Walter disclosed the outlook just before the opening of stock markets this morning. On the New York Stock Exchange, AT&T -- the nation's most widely held stock -- tumbled nearly 8 percent, or by $3.125 a share, to close at $36.75.

Walter's comments were made to a group of some 200 financial and industry analysts at the start of a two-day investment conference at AT&T's operational headquarters in Basking Ridge.

He said the company would cut costs by $2.6 billion over the next two years as it strives to boost its sagging earnings by up to 73 percent by the year 2002.

While costs will be trimmed, a spokesman said any job cuts would fall within the plans announced last year to eliminate 17,000 positions. AT&T already has cut 5,700 jobs in the first stage of that three-year program.

In the short term, Walter said AT&T's profits would continue to disappoint, with profit in the current quarter nearly 10 percent below the 76 cents a share earned in the final quarter of last year. That would be down even more from profits in the first quarter of 1996, when AT&T earned 90 cents a share.

He also said AT&T's financial results would be reduced by 75 cents to $1 a share for all of this year as a result of the company's plans to spend $8 billion to $9 billion on growth initiatives.

Analysts earlier had been predicting AT&T would earn about $3.60 a share in 1997.