements."
 
     The Company believes its plants and facilities are suitable and adequate,
and have sufficient productive capacity, to meet its current needs.
 
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                                   MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
 
     Set forth below is certain information concerning the executive officers of
the Company and concerning the individuals who, prior to the Closing Date, are
expected to serve as directors of the Company. Seven additional directors who
are officers but not directors of AT&T are also to be elected to the Company
Board prior to the Closing Date. The Company Board will be divided into three
classes. Commencing with the annual meeting of stockholders to be held in April
1997, directors for each class will be elected at the annual meeting of
stockholders held in the year in which the term for such class expires and
thereafter will serve for a term of three years. See "Description of Capital
Stock -- Antitakeover Effects of Certain Provisions of the Certificate and
By-Laws." The Company currently has three directors, all of whom are AT&T
officers who will resign as directors prior to the Closing Date.
NAME                     AGE                POSITION AND OFFICES HELD
-----------------------------------  ---------    --------------------------------------------
Henry B. Schacht...................     61        Chairman of the Board Nominee and Chief
                                                  Executive Officer
Richard A. McGinn..................     49        President and Chief Operating Officer, and a
                                                  Director Nominee
Carla A. Hills.....................     61        Director Nominee
Drew Lewis.........................     64        Director Nominee
Donald S. Perkins..................     68        Director Nominee
Franklin A. Thomas.................     61        Director Nominee
Curtis R. Artis....................     48        Senior Vice President, Human Resources
John E. Berndt.....................     55        President, Multimedia Ventures &
                                                  Technologies
Gerald J. Butters..................     52        President, North American Region, Network
                                                  Systems
Joseph S. Colson, Jr...............     48        President, AT&T Affiliates, Network Systems
Curtis J. Crawford.................     48        President, Microelectronics
Carleton S. Fiorina................     41        Executive Vice President, Corporate
                                                  Operations
Homayoun Firouztash................     52        Vice President, Consumer Products
William B. Marx, Jr................     57        Senior Executive Vice President
William T. O'Shea..................     48        President, International, Network Systems
Donald K. Peterson.................     46        Executive Vice President and Chief Financial
                                                  Officer
Richard J. Rawson..................     43        Senior Vice President, General Counsel and
                                                  Secretary
Patricia F. Russo..................     43        President, Business Communications Systems
Daniel C. Stanzione................     51        President, Network Systems; President, Bell
                                                  Laboratories
Mr. Schacht was named Chief Executive Officer of the Company effective
February 1, 1996 and will become Chairman of the Board of the Company prior to
the Closing Date. He has been a member of the AT&T Board since 1981 but will
resign from the AT&T Board effective as of the Closing Date. Mr. Schacht is a
director of Cummins Engine Company, Inc. ("Cummins"), a position he has held
since 1977, and also was Chief Executive Officer of Cummins from 1973 to 1994
and Chairman of the Board of Cummins from 1977 to 1995. In addition, Mr. Schacht
is a director of Aluminum Company of America, and The Chase Manhattan Corp. and
its subsidiary, The Chase Manhattan Bank, N.A. Mr. Schacht's initial term will
expire at the annual meeting of stockholders to be held in 199 .
 
     Mr. McGinn was named President and Chief Operating Officer of the Company
effective February 1, 1996 and will become a director prior to the Closing Date.
Previously, he was Executive Vice President and Chief Executive Officer of the
AT&T Network Systems Group, a position to which he was named in October 1994.
From August 1993 to October 1994, Mr. McGinn was President and Chief Operating
Officer, AT&T
 
                                       50
54
 
Network Systems Group, and, from August 1991 to August 1993, he was Senior Vice
President, AT&T Network Systems Group. Prior to that time, Mr. McGinn held
various senior management positions within AT&T. Mr. McGinn's initial term will
expire at the annual meeting of stockholders of the Company to be held in 199 .
 
     Ms. Hills will become a director prior to the Closing Date. Ms. Hills has
been a director of AT&T since 1993 but will resign from the AT&T Board effective
as of the Closing Date. She has been Chairman and Chief Executive Officer of
Hills & Company (international consultants) since 1993. She was the United
States Trade Representative, Executive Office of the President, from 1989 to
1993. In addition, she is a director of American International Group, Inc.,
Chevron Corporation, and Time Warner Inc. Ms. Hills' initial term will expire at
the annual meeting of stockholders of the Company to be held in 199 .
 
     Mr. Lewis will become a director prior to the Closing Date. Mr. Lewis has
been a director of AT&T since 1989, but will resign from the AT&T Board
effective as of the Closing Date. He has been Chairman and Chief Executive
Officer of Union Pacific Corporation since 1987. He is also a director of
American Express Company, FPL Group., Inc., Ford Motor Company, and Gannett Co.,
Inc. Mr. Lewis' initial term will expire at the annual meeting of stockholders
of the Company to be held in 199 .
 
     Mr. Perkins will become a director prior to the Closing Date. Mr. Perkins
has been a director of AT&T since 1979, but will resign from the AT&T Board
effective as of the Closing Date. From 1970 to 1980, Mr. Perkins served as the
Chairman and Chief Executive Officer of Jewel Companies, Inc., a diversified
retailer. From January through June 1995, Mr. Perkins served as Non-Executive
Chairman of Kmart Corp. In addition, Mr. Perkins is a director of Aon Corp.,
Cummins, Current Assets L.L.C., Illinova Corporation and its subsidiary,
Illinois Power Corporation, Inland Steel Industries, LaSalle Street Fund, The
Putnam Funds, Springs Industries, Inc. and Time Warner Inc. Mr. Perkins' initial
term will expire at the annual meeting of stockholders of the Company to be held
in 199 .
 
     Mr. Thomas will become a director prior to the Closing Date. Mr. Thomas has
been a director of AT&T since 1988, but will resign from the AT&T Board
effective as of the Closing Date. He has been President of The Ford Foundation
since 1979. He also is a director of the Aluminum Company of America, CBS Inc.,
Citicorp and its subsidiary, Citibank, N.A., Cummins and Pepsico, Inc. Mr.
Thomas' initial term will expire at the annual meeting of stockholders of the
Company to be held in 199 .
 
     Mr. Artis became Senior Vice President, Human Resources of the Company
effective February 1, 1996. Mr. Artis held the position of Vice President, Human
Resources for the AT&T Network Systems Group since August 1994. From December
1993 to August 1994, Mr. Artis was a Vice President of Corporate Human
Resources, AT&T. Prior to that time, Mr. Artis held various senior management
positions within AT&T.
 
     Mr. Berndt became President, Multimedia Ventures and Technologies of the
Company effective February 1, 1996. Since February of 1995, Mr. Berndt has held
the position of President, Multimedia Ventures and Technologies; AT&T Multimedia
Products Group. Mr. Berndt held the position of President, New Business
Development; AT&T Multimedia Products Group from August 1993 to February 1995.
Prior to that time, Mr. Berndt was President, Business Services; AT&T
Communications Services Group, a position he held from November 1991.
 
     Mr. Butters became President, North American Region, Network Systems, of
the Company effective February 1, 1996. Since January 1994, Mr. Butters has held
various positions within the AT&T Network Systems Group, including President,
North American Region (since January 1996), President, Global Public Networks,
Offer Business Unit (from January 1995 to January 1996), President, North
American Region, Customer Business Unit (from July 1994 to January 1995), and
Vice President, Strategic Business Development (from January 1994 to July 1994).
From January 1993 to January 1994, Mr. Butters held the position of President,
Northern Telecom, Inc. Mr. Butters was Executive Vice President, Sales and
Service, from February 1992 to January 1993 and Executive Vice President, Public
Networks, both of Northern Telecom, Inc., from January 1991 to February 1992.
 
     Mr. Colson became President, AT&T Business, Network Systems of the Company
effective February 1, 1996. Since April 1993, Mr. Colson has held the position
of President, AT&T Affiliates for the AT&T
 
                                       51
55
 
Network Systems Group. From July 1990 to April 1993, Mr. Colson was the
Switching Systems Vice President, United States.
 
     Mr. Crawford became President, Microelectronics of the Company effective
February 1, 1996. Mr. Crawford held the position of President, AT&T
Microelectronics since July 1993. From August 1991 to July 1993, Mr. Crawford
was Vice President, AT&T Microelectronics.
 
     Ms. Fiorina became Executive Vice President, Corporate Operations of the
Company effective February 1, 1996. Previously, Ms. Fiorina held the positions
of President, North America (from January 1995 to January 1996) and President,
Atlantic and Canadian Region (from July 1994 to January 1995) within the AT&T
Network Systems Group. From February 1993 to July 1994, Ms. Fiorina was Vice
President, Strategy and Marketing Development for the AT&T Network Systems
Group. Prior to that time, Ms. Fiorina held various senior positions with AT&T
in business development and marketing.
 
     Mr. Firouztash became Vice President, Consumer Products, of the Company
effective February 1, 1996. From October 1995, Mr. Firouztash was Vice
President, Marketing, Sales and Product Management of the Consumer Products
Group of AT&T. From August 1994 to October 1995, Mr. Firouztash held the
position of Global Marketing and Sales Vice President of AT&T Consumer Products
Group. From September 1993 to August 1994, Mr. Firouztash held the position of
Group Vice President, Global Sales/Customer Service for Consumer Products Group.
Prior to that time, Mr. Firouztash was Chief Executive Officer -- Americas
Region of Control Data Corp., a position he held from January 1991 to January
1992, and Chief Executive Officer -- Western Europe Region of Control Data
Corp., a position he held from January 1990 to January 1992.
 
     Mr. Marx became Senior Executive Vice President of the Company effective
February 1, 1996. Since July 1989, Mr. Marx has held a number of senior
management positions within AT&T, most recently as Executive Vice President and
Chief Executive Officer, AT&T Multimedia Products Group, beginning October 1994
and, previously, as Executive Vice President and Chief Executive Officer, AT&T
Network Systems Group (from August 1993) and Group Executive, AT&T Network
Systems Group (from July 1989 to August 1993).
 
     Mr. O'Shea became President, International, Network Systems of the Company
effective February 1, 1996. Since July 1995 Mr. O'Shea has held the position of
President, International Regions and Professional Services of the AT&T Network
Systems Group. Previously, in 1995, Mr. O'Shea held the position of acting Chief
Executive Officer of AT&T Global Information Solutions Company (renamed NCR)
("AT&T GIS"). Mr. O'Shea was named Senior Vice President, Worldwide Marketing of
AT&T GIS in 1993. Prior to that time, Mr. O'Shea held the position of Senior
Vice President of the AT&T GIS Network Products Group.
 
     Mr. Peterson became Executive Vice President and Chief Financial Officer of
the Company effective February 1, 1996. Mr. Peterson has held the positions of
Vice President and Chief Financial Officer of the AT&T Communications Services
Group since September 1995. Prior to that time, Mr. Peterson held various senior
executive positions at Northern Telecom, Inc. which included President of Nortel
Communications Systems, Inc. (from January 1993 to September 1995), Vice
President of Finance of Northern Telecom, Inc. (from January 1991 to January
1993) and Group Vice President of Northern Telecom, Inc. (from September 1987 to
January 1991).
 
     Mr. Rawson became Senior Vice President, General Counsel and Secretary of
the Company effective February 1, 1996. Previously, Mr. Rawson was Vice
President, Law -- AT&T Network Systems Group, a position to which he was named
in September 1992. From July 1984 to September 1992, Mr. Rawson was legal
counsel for various business units within AT&T.
 
     Ms. Russo became President, Business Communications Systems of the Company
effective February 1, 1996. From May 1993 through January 1996, Ms. Russo held
the position of President, Global Business Communications Systems of AT&T. From
August 1992 to May 1993, Ms. Russo was Vice President, National Sales and
Service of AT&T Global Communications Systems. Prior to that time, Ms. Russo
held the position of Vice President, National Sales and Service for AT&T
Business Communications Systems. From
 
                                       52
56
 
August 1990 to January 1992, Ms. Russo held the position of Vice President,
National Sales of AT&T Business Communications Services.
 
     Mr. Stanzione became President, Network Systems Group and President, Bell
Laboratories effective February 1, 1996. Mr. Stanzione had held the position of
President, AT&T Bell Laboratories since January 1995. Previously, Mr. Stanzione
held the positions of President, Global Public Networks (from July 1994 to
January 1995) and President, Switching Systems (from November 1993 to July 1994)
both units of the AT&T Network Systems Group. From April 1992 to November 1993,
Mr. Stanzione held the position of Group Technical Officer and Corporate
Information Officer, AT&T Network Systems Group and from January 1989 to April
1992 Mr. Stanzione was President, Operations Systems of the AT&T Network Systems
Group.
 
     It is expected that effective as of the Distribution, the seven directors
who are officers but not directors of AT&T will resign from the Company Board.
Prior to the Distribution, the Nominating Committee of the Company Board expects
to identify a number of additional candidates not affiliated with the Company or
AT&T for election by the Company Board.
 
ANNUAL MEETING
 
     The By-Laws provide that annual meetings of stockholders will be held at
the Company's principal office or at such other place and on such date as may be
fixed from time to time by resolution of the Company Board. The first annual
meeting for which proxies will be solicited from stockholders will be held on
April 16, 1997.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Company Board has established three committees: an Audit and Finance
Committee, a Benefits and Compensation Committee and a Nominating Committee.
Each of Ms. Hills, Mr. Lewis, Mr. Perkins and Mr. Thomas will serve on each of
the three Committees.
 
     The Audit and Finance Committee meets with management to consider the
adequacy of the internal controls and the objectivity of financial reporting.
The Audit and Finance Committee also meets with the independent auditors and
with appropriate financial personnel and internal auditors of the Company
regarding these matters. The Audit and Finance Committee recommends to the
Company Board the appointment of the independent auditors, subject to
ratification by the stockholders at the annual meeting. Both the internal
auditors and the independent auditors periodically will meet alone with the
Audit and Finance Committee and will have unrestricted access to the Audit and
Finance Committee. The Audit and Finance Committee also reviews the Company's
long-term plans and financings, and reports its recommendations to the full
Company Board for approval and to authorize action. The Audit and Finance
Committee will consist of directors who are not employees of the Company or
employees or directors of AT&T ("Non-Employee Directors"), together with the
Chief Executive Officer and the Chief Operating Officer, ex officio, neither of
whom will participate in Audit and Finance Committee meetings when audit matters
are discussed.             will serve as chair of the Audit and Finance
Committee.
 
     The Benefits and Compensation Committee administers management incentive
compensation plans, including the 1996 LTIP, and makes recommendations to the
Company Board with respect to the compensation of directors and officers of the
Company. The Benefits and Compensation Committee also supervises the Company's
employee benefit plans. The Benefits and Compensation Committee will consist of
Non-Employee Directors. It is expected that following the Distribution, the
Benefits and Compensation Committee will be reconstituted as the Executive,
Benefits and Compensation Committee, which, between meetings of the Company
Board, will be authorized to exercise all the powers and authority of the
Company Board in the management of the business and affairs of the Company,
except for powers reserved to the full board of directors by the DGCL. At that
time, it is expected that the Chief Executive Officer and the Chief Operating
Officer will become ex officio members of such committee, but will not
participate in Executive, Benefits and Compensation Committee meetings where
compensation or benefit matters are discussed.                   will serve as
chair of the Executive, Benefits and Compensation Committee.
 
                                       53
57
 
     The duties of the Nominating Committee will be to recommend to the full
Company Board nominees for election as directors of the Company. The Nominating
Committee will consist of Non-Employee Directors.                   will serve
as chair of the Nominating Committee.
 
COMPENSATION OF DIRECTORS
 
     As of the Closing Date, all Non-Employee Directors will receive an annual
retainer of $55,000. The chair of each committee will receive an additional
annual retainer of $10,000. Directors will not receive separate meeting fees.
One-half each of the annual retainer, and the additional annual retainer for
committee chairs, will be paid in Common Stock.
 
     Pursuant to the Company's Deferred Compensation Plan for Directors,
Non-Employee Directors may defer all or a portion of the remainder of their
compensation to a deferred compensation account (the "Account"). Directors may
elect to defer all or part of the receipt of such compensation into a portion of
the Account, the value of which is measured from time to time by the value of
the Common Stock (the "Company Shares Portion") or into a cash portion of the
Account (the "Cash Portion"). The Company Shares Portion is credited on each
dividend payment date for Common Stock with a number of deferred shares of
Common Stock equivalent in market value to the amount of the quarterly dividend
on the shares then credited in the Account. The Cash Portion of the Account
earns interest, compounded quarterly, at an annual rate equal to the average
interest rate for ten-year United States Treasury notes for the previous
quarter, plus 5%.
 
     The Company also provides Non-Employee Directors with travel accident
insurance when on Company business. A Non-Employee Director may purchase life
insurance sponsored by the Company. The Company will share the premium expense
with the director; however, all the Company contributions will be returned to
the Company at the earlier of (a) the director's death or (b) the later of age
70 or 10 years from the policy's inception. This benefit will continue after the
Non-Employee Director's retirement from the Company Board.
 
     The current Non-Employee Directors of the Company who formerly were
directors of AT&T are eligible for an annual retirement benefit under the AT&T
Retirement Plan for Outside Directors, equal to their annual retainer at
retirement from the AT&T Board, provided they attain five years of service. Such
Plan will be assumed by the Company with respect to such directors. The
directors' years of service as directors of both AT&T and the Company will be
credited in the determination of years of service. The benefit begins at age 70
and is payable for life. Except as set forth in this paragraph, the Company does
not have a retirement plan for Non-Employee Directors.
 
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
 
     No present or future officer or director currently owns any shares of
Common Stock, all of which are currently owned by AT&T. Such directors and
officers will receive shares of Common Stock in the Distribution in respect of
shares of AT&T Common Stock held by them on the record date for the
Distribution. In addition, AT&T Stock Awards will be converted into comparable
awards based on Common Stock under the 1996 LTIP as described below. See
"-- 1996 Company Long Term Incentive Plan" and "Arrangements Between the Company
and AT&T -- Employee Benefits Agreement." The following table sets forth the
number of shares of AT&T Common Stock beneficially owned on             , 1996
by each of the Company's directors and director nominees, the executive officers
named in the Summary Compensation Table below and all directors and executive
officers of the Company as a group. Except as otherwise noted, the individual
director, director nominee or executive officer or their family members had sole
voting and investment power with respect to such securities.
 
                                       54
58
NUMBER OF
                                                                              SHARES
                                                            BENEFICIALLY     DEFERRAL
                           NAME                               OWNED(1)       PLANS(2)        TOTAL
----------------------------------------------------------  ------------     ---------     ---------
Henry P. Schacht..........................................
Richard A. McGinn.........................................             (3)
Carla A. Hills............................................
Drew Lewis................................................
Donald S. Perkins.........................................             (4)
Franklin A. Thomas........................................
Directors and Executive Officers as a Group (
  persons)................................................             (5)
---------------
(1) No individual director, director nominee or named executive officer
     beneficially owns 1% or more of the AT&T Common Stock, nor do the directors
     and executive officers as a group.
 
(2) Reflects share units representing AT&T Common Stock held in elective
     deferred compensation accounts.
 
(3) Includes beneficial ownership of the following number of shares of AT&T
     Common Stock which may be acquired within 60 days pursuant to stock options
     awarded under employee incentive compensation plans of AT&T: Mr.
     Schacht -         ; Mr. McGinn -         ;              -         ;
                  -         ;              -         ; and all directors and
     executive officers as a group -         .
 
(4) Mr. Perkins as an investment company trustee also has shared voting and
     investment power over         shares of AT&T Common Stock.
 
(5) Includes beneficial ownership of           shares of AT&T Common Stock which
     may be acquired within 60 days pursuant to stock options awarded under
     employee incentive compensation plans as well as           shares over
     which they have sole or shared voting and investment power as trustees.
 
     Options to purchase Common Stock may be granted to directors, officers and
other key employees of the Company in the future under the 1996 LTIP. See
"-- 1996 Company Long Term Incentive Plan."
 
EXECUTIVE COMPENSATION
 
     The following table sets forth certain compensation information for the
chief executive officer and the four other executive officers of the Company as
of January 1, 1996 who, based on employment with AT&T and its subsidiaries, were
the most highly compensated for the year ended December 31, 1995. All of the
information set forth in this table reflects compensation earned by such
individuals for services with AT&T and its subsidiaries.
 
                           SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION(2)
                                            ANNUAL COMPENSATION(2)                AWARDS           PAYOUTS
  ------------------------------------------------------------------------------------------------------------------
                                                                                                                ALL
                                                               OTHER       RESTRICTED                          OTHER
                                                               ANNUAL        STOCK                  LTIP      COMPEN-
           NAME AND                     SALARY     BONUS      COMPEN-       AWARD(S)    OPTIONS/   PAYOUTS   SATION(5)
     PRINCIPAL POSITION(1)      YEAR     ($)        ($)     SATION(3)($)      ($)       SARS(#)    ($)(4)       ($)
------------------------------------------------------------------------------------------------------------------
Henry B. Schacht(6)           1995
  Chairman of the Board and     1994
  Chief Executive Officer       1993

  Richard A. McGinn             1995
  President and Chief           1994
  Operating Officer             1993

                                1995
                                1994
                                1993

                                1995
                                1994
                                1993

                                1995
                                1994
                                1993
------------------------------------------------------------------------------------------------------------------
55
59
 
---------------
(1) Includes Chief Executive Officer and the four other most highly compensated
    executive officers.
 
(2) Compensation deferred at the election of named officers is included in the
    category (e.g., bonus, LTIP payouts) and year it would have otherwise been
    reported had it not been deferred.
 
(3) Includes (a) payments of above-market interest on deferred compensation, (b)
    dividend equivalents paid with respect to long-term performance shares prior
    to end of three-year performance period, or other earnings on long-term
    incentive compensation paid during the year, (c) tax payment reimbursements,
    and (d) the value of personal benefits and perquisites.
 
(4) Includes distribution in 1995 to Mr. McGinn,           ,           and
              of performance shares whose three-year performance period ended
    December 31, 1994.
 
(5) In 1995, includes (a) AT&T contributions to savings plans (Mr. McGinn:
    $       ,        : $       ,        : $       and        : $       ), (b)
    dollar value of the benefit of premiums paid for split-dollar life insurance
    policies (unrelated to term life insurance coverage projected on an
    actuarial basis (Mr. McGinn: $       ,        : $       ,        : $
    and        : $       )), and (c) payments equal to lost AT&T savings match
    caused by IRS limitations (Mr. McGinn: $       ,        : $       ,        :
    $       and        : $       ).
 
(6) Mr. Schacht became Chief Executive Officer of the Company on February 1,
    1996. For a description of Mr. Schacht's 1995 and 1996 compensation
    arrangements, see "-- Other Employment Arrangements."
 
OPTION AND SAR GRANTS OF AT&T COMMON STOCK TO EXECUTIVE OFFICERS
 
     The following tables disclose information regarding stock options and stock
appreciation rights ("SARs") granted to the executive officers named in the
above Summary Compensation Table in respect of shares of AT&T Common Stock under
the AT&T 1987 Long Term Incentive Plan (the "1987 Plan") during 1995.
 
                  AGGREGATED OPTION/STOCK APPRECIATION RIGHTS
                     EXERCISES IN 1995 AND YEAR-END VALUES
VALUE OF
                                                                      UNEXERCISED                IN-THE-MONEY
                                                                     OPTIONS/SARS                OPTIONS/SARS
                                                                      AT YEAR END                 AT YEAR END
                                                                          (#)                         ($)
                            SHARES ACQUIRED   VALUE REALIZED   -------------------------   -------------------------
         NAME(1)            ON EXERCISE(#)         ($)         EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
--------------------------  ---------------   --------------   -------------------------   -------------------------
Henry B. Schacht..........
Richard A. McGinn.........
---------------
(1) Includes Chief Executive Officer and the four other most highly compensated
    executive officers.
 
                  LONG-TERM INCENTIVE PLANS -- AWARDS IN 1995
ESTIMATED FUTURE PAYOUTS
                                                                                 OF PERFORMANCE SHARES
                                                                 PERFORMANCE     UNDER NON-STOCK PRICE
                                                    NUMBER OF    PERIOD UNTIL          BASED PLAN
                                                   PERFORMANCE    MATURATION             TARGET
                     NAME(1)                         SHARES       OR PAYOUT               (#)
-------------------------------------------------  -----------   ------------   ------------------------
Henry B. Schacht.................................
Richard A. McGinn................................
---------------
(1) Includes Chief Executive Officer and the four other most highly compensated
    executive officers.
 
                                       56
60
 
                             OPTION GRANTS IN 1995
INDIVIDUAL GRANTS
                                           --------------------------------------------------------------
                                           NUMBER OF
                                             SHARES                                              GRANT
                                           UNDERLYING    % OF TOTAL                               DATE
                                            OPTIONS       OPTIONS      EXERCISE                 PRESENT
                                            GRANTED      GRANTED TO     PRICE     EXPIRATION    VALUE(2)
                 NAME(1)                       #        EMPLOYEES(2)    ($/SH)       DATE        ($)(3)
-----------------------------------------  ----------   ------------   --------   ----------   ----------
Henry B. Schacht.........................
Richard A. McGinn........................
---------------
(1) Includes Chief Executive Officer and the four other most highly compensated
    executive officers.
 
(2) Percent of total options granted based on total options granted to AT&T
    employees.
 
(3) In accordance with rules of the Securities and Exchange Commission (the
    "Commission"), the Black-Scholes option pricing model was chosen to estimate
    the grant date present value of the options set forth in this table. The use
    of this model should not be construed as an endorsement of its accuracy for
    valuing options. All stock option valuation models, including the
    Black-Scholes model, require a prediction about the future movement of the
    stock price. The real value of the options in this table depends upon the
    actual performance of the stock during the applicable period.
 
PENSION PLANS
 
     Prior to the Distribution, the Company's management employees will be
participants in AT&T's Management Pension Plan (the "AT&T Management Pension
Plan"). Effective at the time of the Distribution, the Company will adopt a
management pension plan (the "Company Management Pension Plan") that will
replicate, in all material respects, the AT&T Management Pension Plan and that
will be a non-contributory pension plan which covers all management employees,
including Mr. Schacht, Mr. McGinn,           ,           and           . The
Company also will adopt non-contributory supplementary pension plans which will
replicate in all material respects AT&T's supplementary pension plans. The
following is a summary description of the expected terms of the Company
Management Pension Plan. Participants will be given full credit under the
Company Management Pension Plan for service and compensation accrued under the
AT&T Management Pension Plan. The normal retirement age under the Company
Management Pension Plan is 65; however, retirement before age 65 can be elected
under certain conditions.
 
     Under the Company Management Pension Plan, annual pensions will be computed
on an adjusted career average pay basis. The adjusted career average pay formula
will be the sum of (a) 1.6% of the average annual pay for the six years ending
December 31, 1992, times the number of years of service prior to January 1,
1993, plus (b) 1.6% of pay subsequent to December 31, 1992. Only the basic
salary will be taken into account in the formula used to compute pension
amounts.
 
     Federal laws place limitations on pensions that may be paid from the
pension trust related to the Company Management Pension Plan. Pension amounts
based on the Company Management Pension Plan formula which exceed the applicable
limitations will be paid as an operating expense.
 
     Prior to the Distribution, the Company's employees will be participants in
AT&T's Non-Qualified Pension Plan (the "AT&T Non-Qualified Plan"). Effective at
the time of the Distribution, the Company will adopt a non-qualified pension
plan (the "Company Non-Qualified Plan") that will replicate, in all material
respects, the AT&T Non-Qualified Plan, and under which annual pensions for Mr.
Schacht, Mr. McGinn,             ,             and             and other senior
managers will be computed based primarily on the Company's short-term incentive
plan. Participants will be given full credit under the Company Non-Qualified
Plan for service and compensation under the AT&T Non-Qualified Plan.
 
     Under the Company Non-Qualified Plan, pension benefits generally will
commence at the same time as benefits under the Company Management Pension Plan.
The annual pension amounts payable under the
 
                                       57
61
 
Company Non-Qualified Plan will be equal to the greater of the amounts computed
under the Basic or Alternate Formula described below.
 
Basic Formula:
 
     The sum of (a) 1.5% of the average of the actual annual bonus awards for
     the three-year period ending December 31, 1989, times the number of years
     of service prior to January 1, 1990, plus (b) 1.6% of the actual annual
     bonus awards subsequent to December 31, 1989.
 
Alternate Formula:
 
     The excess of (a) 1.7% of the adjusted career average pay, over (b) 0.8% of
     the covered compensation base, times years of service to retirement, minus
     the benefit calculated under the Company Management Pension Plan formula
     (without regard to limitations imposed by the IRS). For purposes of this
     formula, adjusted career average pay will be determined by dividing the sum
     of the employee's total adjusted career income by the employee's actual
     term of employment at retirement. Total adjusted career income is the sum
     of (A) and (B), where (A) is the sum of (i) employee's years of service
     prior to January 1, 1993, multiplied by the employee's average annual
     compensation (within the meaning of the Company Management Pension Plan)
     for the three-year period ending December 31, 1992, without regard to the
     limitations imposed by the Code, plus (ii) the employee's years of service
     prior to January 1, 1990, multiplied by the average of the employee's
     actual annual bonus awards for the three-year period ending December 31,
     1989, and (B) is the sum of the employee's actual compensation (within the
     meaning of the Company Management Pension Plan) after December 31, 1992,
     without regard to the limitations imposed by the Code, and actual annual
     bonus awards subsequent to December 31, 1989. The covered compensation base
     used in this formula is the average of the maximum wage amount on which an
     employee was liable for social security tax for each year beginning with
     1961 and ending with 1995. In 1995, the covered compensation base was
     $25,800.
 
     An Alternative Minimum Formula ("AMF") will apply to active senior managers
with five years of service who were participants in the predecessor to the AT&T
Non-Qualified Plan as of December 31, 1993. The annual pension amount payable
under the AMF will be equal to the greater of the amounts computed under
Formulas A and B plus an additional percent increase factor as described below:
 
Formula A:
 
     The sum of (a) 1.5% of the average of the total compensation for the
     three-year period ending December 31, 1992, times the number of years of
     service prior to January 1, 1993, plus (b) 1.6% of the total compensation
     from January 1, 1993, to December 31, 1993. For purposes of this Formula A,
     total compensation will be basic salary plus actual annual bonus awards.
     The pension amounts resulting from this Formula A will be reduced to
     reflect retirements prior to age 55.
 
Formula B:
 
     The excess of (a) 1.7% of the adjusted career average pay, over (b) 0.8% of
     the covered compensation base, times years of service to December 31, 1993.
     For purposes of this Formula B, adjusted career average pay is determined
     by dividing the sum of the employee's total adjusted career income used for
     purposes of Formula A, by the employee's actual term of employment to
     December 31, 1993. The covered compensation base used in this Formula B is
     the average of the maximum wage amounts on which an employee was liable for
     social security tax for each year beginning with 1959 and ending with 1993.
     In 1993, the covered compensation base was $22,800. The pension amounts
     resulting from this Formula B will be reduced to reflect retirements prior
     to age 60.
 
     An additional percent increase factor based on age and service is applied
to the pension amount resulting from the higher of Formula A or B. The total AMF
pension results in a fixed benefit and such amount will be reduced by the amount
payable under the Company Management Pension Plan. It is anticipated that after
1997, a senior manager's normal pension increases resulting from additional age
and service as well as possible
 
                                       58
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future pension plan amendments could cause the regular accrued pension benefit
to exceed the fixed AMF benefit. Pensions resulting from the AMF will be payable
under the Company Non-Qualified Plan.
 
     Prior to the Distribution, certain of the Company's employees also will be
participants in AT&T's Mid-Career Pension Pension (the "AT&T Mid-Career Pension
Plan"). Effective at the time of the Distribution, the Company will adopt a
mid-career pension pension (the "Company Mid-Career Pension Plan") that will
replicate, in all material respects, the AT&T Mid-Career Pension Plan.
Participants will be given full credit under the Company Mid-Career Pension Plan
for service and compensation under the AT&T Mid-Career Pension Plan. The Company
Mid-Career Pension Plan, will cover senior managers (including Mr. Schacht) and
certain other management employees who are hired at age 35 or over. For
specified managers retiring with at least five years in level, the Company
Mid-Career Pension Plan will provide additional pension credits equal to the
difference between age 35 and their maximum possible years of service attainable
at age 65, but not to exceed actual net credited service, at approximately
one-half the rate in the Company Management Pension Plan.
 
     Senior managers (including Mr. Schacht) are also covered by a supplemental
pension plan (the "Company Long Term Disability and Survivor Protection Plan")
which provides for a minimum pension of 15% of the sum of final base salary rate
plus the final actual annual bonus. All other Company pension plans are offsets
to this minimum pension.
 
     Pension amounts under any of the Company Management Pension Plan formula,
the Company Non-Qualified Plan, the Company Mid-Career Pension Plan or the
Company Long Term Disability and Survivor Protection Plan are not subject to
reductions for social security benefits or other offset amounts. If Mr. Schacht
continues in the position given above and retires at the normal retirement age
of 65, he would receive a pension payable under the Company Management Pension
Plan formula, the Company Non-Qualified Plan, the Company Mid-Career Pension
Plan and the Company Long Term Disability and Survivor Protection Plan (as
successors to the corresponding AT&T plans). For Mr. McGinn,             ,
            and             , the estimated annual pension amounts payable under
the Company Management Pension Plan formula and the Company Non-Qualified Plan
would be $          , $          , $          and $          , respectively.
Amounts shown are straight-life annuity amounts not reduced by a joint and
survivorship provision which is available to the officers named.
 
     The Company has reserved the right to purchase annuity contracts to satisfy
its unfunded obligations to any of these officers under the Company
Non-Qualified Plan. In the event the Company purchases an annuity contract for
any officer, the pension payments for such officer will vary from those set
forth above. In such event, there would be a tax gross-up payment to the officer
and annuity benefits paid by the annuity provider will be reduced to offset the
tax gross-up payment. The after-tax pension benefit will be the same as the
after-tax benefit the participant would otherwise have received under the
Company Non-Qualified Plan.
 
     Certain of the Company's non-qualified executive benefit plans will be
supported by a benefits protection trust, the assets of which are subject to the
claims of the Company's creditors. In the event of a "Change in Control" or
"Potential Change in Control" of the Company (as such terms are defined
therein), certain additional funds might be required to be contributed to such
trust to support benefits under such plans.
 
OTHER EMPLOYMENT ARRANGEMENTS
 
     Mr. Schacht became Chief Executive Officer of the Company on February 1,
1996. The following summarizes Mr. Schacht's compensation arrangement with the
Company for 1995 and 1996:                         .
 
1996 COMPANY LONG TERM INCENTIVE PLAN
 
     The Company intends to adopt, with the approval of AT&T in its capacity as
the sole stockholder of the Company, the 1996 LTIP. After the Distribution, the
1996 LTIP will be administered by the Executive, Benefits and Compensation
Committee of the Company Board. In order to ensure that compensation paid
pursuant to the 1996 LTIP can qualify as "performance-based compensation" not
subject to the limitation on
 
                                       59
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deductibility of certain executive compensation in excess of $1 million, the
Company intends to seek stockholder approval of the 1996 LTIP at either its 1997
or 1998 annual meeting of stockholders. Such stockholder approval is not
required for any other purpose. The following description of the 1996 LTIP is
qualified by reference to the full text thereof, a copy of which will be filed
as an exhibit to the Registration Statement. See "Available Information."
 
  Awards
 
     The 1996 LTIP provides for the grant of incentive stock options that
qualify under Section 422 of the Code ("ISOs") and non-statutory stock Options,
SARs, Restricted Stock Awards, Performance Awards, Other Stock Unit Awards (as
such terms are defined herein), and any other right, interest, or option
relating to shares of Common Stock or other securities of the Company
(collectively, "Awards"). No determination has yet been made as to the number of
employees of the Company who will be eligible to participate in the 1996 LTIP.
However, as described under "Arrangements Between the Company and
AT&T -- Employee Benefits Agreement," employees of the Company who hold AT&T
Stock Awards (approximately     persons as of           , 1996) are expected to 
receive in substitution therefor, following consummation of the Distribution, 
Awards under the 1996 LTIP (the "Substitute Awards").
 
  Shares Available
 
     The 1996 LTIP contains a formula for establishing an annual limit on the
number of shares of Common Stock which may be awarded (or with respect to which
non-stock Awards may be made) in any given calendar year, except that Substitute
Awards will not be counted against such limit. Subject to customary
anti-dilution adjustments, the total number of shares of Common Stock available
for grant under the 1996 LTIP in each calendar year is 1% of the total
outstanding shares of Common Stock as of the first day of such year for which
the 1996 LTIP is in effect (except that for 1996, the number of shares of Common
Stock outstanding immediately after the Offerings will be used); provided that
such number will be increased in any year by the number of shares of Common
Stock available for grant under the 1996 LTIP in previous years but not covered
by Awards granted thereunder in such years; and provided, further; that no more
than           shares of Common Stock will be cumulatively available for the
grant of ISOs. Any shares of Common Stock issued by the Company through the
assumption or substitution of outstanding grants from an acquired company will
not reduce the number of shares of Common Stock available for grants thereunder.
In addition, no one individual may be granted Awards with respect to more than
          shares in any one year (not including Substitute Awards). Any shares
of Common Stock issued under the 1996 LTIP (including in connection with
Substitute Awards) may consist, in whole or in part, of authorized and unissued
shares or treasury shares or shares purchased in the open market. If any shares
of Common Stock subject to any Award are forfeited or such Award otherwise
terminates without the issuance of such shares of Common Stock or of other
consideration in lieu of such shares, the shares subject to such Award, to the
extent of any such forfeiture or termination, will again be available for grant
under the 1996 LTIP. In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the shares of Common Stock, such adjustment will be made in the
aggregate number and class of shares which may be delivered under the 1996 LTIP,
in the individual limit described above, in the number, class and option price
of shares of Common Stock subject to outstanding Options thereunder, and in the
value of, or number or class of shares of Common Stock subject to, Awards as may
be determined to be appropriate by the Executive, Benefits and Compensation
Committee, in its sole discretion, provided that the number of shares of Common
Stock subject to any Award will always be a whole number.
 
  Executive, Benefits and Compensation Committee
 
     The Executive, Benefits and Compensation Committee, which is comprised of
Non-Employee Directors, none of whom may receive any Awards under the 1996 LTIP,
will administer the 1996 LTIP after the Distribution. See "-- Committees of the
Board of Directors." The Executive, Benefits and Compensation Committee will
have full power and authority, subject to such orders or resolutions not
inconsistent with the provisions of the 1996 LTIP as may from time to time be
adopted by the Company Board, (i) to select the
 
                                       60
64
 
employees of the Company and its affiliates to whom Awards may from time to time
be granted (the "Participants"); (ii) to determine the type or types of Award to
be granted to each Participant; (iii) to determine the number of shares of
Common Stock to be covered by each Award; (iv) to determine the terms and
conditions, not inconsistent with the provisions of the 1996 LTIP of any Award;
(v) to determine whether, to what extent and under what circumstances Awards may
be settled in cash, shares of Common Stock or other property or canceled or
suspended; (vi) to determine whether, to what extent and under what
circumstances cash, shares of Common Stock and other property and other amounts
payable with respect to an Award will be deferred either automatically or at the
election of the Participant; (vii) to interpret and administer the 1996 LTIP and
any instrument or agreement entered into thereunder; (viii) to establish such
rules and regulations and appoint such agents as it may deem appropriate for the
proper administration thereof; and (ix) to make any other determination and take
any other action that the Executive, Benefits and Compensation Committee deems
necessary or desirable for administration of the 1996 LTIP.
 
  Substitute Awards
 
     Pursuant to the Employee Benefits Agreement, Substitute Awards will be
issued to employees of the Company following the Distribution in exchange for
AT&T Stock Awards. The terms and conditions of each Substitute Award, including,
without limitation, the time or times when, and the manner in which, each stock
Option or SAR constituting a Substitute Award will be exercisable, the duration
of the exercise period, the permitted method of exercise, settlement and
payment, the rules that will apply in the event of the termination of employment
of the employee, the events, if any, that may give rise to an employee's right
to accelerate the vesting or the time of exercise thereof and the vesting
provisions of any Restricted Stock Award or Performance Award constituting
Substitute Awards, will be the same as those of the surrendered or forfeited
AT&T Stock Award. See "Arrangements Between the Company and AT&T -- Employee
Benefits Agreement."
 
  Options; Stock Appreciation Rights
 
     Options to purchase Common Stock ("Options") may be granted under the 1996
LTIP, either alone or in addition to other Awards. Except in the case of
Substitute Awards, the purchase price per share of Common Stock purchasable
under an Option will be determined by the Executive, Benefits and Compensation
Committee, in its sole discretion; provided that such purchase price will not be
less than the Fair Market Value (as defined in the 1996 LTIP) of a share of
Common Stock on the date of the grant of the Option. The term of each Option
will be fixed by the Executive, Benefits and Compensation Committee in its sole
discretion; provided that no ISO will be exercisable after the expiration of 10
years from the date the Option is granted. Options will be exercisable at such
time or times as determined by the Executive, Benefits and Compensation
Committee at or subsequent to grant. Unless otherwise determined by the
Executive, Benefits and Compensation Committee at or subsequent to grant, no ISO
will be exercisable during the year ending on the day before the first
anniversary date of the granting of the ISO. Subject to the other provisions of
the 1996 LTIP and any applicable Award agreement, any Option may be exercised by
the Participant, in whole or in part, at such time or times, and the Participant
may make payment of the option price in such form or forms, including, without
limitation, payment by delivery of cash, shares of Common Stock or other
consideration (including, where permitted by law and the Executive, Benefits and
Compensation Committee, Awards) having a Fair Market Value on the exercise date
equal to the total option price, or by any combination of cash, shares of Common
Stock and other consideration as the Executive, Benefits and Compensation
Committee may specify in the applicable Award agreement.
 
     In accordance with rules and procedures established by the Executive,
Benefits and Compensation Committee, the aggregate Fair Market Value (determined
as of the time of grant) of the shares of Common Stock with respect to which
ISOs held by any Participant and exercisable for the first time by such
Participant during any calendar year under the 1996 LTIP (and under any other
benefit plans of the Company or of any parent or subsidiary corporation of the
Company) will not exceed $100,000 or, if different, the maximum limitation in
effect at the time of grant under Section 422 of the Code, or any successor
provision, and any regulations promulgated thereunder. In its sole discretion,
the Executive, Benefits and Compensation
 
                                       61
65
 
Committee may provide, at the time of grant, that the shares to be issued upon
an Option's exercise will be in the form of restricted stock or other similar
securities, or may reserve the right so to provide after the time of grant. SARs
may be granted to Participants either alone or in addition to other Awards and
may, but need not, relate to a specific Option. The provisions of SARs need not
be the same with respect to each recipient. Any SAR related to an Option other
than an ISO may be granted at the same time such Option is granted or at any
time thereafter before exercise or expiration of such Option. Any SAR related to
an ISO must be granted at the same time such Option is granted. In the case of
any SAR related to any Option, the SAR or applicable portion thereof will
terminate and no longer be exercisable upon the termination or exercise of the
related Option, except that any SAR granted with respect to less than the full
number of shares of Common Stock covered by a related Option will not be reduced
except to the extent that the number of shares affected by the exercise or
termination of the related Option exceeds the number of shares not covered by
the SAR. Any Option related to any SAR will no longer be exercisable to the
extent the related SAR has been exercised. The Executive, Benefits and
Compensation Committee may impose such conditions or restrictions on the
exercise of any SAR as it may deem appropriate.
 
  Performance Shares
 
     Performance-based equity awards ("Performance Awards") may be issued to
Participants, for no cash consideration or for such minimum consideration as may
be required by applicable law, either alone or in addition to other Awards
granted under the 1996 LTIP. The performance criteria to be achieved during any
Performance Period (as defined in the 1996 LTIP) and the length of the
Performance Period will be determined by the Executive, Benefits and
Compensation Committee upon the grant of each Performance Award. With certain
exceptions, Performance Awards will be distributed only after the end of the
relevant Performance Period. Performance Awards may be paid in cash, shares of
Common Stock, other property or any combination thereof, in the sole discretion
of the Executive, Benefits and Compensation Committee at the time of payment.
The performance levels to be achieved for each Performance Period and the amount
of the Performance Award to be distributed will be conclusively determined by
the Executive, Benefits and Compensation Committee. Performance Awards may be
paid in a lump sum or in installments following the close of the Performance
Period or, in accordance with procedures established by the Executive, Benefits
and Compensation Committee, on a deferred basis.
 
  Other Stock Unit Awards
 
     Other Awards of shares of Common Stock and other Awards that are valued in
whole or in part by reference to, or are otherwise based on, shares of Common
Stock or other property ("Other Stock Unit Awards") may be granted to
Participants, either alone or in addition to other Awards. Other Stock Unit
Awards may be paid in shares of Common Stock, other securities of the Company,
cash or any other form of property as the Executive, Benefits and Compensation
Committee may determine. Subject to the provisions of the 1996 LTIP, the
Executive, Benefits and Compensation Committee will have sole and complete
authority to determine the employees of the Company and its affiliates to whom,
and the time or times at which, such Awards will be made, the number of shares
of Common Stock to be granted pursuant to such Awards, and all other conditions
of the Awards. The provisions of Other Stock Unit Awards need not be the same
with respect to each recipient.
 
     Shares of Common Stock (including securities convertible into shares of
Common Stock) subject to Other Stock Unit Awards may be issued for no cash
consideration or for such minimum consideration as may be required by applicable
law; shares of Common Stock (including securities convertible into such shares)
purchased pursuant to such a purchase right will be purchased for such
consideration as the Executive, Benefits and Compensation Committee may, in its
sole discretion, determine, which (other than in the case of Substitute Awards)
will not be less than the Fair Market Value of such shares of Common Stock or
other securities as of the date such purchase right is awarded.
 
                                       62
66
 
  Restricted Shares
 
     Restricted stock awards ("Restricted Stock Awards") may be issued to
Participants, for no cash consideration or for such minimum consideration as may
be required by applicable law, either alone or in addition to other Awards
granted under the 1996 LTIP. The provisions of Restricted Stock Awards need not
be the same with respect to each recipient. Except as otherwise determined by
the Executive, Benefits and Compensation Committee at the time of grant, upon
termination of employment for any reason during the restriction period, all
Restricted Stock Awards still subject to restriction will be forfeited by the
Participant and reacquired by the Company; provided that, in the event of a
Participant's retirement, permanent disability, other termination of employment
or death, or in cases of special circumstances, the Executive, Benefits and
Compensation Committee may, in its sole discretion, when it finds that a waiver
would be in the best interests of the Company, waive, in whole or in part, any
or all remaining restrictions with respect to such Participant's Restricted
Stock Awards.
 
  Change in Control
 
     The 1996 LTIP provides that upon any Change in Control (as defined in the
1996 LTIP), unless the Executive, Benefits and Compensation Committee provides
otherwise at the time of grant: (i) each Option will become fully vested and
exercisable; (ii) each Restricted Stock Award will become fully vested and
transferrable; (iii) each Performance Award will be considered earned and
payable in full; (iv) all deferral limitations will lapse; and (v) each Option
holder generally will have the right to surrender his or her Option, within 60
days after the Change in Control, for a cash payment equal to the difference
between the Change in Control Price (as defined in the 1996 LTIP) and the
exercise price of such Option, multiplied by the number of shares subject to
such Option.
 
  Other Provisions
 
     The Company Board may amend, alter or discontinue the 1996 LTIP, but no
amendment, alteration, or discontinuation may be made that would impair rights
under an Award theretofore granted without the Participant's consent, or that,
without the approval of the stockholders, would (a) except pursuant to the
provisions providing for anti-dilution adjustments, increase the total number of
shares of Common Stock reserved thereunder; (b) change the employees or class of
employees eligible to participate therein; or (c) prevent the Company from
fulfilling its obligations with respect to Substitute Awards pursuant to the
Employee Benefits Agreement. The Executive, Benefits and Compensation Committee
may amend the terms of any Award theretofore granted, prospectively or
retroactively, but no such amendment may impair the rights of any Participant
without his or her consent. The Executive, Benefits and Compensation Committee
may also substitute new Awards for previously granted Awards, including, without
limitation, previously granted Options having higher Option prices.
 
     The Executive, Benefits and Compensation Committee will be authorized to
make adjustments in Performance Award criteria or in the terms and conditions of
other Awards in recognition of unusual or nonrecurring events affecting the
Company or its financial statements or changes in applicable laws, regulations
or accounting principles.
 
     Subject to the provisions of the 1996 LTIP and any Award agreement, the
recipient of an Award (including, without limitation, any deferred Award) may,
if so determined by the Executive, Benefits and Compensation Committee, be
entitled to receive, currently or on a deferred basis, interest or dividends, or
interest or dividend equivalents, with respect to the number of shares of Common
Stock covered by the Award, as determined by the Executive, Benefits and
Compensation Committee, in its sole discretion, and the Benefits and
Compensation Committee may provide that such amounts (if any) will be deemed to
have been reinvested in additional shares of Common Stock or otherwise
reinvested.
 
  The Company's Other Benefit Plans
 
     Pursuant to the Employee Benefits Agreement, the Company will create plans
for management and occupational employees of the Company that replicate in all
material respects AT&T's benefit plans. Except
 
                                       63
67
 
as provided therein, the Employee Benefits Agreement does not preclude the
Company from discontinuing any plan, changing any plan or benefit or adopting
any new plan. See "Arrangements Between the Company and AT&T -- Employee
Benefits Agreement."
 
     In addition, the Company plans to investigate other programs for more
broad-based ownership of Common Stock by the Company's employees following the
Distribution.
 
RELATED TRANSACTIONS
 
     In addition to the transactions and other matters referred to in the
"Arrangements Between the Company and AT&T," the Company has engaged, and
expects to continue to engage, with AT&T and with affiliates of AT&T, in certain
ordinary course business transactions. Such transactions include certain
financing activities, including sales of lease receivables, with AT&T Capital
Corporation, a majority-owned subsidiary of AT&T. For a summary of such
transactions, see Note 12 of Notes to Consolidated Financial Statements included
elsewhere in this Prospectus.
 
                                       64
68
 
                   ARRANGEMENTS BETWEEN THE COMPANY AND AT&T
 
     For the purposes of governing certain of the relationships between the
Company and AT&T (including NCR) following the Separation, the Offerings and the
Distribution, the Company, AT&T and NCR have entered into the Separation and
Distribution Agreement, and have entered into or, on or prior to the Closing
Date, will enter into the Ancillary Agreements to which they are parties
(collectively, the "Transaction Agreements"). The Ancillary Agreements include
the Interim Services and Systems Replication Agreement; the General Purchase
Agreement and the supplemental agreements related thereto; the Employee Benefits
Agreement; the Brand License Agreement; the Patent License Agreement and other
patent-related agreements; the Technology License Agreement and other
technology-related agreements; the Tax Sharing Agreement and other tax-related
agreements; certain agreements providing for the assignment of, and the
establishment of transitional arrangements with respect to, real property; and
agreements pursuant to which AT&T will provide communications services to the
Company and NCR will sell certain products to the Company. Certain of the
Transaction Agreements summarized below have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part and the summaries
of such agreements are qualified in their entirety by reference to the full text
of such agreements. See "Available Information." Capitalized terms used in this
section and not otherwise defined herein shall have their respective meanings
set forth in the Separation and Distribution Agreement (except that the term
"Company" is used in lieu of the term "Lucent").
 
SEPARATION AND DISTRIBUTION AGREEMENT
 
     The Separation and Distribution Agreement sets forth the agreements among
the Company, AT&T and NCR with respect to the principal corporate transactions
required to effect the Separation, the Offerings and the Distribution, and
certain other agreements governing the relationship among the parties
thereafter. Certain agreements specifying the series of transactions necessary
to effect the separation of Assets and Liabilities of the Company, AT&T and NCR
located outside the United States are contained in the Non-U.S. Plan.
 
  The Separation
 
     To effect the Separation, AT&T and NCR have transferred or agreed to
transfer, or to cause their respective subsidiaries to transfer, the Company
Assets to the Company. The Company has assumed or agreed to assume and has
agreed faithfully to perform and fulfill all the Company Liabilities in
accordance with their respective terms. Except as expressly set forth in the
Separation and Distribution Agreement or in any Ancillary Agreement, no party is
making any representation or warranty as to the assets, businesses or
liabilities transferred or assumed as part of the Separation, as to any consents
or approvals required in connection therewith, as to the value or freedom from
any Security Interests of any of the Assets transferred or as to the absence of
any defenses or freedom from counterclaim with respect to any claim of any
party, or as to the legal sufficiency of any assignment, document or instrument
delivered to convey title to any Asset transferred. Except as expressly set
forth in any Transaction Agreement, all Assets are being transferred on an "as
is," "where is" basis, and the respective transferees have agreed to bear the
economic and legal risks that the conveyance is insufficient to vest in the
transferee good and marketable title, free and clear of any Security Interest.
 
  The Distribution
 
     The Separation and Distribution Agreement provides that, subject to the
terms and conditions thereof, AT&T and the Company will take all reasonable
steps necessary and appropriate to cause all conditions to the Distribution to
be satisfied, and to effect the Distribution on the Distribution Date. The AT&T
Board will have the sole discretion to determine the date of consummation of the
Distribution at any time after the Closing Date and on or prior to December 31,
1996. AT&T has agreed to consummate the Distribution no later than December 31,
1996, subject to the satisfaction or waiver by the AT&T Board, in its sole
discretion, of the following conditions:
 
                                       65
69
 
          (i) a private letter ruling from the IRS shall have been obtained, and
     shall continue in effect, to the effect that, among other things, the
     Distribution will qualify as a tax-free distribution for federal income tax
     purposes under Section 355 of the Code and the transfer to the Company of
     the Company Assets and the assumption by the Company of the Company
     Liabilities in connection with the Separation will not result in
     recognition of any gain or loss for federal income tax purposes to AT&T,
     the Company or AT&T's or the Company's shareholders, and such ruling shall
     be in form and substance satisfactory to AT&T, in its sole discretion;
 
          (ii) any material Governmental Approvals and Consents necessary to
     consummate the Distribution shall have been obtained and be in full force
     and effect;
 
          (iii) no order, injunction or decree issued by any court or agency of
     competent jurisdiction or other legal restraint or prohibition preventing
     the consummation of the Distribution shall be in effect, and no other event
     outside the control of AT&T shall have occurred or failed to occur that
     prevents the consummation of the Distribution; and
 
          (iv) no other events or developments shall have occurred subsequent to
     the Closing Date that, in the judgment of the AT&T Board, would result in
     the Distribution having a material adverse effect on AT&T or on the
     shareholders of AT&T.
 
In the event that any such condition is not satisfied or waived on or before
December 31, 1996, AT&T has agreed to consummate the Distribution as promptly as
practicable following the satisfaction or waiver of all such conditions. AT&T
may terminate the obligation to consummate the Distribution if the Distribution
has not occurred by December 31, 1997. See "-- Termination."
 
     The Company, AT&T and NCR have agreed that, after the Closing Date, none of
the parties will take, or permit any of its affiliates to take, any action which
reasonably could be expected to prevent the Distribution from qualifying as a
tax-free distribution within the meaning of Section 355 of the Code. The parties
have also agreed to take any reasonable actions necessary in order for the
Distribution to qualify as a tax-free distribution pursuant to Section 355 of
the Code. Without limiting the foregoing, after the Closing Date and on or prior
to the Distribution Date, the Company will not issue or grant, and will not
permit any member of the Company Group to issue or grant, directly or
indirectly, any shares of Common Stock or any rights, warrants, options or other
securities to purchase or acquire (whether upon conversion, exchange or
otherwise) any shares of Common Stock (whether or not then exercisable,
convertible or exchangeable).
 
  Retained Receivables
 
     Under the Separation and Distribution Agreement, AT&T has retained all the
Retained Receivables, consisting of certain receivables that arose in the
Company Business. The Retained Receivables have a face amount estimated for pro
forma purposes at approximately $2,000 million. The Separation and Distribution
Agreement provides that the Company will use its reasonable best efforts to
satisfy any conditions to the payment of any Retained Receivables and to fulfill
all obligations to the applicable account debtors related to such Retained
Receivables. Any payment made by an account debtor to the Company or any member
of the Company Group with respect to an account receivable will be applied to
any Retained Receivables attributable to that account debtor (and paid over to
AT&T) before they are applied to any other account receivable whenever arising
for such account debtor, subject to certain limited exceptions. In the
Separation and Distribution Agreement, the Company represents and warrants to
AT&T that each Retained Receivable constitutes a legal, valid and binding
obligation of the applicable account debtor enforceable against such account
debtor in accordance with its respective terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium and other similar
laws affecting the enforcement of creditors' rights generally, and is not
subject to any Security Interest or any other lien, claim, defense or right of
set-off.
 
  Releases and Indemnification
 
     The Separation and Distribution Agreement provides for a full and complete
release and discharge as of the Closing Date of all Liabilities existing or
arising from all acts and events occurring or failing to occur or
 
                                       66
70
 
alleged to have occurred or to have failed to occur and all conditions existing
or alleged to have existed on or before the Closing Date, between or among the
Company or any member of the Company Group, on the one hand, and AT&T, NCR or
any member of the AT&T Services Group or the NCR Group, on the other hand
(including any contractual agreements or arrangements existing or alleged to
exist between or among any such members on or before the Closing Date), except
as expressly set forth in the Separation and Distribution Agreement.
 
     Except as provided in the Separation and Distribution Agreement, the
Company has agreed to indemnify, defend and hold harmless each of AT&T and NCR,
each member of the AT&T Group and the NCR Group, and each of their respective
directors, officers and employees, from and against all Liabilities relating to,
arising out of or resulting from (i) the failure of the Company or any member of
the Company Group or any other Person to pay, perform or otherwise promptly
discharge any Company Liabilities, any Environmental Liabilities of a Subsidiary
of the Company not directly assumed by the Company, or any Company Contract, in
accordance with their respective terms, (ii) the Company Business, any Company
Liability, the Environmental Liabilities referred to above or any Company
Contract, (iii) any breach by the Company or any member of the Company Group of
the Separation and Distribution Agreement or any of the Ancillary Agreements,
and (iv) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, with respect
to all information contained in this Prospectus or the Registration Statement of
which it forms a part. Also, in the Separation and Distribution Agreement, the
Company has indemnified the members of the AT&T Group, subject to limited
exceptions, against any claims of patent, copyright or trademark infringement or
trade secret misappropriation with respect to any product, software or other
material provided by or ordered from the Company Business (whether alone or in
combination with other items provided by the Company Business or third parties)
prior to the Offerings.
 
     AT&T has agreed to indemnify, defend and hold harmless the Company, each
member of the Company Group and each of their respective directors, officers and
employees from and against all Liabilities relating to, arising out of or
resulting from (i) the failure of AT&T or any member of the AT&T Group or any
other Person to pay, perform or otherwise promptly discharge any liabilities of
the AT&T Group other than the Company Liabilities or the NCR Covered
Liabilities, (ii) the AT&T Services Business or any Liability of the AT&T Group
other than the Company Liabilities and the NCR Covered Liabilities, and (iii)
any breach by AT&T or any member of the AT&T Services Group of the Separation
and Distribution Agreement or any of the Ancillary Agreements.
 
     NCR has agreed to indemnify, defend and hold harmless the Company, each
member of the Company Group and each of their respective directors, officers and
employees from and against all liabilities relating to, arising out of or
resulting from (i) the failure of NCR or any member of the NCR Group or any
other Person to pay, perform or otherwise promptly discharge any Exclusive NCR
Contingent Liability or any Shared NCR Percentage of any Shared Contingent
Liability, and (ii) any breach by NCR or any member of the NCR Group of the
Separation and Distribution Agreement or any of the Ancillary Agreements, or any
other agreement that is not contemplated to be terminated as of the Closing Date
pursuant to the Separation and Distribution Agreement.
 
     The Separation and Distribution Agreement also specifies certain procedures
with respect to claims subject to indemnification and related matters.
 
  Contingent Liabilities and Contingent Gains
 
     The Separation and Distribution Agreement provides for indemnification by
the Company, AT&T and NCR with respect to Contingent Liabilities primarily
relating to their respective businesses or otherwise assigned to them
("Exclusive Contingent Liabilities"), subject to the sharing provisions
described below. In the event the aggregate Value (as defined herein) of all
amounts paid by the Company, AT&T or NCR (in each case, together with any
members of its respective Group) in respect of any single Exclusive Contingent
Liability of such Group or any set or group of Related Exclusive Contingent
Liabilities of such Group is in
 
                                       67
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excess of $100 million, the Company, AT&T and NCR will share such portion in
excess of $100 million (the "Excess Portion") in accordance with the following
percentages:
 
          (i) if the Exclusive Contingent Liability primarily relates to the
     business of AT&T, AT&T will bear 75% of such Excess Portion, the Company
     will bear 22% of such Excess Portion, and NCR will bear 3% of such Excess
     Portion;
 
          (ii) if the Exclusive Contingent Liability primarily relates to the
     business of the Company, the Company will bear 50% of such Excess Portion,
     AT&T will bear 47% of such Excess Portion, and NCR will bear 3% of such
     Excess Portion;
 
          (iii) if the Exclusive Contingent Liability primarily relates to the
     business of NCR, NCR will bear 50% of such Excess Portion, AT&T will bear
     37% of such Excess Portion, and the Company will bear 13% of such Excess
     Portion.
 
     For purposes of the foregoing, the term "Value" is defined as the aggregate
amount of all cash payments, the fair market value of all non-cash payments and
the incremental cost of providing any goods or services made or provided in
respect of any Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, net of: (a) any Insurance Proceeds received or realized in respect
of the applicable Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities, (b) any Tax benefits associated with such payments or the provision
of such goods or services (calculated in the manner specified in the Separation
and Distribution Agreement), (c) any amounts received pursuant to certain
specified third party agreements in respect of the Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities, (d) any other amounts
recovered (including by way of set off) from a third party in connection with
the applicable Action or threatened Action and (e) the amount of any reserve,
account payable or similar accrual in respect of the Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities, net of any offsetting
receivables in respect of such Exclusive Contingent Liability or Related
Exclusive Contingent Liabilities, in each case as reflected on the Company's
Balance Sheet or the audited consolidated balance sheet of AT&T, including the
notes thereto, as of December 31, 1995.
 
     As a result of the foregoing provisions, if the Value of amounts paid in
respect of any Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities of AT&T or NCR exceeds $100 million, the Company will be required to
pay 22% of the Excess Portion (in the case of any AT&T Exclusive Contingent
Liability or Related Exclusive Contingent Liabilities) or 13% of the Excess
Portion (in the case of any NCR Exclusive Contingent Liability or Related
Exclusive Contingent Liabilities), notwithstanding the fact that the Exclusive
Contingent Liability or Related Exclusive Contingent Liabilities do not relate
to the business and operations of the Company or any other member of the Company
Group. Conversely, if the Value of amounts paid in respect of any Company
Exclusive Contingent Liability or Related Exclusive Contingent Liabilities
exceeds $100 million, the Company will be entitled to reimbursement from AT&T
and NCR of 50%, in the aggregate, of the Excess Portion, notwithstanding the
fact that the Exclusive Contingent Liability or Related Exclusive Contingent
Liabilities do not relate to the business and operations of AT&T or NCR or the
members of their Groups.
 
     The Separation and Distribution Agreement also provides for the sharing of
Shared Contingent Liabilities, which are defined as (a) any Contingent
Liabilities that are not Exclusive AT&T Contingent Liabilities, Exclusive
Company Contingent Liabilities or Exclusive NCR Contingent Liabilities, (b) any
RBOC Liability, and (c) certain specifically identified Liabilities, including
certain Liabilities relating to terminated, divested or discontinued businesses
or operations of AT&T or its current or former Affiliates. With respect to any
Shared Contingent Liability, the parties have agreed that AT&T will be
responsible for 75%, the Company for 22% and NCR for 3% of such Shared
Contingent Liability. AT&T will assume the defense of, and may seek to settle or
compromise, any Third Party Claim that is a Shared Contingent Liability, and the
costs and expenses thereof will be included in the amount to be shared by the
parties.
 
     The Separation and Distribution Agreement provides that the Company, AT&T
and NCR will have the exclusive right to any benefit received with respect to
any Contingent Gain that primarily relates to the business of, or that is
expressly assigned to, the Company, AT&T or NCR, respectively (an "Exclusive
 
                                       68
72
 
Contingent Gain"). Each of the Company, AT&T and NCR will have sole and
exclusive authority to manage, control and otherwise determine all matters
whatsoever with respect to an Exclusive Contingent Gain that primarily relates
to its respective business. The parties have agreed to share any benefit that
may be received from any Contingent Gain that is not an Exclusive Contingent
Gain (a "Shared Contingent Gain"), with AT&T receiving 75%, the Company
receiving 22% and NCR receiving 3% of any such benefit. The parties have agreed
that AT&T will have the sole and exclusive authority to manage, control and
otherwise determine all matters whatsoever with respect to any Shared Contingent
Gain. Pursuant to the Separation and Distribution Agreement, each of the Company
and NCR acknowledges that AT&T may elect not to pursue any Shared Contingent
Gain for any reason whatsoever (including a different assessment of the merits
of any Action, claim or right than the Company or NCR or any business reasons
that are in the best interests of AT&T or a member of the AT&T Services Group,
without regard to the best interests of any member of the Company Group or the
NCR Group) and that no member of the AT&T Group will have any liability to any
Person (including any member of the Company Group or the NCR Group) as a result
of any such determination.
 
     The Separation and Distribution Agreement provides for the establishment of
a Contingent Claims Committee and sets forth procedures for the purpose of
resolving disagreements among the parties as to Contingent Gains and Contingent
Liabilities.
 
  Dispute Resolution
 
     The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims that may arise between or among the parties.
These provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management (or
other mutually agreed) representatives of the parties. If such efforts are not
successful, any party may submit the dispute, controversy or claim to mandatory,
binding arbitration, subject to the provisions of the Separation and
Distribution Agreement. The Separation and Distribution Agreement contains
procedures for the selection of a sole arbitrator of the dispute, controversy or
claim and for the conduct of the arbitration hearing, including certain
limitations on discovery rights of the parties. These procedures are intended to
produce an expeditious resolution of any such dispute, controversy or claim.
 
     In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $100 million, or in the event that an arbitration
award in excess of $100 million is issued in any arbitration proceeding
commenced under the Separation and Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent jurisdiction and the arbitration provisions contained in the
Separation and Distribution Agreement will not apply. In the event that the
parties do not agree that the amount in controversy is in excess of $100
million, the Separation and Distribution Agreement provides for arbitration of
such disagreement.
 
  Certain Business Transactions
 
     The Separation and Distribution Agreement provides that no member of any
Group will have any duty to refrain from engaging in the same or similar
activities or lines of business as any member of any other Group, or from doing
business with any potential or actual supplier or customer of any member of any
other Group. The Separation and Distribution Agreement also provides for the
allocation of certain corporate opportunities following the Closing Date and
prior to the Distribution Date. During this period, none of the Company, AT&T or
NCR will have any duty to communicate or offer such opportunities to any of the
others and may pursue or acquire any such opportunity for itself or direct such
opportunity to any other Person, unless (a) the opportunity relates primarily to
the Company Business, the AT&T Services Business or the NCR Business, in which
case the party that acquires knowledge of the opportunity will generally be
required to communicate and offer the opportunity to the company to whose
business the opportunity primarily relates, or (b) the opportunity relates both
to the AT&T Services Business and the Company Business but not primarily to
either one, in which case such party will generally be required to communicate
and offer the opportunity to the Company. In the event the foregoing clause (a)
or (b) is applicable, no party, other than the party to whom
 
                                       69
73
 
the opportunity must be offered in accordance with such clauses, will pursue or
acquire such opportunity for itself, or direct such opportunity to any other
Person, unless the party to whom the opportunity is required to be offered does
not within a reasonable period of time begin to pursue, or does not thereafter
continue to pursue, such opportunity diligently and in good faith.
 
  Ability to Terminate Certain Rights
 
     The Separation and Distribution Agreement provides that certain rights
granted to the Company and the members of the Company Group will be subject to
the following provisions. Except as otherwise expressly provided, in the event
that, at any time prior to February 1, 2001, the Company or any member of the
Company Group offers, furnishes or provides any Telecommunications Services of
the type offered by the AT&T Services Business as of the Closing Date, then AT&T
may, in its sole discretion: (a) terminate all or any portion of the rights
granted by AT&T under the Brand License Agreement; (b) terminate all or any
remaining portion of the purchase commitments made by AT&T and the members of
the AT&T Group in the General Purchase Agreement; (c) exercise the right to
require the Company to transfer to AT&T certain personnel, information,
technology and software under the Supplemental Agreements; (d) terminate all or
any portion of the rights to patents and technology of AT&T or any member of the
AT&T Group granted to the Company and the members of the Company Group pursuant
to the Patent License Agreement and the Technology License Agreement; and (e)
direct the Company and the members of the Company Group to reconvey to AT&T all
interests in any and all patents and technology in which the Company or any
member of the Company Group was granted an undivided one-half interest pursuant
to the Patent Assignments or the Technology Assignment and Joint Ownership
Agreements. The Company and the members of the Company Group will not be deemed
to offer, furnish or provide any Telecommunications Services (and the foregoing
provisions will not apply) solely by virtue of certain specified investments in
Persons that offer, furnish or provide Telecommunications Services or by virtue
of offering, furnishing or providing Telecommunications Services below a
specified de minimis amount.
 
  Provisions Relating to Third-Party Patent License Agreements
 
     The Separation and Distribution Agreement provides, subject to specified
exceptions, for the grant by AT&T to the Company and NCR of rights to share with
AT&T the patent license rights granted to AT&T under third-party patent license
agreements. To the extent this grant is not effective, AT&T will transfer the
patent license agreement to the Company (and the Company will seek equivalent
rights from the third party for AT&T and NCR) or, if such transfer is not
effective, AT&T will retain the patent license agreement (and AT&T will seek
equivalent rights from the third party for the Company and NCR).
 
  Proceeds; Expenses
 
     The Separation and Distribution Agreement provides that the Offerings will
be primary Offerings of the Common Stock and that the net proceeds of the
Offerings will be retained by the Company. See "Use of Proceeds." The Company
has agreed to pay all third party costs, fees and expenses relating to the
Offerings, all of the reimbursable expenses of the Underwriters pursuant to the
Underwriting Agreement, all of the costs of producing, printing, mailing and
otherwise distributing this Prospectus, as well as the Underwriters' discount as
provided in the Underwriting Agreement. See "Underwriting." Except as expressly
set forth in the Separation and Distribution Agreement or in any Ancillary
Agreement, whether or not the Offerings or the Distribution is consummated, all
third-party fees, costs and expenses paid or incurred in connection with the
Distribution will be paid by AT&T.
 
  Termination
 
     The Separation and Distribution Agreement may be terminated at any time
prior to the Distribution Date by the mutual consent of AT&T, NCR and the
Company, or by AT&T at any time prior to the Closing Date. In addition, the
obligations of AT&T and the Company to pursue or effect the Distribution may be
terminated by AT&T if the Distribution does not occur on or prior to December
31, 1997. If the Separation and Distribution Agreement is terminated prior to
the Closing Date, no party thereto (or any of its respective
 
                                       70
74
 
directors or officers) will have any Liability or further obligation to any
other party. In the event of any termination of the Separation and Distribution
Agreement on or after the Closing Date, only the provisions of the Separation
and Distribution Agreement that obligate the parties to pursue the Distribution
will terminate and the other provisions of the Separation and Distribution
Agreement and each Ancillary Agreement will remain in full force and effect.
 
  Amendments and Waivers
 
     No provisions of the Separation and Distribution Agreement or any Ancillary
Agreement will be deemed waived, amended, supplemented or modified by any party,
unless such waiver, amendment, supplement or modification is in writing and
signed by the authorized representative against whom it is sought to enforce
such waiver, amendment, supplement or modification. The Company has agreed and
acknowledged on behalf of itself and each other member of the Company Group that
(a) AT&T and NCR may enter into a separation and distribution agreement and
other agreements and instruments in connection with the NCR Distribution or
otherwise providing for certain arrangements between AT&T and NCR and that no
consent of any member of the Company Group will be required in connection
therewith, (b) certain transfers of Assets and Liabilities may occur between
members of the AT&T Services Group and the NCR Group and that no consent of any
member of the Company Group will be required in connection therewith, (c) AT&T
will have no obligation to proceed with the NCR Distribution, and (d) except as
otherwise set forth, all of the rights and obligations of the NCR Group will
continue regardless of whether NCR is an Affiliate of AT&T. Effective
immediately on notice to the Company, without any further action required by any
member of the Company Group, AT&T may assume any Asset or Liability of any
member of the NCR Group under the Separation and Distribution Agreement or under
any Ancillary Agreement (and any rights of any member of the NCR Group in
connection therewith) and all members of the NCR Group will thereupon
automatically be released therefrom.
 
  Further Assurances
 
     In addition to the actions specifically provided for elsewhere in the
Separation and Distribution Agreement, each of the parties has agreed to use its
reasonable best efforts, prior to, on and after the Closing Date, to take, or
cause to be taken, all actions, and to do, or cause to be done, all things,
reasonably necessary, proper or advisable under applicable laws, regulations and
agreements to consummate and make effective the transactions contemplated by the
Separation and Distribution Agreement and the Ancillary Agreements.
 
INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT
 
     The Company, AT&T and NCR have entered into an Interim Services and Systems
Replication Agreement (the "Interim Services and Systems Replication
Agreement"), governing the provision by each to one or more of the others, on an
interim basis, of certain data processing and telecommunications services
(including voice telecommunications and data transmission), and certain
corporate support services (including accounting, financial management, tax,
payroll, stockholder and public relations, legal, human resources
administration, procurement, real estate management and other administrative
functions), each as specified and on the terms set forth therein and in the
schedules thereto. Specified charges for such services are generally intended to
allow the providing company to recover the fully allocated direct costs of
providing the services, plus all out-of-pocket costs and expenses, but without
any profit. The Interim Services and System Replication Agreement also provides
for the provision of certain additional services identified from time to time
after the Closing Date that a party reasonably believes were inadvertently or
unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the Separation and Distribution Agreement
(so long as the provision of such services would not significantly disrupt the
providing party's operations).
 
     In addition, the Interim Services and Systems Replication Agreement
provides for the replication and transfer, from each party to one or more of the
others, of certain computer systems, including hardware, software, data storage
or maintenance and support components, specified therein and in the schedules
thereto. The computer systems that will be replicated or transferred include
specified computer systems that are used
 
                                       71
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to provide administrative support services to the Company or for business
applications specific to the Company's business. Except where otherwise
specified, the costs and expenses of separating or replicating a system are
intended to be borne by the companies in proportion to their prior usage of the
system. Costs and expenses of purchasing new hardware or obtaining new software
licenses will be borne by the Company purchasing the new hardware or licensing
the new software.
 
PURCHASE AGREEMENTS
 
     The Company and AT&T have entered into a General Purchase Agreement (the
"General Purchase Agreement") and various related and supplemental agreements
pursuant thereto (the "Supplemental Agreements"). The General Purchase Agreement
governs transactions pursuant to which the company provides Products, Licensed
Materials and Services (as such terms are defined in the General Purchase
Agreement) to AT&T and certain designated AT&T affiliates (each an "Ordering
Company"). The Products, Licensed Materials and Services include those related
to switching, signaling, transmission, power and operations support systems. In
the General Purchase Agreement, AT&T has committed that payments made to the
Company (commencing January 1, 1996) for purchases of Products, Licensed
Materials and Services by all Ordering Companies will total at least $3,000
million cumulatively for the calendar years 1996, 1997 and 1998. If that
commitment is not fulfilled by December 31, 1998, certain interest will be
payable determined by reference to the amount of the shortfall. Such interest
payment is the sole remedy for any shortfall in such commitment. Under the
General Purchase Agreement, on or prior to the Closing Date, AT&T will prepay to
the Company $500 million, which will be applied to accounts receivable owed by
AT&T covering purchases of Products, Licensed Materials and Services that are
due and payable on or after January 1, 1997.
 
     The General Purchase Agreement also contains provisions governing (i)
ordering and delivery, (ii) payment terms, (iii) certain intellectual property
matters, (iv) product warranties, (v) product support and documentation, (vi)
engineering, installation, maintenance and other services, and (vii) consulting
services. The General Purchase Agreement has a five-year term, which will be
automatically extended for additional one-year periods unless either party
provides the other party one year's prior written notice of its desire to permit
the General Purchase Agreement to expire without further extension of its term.
 
     The Supplemental Agreements set forth the specific terms and conditions,
including pricing, applicable to the provision by the Company to AT&T of the
particular Products, Licensed Materials and Services covered by each
Supplemental Agreement. Under certain circumstances, including a Change of
Control of the Company that AT&T determines will have a material adverse impact
on particular AT&T programs, AT&T will have the right to require the Company to
transfer to AT&T certain personnel and certain information, technology and
software used by the Company in connection with specified Products, Licensed
Materials and Services provided by the Company to AT&T. The pricing terms for
the Products, Licensed Materials and Services covered by the Supplemental
Agreements reflect negotiated prices taking into account the size of AT&T's
purchase commitment and AT&T's position as one of the Company's largest
customers. Any purchases by AT&T Wireless Services, Inc. ("AT&T Wireless") under
separate agreements with the Company will also be included in determining
whether AT&T's $3,000 million commitment under the General Purchase Agreement is
met.
 
EMPLOYEE BENEFITS AGREEMENT
 
     AT&T and the Company have entered into an Employee Benefits Agreement,
dated as of February 1, 1996 (the "Employee Benefits Agreement") that governs
the employee benefit obligations of the Company, including both compensation and
benefits, with respect to active employees and retirees assigned to the Company.
Pursuant to the Employee Benefits Agreement, the Company assumes and agrees to
pay, perform, fulfill and discharge, in accordance with their respective terms,
all Liabilities to, or relating to, former employees of AT&T or its affiliates
who will be employed by the Company and its affiliates and certain former
employees of AT&T or its affiliates (including retirees) who either were
employed in the Company Business or who otherwise are assigned to the Company
for purposes of allocating employee benefit obligations (including all retirees
of Bell Labs). Until the Distribution Date, the employees and former employees
assigned to the Company will continue to participate in AT&T's pension and other
employee benefit plans,
 
                                       72
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although the Company will bear its allocable share of the costs of benefits and
administration of such plans. Effective immediately after the Distribution, the
Company will establish its own pension and employee benefit plans, which
generally will be the same as AT&T's plans as in effect at that time. The
Employee Benefits Agreement does not preclude the Company from discontinuing or
changing such plans at any time thereafter, with certain exceptions noted below.
The Company's plans generally will assume all liabilities under AT&T's plans to
employees and former employees assigned to the Company, and certain assets
funding such liabilities, including, assets held in trusts funding benefits
under Voluntary Employee Beneficiary Associations (VEBAs), will be transferred
from trusts and other funding vehicles associated with AT&T's plans to the
corresponding trusts and other funding vehicles associated with the Company's
plans.
 
     Assets of trusts under qualified pension plans will be divided, immediately
after the Distribution Date, between the trusts for AT&T qualified pension plans
and the new Company qualified pension plans. Each such trust will receive the
legally required funding minimum and, if greater, a sufficient amount of
additional trust assets to ensure continued compliance with the existing AT&T
pension funding policy. Any trust assets in excess of the funding policy level
will be divided equally between the trusts of AT&T and the Company for such
qualified pension plans. Consistent with existing collective bargaining
agreements and applicable law, there will be a specified period of portability
of benefits under certain pension and other employee benefit plans for
occupational employees who move from AT&T to the Company or from the Company to
AT&T after the Distribution Date. For management employees, there will be a
limited period of portability of such benefits after the Distribution Date if
such employees move between the companies. In addition, during a transitional
period, AT&T or its affiliates will provide certain benefit plan administrative
services, investment management services, and actuarial services to the Company
and will share the administration of contracts with third parties to support
certain welfare benefit plans of both AT&T and the Company. During the period of
joint administration of welfare benefit plans, changes to the plans may only be
made in accordance with procedures specified in the Employee Benefits Agreement
so that any such changes will not materially increase the costs of the other
company.
 
  AT&T Stock Awards
 
     General.  Pursuant to the Employee Benefits Agreement, the Company will
issue Substitute Awards under the 1996 LTIP in substitution for awards
(collectively, "AT&T Stock Awards") under the 1987 Plan and under other
stock-based plans of AT&T as of the Distribution Date and held by individuals
employed by the Company as of such date (the "Company Employees"). With certain
exceptions, AT&T Stock Awards held by individuals employed by AT&T as of the
Distribution Date and AT&T Stock Awards held by individuals who will not
continue their employment after the Distribution Date with any of AT&T, the
Company or any of their subsidiaries, including individuals who have retired
prior to such date, will remain outstanding as AT&T Stock Awards, with an
appropriate antidilution adjustment to reflect the Distribution.
 
     In the case of AT&T Stock Awards consisting of stock options, the
Substitute Award will provide for the purchase of a number of shares of the
Common Stock equal to the number of shares of AT&T Common Stock subject to such
AT&T Stock Award as of the Distribution Date, multiplied by the Ratio (as
defined herein), rounded down to the nearest whole share. The per share exercise
price of the Substitute Award will equal the per share exercise price of such
AT&T Stock Award as of the Distribution Date divided by the Ratio. The Company
will pay the holder of the Substitute Award cash in lieu of any fractional
share. The Substitute Award for each AT&T Stock Award consisting of performance
shares, stock units, restricted stock or restricted stock units will be a new
award consisting of Company performance shares, stock units, restricted stock or
restricted stock units, respectively, representing a number of shares of Common
Stock equal to the number of shares of AT&T Common Stock represented by such
AT&T Stock Award multiplied by the Ratio rounded down to the nearest whole
share. The Company will pay to the holder of such Substitute Award cash in lieu
of any fractional share. The other terms and conditions of each Substitute
Award, will be the same as those of the surrendered AT&T Stock Award. The
"Ratio" means the amount obtained by dividing (i) the average of the daily high
and low per share prices of the AT&T Common Stock as listed on the NYSE during
each of the five trading days immediately preceding the ex-dividend date for the
Distribution by (ii) the average of the daily high and low per share prices of
the Common Stock as listed on the NYSE during each of the five trading days
immediately preceding the ex-dividend date for the Distribution.
 
                                       73
77
 
  Shares Subject to Substitute Awards
 
     It is not possible to specify how many shares of Common Stock will be
subject to Substitute Awards. It is expected that some AT&T Stock Awards
consisting of stock options and SARs held by Company Employees will be
exercised, other AT&T Stock Awards will vest and other AT&T Stock Awards could
be granted, prior to the Distribution Date. In addition, the remaining balance
of unexercised AT&T Stock Awards will be converted into Substitute Awards by
reference to the Ratio, which will not be known until after the Distribution is
completed. Stockholders of the Company are, however, likely to experience some
dilutive impact from the above-described adjustments.
 
  Treatment of AT&T Stock Awards Pending the Distribution
 
     Pending the Distribution, AT&T Stock Awards held by Company Employees will
remain outstanding as AT&T Stock Awards. Pursuant to the Employee Benefits
Agreement, however, the Company will pay AT&T (i) upon the exercise of an AT&T
Stock Award consisting of stock options by a Company Employee whether prior to,
on or after the Distribution, in an amount equal to the excess, if any, of the
Market Value (as defined below) of the purchased shares on the date of exercise
of such option or the date of such purchase, as applicable, over the price paid
for such shares; and (ii) upon the vesting or delivery of shares of AT&T Common
Stock pursuant to an Award (other than an option) held by a Company Employee in
an amount equal to the Market Value of such AT&T Common Stock on the date of
such vesting or delivery. The "Market Value" of a share of AT&T Common Stock on
a given date means the average of the high and the low per share price of the
AT&T Common Stock as listed on the NYSE on such date, or if there is no trading
on the NYSE on such date, on the most recent previous date on which such trading
takes place.
 
  Outstanding AT&T Stock Awards Held by Employees of the Company
 
     As of             , 1996, there were approximately           million shares
of AT&T Common Stock subject to options for AT&T Common Stock and approximately
     million shares of AT&T Common Stock represented by other AT&T Stock Awards
in each case held by Company Employees.
 
BRAND LICENSE AND RELATED MATTERS
 
     The Company and AT&T have entered into a license agreement (the "Brand
License Agreement") pursuant to which the Company will have rights, on a
royalty-free basis, to continue to use the AT&T brand (including the AT&T globe
design) for specified transition periods following the Closing Date. Under the
Brand License Agreement, the Company will be entitled to use the AT&T brand,
alone or in combination with the Company's brand, for the sale of consumer
products and services and business communications systems and services for a
period of one year following the Closing Date. After the initial one-year
period, the Company will be entitled to continue to use the AT&T brand on these
products, systems and services, but only in combination with the Company's
brand, for an additional three-year period. The right to use the AT&T brand,
alone or in combination with the Company's brand, in connection with certain
leased products or maintenance contracts will extend for 66 months after the
Closing Date. The Brand License Agreement permits the Company to use the AT&T
brand on the Company's other products, systems and services until the earlier of
the Distribution or six months after the Closing Date. In addition, the Company
may use the AT&T brand after these time periods to the extent necessary to
deplete pre-existing inventory. Subject to certain conditions set forth in the
Brand License Agreement, the Company may also extend these rights to use the
AT&T brand to authorized dealers of the Company's products, systems and
services.
 
     The Brand License Agreement provides that the Company will comply with
specified quality, customer care and marketing standards in connection with the
use of the AT&T brand. It also provides that neither the Company nor any of its
authorized dealers will, during the period it is using the AT&T brand, provide,
offer or market telecommunications services provided by any person other than
AT&T (with certain exceptions, including to permit specified authorized dealers
to continue existing practices). AT&T has agreed in the Brand License Agreement
that, for a period of one year after the Closing Date, it will not license the
AT&T brand or trade dress to third parties (other than AT&T's affiliates) for
use in connection with products or
 
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services that compete with the Company's consumer products and services or
business communications systems and services. AT&T may terminate the Brand
License Agreement in the event of a significant breach (as defined therein),
including in the event of a change of control of the Company.
 
     Pursuant to separate assignments, AT&T has also assigned to the Company all
rights in specified other trademarks, service marks and trade dress used in the
Company's business.
 
PATENT LICENSES AND RELATED MATTERS
 
     The Separation and Distribution Agreement provides that, on or prior to the
Closing Date, the Company, AT&T and NCR will execute and deliver assignments and
other agreements, including a patent license agreement, related to patents
currently owned or controlled by AT&T and its subsidiaries. The patent
assignments will divide ownership of patents, patent applications and foreign
counterparts among the Company, AT&T and NCR, with the substantial portion of
those currently owned or controlled by AT&T and its subsidiaries (other than
NCR) being assigned to the Company. A small number of the patents assigned to
the Company will be jointly owned with either AT&T or NCR. Certain of the
patents that the Company will jointly own with AT&T will be subject to a joint
ownership agreement under which each of the Company and AT&T will have full
ownership rights in the patents. The other patents that the Company will jointly
own with AT&T, and the patents that the Company will jointly own with NCR, will
be subject to defensive protection agreements with AT&T and NCR, respectively,
under which the Company will hold most ownership rights in the patents
exclusively. Under these defensive protection agreements, AT&T or NCR, as the
case may be, will have the ability, subject to specified restrictions, to assert
infringement claims under the patents against companies that assert patent
infringement claims against them, and will have consent rights in the event the
Company wishes to license the patents to certain third parties or for certain
fields of use under specified circumstances. The defensive protection agreements
also provide for one-time payments from AT&T and NCR to the Company.
 
     The patent license agreement to be entered into by the Company, AT&T and
NCR provides for royalty-free cross-licenses to each company, under each of the
other company's patents that are covered by the licenses, to use, lease, sell
and import any and all products and services of the businesses in which the
licensed company (including specified related companies) is now or hereafter
engaged. The cross-licenses also permit each company, subject to specified
limitations, to have third parties make items under the other companies'
patents, as well as to pass through to customers certain rights under the other
companies' patents with respect to products and services furnished to customers
by the licensed company. In addition, the rights granted to the Company and AT&T
include the right to license third parties under each of the other company's
patents to the extent necessary to meet existing patent licensing obligations
and AT&T has the right, subject to specified restrictions and procedures, to
seek sublicensing of a limited number of identified patents to be assigned to
the Company.
 
     The cross-licenses between the Company and AT&T cover all of each company's
patents, including patents issued on patent applications filed on or before
December 31, 1996, except for certain patents and patents on filed applications
owned or controlled by AT&T Wireless. The cross-licenses between the Company and
NCR cover all of each company's patents, including patents issued on patent
applications filed on or before December 31, 1999.
 
TECHNOLOGY LICENSES AND RELATED MATTERS
 
     The Separation and Distribution Agreement provides that, on or prior to the
Closing Date, the Company, AT&T and NCR will execute and deliver assignments and
other agreements, including the Technology License Agreement, related to
technology currently owned or controlled by AT&T and its subsidiaries.
Technology includes copyrights, mask works and other intellectual property other
than trademarks, trade names, trade dress, service marks and patent rights. The
technology assignments will divide ownership of technology among the Company,
AT&T and NCR, with the Company and AT&T owning technology that was developed by
or for, or purchased by, the Company's business or AT&T's services business,
respectively, and NCR owning technology that was developed by or for, or
purchased by, NCR. Technology that is not
 
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covered by any of these categories will be owned jointly by the Company and AT&T
or, in the case of certain specified technology, owned jointly by the Company,
AT&T and NCR.
 
     The Technology License Agreement to be entered into by the Company, AT&T
and NCR provides for royalty-free cross-licenses to each company to use the
other companies' technology existing as of the Closing Date, except for
specified portions of each company's technology as to which use by the other
companies is restricted or prohibited.
 
TAX AGREEMENTS
 
  Tax Allocation Agreements
 
     The parties have entered into agreements to govern the allocation of
consolidated or combined federal and state and local income tax liability (the
"Tax Allocation Agreements") among AT&T, the Company, NCR and all other domestic
subsidiaries of AT&T for the period before the Distribution Date. No party will
pay an amount of income tax greater than the income tax it would have paid had
it filed its income tax return as a separate entity (prior to credits), except
in cases in which the consolidated or combined group as a whole realizes a
detriment from consolidation or combination. The Tax Allocation Agreements also
provide that profitable entities will compensate loss entities to the extent
that the losses are utilized in the consolidated tax return. No loss entity,
however, will be compensated for an amount of losses in excess of the amount of
losses that it would have shown had it filed its income tax return separately.
Consolidated or combined credits allowed against tax on a consolidated or
combined income tax return will be allocated to each entity in proportion to the
creditable expenditures by such entity (or, in the case of credits not based on
expenditures, in proportion to its contribution to such credits). To the extent
that the consolidated or combined group is subject to alternative minimum tax
("AMT"), such AMT will be allocated proportionately among those members of the
group that would have owed AMT had they filed their income tax return
separately.
 
     Tax Sharing Agreement
 
     The Tax Sharing Agreement, by and among the Company, AT&T and NCR (the "Tax
Sharing Agreement"), governs contingent tax liabilities and benefits, tax
contests and other tax matters with respect to tax returns filed with respect to
tax periods, in the case of the Company, ending or deemed to end on or before
the Distribution Date. Under the Tax Sharing Agreement, Adjustments (as defined
in the Tax Sharing Agreement) to Taxes that are clearly attributable to the
business of one party will be borne solely by that party. Adjustments to all
other Tax liabilities will be borne 75% by AT&T, 22% by the Company and 3% by
NCR.
 
     Notwithstanding the above, if as a result of the acquisition of all or a
portion of the capital stock or assets of the Company, the Distribution fails to
qualify as a tax-free distribution under Section 355 of the Code, then the
Company will be liable for any and all increases in Tax attributable thereto.
 
REAL ESTATE AGREEMENTS
 
     AT&T, the Company and NCR have executed a series of instruments that assign
AT&T's worldwide real estate portfolio, consisting of both owned and leased
property, among the parties. Generally, such real estate was assigned by
reference to which party was the dominant tenant in the applicable facility. The
parties also have agreed to share, pursuant to intercompany leases, subleases
and sub-subleases, certain facilities, consisting predominantly of office space
and laboratory sites.
 
     With certain exceptions the terms of such leases, subleases and
sub-subleases are substantially the same regardless of which company is tenant
or landlord. In the case of owned real estate to be leased, the lease terms will
be either two or three years, except that a limited number of leases may be
terminated on 90 days' notice by the tenant. In the case of subleases or
sub-subleases of property, the lease term will generally coincide with the
remaining term of the primary lease or sublease, respectively. In the case of
owned property, rent payments are generally determined by reference to
prevailing market rents or previously specified internal budget levels. In the
case of subleases of third-party leases, or sub-subleases, rent payments are
generally
 
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determined by reference to the rent specified in the underlying lease or
sublease, plus an administrative fee. The leases, subleases and sub-subleases
provide generally that owner, landlord or sub-landlord will provide property
services for specified fees.
 
OTHER AGREEMENTS
 
     AT&T and the Company have entered into the Virtual Telecommunications
Network Service Agreement pursuant to which the Company has committed to
purchase a minimum of $62.5 million of telecommunication services from AT&T over
a three-year term at specified tariffs. In addition, NCR and the Company have
entered into the Volume Purchase Agreement under which the Company has committed
to purchase at least $150 million of products and services from NCR by December
31, 1998.
 
                             PRINCIPAL STOCKHOLDER
 
     Prior to the Offerings, all of the outstanding shares of Common Stock will
be owned by AT&T. After the Offerings, AT&T will own approximately      %
(     % if the U.S. Underwriters exercise their overallotment option in full) of
the Common Stock then outstanding. Except as described above, the Company is not
aware of any person or group that will beneficially own more than 5% of the
outstanding shares of Common Stock following the Offerings.
 
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                          DESCRIPTION OF CAPITAL STOCK
 
AUTHORIZED CAPITAL STOCK
 
     Immediately after the Offerings, the Company's authorized capital stock
will consist of           shares of preferred stock, par value $1.00 per share
(the "Preferred Stock"), and           shares of Common Stock. Immediately
following the Offerings, approximately           shares of Common Stock will be
outstanding. All of the shares of Common Stock that will be outstanding
immediately following the Offerings, including the shares of Common Stock sold
in the Offerings, will be validly issued, fully paid and nonassessable.
 
COMMON STOCK
 
     The holders of Common Stock will be entitled to one vote for each share on
all matters voted on by stockholders, including elections of directors, and,
except as otherwise required by law or provided in any resolution adopted by the
Company Board with respect to any series of Preferred Stock, the holders of such
shares will possess all voting power. The Certificate does not provide for
cumulative voting in the election of directors. Subject to any preferential
rights of any outstanding series of Preferred Stock created by the Company Board
from time to time, the holders of Common Stock will be entitled to such
dividends as may be declared from time to time by the Company Board from funds
available therefor, and upon liquidation will be entitled to receive pro rata
all assets of the Company available for distribution to such holders. See
"Dividend Policy."
 
PREFERRED STOCK
 
     The Certificate authorizes the Company Board to establish one or more
series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Company Board may thereafter (except where otherwise provided in the
applicable certificate of designation) increase or decrease (but not below the
number of shares thereof then outstanding), (iii) whether dividends, if any,
will be cumulative or noncumulative, and, in the case of shares of any series
having cumulative dividend rights, the date or dates or method of determining
the date or dates from which dividends on the shares of such series shall be
cumulative, (iv) the rate of any dividends (or method of determining such
dividends) payable to the holders of the shares of such series, any conditions
upon which such dividends will be paid and the date or dates or the method for
determining the date or dates upon which such dividends will be payable; (v) the
redemption rights and price or prices, if any, for shares of the series, (vi)
the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series, (vii) the amounts payable on and the
preferences, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, (viii) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
the Company or any other corporation, and, if so, the specification of such
other class or series or such other security, the conversion or exchange price
or prices or rate or rates, any adjustments thereof, the date or dates as of
which such shares will be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made, (ix) restrictions
on the issuance of shares of the same series or of any other class or series,
(x) the voting rights, if any, of the holders of the shares of the series, and
(xi) any other relative rights, preferences and limitations of such series.
 
     The Company believes that the ability of the Company Board to issue one or
more series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs which might arise. The authorized shares of Preferred Stock, as
well as shares of Common Stock, will be available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which the Company's securities may be listed or traded. The NYSE currently
requires stockholder approval as a prerequisite to listing shares in several
instances, including where the present or potential issuance of shares could
result in an increase in the number of shares of common stock, or in the amount
of voting securities, outstanding of at least 20%. If the approval of the
Company's stockholders is not required for
 
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the issuance of shares of Preferred Stock or Common Stock, the Board may
determine not to seek stockholder approval.
 
     Although the Company Board has no intention at the present time of doing
so, it could issue a series of Preferred Stock that could, depending on the
terms of such series, impede the completion of a merger, tender offer or other
takeover attempt. The Company Board will make any determination to issue such
shares based on its judgment as to the best interests of the Company and its
stockholders. The Company Board, in so acting, could issue Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquirer may be able to change the composition of the Company Board, including a
tender offer or other transaction that some, or a majority, of the Company's
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
 
     As of the Closing Date,      Junior Preferred Shares (as defined herein)
will be reserved for issuance upon exercise of the Rights. See "-- Rights Plan."
 
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BY-LAWS
 
  Board of Directors
 
     The Certificate provides that except as otherwise fixed by or pursuant to
the provisions of a Certificate of Designations setting forth the rights of the
holders of any class or series of Preferred Stock, the number of the directors
of the Company will be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the total number of directors which the
Company would have if there were no vacancies (the "Whole Board") (but shall not
be less than three). The directors, other than those who may be elected by the
holders of Preferred Stock, will be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible, one class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1997, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1998 and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1999, with each director to
hold office until its successor is duly elected and qualified. Commencing with
the 1997 annual meeting of stockholders, directors elected to succeed directors
whose terms then expire will be elected for a term of office to expire at the
third succeeding annual meeting of stockholders after their election, with each
director to hold office until such person's successor is duly elected and
qualified.
 
     The Certificate provides that except as otherwise provided for or fixed by
or pursuant to a Certificate of Designations setting forth the rights of the
holders of any class or series of Preferred Stock, newly created directorships
resulting from any increase in the number of directors and any vacancies on the
Company Board resulting from death, resignation, disqualification, removal or
other cause will be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the
Company Board, and not by the stockholders. Any director elected in accordance
with the preceding sentence will hold office for the remainder of the full term
of the class of directors in which the new directorship was created or the
vacancy occurred and until such director's successor shall have been duly
elected and qualified. No decrease in the number of directors constituting the
Company Board will shorten the term of any incumbent director. Subject to the
rights of holders of Preferred Stock, any director may be removed from office
only for cause by the affirmative vote of the holders of at least a majority of
the voting power of all Voting Stock then outstanding, voting together as a
single class; provided, however, that prior to the Trigger Date (as defined
herein), any director or directors may be removed from office by the affirmative
vote of the holders of at least 80% of the voting power of all Voting Stock then
outstanding, voting together as a single class.
 
     These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of the Company Board by filling the
vacancies created by removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections of directors
for any individual or group to gain control of the Company Board. Accordingly,
these provisions could discourage a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of the Company.
 
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  No Stockholder Action by Written Consent; Special Meetings
 
     The Certificate and By-Laws provide that as of the time at which AT&T and
its affiliates cease to be the beneficial owner of an aggregate of at least a
majority of the then outstanding shares of Common Stock (the "Trigger Date"),
any action required or permitted to be taken by the stockholders of the Company
must be effected at a duly called annual or special meeting of such holders and
may not be effected by any consent in writing by such holders. Effective as of
the Trigger Date, except as otherwise required by law and subject to the rights
of the holders of any Preferred Stock, special meetings of stockholders of the
Company for any purpose or purposes may be called only by the Company Board
pursuant to a resolution stating the purpose or purposes thereof approved by a
majority of the Whole Board or by the Chairman of the Company Board and,
effective as of the Trigger Date, any power of stockholders to call a special
meeting is specifically denied. No business other than that stated in the notice
shall be transacted at any special meeting. In addition, prior to the Trigger
Date, the Company will call a special meeting of stockholders promptly upon
request by AT&T, or any of its affiliates, in each case, if such entity is a
stockholder of the Company. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by the Company Board or the Chairman of the Board.
 
  Advance Notice Procedures
 
     The By-Laws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or to bring other business
before an annual meeting of stockholders of the Company (the "Stockholder Notice
Procedure"). The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Chairman of the Board, or by a
stockholder who has given timely written notice to the Secretary of the Company
prior to the meeting at which directors are to be elected, will be eligible for
election as directors of the Company. The Stockholder Notice Procedure also
provides that at an annual meeting only such business may be conducted as has
been brought before the meeting by, or at the direction of, the Chairman of the
Board or the Company Board, or by a stockholder who has given timely written
notice to the Secretary of the Company of such stockholder's intention to bring
such business before such meeting. Under the Stockholder Notice Procedure, for
notice of stockholder nominations to be made at an annual meeting to be timely,
such notice must be received by the Company not later than the close of business
on the 60th calendar day nor earlier than the close of business on the 90th
calendar day prior to the first anniversary of the preceding year's annual
meeting (except that, in the event that the date of the annual meeting is more
than 30 calendar days before or more than 60 calendar days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 90th calendar day prior to such
annual meeting and not later than the close of business on the later of the 60th
calendar day prior to such annual meeting or the 10th calendar day following the
day on which public announcement of a meeting date is first made by the
Company).
 
     Notwithstanding the foregoing, in the event that the number of directors to
be elected to the Company Board is increased and there is no public announcement
by the Company naming all of the nominees for director or specifying the size of
the increased Company Board at least 70 calendar days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice also
will be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered not later than the
close of business on the 10th calendar day following the day on which such
public announcement is first made by the Company. Under the Stockholder Notice
Procedure, for notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected to be timely, such notice must be
received by the Company not earlier than the close of business on the 90th
calendar day prior to such special meeting and not later than the close of
business on the later of the 60th calendar day prior to such special meeting or
the 10th calendar day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Company Board to be elected at such meeting.
 
     In addition, under the Stockholder Notice Procedure, a stockholder's notice
to the Company proposing to nominate a person for election as a director or
relating to the conduct of business other than the nomination of directors must
contain certain specified information. If the chairman of a meeting determines
that an individual was not nominated, or other business was not brought before
the meeting, in accordance with the
 
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Stockholder Notice Procedure, such individual will not be eligible for election
as a director, or such business will not be conducted at such meeting, as the
case may be.
 
     The Stockholder Notice Procedure does not apply to AT&T and its affiliates
prior to the Trigger Date.
 
  Amendment
 
     The Certificate provides that the affirmative vote of the holders of at
least 80% of the Voting Stock, voting together as a single class, is required to
amend provisions of the Certificate relating to stockholder action without a
meeting; the calling of special meetings; the number, election and term of the
Company's directors; the filling of vacancies; and the removal of directors. The
Certificate further provides that the related By-Laws described above (including
the Stockholder Notice Procedure) may be amended only by the Company Board or by
the affirmative vote of the holders of at least 80% of the voting power of the
outstanding shares of Voting Stock, voting together as a single class.
 
  Rights Plan
 
     The Company Board currently expects to adopt a Share Purchase Rights Plan
(the "Rights Plan") on or prior to the Closing Date. Pursuant to the Rights
Plan, the Company Board will cause to be issued one preferred share purchase
right (a "Right") for each outstanding share of Common Stock. Each Right will
entitle the registered holder to purchase from the Company one one-hundredth of
a share of a new series of junior preferred stock, par value $.01 per share (the
"Junior Preferred Shares"), of the Company at a price of $     (the "Purchase
Price"), subject to adjustment. The description and terms of the Rights will be
set forth in a Rights Agreement (the "Rights Agreement"), between the Company
and the designated Rights Agent (the "Rights Agent"). The description set forth
below is intended as a summary only and is qualified in its entirety by
reference to the form of the Rights Agreement, which will be filed as an exhibit
to the Registration Statement. See "Available Information."
 
     Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") have acquired beneficial ownership of 10% or more of the outstanding
shares of Common Stock or (ii) 10 business days (or such later date as may be
determined by action of the Company Board prior to such time as any person
becomes an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of 10% or more of
such outstanding shares of Common Stock (the earlier of such dates being called
the "Rights Distribution Date"), the Rights will be evidenced by the
certificates representing the Common Stock.
 
     The Rights Agreement will provide that, until the Rights Distribution Date
(or earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the Common Stock. Until the Rights Distribution
Date (or earlier redemption or expiration of the Rights), the Common Stock
certificates will contain a notation incorporating the Rights Agreement by
reference. As soon as practicable following the Rights Distribution Date,
separate certificates evidencing the Rights (the "Right Certificates") will be
mailed to holders of record of the Common Stock as of the close of business on
the Rights Distribution Date and such separate Right Certificates alone will
evidence the Rights.
 
     The Rights will not be exercisable until the Rights Distribution Date. The
Rights will expire on the 10th anniversary of the date of issuance (the "Final
Expiration Date"), unless the Final Expiration Date is extended or unless the
Rights are earlier redeemed or exchanged by the Company, in each case, as
summarized below.
 
     In the event that any person or group of affiliated or associated persons
become an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will thereafter have the right to receive upon
exercise that number of shares of Common Stock having a market value of two
times the exercise price of the Right. In the event that the Company is acquired
in a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold after a person or group of
affiliated or associated persons
 
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85
 
becomes an Acquiring Person, proper provision will be made so that each holder
of a Right will thereafter have the right to receive, upon the exercise thereof
at the then-current exercise price of the Right, that number of shares of common
stock of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Right.
 
     At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the outstanding
Common Stock and prior to the acquisition by such person or group of 50% or more
of the outstanding Common Stock, the Company Board may exchange the Rights
(other than Rights owned by such person or group which have become void), in
whole or in part, at an exchange ratio of one share of Common Stock, or one
one-hundredth of a Junior Preferred Share (or of a share of a class or series of
the Preferred Stock having equivalent rights, preferences and privileges), per
Right (subject to adjustment).
 
     At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the outstanding
Common Stock, the Company Board may redeem the Rights in whole, but not in part,
at a price of $.01 per Right (the "Redemption Price"). The redemption of the
Rights may be made effective at such time on such basis and with such conditions
as the Company Board, in its sole discretion, may establish. Immediately upon
any redemption of the Rights, the right to exercise the rights will terminate
and the only right of the holders of the Rights will be eligible to receive the
Redemption Price.
 
     The terms of the Rights may be amended by the Company Board without the
consent of the holders of the Rights; provided, however, that, from and after
such time as any person or group of affiliated or associated persons becomes an
Acquiring Person, no such amendment may adversely affect the interests of the
holders of the Rights.
 
     Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
 
     The number of outstanding Rights and the number of one one-hundredths of a
Junior Preferred Share issuable upon exercise of each Right also will be subject
to adjustment in the event of a stock split of the Common Stock or a stock
dividend on the Common Stock payable in Common Stock or subdivisions,
consolidations or combinations of the Common Stock occurring, in any such case,
prior to the Rights Distribution Date.
 
     The Purchase Price payable, and the number of Junior Preferred Shares or
other securities or property issuable, upon exercise of the Rights will be
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Junior Preferred Shares, (ii) upon the grant to holders of the Junior Preferred
Shares of certain rights or warrants to subscribe for or purchase Junior
Preferred Shares at a price, or securities convertible into Junior Preferred
Shares with a conversion price, less than the then-current market price of the
Junior Preferred Shares or (iii) upon the distribution to holders of the Junior
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or dividends
payable in Junior Preferred Shares) or of subscription rights or warrants (other
than those referred to above).
 
     With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional Junior Preferred Shares will be
issued (other than fractions which are integral multiples of one one-hundredth
of a Junior Preferred Share, which may, at the election of the Company, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Junior Preferred Shares on the
last trading day prior to the date of exercise.
 
     Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $1.00 per share but will be entitled
to an aggregate dividend of 100 times the dividend declared per share of Common
Stock. In the event of liquidation, the holders of the Junior Preferred Shares
will be entitled to a minimum preferential liquidation payment of $100 per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of Common Stock. Each Junior Preferred Share will have 100 votes voting
together with the
 
                                       82
86
 
Common Stock. Finally, in the event of any merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each Junior Preferred
Share will be entitled to receive 100 times the amount received per Common
Stock. These rights are protected by customary anti-dilution provisions.
 
     Due to the nature of the Junior Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a Junior Preferred
Share purchasable upon exercise of each Right should approximate the value of
one share of Common Stock.
 
     The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
the Company on terms not approved by the Company Board. The Rights should not
interfere with any merger or other business combination approved by the Company
Board prior to the time that a person or group has acquired beneficial ownership
of 10% percent or more of the Common Stock since the Rights may be redeemed by
the Company at the Redemption Price until such time.
 
     The Rights contain certain provisions to exclude AT&T and its affiliates
from the operative provisions thereof.
 
DELAWARE BUSINESS COMBINATION STATUTE
 
     Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include (x) any person that
is the owner of 15% or more of the outstanding voting stock of the corporation,
or is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within three
years immediately prior to the date of determination and (y) the affiliates and
associates of any such person.
 
     Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. However,
AT&T and its affiliates are excluded from the definition of "interested
stockholder" pursuant to the terms of Section 203. The provisions of Section 203
may encourage persons interested in acquiring the Company to negotiate in
advance with the Company Board, since the stockholder approval requirement would
be avoided if a majority of the directors then in office approves either the
business combination or the transaction which results in any such person
becoming an interested shareholder. Such provisions also may have the effect of
preventing changes in the management of the Company. It is possible that such
provisions could make it more difficult to accomplish transactions which the
Company's stockholders may otherwise deem to be in their best interests.
 
LIABILITY OF DIRECTORS; INDEMNIFICATION
 
     The Certificate provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except, if required by the DGCL as
amended from time to time, for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit. Neither the amendment
nor repeal of such provision will eliminate or
 
                                       83
87
 
reduce the effect of such provision in respect of any matter occurring, or any
cause of action, suit or claim that, but for such provision, would accrue or
arise prior to such amendment or repeal.
 
     While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Certificate will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
 
     The Certificate provides that each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person, or a person of whom such person is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, will be indemnified and held harmless by
the Company to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss reasonably incurred or
suffered by such person in connection therewith. Such right to indemnification
includes the right to have the Company pay the expenses incurred in defending
any such proceeding in advance of its final disposition, subject to the
provisions of the DGCL. Such rights are not exclusive of any other right which
any person may have or thereafter acquire under any statute, provision of the
Certificate, By-Law, agreement, vote of stockholders or disinterested directors
or otherwise. No repeal or modification of such provision will in any way
diminish or adversely affect the rights of any director, officer, employee or
agent of the Company thereunder in respect of any occurrence or matter arising
prior to any such repeal or modification. The Certificate also specifically
authorizes the Company to maintain insurance and to grant similar
indemnification rights to employees or agents of the Company.
 
TRANSFER AGENT AND REGISTRAR
 
                 will be the transfer agent and registrar for the Common Stock.
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Of the           shares of Common Stock to be outstanding as of the Closing
Date (          shares if the U.S. Underwriters exercise their overallotment
option in full) the      shares of Common Stock sold in the Offerings (
shares if the U.S. Underwriters exercise their overallotment option in full)
will be freely tradable without restriction under the Securities Act of 1933, as
amended (the "1933 Act"), except for any such shares which be may acquired by an
affiliate of the Company (an "Affiliate"), as that term is defined in Rule 144
promulgated under the 1933 Act ("Rule 144"). AT&T has announced that, subject to
certain conditions, AT&T intends to distribute to its shareholders by December
31, 1996 all of the Common Stock of the Company owned by AT&T by means of the
Distribution. Shares of Common Stock distributed to AT&T shareholders in the
Distribution generally will be freely transferable, except for shares of Common
Stock received by persons who may be deemed to be Affiliates. Persons who may be
deemed to be Affiliates generally include individuals or entities that control,
are controlled by, or are under common control with, the Company and may include
directors and certain officers of the Company as well as significant
stockholders of the Company, if any. Persons who are Affiliates will be
permitted to sell the shares of Common Stock that are issued in the Offerings or
that they receive in the Distribution only pursuant to an effective registration
statement under the 1933 Act or an exemption from the registration requirements
of the 1933 Act, including exemptions provided by Rule 144.
 
     The shares of Common Stock held by AT&T are deemed "restricted securities"
as defined in Rule 144, and may not be sold other than through registration
under the 1933 Act or pursuant to an exemption from the regulations thereunder,
including exceptions provided by Rule 144. The Company and AT&T have agreed not
 
                                       84
88
 
to (i) offer, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other agreement
that transfers, in whole or in part, the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or other securities, in cash
or otherwise for a period of    days after the date of this Prospectus, without
the prior written consent of the Underwriters. See "Underwriting."
 
     Under the 1996 LTIP, the Company will issue Substitute Awards in
substitution for AT&T Stock Awards outstanding under various AT&T employee
benefit plans. See "Arrangements Between the Company and AT&T -- Employee
Benefits Agreement". In addition to such Substitute Awards, the Company may
grant shares of Common Stock and non-stock awards pursuant to the 1996 LTIP
subject to certain restrictions. See "Management -- 1996 Company Long Term
Incentive Plan." The Company currently expects to file in 1996 a registration
statement under the 1933 Act to register shares reserved for issuance under the
1996 LTIP. Shares issued pursuant to Awards after the effective date of such
registration statement (other than shares issued to Affiliates) generally will
be freely tradeable without restriction or further registration under the 1933
Act.
 
                                       85
89
 
                                  UNDERWRITING
 
     Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters
named below for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as U.S.
Representatives, and the International Underwriters named below for whom Morgan
Stanley & Co. International Limited, Goldman, Sachs International and Merrill
Lynch International Limited are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective numbers of shares of Common Stock set forth opposite
the names of such Underwriters below:
NUMBER
                                      NAME                                 OF SHARES
        -----------------------------------------------------------------  ----------
U.S. Underwriters:
          Morgan Stanley & Co. Incorporated..............................
          Goldman, Sachs & Co. ..........................................
          Merrill Lynch, Pierce, Fenner & Smith Incorporated.............
             Subtotal....................................................
                                                                           ----------
        International Underwriters:
          Morgan Stanley & Co. International Limited.....................
          Goldman Sachs International....................................
          Merrill Lynch International Limited............................
             Subtotal....................................................
                                                                           ----------
                  Total..................................................
                                                                           ==========
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock offered hereby (other than those covered by the U.S.
Underwriters' overallotment option described below) if any such shares are
taken.
 
     Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (a)
it is not purchasing any U.S. Shares (as defined herein) for the account of
anyone other than a United States or Canadian Person (as defined herein) and (b)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
of the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions: (i) it is not purchasing any International Shares (as
defined herein) for the account of any United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any International Shares or distribute any prospectus relating to the
International Shares in the United States or in any province or territory of
Canada or to any United States or Canadian Person. The foregoing limitations do
not apply to stabilization transactions or to certain other transactions
specified in the Agreement between U.S. and International Underwriters. As used
herein, "United States or Canadian Person" means any national or resident of the
United States or of any province or territory of Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof (other
than a branch located outside the United States and Canada of any United
 
                                       86
90
 
States or Canadian Person) and includes any United States or Canadian branch of
a person who is otherwise not a United States or Canadian Person. All shares of
Common Stock to be purchased by the U.S. Underwriters and the International
Underwriters are referred to herein as the "U.S. Shares" and the "International
Shares," respectively.
 
     Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares sold shall be the Price to Public set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
 
     Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in any
province or territory of Canada in contravention of the securities laws thereof
and has represented that any offer of Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
shares of Common Stock a notice stating in substance that, by purchasing such
Common Stock, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any of such Common Stock in
any province or territory of Canada or to, or for the benefit of, any resident
of any province or territory of Canada in contravention of the securities laws
thereof and that any offer of Common Stock in Canada will be made only pursuant
to an exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer is made, and that such dealer will
deliver to any other dealer to whom it sells any of such Common Stock a notice
to the foregoing effect.
 
     Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and during the period of six months after the date hereof will not offer
to sell any shares of Common Stock to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995 (the "U.K. Regulations"); (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the U.K. Regulations with respect to anything done by it
in relation to the shares of Common Stock offered hereby in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock, other than any
document which consists of, or is a part of, listing particulars, supplementary
listing particulars or any other document required or permitted to be published
by listing rules under Article IV of the Financial Services Act 1986, if that
person is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1995, or is a person to whom
the document may otherwise lawfully be issued or passed on.
 
     The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $          per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $          per share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
 
     Application has been made to have the Common Stock approved for quotation
on the NYSE under the symbol "          ".
 
     Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to           additional shares of Common Stock at the
public offering price set forth on the cover page hereof, less underwriting
discounts and commissions. The U.S. Underwriters may exercise such option to
purchase solely for the purpose of covering
 
                                       87
91
 
overallotments, if any, made in connection with the offering of the shares of
Common Stock offered hereby. To the extent such option is exercised, each U.S.
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such U.S. Underwriter's name in the preceding table bears to the
total number of shares of Common Stock offered by the U.S. Underwriters in the
Offerings.
 
     The Company has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, it will not (a) register for sale or offer, issue,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (b) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clause (a) or (b) of
this sentence is to be settled by delivery of Common Stock or other securities,
in cash or otherwise, for a period of      days after the date of this
Prospectus, other than: (i) the shares of Common Stock offered hereby; (ii) any
shares of Common Stock issued upon the exercise of an option or warrant or the
conversion of a security outstanding on the date of this Prospectus; and (iii)
any shares of Common Stock issued pursuant to existing employee benefit plans of
the Company (including in connection with any Substitute Awards). In addition,
except as set forth above, AT&T has agreed not to (a) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (b) enter into any swap or other agreement that transfers, in whole or in
part, the economic consequences of ownership of Common Stock, whether any such
transaction described in clause (a) or (b) of this sentence is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, for a period
of      days after the date of this Prospectus without the prior written consent
of Morgan Stanley & Co. Incorporated.
 
     The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
 
     The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the 1933 Act.
 
     From time to time, each of Morgan Stanley & Co. Incorporated, Goldman,
Sachs & Co. and Merrill Lynch & Co. provide certain financial advisory services
to each of the Company and AT&T.
 
PRICING OF THE OFFERING
 
     Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price were the sales,
earnings and certain other pro forma financial and operating information of the
Company in recent periods, the future prospects of the Company and its industry
in general, and certain ratios and market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of the Company.
 
                                 LEGAL MATTERS
 
     The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Richard J. Rawson, Senior Vice
President and General Counsel of the Company, and by Wachtell, Lipton, Rosen &
Katz, New York, New York. Certain legal matters will be passed upon for the
Underwriters by Davis Polk & Wardwell, New York, New York.
 
                                       88
92
 
                                    EXPERTS
 
     The audited financial statements and financial statement schedules included
in this Prospectus and in the Registration Statement of which this Prospectus
forms a part have been audited by Coopers & Lybrand L.L.P., independent
auditors, as indicated in their report with respect thereto and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
 
                             AVAILABLE INFORMATION
 
     The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the 1933 Act with respect to the Common
Stock offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which have been omitted in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete, and, in each instance, reference is made to the copy of the document
filed as an exhibit to the Registration Statement. The Registration Statement
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and at
the Commission's regional offices at Suite 1400, Northwest Atrium Center, 500
West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center (13th
Floor), New York, New York 10048. Copies of such material can also be obtained
from the Commission at prescribed rates through its Public Reference Section at
450 Fifth Street, N.W., Washington, D.C. 20549.
 
     The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934 (the "1934 Act"). As a result of the
Offerings, the Company will become subject to the informational requirements of
the 1934 Act. The Company will fulfill its obligations with respect to such
requirements by filing periodic reports and other information with the
Commission. In addition, the Company intends to furnish to its stockholders
annual reports containing consolidated financial statements examined by an
independent public accounting firm.
 
                                       89
93
 
                            LUCENT TECHNOLOGIES INC.
 
                         INDEX TO FINANCIAL STATEMENTS
PAGE
                                                                                        ----
Report of Independent Auditors........................................................   F-2
Consolidated Statements of Operations for the three years ended December 31, 1995.....   F-3
Consolidated Balance Sheets at December 31, 1995 and 1994.............................   F-4
Consolidated Statements of Changes in Stockholder's Equity for the three years ended
  December 31, 1995...................................................................   F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1995.....   F-6
Notes to Consolidated Financial Statements............................................   F-7
Schedule of Valuation and Qualifying Accounts.........................................   S-1
F-1
94
 
                         REPORT OF INDEPENDENT AUDITORS
 
To the Stockholder of Lucent Technologies Inc.:
 
     We have audited the consolidated financial statements and the financial
statement schedule of Lucent Technologies Inc. and subsidiaries (the "Company")
listed in the index on page F-1 of this S-1. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule 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 Lucent
Technologies Inc. and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations, changes in their stockholder's equity
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. In
addition, in our opinion the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
 
     As discussed in Note 3 to the consolidated financial statements, in 1993
the Company changed its methods of accounting for postretirement benefits,
postemployment benefits and income taxes.
 
Coopers & Lybrand L.L.P.
 
1301 Avenue of the Americas
New York, New York
January 25, 1996
(Note 14 is dated February 1, 1996)
 
                                       F-2
95
 
                   LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
                                                                -------------------------------
                                                                1995(1)      1994        1993
                                                                -------     -------     -------
                                                                          IN MILLIONS
                                                                (EXCEPT PER SHARE AMOUNTS)
REVENUES (includes $2,119 in 1995, $2,137 in 1994, and $1,967
  in 1993 from AT&T) (Note 12)................................  $21,413     $19,765     $17,734
COSTS.........................................................   12,945      11,337      10,088
                                                                -------     -------     -------
GROSS MARGIN..................................................    8,468       8,428       7,646
                                                                -------     -------     -------
OPERATING EXPENSES
Selling, general and administrative expenses (Note 12)........    7,083       5,360       5,016
Research and development expenses.............................    2,385       2,097       1,961
                                                                -------     -------     -------
TOTAL OPERATING EXPENSES......................................    9,468       7,457       6,977
                                                                -------     -------     -------
OPERATING INCOME (LOSS).......................................   (1,000)        971         669
Other income -- net (Note 4)..................................      164          83         193
Interest expense (includes $215 in 1995, $133 in 1994, and
  $115 in 1993 to AT&T) (Note 7)..............................      280         200         196
                                                                -------     -------     -------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECTS OF
  ACCOUNTING CHANGES..........................................   (1,116)        854         666
Provision (benefit) for income taxes (Note 6).................     (263)        331         208
                                                                -------     -------     -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECTS OF ACCOUNTING
  CHANGES.....................................................     (853)        523         458
Cumulative effects of accounting changes, net of taxes (Note
  3)..........................................................       --          --      (4,208)
                                                                -------     -------     -------
NET INCOME (LOSS).............................................  $  (853)    $   523     $(3,750)
                                                                =======     =======     =======
UNAUDITED PRO FORMA NET INCOME (LOSS) PER COMMON SHARE (Note
  1)..........................................................  $           $           $
                                                                =======     =======     =======
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
 
---------------
(1) 1995 includes pre-tax charge of $2,801 ($1,847 after taxes), to cover
    restructuring costs of $2,613 and asset impairment and other charges of
    $188. (See Note 5.)
 
                                       F-3
96
 
                   LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31
                                                                        ----------------------
                                                                         1995           1994
                                                                        -------        -------
                                                                             IN MILLIONS
ASSETS
Cash and cash equivalents (Note 14)...................................  $   448        $   580
Accounts receivable, less allowances of $248 in 1995, and $206 in
  1994................................................................    5,354          4,191
Inventories (Note 4)..................................................    3,222          2,405
Deferred income taxes -- net (Note 6).................................    1,482          1,028
Other current assets..................................................      173            288
                                                                        -------        -------
TOTAL CURRENT ASSETS..................................................   10,679          8,492
Property, plant and equipment -- net (Note 4).........................    4,338          4,676
Prepaid pension costs (Note 8)........................................    2,522          2,252
Deferred income taxes -- net (Note 6).................................      872            685
Capitalized software..................................................      387            420
Other assets..........................................................      924            815
                                                                        -------        -------
TOTAL ASSETS..........................................................  $19,722        $17,340
                                                                        =======        =======
LIABILITIES
Accounts payable......................................................  $ 1,229        $   945
Payroll and benefit-related liabilities...............................    3,026          1,931
Postretirement and postemployment benefit liabilities (Notes 3 and
  9)..................................................................      227            594
Debt sharing amount in anticipation of assumption of the Commercial
  Paper Program (Notes 7 and 14)......................................    3,842          2,961
Debt maturing within one year.........................................       49             49
Other current liabilities.............................................    2,690          1,766
                                                                        -------        -------
TOTAL CURRENT LIABILITIES.............................................   11,063          8,246
Postretirement and postemployment benefit liabilities (Notes 3 and
  9)..................................................................    5,569          5,566
Long-term debt........................................................      123            154
Other liabilities.....................................................    1,533            898
Commitments and contingencies (Note 13)
                                                                        -------        -------
TOTAL LIABILITIES.....................................................   18,288         14,864
TOTAL STOCKHOLDER'S EQUITY............................................    1,434          2,476
                                                                        -------        -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............................  $19,722        $17,340
                                                                        =======        =======
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
 
                                       F-4
97
 
                   LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31
                                                                      -------------------------
                                                                       1995     1994     1993
                                                                      ------   ------   -------
                                                                             IN MILLIONS
Balance -- Beginning of Year........................................  $2,476   $2,580   $ 3,098
  Net income (loss).................................................    (853)     523    (3,750)
  Transfers from (to) AT&T (Note 12)................................    (125)    (729)    3,216
  Foreign currency translation......................................     (64)     102        16
                                                                      ------   ------   -------
Balance -- End of Year..............................................  $1,434   $2,476   $ 2,580
                                                                      ======   ======   =======
The notes on pages F-7 through F-23 are an integral part of the consolidated
financial statements.
 
                                       F-5
98
 
                   LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
                                                                -------------------------------
                                                                 1995        1994        1993
                                                                -------     -------     -------
                                                                          IN MILLIONS
OPERATING ACTIVITIES
Net income (loss).............................................  $  (853)    $   523     $(3,750)
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Business restructuring charge...............................    2,613          --          --
  Asset impairment and other charges..........................      188          --          --
  Cumulative effects of accounting changes....................       --          --       4,208
  Depreciation and amortization...............................    1,493       1,311       1,213
  Deferred income taxes.......................................     (653)        338          64
  Provision for uncollectibles................................       69          83          68
  Other adjustments for noncash items, net....................     (103)       (177)       (375)
  Increase in accounts receivable.............................   (1,203)       (159)       (645)
  Increase in inventories.....................................   (1,089)        (26)       (409)
  Increase in accounts payable................................      271         291          42
  Net (increase) decrease in other operating assets and
     liabilities..............................................     (241)       (564)     (1,656)
                                                                -------     -------     -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...........      492       1,620      (1,240)
                                                                -------     -------     -------
INVESTING ACTIVITIES
Capital expenditures..........................................   (1,277)       (878)       (577)
Proceeds from sale or disposal of property, plant and
  equipment...................................................      118          15          38
Net (increase) decrease in investments........................      (86)        252         (45)
(Acquisitions) dispositions, net of cash acquired.............       10         119        (170)
Other investing activities, net...............................     (107)        (75)       (333)
                                                                -------     -------     -------
NET CASH USED IN INVESTING ACTIVITIES.........................   (1,342)       (567)     (1,087)
                                                                -------     -------     -------
FINANCING ACTIVITIES
Repayments of long-term debt..................................      (46)        (22)       (109)
Increase (decrease) in debt sharing amount....................      881          53        (624)
Transfers from (to) AT&T......................................     (125)       (729)      3,216
Decrease in short-term borrowings -- net......................       --         (84)         (1)
                                                                -------     -------     -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES...........      710        (782)      2,482
                                                                -------     -------     -------
Effect of exchange rate changes on cash.......................        8          13          (5)
                                                                -------     -------     -------
Net increase (decrease) in cash and cash equivalents..........     (132)        284         150
Cash and cash equivalents at beginning of year................      580         296         146
                                                                -------     -------     -------
Cash and cash equivalents at end of year......................  $   448     $   580     $   296
                                                                =======     =======     =======
Interest paid was $281, $204 and $306 during 1995, 1994 and 1993,
respectively. Income taxes paid were $315, $8 and $109, during 1995, 1994 and
1993 respectively.
 
     The notes on pages F-7 through F-23 are an integral part of the
consolidated financial statements.
 
                                       F-6
99
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                             (DOLLARS IN MILLIONS)
 
1. BACKGROUND AND BASIS OF PRESENTATION
 
  BACKGROUND
 
     Lucent Technologies Inc. (the "Company") is currently a wholly owned
subsidiary of AT&T. On September 20, 1995, AT&T announced its intention to
create a separate company comprised of the AT&T business and operations that now
comprise the Company, and the associated assets and liabilities of such
businesses and operations and Bell Laboratories (the "Separation"). AT&T also
announced its intention to distribute to its shareholders by December 31, 1996,
subject to certain conditions, all of its interest in the Company following the
Offerings (the "Distribution"). The Company was incorporated on November 29,
1995 with 1,000 shares of Common Stock, without par value, authorized and
outstanding, all of which are owned by AT&T. Beginning February 1, 1996, AT&T is
planning to transfer to the Company substantially all of the assets and
liabilities related to the Company's operations, except that AT&T is retaining
approximately $2,000 in accounts receivable.
 
  BASIS OF PRESENTATION
 
     The consolidated financial statements reflect the results of operations,
financial position, changes in stockholder's equity and cash flows of the
businesses that will be transferred to the Company from AT&T in the Separation
(the "Company Businesses") as if the Company were a separate entity for all
periods presented. The consolidated financial statements have been prepared
using the historical basis in the assets and liabilities and historical results
of operations related to the Company Businesses. Changes in stockholder's equity
represent the net income of the Company plus net cash transfers to or from AT&T.
Additionally, the consolidated financial statements include allocations of
certain AT&T corporate headquarters assets (including prepaid pension assets),
liabilities (including debt and benefit obligations, pension and postretirement
benefits), and expenses relating to the Company Businesses that will be
transferred to the Company from AT&T. Management believes these allocations are
reasonable. All material intercompany transactions and balances between the
Company Businesses have been eliminated.
 
     The liabilities of the Company include outstanding direct third-party
indebtedness and the amounts of debt and related interest expense determined
under the Debt Sharing Agreement discussed in Note 7.
 
     Interest expense shown in the consolidated financial statements reflects
the interest expense associated with the aggregate borrowings for each period
presented principally using AT&T's average commercial paper rates for the
applicable period. General corporate overhead related to AT&T's corporate
headquarters and common support divisions has been allocated to the Company
based on the ratio of the Company's external costs and expenses to AT&T's
external costs and expenses. Management believes these allocations are
reasonable. However, the costs of these services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the Company
had performed these functions as a stand-alone entity. Subsequent to the
Separation, the Company will perform these functions using its own resources or
purchased services and will be responsible for the costs and expenses associated
with the management of a public corporation. Additionally, income taxes are
calculated on a separate tax return basis.
 
     The Company's financial statements include the costs experienced by the
AT&T pension and postretirement benefit plans for employees and retirees for
whom the Company will assume responsibility.
 
     The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in stockholder's
equity and cash flows of the Company in the future or what they would have been
had it been a separate, stand-alone entity during the periods presented.
 
                                       F-7
100
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1. BACKGROUND AND BASIS OF PRESENTATION -- (CONTINUED)

  EARNINGS (LOSS) PER COMMON SHARE
 
     Historical earnings per share have not been presented because they would
not be meaningful. The Company has 1,000 shares of Common Stock outstanding, all
of which are owned by AT&T. Pro forma earnings (loss) per common share is
calculated based on earnings after giving effect to the sale of           shares
of Common Stock in the Offerings, divided by the number of shares of Common
Stock to be outstanding after the Offerings. (Because the offering price and
number of shares of Common Stock to be sold under the Offerings have not yet
been determined, unaudited pro forma earnings (loss) per share have not been
presented. These determinations will be made prior to the effective date of this
Prospectus and unaudited pro forma earnings (loss) per share will be furnished
by amendment and reflected in the definitive Prospectus.)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  CONSOLIDATION
 
     The consolidated financial statements include all majority-owned
subsidiaries of the Company. Investments in which the Company exercises
significant influence but which it does not control (generally a 20% - 50%
ownership interest) are accounted for under the equity method of accounting.
Investments in which the Company has less than a 20% ownership interest are
accounted for under the cost method of accounting.
 
  USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
long-term contracts, allowance for uncollectible accounts receivable, inventory
obsolescence, product warranty, depreciation, employee benefit plans, taxes,
restructuring reserves and contingencies.
 
  CURRENCY TRANSLATION
 
     For operations outside the United States that prepare financial statements
in currencies other than the United States dollar, income statement amounts are
translated at average exchange rates during the year, and assets and liabilities
are translated at year-end exchange rates. These translation adjustments are
included as a separate component of stockholder's equity.
 
  REVENUE RECOGNITION
 
     Revenue is generally recognized on the sales of products or services when
the products are delivered or the services performed, all substantial
contractual obligations have been satisfied, and the collection of the resulting
receivable is deemed probable. Revenue from sales of software products is
generally recognized upon product delivery, acceptance, and completion of all
significant vendor obligations. Revenue from rental sales is recognized
proportionately over the contract period. Revenues and estimated profits on
long-term construction type contracts are recognized under the percentage of
completion method of accounting using either a units of delivery or a cost to
cost methodology. Revisions of profit estimates are reflected in the period in
which the facts that require the revision to the estimate become known. Any
losses on contracts are immediately recognized when determinable.
 
  RESEARCH AND DEVELOPMENT COSTS
 
     Research and development costs are charged to expense as incurred except
for costs incurred for the development of computer software that will be sold,
leased or otherwise marketed which are capitalized when
 
                                       F-8
101
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

technological feasibility has been established. These capitalized costs are
subject to an ongoing assessment of recoverability based upon anticipated future
revenues and changes in hardware and software technologies. Costs capitalized
include direct labor and related overhead.
 
     Amortization of capitalized software development costs begins when the
product is available for general release. Amortization is provided on a
product-by-product basis on either the straight-line method over periods not
exceeding two years or the sales ratio method. Unamortized capitalized software
development costs determined to be in excess of net realizable value of the
product are expensed at the date of such determination.
 
  DERIVATIVE FINANCIAL INSTRUMENTS
 
     The Company uses various financial instruments, including derivative
financial instruments, for purposes other than trading. The Company does not
enter into derivative financial instruments for speculative purposes.
Derivatives, used as part of the Company's risk management strategy, must be
designated at inception as a hedge, and measured for effectiveness both at
inception and on an ongoing basis. For qualifying foreign currency hedges, the
gains and losses are deferred and recognized as adjustments of carrying amounts
when the underlying hedged transaction is recorded. Interest rate swap
agreements involve the periodic exchange of payments without the exchange of the
underlying principal or notional amounts. Net payments are recognized as an
adjustment to income or expense of the underlying hedged transaction. Gains and
losses on interest rate swap agreements that do not qualify as hedges are
recorded at fair value and recognized in other income or expense. If the Company
terminates a 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.
 
  INCOME TAXES
 
     Historically, the Company's operations have been included in the
consolidated income tax returns filed by AT&T. Income tax expense in the
Company's consolidated financial statements has been calculated on a separate
tax return basis.
 
  INVESTMENT TAX CREDITS
 
     For financial reporting purposes, investment tax credits are amortized as a
reduction to the provision for income taxes over the useful lives of the
property that produced the credits.
 
  CASH AND CASH EQUIVALENTS
 
     All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
 
  INVENTORIES
 
     Inventories are stated at the lower of cost or market (i.e., net realizable
value or replacement cost). Cost includes material, labor and manufacturing
overhead. Cost is determined principally on a first-in, first-out ("FIFO")
basis. Inventories also include unbilled costs and fees on contracts in process
net of progress payments.
 
  PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is determined primarily using the unit method. The
group method is used for certain facilities and equipment, except factory
machinery which is depreciated using the unit method. When assets that were
depreciated using the unit
 
                                       F-9
102
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
method are sold, the gains or losses are included in operating results. When
assets that were depreciated using the group method are sold or retired, the
original cost is deducted from the plant account and from accumulated
depreciation and any proceeds are applied against accumulated depreciation.
 
     Accelerated depreciation methods are used for certain high technology
computer processing equipment. All other facilities and equipment are
depreciated on a straight-line basis over their estimated useful lives.
 
  GOODWILL
 
     Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over the periods benefited, principally in
the range of 10 to 15 years. Goodwill is 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 immediately.
 
3. CHANGES IN ACCOUNTING PRINCIPLES
 
  POSTRETIREMENT BENEFITS
 
     AT&T adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective January 1, 1993. This standard requires
accrual of estimated future retiree benefits during the years employees are
working and accumulating these benefits. Previously, health care benefits were
expensed as claims were incurred and life insurance benefits were expensed as
plans were funded. AT&T recorded a one-time pretax charge for the unfunded
portions of these liabilities of $11,317 ($7,023 after taxes).
 
     For purposes of preparing these consolidated financial statements,
estimates were made (see Note 9) of the Company's share of the unfunded portions
of postretirement benefit obligations and a one-time pretax charge of $6,142
($3,722 after taxes) was recorded. This change in accounting does not affect
cash flows.
 
  POSTEMPLOYMENT BENEFITS
 
     AT&T also adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1993. Analogous to SFAS No. 106, this standard
requires the Company to accrue for estimated future postemployment benefits,
including separation payments, during the years employees are working and
accumulating these benefits, and for disability payments when the disabilities
occur. Before this change in accounting, costs for separations were recognized
when approved and disability benefits were recognized when paid. AT&T recorded a
one-time pretax charge for the unprovided portion of these liabilities of $1,809
($1,128 after taxes).
 
     For purposes of preparing these consolidated financial statements,
estimates were made of the Company's share of the unprovided portion of
postemployment liabilities and a one-time pretax charge of $875 ($530 after
taxes) was recorded. This change reduced operating income by $139 and net income
by $84. This change in accounting does not affect cash flows.
 
  INCOME TAXES
 
     The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1993. Among other provisions, this standard requires the computation
of deferred tax amounts using the enacted corporate income tax rates for the
years in which the taxes will be paid or refunds received. Before this change in
accounting, deferred tax accounts reflected rates in effect when the deferrals
were made.
 
                                      F-10
103
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. CHANGES IN ACCOUNTING PRINCIPLES -- (CONTINUED)

     The change in calculating deferred tax amounts required by this standard
resulted in a one-time benefit of $44 in the first quarter of 1993. This change
in accounting does not affect cash flows. This change will only affect net
income in future periods if applicable tax rates change.
 
  IMPAIRMENT OF LONG-LIVED ASSETS
 
     Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of the standard did not materially impact
the Company's consolidated results of operations, financial condition or cash
flows because this was essentially the method the Company used in the past to
measure and record asset impairments. The 1995 restructuring and other charges
did include recognition of asset impairments.
 
  STOCK-BASED COMPENSATION
 
     In 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," will be
adopted. This standard establishes a fair value method for accounting for or
disclosing stock-based compensation plans. This standard will be adopted by
disclosing the pro forma consolidated net income and earnings per share amounts
assuming the fair value method was effective on January 1, 1995. The adoption of
this standard will not impact consolidated results of operations, financial
position, or cash flows.
 
4. SUPPLEMENTARY FINANCIAL INFORMATION
 
SUPPLEMENTARY INCOME STATEMENT INFORMATION
1995      1994     1993
                                                                      ------     ----     ----
INCLUDED IN COSTS
Amortization of software development costs..........................  $  312     $345     $314
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Amortization of goodwill............................................  $   40     $ 31     $ 22
INCLUDED IN COSTS AND OPERATING EXPENSES
Depreciation and amortization of property, plant and equipment......  $1,109     $891     $836
OTHER INCOME
Interest income.....................................................  $   44     $ 24     $ 20
Minority interests in (earnings) losses of subsidiaries.............     (20)     (14)      21
Net equity (losses) earnings from investments.......................     (25)      21       29
Increase in cash surrender value of life insurance..................      40       30       32
Gain/loss on foreign currency transactions..........................     (26)     (48)     (13)
Miscellaneous -- net................................................     151       70      104
                                                                      ------     ----     ----
Total other income -- net...........................................  $  164     $ 83     $193
                                                                      ======     ====     ====
F-11
104
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4. SUPPLEMENTARY FINANCIAL INFORMATION -- (CONTINUED)
SUPPLEMENTARY BALANCE SHEET INFORMATION
1995        1994
                                                                          --------     -------
INVENTORIES
Completed goods.........................................................  $  1,673     $ 1,297
Unbilled costs and fees on contracts in process (net of progress
  payments of $355 in 1995).............................................       371          43
Work in process and raw materials.......................................     1,178       1,065
                                                                          --------     -------
Inventories.............................................................  $  3,222     $ 2,405
                                                                          ========     =======
PROPERTY, PLANT AND EQUIPMENT -- NET
Land and improvements...................................................  $    273     $   258
Buildings and improvements..............................................     2,668       2,613
Machinery, electronic and other equipment...............................     8,096       8,355
Total property, plant and equipment.....................................    11,037      11,226
Less: Accumulated depreciation..........................................    (6,699)     (6,550)
                                                                          --------     -------
Property, plant and equipment -- net....................................  $  4,338     $ 4,676
                                                                          ========     =======
5. BUSINESS RESTRUCTURING AND OTHER CHARGES
 
     In the fourth quarter of 1995, a pre-tax charge of $2,801 was recorded to
cover restructuring costs of $2,613 and asset impairment and other charges of
$188. The Company's fourth quarter restructuring plans include restructuring its
consumer products business to implement major process improvements in how it
designs, manufactures and distributes those products, including closing all of
its Company-owned retail phone center stores, consolidating and reengineering
numerous corporate and business unit operations during the next two years, and
selling its Microelectronics interconnect business and Paradyne business.
Accordingly, the fourth quarter restructuring charge of $2,613 included the
separation costs for nearly 22,000 employees, comprised of about 11,000
management and 11,000 occupational employees. Approximately 1,000 additional
management employees are employed by businesses that the Company has announced
plans to sell. As of December 31, 1995, approximately 4,100 management employees
have accepted a voluntary severance package and the majority of these employees
will leave the Company in early 1996. The Company expects approximately 70% of
all separations to be completed by the end of 1996, with the majority of the
remaining separations being completed during 1997. The restructuring charge also
included costs associated with early termination of building leases and asset
write-downs as part of the plan to sell certain businesses and restructure its
operations.
 
     The pre-tax total of the fourth quarter charge for restructuring,
impairments and other charges of $2,801 for 1995 was recorded as $892 of costs,
$1,645 of selling, general and administrative expenses, and $264 of research and
development expenses. The charges include $1,509 for employee separations; $627
for asset write-downs; $202 for closing, selling and consolidating facilities;
and $463 for other items. The total charges reduced net income by approximately
$1,847. Of the total combined charges, $1,788 will result in payment of cash in
the future. Approximately $1,013 of the charge related to noncash items. There
were no restructuring charges in 1994. The 1993 restructuring charges of $56
were fully utilized at December 31, 1995.
 
                                      F-12
105
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. INCOME TAXES
 
     The following table presents the principal reasons for the difference
between the effective tax rate and the United States federal statutory income
tax rate:
1995        1994        1993
                                                                -------     -------     -------
U.S. federal statutory income tax rate........................       35%         35%         35%
                                                                -------     -------     -------
Federal income tax provision (benefit) at statutory rate......  $  (391)    $   299     $   233
State and local income taxes, net of federal income tax
  effect......................................................      (56)         27          26
Amortization of intangibles...................................       29          12           6
Foreign rate differential.....................................       66         (64)        (17)
Taxes on repatriated and other foreign income.................       74         100          38
Research credits..............................................       (3)        (27)        (20)
Effect of tax rate change on deferred tax assets..............       --          --         (54)
Other differences -- net......................................       18         (16)         (4)
                                                                -------     -------     -------
Provision (benefit) for income taxes..........................  $  (263)    $   331     $   208
                                                                =======     =======     =======
Effective income tax rate.....................................     23.6%       38.8%       31.3%
The following table presents the U.S. and foreign components of income
before income taxes and the provision for income taxes:
1995         1994       1993
                                                                 -------       ----       ----
INCOME (LOSS) BEFORE INCOME TAXES
United States..................................................  $(1,231)      $475       $452
Foreign........................................................      115        379        214
                                                                 -------       ----       ----
                                                                 $(1,116)      $854       $666
                                                                 =======       ====       ====
PROVISION (BENEFIT) FOR INCOME TAXES
CURRENT
Federal........................................................  $   205       $(96)      $ 59
State and local................................................       44        (34)         8
Foreign........................................................      141        123         77
                                                                 -------       ----       ----
                                                                     390         (7)       144
                                                                 -------       ----       ----
DEFERRED
Federal........................................................     (523)       267         34
State and local................................................     (130)        76         32
Foreign........................................................        1         (4)        (1)
                                                                 -------       ----       ----
                                                                    (652)       339         65
Deferred investment tax credits................................       (1)        (1)        (1)
                                                                 -------       ----       ----
Provision (benefit) for income taxes...........................  $  (263)      $331       $208
                                                                 =======       ====       ====
The foreign deferred income tax provision is shown net of valuation
allowance increases of $46 and $39 in 1995 and 1993, respectively, and a
valuation allowance decrease of $27 in 1994.
 
     Deferred income tax liabilities are taxes the Company expects to pay in
future periods. Similarly, deferred income tax assets are taxes recognized for
expected reductions in taxes payable. Deferred income taxes arise
 
                                      F-13
106
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. INCOME TAXES -- (CONTINUED)

because of differences in the book and tax bases of certain assets and
liabilities. Deferred income tax assets/ liabilities consist of the following:
1995        1994
                                                                           -------     -------
CURRENT DEFERRED INCOME TAX ASSETS:
  Business restructuring.................................................  $   519     $    57
  Employee pensions and other benefits...................................      516         540
  Reserves and allowances................................................      537         474
  Valuation allowance....................................................     (117)         --
  Other..................................................................      143          45
                                                                           -------     -------
Total current deferred income tax assets.................................    1,598       1,116
                                                                           -------     -------
CURRENT DEFERRED INCOME TAX LIABILITIES:
  Other..................................................................  $   116     $    88
                                                                           -------     -------
Total current deferred income tax liabilities............................  $   116     $    88
                                                                           -------     -------
Net current deferred income tax assets...................................  $ 1,482     $ 1,028
                                                                           =======     =======
LONG-TERM DEFERRED INCOME TAX ASSETS:
  Employee pensions and other benefits, net..............................  $ 1,425     $ 1,478
  Business restructuring.................................................      267          68
  Net operating losses/credit carryforwards..............................       28          96
  Reserves and allowances................................................        9          31
  Valuation allowance....................................................      (25)        (96)
  Other..................................................................      270         199
                                                                           -------     -------
Total long-term deferred income tax assets...............................    1,974       1,776
                                                                           -------     -------
LONG-TERM DEFERRED INCOME TAX LIABILITIES:
  Property, plant and equipment..........................................  $   738     $   806
  Other..................................................................      364         285
                                                                           -------     -------
Total long-term deferred income tax liabilities..........................    1,102       1,091
                                                                           -------     -------
Net long-term deferred income tax assets.................................  $   872     $   685
                                                                           =======     =======
The Company has not provided for United States federal income taxes or
foreign withholding taxes on $1,004 and $765 of undistributed earnings of its
non-United States subsidiaries as of December 31, 1995 and December 31, 1994,
respectively, because such earnings are intended to be reinvested indefinitely.
Such earnings may be repatriated only when it is advantageous to do so, at which
time applicable taxes would be provided for on the amount of the earnings
remitted. It is not practicable to determine the amount of applicable taxes.
 
7. DEBT SHARING AGREEMENT
 
     The amounts of debt and interest expense included in the Company's
financial statements have been determined under the provisions of a debt sharing
agreement with AT&T. The amount of debt and related interest shared by the
Company reflect the cost of financing the Company's assets and operations. The
agreement is effective from January 1, 1991 through December 31, 1995. The
amount of debt shared by the Company in each of those years represents
approximately 55% of the Company's total expected capital structure. Interest on
this debt is based on the average commercial paper rates incurred by AT&T in
each of
 
                                      F-14
107
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7. DEBT SHARING AGREEMENT -- (CONTINUED)
the years. The rates were 6.2%, 4.5% and 4.4% for 1995, 1994 and 1993,
respectively, and interest amounted to $215, $133 and $115 for each of the
respective years.
 
8. EMPLOYEE BENEFIT PLANS
 
     At the Distribution, the Company will assume responsibility for pension and
post-retirement benefits for retirees whose last work assignment was a unit of
the Company, for other retirees assigned to the Company and for the employees of
the Company. Until the Distribution, the Company's financial statements will
include the costs experienced by the AT&T plans for employees and retirees for
whom the Company will assume responsibility.
 
  PENSION PLANS
 
     The majority of the Company's employees participate in AT&T's
noncontributory defined benefit plans. Benefits for management employees are
principally based on career-average pay. Benefits for occupational employees are
not directly pay-related. 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 Distribution, the Company will establish separate
defined benefit plans for the employees and retirees of the Company. Pension
assets will be transferred from AT&T's pension trust to the Company's pension
trust pursuant to a specified formula. For purposes of preparing these financial
statements, estimates were made, as of December 31, 1995, of the assets and
pension obligations that will be transferred to the Company. As of December 31,
1995, the projected benefit obligation is estimated at $23,410 and the assets to
be transferred are estimated at $29,092. The actual amounts transferred will be
measured at the Distribution date, using the same methodology, and will likely
be different from these estimates. The estimated December 31, 1995 assets and
pension obligations were also the basis for estimating the Company's assets and
pension obligations for 1994 and 1993.
 
     As of December 31, 1995 and 1994, AT&T had a prepaid pension asset of
$4,664 and $4,151, respectively. Based on the estimates described in this note,
the Company's share of the prepaid pension asset as of December 31, 1995 and
1994 is $2,522 and $2,252, respectively.
 
     Pension cost is computed using the projected unit credit method. The
Company recorded pension income related to the AT&T plans of $135, $288 and $284
in 1995, 1994 and 1993, respectively. The 1995 consolidated statement of
operations includes a charge of $97 for curtailment loss.
 
  SAVINGS PLANS
 
     The majority of the Company's employees are eligible to participate in
savings plans sponsored by AT&T. The plans allow employees to contribute a
portion of their pre-tax and/or after-tax income in accordance with specified
guidelines. AT&T matches a certain percentage of employee contributions, up to
certain limits. The Company's expense related to the AT&T savings plans was $196
in 1995, $178 in 1994 and $167 in 1993. The Company expects to establish similar
plans following the Distribution.
 
9. POSTRETIREMENT BENEFITS
 
     The majority of the Company's employees and retirees participate in AT&T's
benefit plans for retirees, which currently include health care benefits, life
insurance coverage and telephone concessions.
 
     Immediately following the Distribution, the Company will establish separate
postretirement benefit plans for the employees and retirees of the Company.
Postretirement benefit assets will be transferred from AT&T to the Company based
on methods and assumptions that have been agreed to by both companies. For
purposes of preparing these financial statements, estimates were made, as of
December 31, 1995, of the assets and
 
                                      F-15
108
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. POSTRETIREMENT BENEFITS -- (CONTINUED)

postretirement benefit obligations that will be transferred to the Company. As
of December 31, 1995, the accumulated postretirement benefit obligation is
estimated at $8,368 and the assets to be transferred are estimated at $3,462.
The actual amounts transferred will be measured at the Distribution date, using
the same methodology, and will likely be different from these estimates. The
estimated December 31, 1995 assets and postretirement benefit obligations were
also the basis for estimating the Company's assets and postretirement benefit
obligations for 1994 and 1993.
 
     As of December 31, 1995 and 1994, AT&T had an accrued postretirement
benefit liability of $7,389 and $7,816, respectively. Based on the estimates
described in this note, the Company's share of the accrued postretirement
benefit liability as of December 31, 1995 and 1994 is $4,635 and $5,006,
respectively.
 
     The Company recorded postretirement benefit expense related to the AT&T
plans of $468, $461 and $529 in 1995, 1994 and 1993, respectively. It is
estimated that increasing the assumed health care cost trend rate by 1% would
raise the Company's portion of the accumulated postretirement benefit obligation
as of December 31, 1995 by $423 and 1995 postretirement benefit costs by $35.
 
10. SEGMENT INFORMATION
 
  INDUSTRY SEGMENT
 
     The Company operates in the global telecommunications networking industry
segment. This segment includes systems, software and products used for voice
data and video communications.
 
  GEOGRAPHIC SEGMENTS
 
     Transfers between geographic areas are on terms and conditions comparable
with sales to external customers. The methods followed in developing the
geographic area data require the use of estimation techniques and do not take
into account the extent to which product development, manufacturing and
marketing depend upon each other. Thus the information may not be indicative of
results if the geographic areas were independent organizations.
 
                                      F-16
109
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. SEGMENT INFORMATION -- (CONTINUED)
1995      1994      1993
                                                                    -------   -------   -------
REVENUES
United States.....................................................  $17,826   $17,207   $16,213
Other geographic areas............................................    3,587     2,558     1,521
                                                                    -------   -------   -------
                                                                    $21,413   $19,765   $17,734
                                                                    =======   =======   =======
TRANSFERS BETWEEN GEOGRAPHIC AREAS (ELIMINATED IN CONSOLIDATION)
United States.....................................................  $ 1,081   $ 1,338   $   946
Other geographic areas............................................      911     1,041       892
                                                                    -------   -------   -------
                                                                    $ 1,992   $ 2,379   $ 1,838
                                                                    =======   =======   =======
OPERATING INCOME (LOSS)
United States.....................................................  $  (679)  $ 1,697   $ 1,097
Other geographic areas............................................      (67)       (5)     (242)
Corporate, eliminations and nonoperating..........................     (370)     (838)     (189)
                                                                    -------   -------   -------
Income (loss) before income taxes.................................  $(1,116)  $   854   $   666
                                                                    =======   =======   =======
ASSETS
United States.....................................................  $15,043   $14,114   $14,955
Other geographic areas............................................    4,696     3,493     2,289
Corporate assets..................................................      738       696       458
Eliminations......................................................     (755)     (963)     (593)
                                                                    -------   -------   -------
                                                                    $19,722   $17,340   $17,109
                                                                    =======   =======   =======
Corporate assets are principally cash and temporary cash investments. Data
on other geographic areas pertain to operations that are located outside the
United States. Revenues from all international activities, including those in
the table and exports, provided 23.3%, 19.1%, and 16.9% of consolidated revenues
in 1995, 1994 and 1993, respectively.
 
  CONCENTRATIONS
 
     Historically, the Company has relied on a limited number of customers for a
substantial portion of its total revenues. In terms of total revenues, the
Company's largest customer has been AT&T, although other large customers may
purchase more of any particular system or product line. The Company expects that
a significant portion of its future revenues will continue to be generated by a
limited number of customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could materially
adversely affect the Company's operating results. The Company does not have a
concentration of available sources of supply materials, labor, services or other
rights that, if suddenly eliminated, could severely impact its operations.
 
11. FINANCIAL INSTRUMENTS
 
     In the normal course of business, AT&T has entered into various financial
instruments, including derivative financial instruments, for purposes other than
trading. A portion of such financial instruments related to the Company's
Businesses have, as between AT&T and the Company, been assumed by the Company.
Derivative financial instruments are not entered into for speculative purposes.
These instruments include letters of credit, commitments to extend credit,
guarantees of debt and foreign currency exchange
 
                                      F-17
110
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. FINANCIAL INSTRUMENTS -- (CONTINUED)

contracts. Unless otherwise noted, the Company generally does not require
collateral to support these financial instruments.
 
     By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties, and the maximum potential loss may
exceed the amount recognized in the balance sheet. The contract or notional
amount of the financial instruments reflects the maximum amount of the Company's
commitments to extend credit or the extent of involvement that the Company has
in particular classes of financial instruments. At December 31, 1995 and 1994,
the Company's maximum exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
financial guarantees is represented by the amount drawn and outstanding on those
instruments. For forward and futures contracts, and option contracts, the
contract or notional amounts do not represent exposure to credit loss.
 
     At December 31, 1995 and 1994, in management's opinion, there was no
significant risk of loss in the event of nonperformance of the counterparties to
these financial instruments. Exposure to credit risk is controlled through
credit approvals, credit limits and monitoring procedures and management
believes that the reserves for losses are adequate. The Company had no
significant exposure to any individual customer or counterparty at December 31,
1995 and December 31, 1994. Letters of credit, commitments to extend credit and
guarantees of debt may exist or expire without being drawn upon. Therefore, the
total notional or contract amounts do not necessarily represent future cash
flows.
 
     Requests for providing commitments to extend credit and financial
guarantees are reviewed and approved by the senior management of the Company.
Management conducts regular reviews of all outstanding commitments, letters of
credit and financial guarantees, and the results of these reviews are considered
in assessing the adequacy of the Company's reserve for possible credit and
guarantee losses.
 
     For the years ended December 31, 1995 and December 31, 1994, no interest
rate cap agreements had been entered into for the benefit of the Company. The
Company may, in the future, enter into these or other types of derivative
transactions as it judges prudent for the proper management of its business.
 
  LETTERS OF CREDIT
 
     Letters of credit are purchased guarantees that ensure the Company's
performance or payment to third parties in accordance with specified terms and
conditions.
 
  COMMITMENTS TO EXTEND CREDIT
 
     Commitments to extend credit are legally binding, conditional agreements
generally having fixed expiration or termination dates and specified interest
rates and purposes.
 
  GUARANTEES OF DEBT
 
     From time to time, the Company guarantees the financing for product
purchases by customers and the debt of certain unconsolidated joint ventures.
Requests for providing such guarantees are reviewed and approved by the senior
management of the Company. The Company seeks to limit its exposure to credit
risks in any single country or region. Certain financial guarantees are backed
by amounts held in trust for the Company.
 
  FOREIGN CURRENCY EXCHANGE CONTRACTS
 
     Foreign currency exchange contracts, including forward, option and swap
contracts are used to manage exposure to changes in currency exchange rates,
principally Dutch guilders, Deutsche marks, and Japanese yen. Some of the
contracts involve the exchange of two foreign currencies, according to local
needs in foreign
 
                                      F-18
111
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. FINANCIAL INSTRUMENTS -- (CONTINUED)

subsidiaries. The use of derivative financial instruments allows the Company to
reduce its exposure to the risk that the eventual dollar net cash inflows and
outflows resulting from the sale of products to foreign customers and purchases
from foreign suppliers will be adversely affected by changes in exchange rates.
The foreign exchange contracts hedge firmly committed or forecasted purchases
and sales. These transactions are generally expected to occur in less than one
year. Gains and losses are deferred in other current assets and liabilities for
firmly committed sales and purchases. Deferred gains and losses are recognized
as adjustments to the underlying hedged transactions when the future sales or
purchases are recognized, or immediately, if the commitment is canceled. Gains
and losses on foreign exchange contracts that hedge forecasted transactions are
recognized in other income as the exchange rates change. At December 31, 1995
and 1994, deferred unrealized gains were $8 and $3 and deferred unrealized
losses were $6 and $7, respectively.
 
 FAIR VALUE OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
 
     The tables below present the valuation methods and the carrying or notional
amounts and estimated fair values 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 the instruments. The Company's
exposure is limited to the fair value of the contracts with a positive fair
value at the reporting date plus interest receivable, if any, at the reporting
date.
FINANCIAL INSTRUMENT                            VALUATION METHOD
Short-term debt.............................    The carrying amount is a reasonable estimate
                                                of fair value.
Letters of credit...........................    Fees paid to obtain the obligations.
Guarantees of debt..........................    Costs to terminate agreements.
Commitments to extend credit................    Costs to terminate agreements.
Foreign currency exchange contracts.........    Market quotes.
1995                    1994
                                                         -------------------     -------------------
                                                         CARRYING      FAIR      CARRYING      FAIR
                                                          AMOUNT      VALUE       AMOUNT      VALUE
                                                         --------     ------     --------     ------
ON BALANCE SHEET
Liabilities:
Debt sharing amount in anticipation of assumption of
  the commercial paper program.........................   $3,842      $3,842      $2,961      $2,961
AMOUNTS DRAWN
                                                            1995          1994           DOWN AND
                                                          CONTRACT/     CONTRACT/       OUTSTANDING
                                                          NOTIONAL      NOTIONAL      ---------------
                                                           AMOUNT        AMOUNT       1995      1994
                                                          ---------     ---------     -----     -----
DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS
Foreign exchange:.......................................
  Forward contracts.....................................   $ 1,086        $ 790
  Swap contracts........................................        --          118
  Option contracts......................................         4           --
Letters of credit.......................................       659          640
Commitments to extend credit............................        16          119       $  13     $  34
Guarantees of debt......................................       598          368         296       280
F-19
112
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. FINANCIAL INSTRUMENTS -- (CONTINUED)
CARRYING AMOUNT             FAIR VALUE
                                                      ---------------------     ---------------------
                                                       ASSET      LIABILITY      ASSET      LIABILITY
                                                      -------     ---------     -------     ---------
1995
Foreign exchange forward contracts..................  $    16      $     10     $    11      $     15
Letters of credit...................................       --            --           2            --

1994
Foreign exchange forward contracts..................  $     7      $     12     $     9      $     28
Foreign exchange swap contracts.....................       --             5           5             4
Letters of credit...................................       --            --           1            --
12. TRANSACTIONS WITH AT&T
 
     For the years 1995, 1994 and 1993, the Company had $2,119, $2,137, and
$1,967, respectively, of revenues from AT&T. At December 31, 1995 and 1994, the
related receivables amounted to $291 and $81, respectively.
 
     AT&T has allocated general corporate overhead expenses amounting to $372,
$358 and $312 in 1995, 1994 and 1993, respectively. Additionally, the Company
incurred expenses for long distance services provided by AT&T of $80, $93 and
$92 for the years ended December 31, 1995, 1994 and 1993, respectively. Amounts
payable to AT&T were $25 at December 31, 1995 and 1994.
 
     Rights, title and interest in certain lease receivables for business
communication equipment are sold at a discount to AT&T's finance subsidiary,
AT&T Capital Corporation. The Company acts as an agent to bill and collect such
receivables. The Company has agreed to repurchase certain of these lease
receivables in the event of a default thereon. At December 31, 1995 and 1994,
$206 and $208, respectively, of such receivables had recourse to the Company in
the event of default.
 
     In connection with the Separation, AT&T has agreed to prepay prior to the
closing of the Offerings $500 to the Company, which amount will be applied to
accounts receivable from AT&T that are due and payable on or after January 1,
1997 for the purchase of products, services and licensed materials from the
Company.
 
13. COMMITMENTS AND CONTINGENCIES
 
     In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims, including proceedings under government laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 1995 cannot be ascertained.
While these matters could affect the operating results of any one quarter when
resolved in future periods, management believes that after final disposition,
any monetary liability or financial impact to the Company beyond that provided
for at year-end would not be material to the annual consolidated financial
statements.
 
     The Company leases land, buildings and equipment through contracts that
expire in various years, through 2025. Rental expense under operating leases was
$209 in 1995, $183 in 1994 and $202 in 1993. The table below shows the future
minimum lease payments due under noncancelable operating leases at December 31,
1995. Such payments total $245.
LATER
                                          1996      1997      1998      1999      2000      YEARS
                                          -----     -----     -----     -----     -----     -----
Operating leases........................   $85       $59       $40       $26       $13       $22
F-20
113
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. SUBSEQUENT EVENTS
 
     In connection with the Separation and Distribution, the Company, AT&T and
NCR Corporation, a wholly owned subsidiary ("NCR"), executed and delivered the
Separation and Distribution Agreement, dated as of February 1, 1996 (the
"Separation and Distribution Agreement"), and certain related agreements which
are summarized below. This summary is qualified in all respects by the terms of
the Separation and Distribution Agreement and such related agreements.
 
          SEPARATION AND DISTRIBUTION AGREEMENT
 
     Pursuant to the Separation and Distribution Agreement, AT&T will transfer
to the Company substantially all of the assets and liabilities associated with
the Company's Business, other than accounts receivable having a face amount of
approximately $2,000.
 
     The Separation and Distribution Agreement, among other things, provides
that the Company will indemnify AT&T and NCR for all liabilities relating to the
Company's business and operations and for all contingent liabilities relating to
the Company's business and operations or otherwise assigned to the Company. In
addition, the Separation and Distribution Agreement provides for the sharing of
contingent liabilities not allocated to one of the parties, in the following
proportions: AT&T: 75%, the Company: 22%, and NCR: 3%. The Separation and
Distribution Agreement also provides that each party will share specified
portions of contingent liabilities related to the business of any of the other
parties that exceed specified levels.
 
          EMPLOYEE BENEFITS AGREEMENT
 
     The Company entered into an agreement which governs its employee benefit
obligations with respect to actual employees as well as retirees assigned to the
Company. This agreement provides that, from the Separation until the
Distribution, the Company will be a "Participating Company" in AT&T employee
benefit plans and will bear its allocable share of costs for benefits and
administration under these plans. Immediately after the Distribution, pension
plan assets will be divided between AT&T pension plans and the Company's pension
plans so that each plan will receive the legally required minimum and a
sufficient amount of additional assets to ensure continued compliance with the
existing AT&T pension funding policy. Any trust assets in excess of the funding
policy level will be divided equally between the trusts of AT&T and the Company
with respect to such qualified plans. Liability under the AT&T plans relating to
the Company's employees or retirees will be assumed by the Company's plans.
 
          FEDERAL, STATE AND LOCAL TAX ALLOCATION AGREEMENTS
 
     The Company has entered into agreements with AT&T and its other domestic
subsidiaries that apply to income taxes attributable to the period from the
Company's incorporation through the Distribution. The agreements set forth
principles to be applied in allocating tax liability among those entities filing
returns on a consolidated or combined basis.
 
          TAX SHARING AGREEMENT
 
     The Company has entered into an agreement with AT&T and NCR that governs
contingent tax liabilities and benefits, tax contests and other tax matters with
respect to tax periods ending or deemed to end on the date of the Distribution.
Under such agreement, adjustments to taxes that are clearly attributable to the
business of one party will be borne solely by that party. Adjustments to all
other tax liabilities generally will be borne 75% by AT&T, 22% by the Company
and 3% by NCR.
 
          GENERAL PURCHASE AGREEMENT
 
     The Company and AT&T have entered into the General Purchase Agreement and
various related and supplemental agreements which govern transactions pursuant
to which the Company provides products,
 
                                      F-21
114
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. SUBSEQUENT EVENTS -- (CONTINUED)
licensed materials and services to AT&T and certain designated AT&T affiliates.
AT&T commits therein that payments made to the Company (commencing January 1,
1996) for purchases of products, licensed materials and services by AT&T and
such designated affiliates will total at least $3,000 cumulatively for the
calendar years 1996, 1997 and 1998.
 
          INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT; REAL ESTATE
SHARING
 
     The Company, AT&T and NCR have entered into an agreement governing the
provision by each to one or more of the others on an interim basis of certain
data processing and telecommunications services and certain corporate support
services on specified terms. Specified charges are generally intended to allow
the providing company to recover the fully allocated direct costs of providing
the services, plus all out-of-pocket costs and expenses, but without any profit.
Such agreement also provides for the replication and transfer of certain
computer systems on specified terms. AT&T, the Company and NCR also have entered
into various leases and sublease arrangements for the sharing of certain
facilities for a transitional period on commercial terms.
 
          BRAND LICENSE AGREEMENT
 
     The Company and AT&T have entered into the Brand License Agreement,
pursuant to which the Company will have rights, on a royalty-free basis, to
continue to use the AT&T brand for specified transition periods following the
closing of the Offerings. Under the Brand License Agreement, the Company will be
entitled to use the AT&T brand, alone or in combination with the Company's
brand, for the sale of consumer products and services and business
communications systems and services for a period of one year following the
closing of the Offerings. After the initial one-year period, the Company will be
entitled to continue to use the AT&T brand on these products, systems and
services, but only in combination with the Company's brand, for an additional
three-year period. The right to use the AT&T brand, alone or in combination with
the Company's brand, in connection with certain leased products or maintenance
contracts will extend for 66 months after the closing of the Offerings. The
Brand License Agreement permits the Company to use the AT&T brand on the
Company's other products, systems and services until the earlier of the
Distribution or six months after the closing of the Offerings. In addition, the
Company may use the AT&T brand after these time periods to the extent necessary
to deplete pre-existing inventory.
 
          FINANCING
 
     The Company entered into a Competitive Advance and Revolving Credit
Facility Agreement, dated as of February 1, 1996, with Chemical Bank, as agent
(the "Initial Working Capital Facility"), pursuant to which the Company may
borrow up to $1,000 subject to the terms and conditions thereof. In addition,
AT&T intends to issue up to approximately $4,000 of short-term debt under a
commercial paper facility ("Commercial Paper Program"), which will be assumed by
the Company in respect of the debt sharing amount under the Debt Sharing
Agreement.
 
          ACQUISITIONS OF CERTAIN PHILIPS OPERATIONS
 
     On February 7, 1996, the Company will acquire several operations of Philips
Electronics, N.V. for approximately $260. This acquisition augments the
Company's global position in the development, manufacturing and marketing of
Synchronous Digital Hierarchy, Global System Mobile and Fixed Wireless Systems.
This acquisition is not expected to have a material impact on the Company's
results of operations.
 
                                      F-22
115
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. SUBSEQUENT EVENTS -- (CONTINUED)
          LONG TERM INCENTIVE PLAN
 
     The Company intends to adopt the 1996 Long Term Incentive Plan, under which
stock options, stock appreciation rights ("SARs") and other awards would be
granted. Details of the Plan are described elsewhere in this prospectus. No
grants under this Plan have been made at December 31, 1995.
 
     Under AT&T's Long Term Incentive Program, certain employees of the Company
are eligible for the grant of stock options, SARs, either in tandem with stock
options or free standing, and other awards. Pending AT&T's distribution of all
of its interest in the Company, AT&T stock awards held by Company employees will
remain outstanding as AT&T stock awards. If any such AT&T stock options are
exercised or any such AT&T stock awards vest or are delivered, the Company will
reimburse AT&T for the difference between the exercise price and AT&T's common
stock market price on the date of exercise, in the case of stock options, and
for the market value of AT&T common stock on the date of vesting or delivery, in
the case of stock awards.
 
     Immediately following the Distribution, outstanding awards under the AT&T
Long Term Incentive Program held by Company employees will be replaced by
substitute awards under the Company's 1996 Stock Plan. The substitute awards
will have the same ratio of the exercise price per option to the market value
per share, the same aggregate difference between market value and exercise price
and the same vesting provisions, option periods and other terms and conditions
as the AT&T options and SARs they replace. The formula for determining the total
number of substitute awards to be issued to Company employees depends on an
average of the respective market values of AT&T's and the Company's common stock
during the five trading days immediately preceding the ex-dividend date for the
Distribution. The formula is a fraction, with the average market value of AT&T's
common stock as the numerator and with the average market value of the Company's
common stock as the denominator, multiplied by the number of AT&T stock options,
SARs and other stock awards held by Company employees at the Distribution date.
Accordingly, the Company cannot currently determine the number of shares of its
common stock that will be subject to substitute awards after the Distribution.
 
     At December 31, 1995, there were approximately        million shares of
AT&T common stock subject to options, SARs, performance shares and other stock
awards held by Company employees.
 
15. QUARTERLY INFORMATION (UNAUDITED)
FIRST      SECOND      THIRD      FOURTH(1)   TOTAL
                                              ------     -------     ------     ------     -------
1995
Total revenues..............................  $4,159     $ 5,083     $4,744     $7,427     $21,413
Gross margin................................   1,850       2,251      2,042      2,325       8,468
Net income (loss)...........................     (18)        163         17     (1,015)       (853)
1994
Total revenues..............................  $4,052     $ 4,665     $4,776     $6,272     $19,765
Gross margin................................   1,740       2,028      2,006      2,654     $ 8,428
Net income (loss)...........................     (29)         90         53        409         523
---------------
(1) 1995 includes pre-tax charges of $2,801 ($1,847 after taxes), to cover
    restructuring costs of $2,613 and asset impairment and other charges of
    $188. (See Note 5.)
 
                                      F-23
116

 
              [Alternate Cover Page for International Prospectus]

PROSPECTUS (Subject to Completion)
Issued February 5, 1996
 
                                              Shares
 
                              LUCENT TECHNOLOGIES         [LOGO]

                                  COMMON STOCK
                            ------------------------
 
OF THE         SHARES OF COMMON STOCK BEING OFFERED,         SHARES ARE BEING
OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
    UNDERWRITERS AND         SHARES ARE BEING OFFERED INITIALLY IN THE
    UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. ALL OF THE SHARES
       OF COMMON STOCK ARE BEING OFFERED BY LUCENT TECHNOLOGIES INC.,
       WHICH IS CURRENTLY A WHOLLY OWNED SUBSIDIARY OF AT&T CORP. PRIOR
        TO THE OFFERINGS, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
        STOCK. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
           OFFERING PRICE WILL BE BETWEEN $      AND $      PER
           SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF THE
              FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC
                               OFFERING PRICE.
 
AFTER THE OFFERINGS, AT&T WILL OWN APPROXIMATELY     % (    % IF THE U.S.
UNDERWRITERS EXERCISE THEIR OVERALLOTMENT OPTION IN FULL) OF THE COMMON STOCK.
  AT&T HAS ANNOUNCED ITS INTENTION, SUBJECT TO SATISFACTION OF CERTAIN
  CONDITIONS, TO DIVEST ITS OWNERSHIP INTEREST IN THE COMPANY BY DECEMBER
    31, 1996 BY MEANS OF A TAX-FREE DISTRIBUTION TO ITS SHAREHOLDERS. SEE
                 "ARRANGEMENTS BETWEEN THE COMPANY AND AT&T."
                            ------------------------
 
    APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK ON THE NEW YORK STOCK
                       EXCHANGE UNDER THE SYMBOL "    ."
                            ------------------------
 
   SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR INFORMATION CONCERNING CERTAIN
          FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
                            ------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
       EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
           SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
            COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
                     PROSPECTUS. ANY REPRESENTATION TO THE
                        CONTRARY IS A CRIMINAL OFFENSE.
 
      --------------------------------------------------------------------------
 
                             PRICE $       A SHARE
 
                                ----------------
UNDERWRITING
                                        PRICE TO         DISCOUNTS AND        PROCEEDS TO
                                         PUBLIC          COMMISSIONS(1)      THE COMPANY(2)
                                    ----------------    ----------------    ----------------
Per Share.....................             $                   $                   $
Total(3)......................             $                   $                   $
------------
    (1) The Company has agreed to indemnify the Underwriters against certain
        liabilities, including liabilities under the Securities Act of 1933, as
        amended.
 
    (2) Before deducting expenses payable by the Company estimated at
        $          .
 
    (3) The Company has granted to the U.S. Underwriters an option, exercisable
        within 30 days of the date hereof, to purchase up to an aggregate of
                  additional shares of Common Stock at the Price to Public less
        Underwriting Discounts and Commissions for the purpose of covering
        overallotments, if any. If the U.S. Underwriters exercise such option in
        full, the total Price to Public, Underwriting Discounts and Commissions
        and Proceeds to the Company will be $        , $        and $        ,
        respectively. See "Underwriting."
                            ------------------------
 
    The shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the shares will be made on or about            , 1996 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in same-day funds.
                            ------------------------
 
                           Joint Global Coordinators
MORGAN STANLEY & CO.                                        GOLDMAN, SACHS & CO.
           Incorporated
                            ------------------------
 
MORGAN STANLEY & CO.                                 GOLDMAN SACHS INTERNATIONAL
           International
 
                      MERRILL LYNCH INTERNATIONAL LIMITED
 
          , 1996
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
117
 
                 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
 
     NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
                            ------------------------
 
     UNTIL               , 1996 (25 DAYS AFTER COMMENCEMENT OF THE OFFERINGS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
                            ------------------------
 
     For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Common Stock or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.
 
     In this Prospectus references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
                            ------------------------
 
                               TABLE OF CONTENTS
PAGE
                                         -----
Prospectus Summary....................       3
Risk Factors..........................       9
The Company...........................      16
Use of Proceeds.......................      19
Dividend Policy.......................      19
Certain Transactions in Connection
  with the Offerings..................      20
Capitalization........................      22
Selected Financial Data...............      23
Pro Forma Condensed Financial
  Statements..........................      24
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................      26
Business..............................      35
Management............................      54
Arrangements Between the Company and
  AT&T................................      70
Principal Stockholder.................      85
Description of Capital Stock..........      86
Shares Eligible for Future Sale.......      92
Certain United States Tax Consequences
  to Non-United States Holders........      93
Underwriting..........................      95
Legal Matters.........................      98
Experts...............................      98
Available Information.................      98
Index to Financial Statements.........     F-1
------------------------
 
     IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
                            ------------------------
 
     This Prospectus contains trademarks, service marks or registered marks of
the Company, AT&T, their respective subsidiaries, and other companies, as
indicated.
                            ------------------------
 
                                       I-2
118
 
                 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
 
                     CERTAIN UNITED STATES TAX CONSEQUENCES
                          TO NON-UNITED STATES HOLDERS
 
     The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
Common Stock applicable to Non-United States Holders of such Common Stock. For
the purpose of this discussion, a "Non-United States Holder" is any holder that
is, as to the United States, a foreign corporation, a non-resident alien
individual, a foreign partnership or a non-resident fiduciary of a foreign
estate or trust as such terms are defined in the Code. This discussion does not
deal with all aspects of United States federal income and estate taxation and
does not deal with foreign, state and local tax consequences that may be
relevant to Non-United States Holders in light of their personal circumstances.
Furthermore, the following discussion is based on current provisions of the Code
and administrative and judicial interpretations as of the date hereof, all of
which are subject to change. PROSPECTIVE FOREIGN INVESTORS ARE URGED TO CONSULT
THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-UNITED STATES INCOME AND OTHER TAX CONSEQUENCES OF OWNING AND DISPOSING OF
COMMON STOCK.
 
DIVIDENDS
 
     Generally, any dividend paid to a Non-United States Holder of Common Stock
will be subject to United States withholding tax either at a rate of 30% of the
gross amount of the dividend or such lower rate as may be specified by an
applicable tax treaty. Under current United States Treasury Regulations (the
"U.S. Regulations"), dividends paid to an address outside the United States are
presumed to be paid to a resident of such country (absent knowledge that such
presumption is not warranted) for purposes of the withholding discussed above
and, under the current interpretation of the U.S. Regulations, for purposes of
determining applicability of a tax treaty rate. However, under proposed U.S.
Regulations not currently in effect, a Non-United States Holder of Common Stock
who wishes to claim the benefit of an applicable treaty rate would be required
to satisfy applicable certification and other requirements. Dividends received
by a Non-United States Holder that are effectively connected with a United
States trade or business conducted by such Non-United States Holder are exempt
from such withholding tax. However, such effectively connected dividends, net of
certain deductions and credits, are taxed at the same graduated rates applicable
to United States person. A Non-United States Holder may claim exemption from
withholding under the effectively connected income exception by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected With the
Conduct of Business in the United States) each year with the Company or its
paying agent prior to the payment of the dividends for such year.
 
     In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
 
     A Non-United States Holder of Common Stock eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the IRS. In the event that dividends from the Company are not out of
current or accumulated earnings and profits (see "Dividend Policy"), a
Non-United States Holder of Common Stock may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the IRS.
 
GAIN OR DISPOSITION OF COMMON STOCK
 
     A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his Common Stock unless: (i) such gain is effectively connected with a United
States trade or business of the Non-United States Holder; (ii) the Non-United
States Holder is an individual who holds such Common Stock as a capital asset
and who is present in the
 
                                       I-3
119
 
                 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
 
United States for a period or periods aggregating 183 days or more during the
calendar year in which such sale or disposition occurs and certain other
conditions are met; or (iii) the Company is or has been a "United States real
property holding corporation" for federal income tax purposes at any time within
the shorter of the five-year period preceding such disposition or such holder's
holding period. The Company has determined that it is not and does not believe
that it will become a "United States real property holding corporation" for
federal income tax purposes.
 
BACKUP WITHHOLDING AND INFORMATION REPORTING
 
     Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
 
     Dividends paid to a Non-United States Holder at an address within the
United States may be subject to backup withholding at a rate of 31% if the
Non-United States Holder fails to establish that it is entitled to an exemption
or to provide a correct taxpayer identification number and other information to
the payer. Backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States (unless the
payer has knowledge that the payee is a U.S. person).
 
     The payment of the proceeds of the disposition of Common Stock to or
through the United States office of a broker is subject to information reporting
and backup withholding at a rate of 31% unless the holder certified its
non-United States status under penalties of perjury or otherwise establishes an
exemption. Generally, the payment of the proceeds of the disposition by a
Non-United States Holder of Common Stock outside the United States through a
foreign office of a broker will not be subject to backup withholding. However,
information reporting requirements (but not backup withholding) will apply to a
payment of disposition proceeds outside the United States through an office
outside the United States of a broker that is (a) a United States person, (b) a
United States "controlled foreign corporation" for U.S. tax purposes or (c) a
foreign person 50% or more of whose gross income for certain periods is from the
conduct of a United States trade or business unless such broker has documentary
evidence in its files of the owner's foreign status and has no actual knowledge
to the contrary or the holder otherwise establishes an exemption.
 
     Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
 
ESTATE TAX
 
     An individual Non-United States Holder who owns Common Stock at the time of
his death or has made certain lifetime transfers of an interest in Common Stock
will be required to include the value of such Common Stock in such holder's
gross estate for United States federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
 
                                       I-4
120
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All amounts are estimated except the
Securities and Exchange Commission (the "Commission") registration fee, the
National Association of Securities Dealers, Inc. ("NASD") registration fee and
the New York Stock Exchange listing fee.
PAYABLE BY
                                                                          THE REGISTRANT
                                                                          --------------
SEC registration fee............................................    $   34,483
        NASD registration fee...........................................        10,500
        New York Stock Exchange listing fee.............................       *
        Blue Sky fees and expenses......................................       *
        Accounting fees and expenses....................................       *
        Legal fees and expenses.........................................       *
        Printing and engraving expenses.................................       *
        Miscellaneous fees and expenses.................................       *
                                                                              --------
                  Total.................................................    $  *
---------------
* To be provided by amendment.
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation, a
"derivative action") if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, if they had no reasonable
cause to believe their conduct was unlawful. A similar standard is applicable in
the case of derivative actions, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with the defense or
settlement of such actions, and the statute requires court approval before there
can be any indemnification where the person seeking indemnification has been
found liable to the corporation. The statute provides that it is not exclusive
of other indemnification that may be granted by a corporation's bylaws,
disinterested director vote, stockholder vote, agreement or otherwise.
 
     The Restated Certificate of Incorporation of the Company (the
"Certificate") provides that each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person, or a person of whom such person is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, will be indemnified and held harmless by
the Company to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss reasonably incurred or
suffered by such person in connection therewith. Such right to indemnification
includes the right to have the Company pay the expenses incurred in defending
any such proceeding in advance of its final disposition, subject to the
provisions of the DGCL. Such rights are not exclusive of any other right which
any person may have or
 
                                      II-1
121
 
thereafter acquire under any statute, provision of the Certificate, By-Law,
agreement, vote of stockholders or disinterested directors or otherwise. No
repeal or modification of such provision will in any way diminish or adversely
affect the rights of any director, officer, employee or agent of the Company
thereunder in respect of any occurrence or matter arising prior to any such
repeal or modification. The Certificate also specifically authorizes the Company
to maintain insurance and to grant similar indemnification rights to employees
or agents of the Company.
 
     The DGCL permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) payments of unlawful dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit.
 
     The Certificate provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except, if required by the DGCL as
amended from time to time, for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit. Neither the amendment
nor repeal of such provision will eliminate or reduce the effect of such
provision in respect of any matter occurring, or any cause of action, suit or
claim that, but for such provision, would accrue or arise prior to such
amendment or repeal.
 
     The Underwriting Agreements provide for indemnification by the Underwriters
of the registrant, its Directors and officers, and by the registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Act, and affords certain rights of contribution with respect thereto.
 
     The Separation and Distribution Agreement by and among the Company, AT&T
Corp. ("AT&T") and NCR Corporation ("NCR") provides for indemnification by the
Company of AT&T and its directors, officers and employees for certain
liabilities, including liabilities under the Act.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     Not applicable.
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     (a) Exhibits.
EXHIBIT
NUMBER                                       DESCRIPTION
------   ------------------------------------------------------------------------------------
1.1    Form of Underwriting Agreement.*
  3.1    Form of Restated Certificate of Incorporation of the Company.
  3.2    Form of By-Laws of the Company.
  4.1    Form of the Company's Common Stock certificate.*
  5.1    Opinions re: legality of shares being registered.*
 10.1    Separation and Distribution Agreement by and among the Company, AT&T and NCR, dated
         as of February 1, 1996.
 10.2    Employee Benefits Agreement by and between AT&T and the Company, dated as of
         February 1, 1996.*
 10.3    General Purchase Agreement by and between AT&T and the Company, dated as of February
         1, 1996.
 10.4    Interim Services and Systems Replication Agreement by and among AT&T, the Company
         and NCR, dated as of February 1, 1996.
 10.5    Brand License Agreement by and between the Company and AT&T, dated as of February 1,
         1996.
II-2
122
EXHIBIT
NUMBER                                       DESCRIPTION
------   ------------------------------------------------------------------------------------
10.6    Tax Sharing Agreement by and among the Company, AT&T and NCR, dated as of February
         1, 1996.
 11.1    Statement re: Computation of Per Share Earnings.*
 21.1    Subsidiaries of the Company.*
 23.1    Consent of Coopers & Lybrand L.L.P.
 27.1    Financial Data Schedule.
 99.1    Consent of Carla A. Hills to be named as a director nominee.
 99.2    Consent of Drew Lewis to be named as a director nominee.
 99.3    Consent of Richard A. McGinn to be named as a director nominee.
 99.4    Consent of Donald S. Perkins to be named as a director nominee.
 99.5    Consent of Henry B. Schacht to be named as a director nominee.
 99.6    Consent of Franklin A. Thomas to be named as a director nominee.
---------------
 
     * To be filed by amendment.
 
     (b) Financial Statement Schedules.
 
     The following financial statement schedules are filed herewith:
 
        Schedule of Valuation and Qualifying Accounts.
 
     Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
 
ITEM 17. UNDERTAKINGS
 
     The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing of the Offerings specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
 
     Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
 
     The undersigned registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Act, the
     information omitted from the form of prospectus filed as part of this
     Registration Statement in reliance upon Rule 430A and contained in a form
     of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
     497(h) under the Act shall be deemed to be part of this Registration
     Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Act, each
     post-effective amendment that contains a form of prospectus shall be deemed
     to be a new Registration Statement relating to the securities offered
     therein, and the offering of such securities at that time shall be deemed
     to be the initial bona fide offering thereof.
 
                                      II-3
123
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 5th day of February, 1996.
 
                                          LUCENT TECHNOLOGIES INC.
 
                                          By      /s/  HENRY B. SCHACHT
                                            ------------------------------------
                                                      Henry B. Schacht
                                                  Chief Executive Officer
 
     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURES                                TITLE                     DATE
---------------------------------------------   ----------------------------  -------------------
/s/  HENRY B. SCHACHT             Chief Executive Officer     February 5, 1996
---------------------------------------------
              Henry B. Schacht

               /s/  DONALD K. PETERSON          Chief Financial Officer and   February 5, 1996
---------------------------------------------     Chief Accounting Officer
             Donald K. Peterson

             /s/  PAMELA F. CRAVEN                        Director            February 5, 1996
---------------------------------------------
              Pamela F. Craven

                 /s/  MAUREEN B. TART                     Director            February 5, 1996
---------------------------------------------
               Maureen B. Tart

                /s/  MARILYN J. WASSER                    Director            February 5, 1996
---------------------------------------------
              Marilyn J. Wasser
II-4
124
 
                                                                     SCHEDULE II
 
                            LUCENT TECHNOLOGIES INC.
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                  IN MILLIONS
COLUMN C
                                                  -------------------------
                                   COLUMN B               ADDITIONS                             COLUMN E
                                 ------------     -------------------------                    ----------
           COLUMN A               BALANCE AT      CHARGED TO     CHARGED TO      COLUMN D      BALANCE AT
-------------------------------   BEGINNING        COSTS &         OTHER        ----------        END
          DESCRIPTION             OF PERIOD        EXPENSES       ACCOUNTS      DEDUCTIONS     OF PERIOD
-------------------------------  ------------     ----------     ----------     ----------     ----------
Year 1995
  Allowance for Doubtful
     Accounts..................       206               94            (3)            49             248
  Reserves related to business
     restructuring and facility
     consolidation.............       133            1,774             0              0           1,907
  Deferred tax asset valuation
     allowance.................        96               46             0              0             142
  Inventory valuation
     reserves..................       591              136             0            133             594
Year 1994
  Allowance for Doubtful
     Accounts..................       143               82            17             36             206
  Reserves related to business
     restructuring and facility
     consolidation.............       205                0            26             98             133
  Deferred tax asset valuation
     allowance.................       123                0             0             27              96
  Inventory valuation
     reserves..................       523              164             0             96             591
Year 1993
  Allowance for Doubtful
     Accounts..................       139               67            (2)            61             143
  Reserves related to business
     restructuring and facility
     consolidation.............       233               56           (53)            31             205
  Deferred tax asset valuation
     allowance.................        84               39             0              0             123
  Inventory valuation
     reserves..................       484              153             0            114             523
S-1
125
 
                                 EXHIBIT INDEX
EXHIBIT
NUMBER                                       DESCRIPTION
------   ------------------------------------------------------------------------------------
1.1    Form of Underwriting Agreement.*
  3.1    Form of Restated Certificate of Incorporation of the Company.
  3.2    Form of By-Laws of the Company.
  4.1    Form of the Company's Common Stock certificate.*
  5.1    Opinions re: legality of shares being registered.*
 10.1    Separation and Distribution Agreement by and among the Company, AT&T and NCR, dated
         as of February 1, 1996.
 10.2    Employee Benefits Agreement by and between AT&T and the Company, dated as of
         February 1, 1996.*
 10.3    General Purchase Agreement by and between AT&T and the Company, dated as of February
         1, 1996.
 10.4    Interim Services and Systems Replication Agreement by and among AT&T, the Company
         and NCR, dated as of February 1, 1996.
 10.5    Brand License Agreement by and between the Company and AT&T, dated as of February 1,
         1996.
 10.6    Tax Sharing Agreement by and among the Company, AT&T and NCR, dated as of February
         1, 1996.
 11.1    Statement re: Computation of Per Share Earnings.*
 21.1    Subsidiaries of the Company.*
 23.1    Consent of Coopers & Lybrand L.L.P.
 27.1    Financial Data Schedule.
 99.1    Consent of Carla A. Hills to be named as a director nominee.
 99.2    Consent of Drew Lewis to be named as a director nominee.
 99.3    Consent of Richard A. McGinn to be named as a director nominee.
 99.4    Consent of Donald S. Perkins to be named as a director nominee.
 99.5    Consent of Henry B. Schacht to be named as a director nominee.
 99.6    Consent of Franklin A. Thomas to be named as a director nominee.
---------------
 
     * To be filed by amendment.