<PAGE>   1
================================================================================

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


           [X] Quarterly Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

               For the quarterly period ended: SEPTEMBER 30, 1999

                                       or

          [ ] Transition Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                For the transition period from _______ to _______


                          Commission File Number 1-6417


                           GTE CALIFORNIA INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                  CALIFORNIA                           95-0510200
       (STATE OR OTHER JURISDICTION OF      (I.R.S. EMPLOYER IDENTIFICATION NO.)
        INCORPORATION OR ORGANIZATION)

1255 Corporate Drive, SVC04C08, Irving, Texas            75038
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)            (ZIP CODE)

         Registrant's telephone number, including area code 972-507-5000


         (Former name, former address and former fiscal year, if changed
                               since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                                               YES [X]    NO [ ]

The Company had 70,000,000 shares of $20 par value common stock outstanding at
October 31, 1999. The Company's common stock is 100% owned by GTE Corporation.


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<PAGE>   2
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
             Condensed Consolidated Statements of Income (Unaudited)


<TABLE>
<CAPTION>
                                             Three Months Ended      Nine Months Ended
                                                September 30,          September 30,
                                             -------------------    -------------------
                                               1999       1998        1999       1998
                                             --------   --------    --------   --------
                                                        (Dollars in Millions)
<S>                                          <C>        <C>         <C>        <C>
REVENUES AND SALES
     Local services                          $  368.3   $  362.5    $1,080.2   $1,083.6
     Network access services                    294.6      282.6       863.8      751.4
     Other services and sales                   191.3      258.4       561.0      643.2
                                             --------   --------    --------   --------

        Total revenues and sales                854.2      903.5     2,505.0    2,478.2
                                             --------   --------    --------   --------

OPERATING COSTS AND EXPENSES
     Cost of services and sales                 188.7      204.9       639.6      720.9
     Selling, general and administrative         93.8      120.6       338.6      344.9
     Depreciation and amortization              155.2      146.3       462.9      437.9
                                             --------   --------    --------   --------

        Total operating costs and expenses      437.7      471.8     1,441.1    1,503.7
                                             --------   --------    --------   --------

OPERATING INCOME                                416.5      431.7     1,063.9      974.5

OTHER (INCOME) EXPENSE
     Interest - net                              34.6       32.1       103.8       91.5
     Other - net                                   --       (2.2)         --       (2.1)
                                             --------   --------    --------   --------

INCOME BEFORE INCOME TAXES                      381.9      401.8       960.1      885.1
     Income taxes                               155.4      164.3       390.5      357.6
                                             --------   --------    --------   --------

NET INCOME                                   $  226.5   $  237.5    $  569.6   $  527.5
                                             ========   ========    ========   ========
</TABLE>

Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation.

The accompanying notes are an integral part of these statements.


                                       1
<PAGE>   3

                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
                Condensed Consolidated Balance Sheets (Unaudited)


<TABLE>
<CAPTION>
                                                    September 30,  December 31,
                                                        1999          1998
                                                    -------------  ------------
                                                       (Dollars in Millions)
<S>                                                 <C>            <C>
ASSETS
Current assets
    Cash and cash equivalents                         $     7.9     $    16.4
    Receivables, less allowances of
       $67.6 million and $65.9 million                    604.7         661.8
    Receivables from affiliates                            10.4          11.2
    Inventories and supplies                               60.4          54.8
    Net assets held for sale (see Note 6)                  40.5            --
    Prepaid insurance                                      16.7          43.3
    Deferred income tax benefits and other                 53.3          32.2
                                                      ---------     ---------

       Total current assets                               793.9         819.7
                                                      ---------     ---------


Property, plant and equipment, at cost                 10,387.5      10,513.3
Accumulated depreciation                               (6,555.3)     (6,601.2)
                                                      ---------     ---------

       Total property, plant and equipment, net (a)     3,832.2       3,912.1
                                                      ---------     ---------


Prepaid pension costs                                   1,064.1         847.9
Other assets                                               16.6          25.8
                                                      ---------     ---------

Total assets                                          $ 5,706.8     $ 5,605.5
                                                      =========     =========
</TABLE>

(a)  Includes $40.7 million at December 31, 1998, that is now held for sale, see
     Note 6.

The accompanying notes are an integral part of these statements.


                                       2
<PAGE>   4

                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
          Condensed Consolidated Balance Sheets (Unaudited) - Continued


<TABLE>
<CAPTION>
                                            September 30,   December 31,
                                                1999           1998
                                            -------------   ------------
                                                (Dollars in Millions)
<S>                                         <C>             <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Notes payable to affiliates               $  174.1         $  281.7
    Accounts payable                             166.1            113.9
    Affiliate payables                           124.3            131.8
    Taxes payable                                263.5            163.6
    Dividends payable                            190.5            205.5
    Other                                        406.1            382.9
                                              --------         --------

       Total current liabilities               1,324.6          1,279.4
                                              --------         --------


Long-term debt                                 1,690.7          1,691.2
Deferred income taxes                            666.4            579.2
Deferred employee benefit plans and other        226.0            292.3
                                              --------         --------

       Total liabilities                       3,907.7          3,842.1
                                              --------         --------


Shareholders' equity
    Preferred stock                               50.0             50.0
    Common stock (70,000,000 shares issued)    1,400.0          1,400.0
    Additional paid-in capital                    91.1             82.2
    Retained earnings                            258.0            231.2
                                              --------         --------

       Total shareholders' equity              1,799.1          1,763.4
                                              --------         --------

Total liabilities and shareholders' equity    $5,706.8         $5,605.5
                                              ========         ========
</TABLE>


The accompanying notes are an integral part of these statements.


                                       3
<PAGE>   5

                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
           Condensed Consolidated Statements of Cash Flows (Unaudited)


<TABLE>
<CAPTION>
                                                                        Nine Months Ended
                                                                          September 30,
                                                                       --------------------
                                                                         1999        1998
                                                                       --------    --------
                                                                       (Dollars in Millions)
<S>                                                                    <C>         <C>
OPERATIONS
    Net income                                                         $  569.6    $  527.5
    Adjustments to reconcile net income to net cash from operations:
         Depreciation and amortization                                    462.9       437.9
         Provision for uncollectible accounts                              50.5        57.6
         Changes in current assets and current liabilities                189.2        23.2
         Deferred income taxes and other - net                           (198.0)      (78.8)
                                                                       --------    --------

       Net cash from operations                                         1,074.2       967.4
                                                                       --------    --------

INVESTING
    Capital expenditures                                                 (415.3)     (510.9)
    Other                                                                   0.3         2.6
                                                                       --------    --------

       Net cash used in investing                                        (415.0)     (508.3)
                                                                       --------    --------

FINANCING
    Long-term debt issued                                                 222.4       197.6
    Long-term debt retired                                                 (0.1)     (150.1)
    Dividends                                                            (557.8)     (496.6)
    Net change in affiliate notes                                        (332.2)      (14.3)
                                                                       --------    --------

       Net cash used in financing                                        (667.7)     (463.4)
                                                                       --------    --------

Decrease in cash and cash equivalents                                      (8.5)       (4.3)

Cash and cash equivalents:
    Beginning of period                                                    16.4         9.9
                                                                       --------    --------

    End of period                                                      $    7.9    $    5.6
                                                                       ========    ========
</TABLE>


The accompanying notes are an integral part of these statements.


                                       4
<PAGE>   6

                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
           Consolidated Statement of Shareholders' Equity (Unaudited)

<TABLE>
<CAPTION>
                                                                 Additional
                                          Preferred     Common     Paid-In    Retained
                                            Stock       Stock      Capital    Earnings    Total
                                          ---------    --------  ----------   --------   --------
                                                             (Dollars in Millions)
<S>                                       <C>          <C>       <C>          <C>        <C>
Shareholders' equity, December 31, 1998    $   50.0    $1,400.0    $   82.2   $  231.2   $1,763.4

Net income                                                                       569.6      569.6
Tax benefit of employee stock options
   exercised                                                            8.9                   8.9
Dividends declared                                                              (542.8)    (542.8)
                                           --------    --------    --------   --------   --------
Shareholders' equity, September 30, 1999   $   50.0    $1,400.0    $   91.1   $  258.0   $1,799.1
                                           ========    ========    ========   ========   ========
</TABLE>

The accompanying notes are an integral part of these statements.


                                       5
<PAGE>   7

                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
        Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1. BASIS OF PRESENTATION

GTE California Incorporated (the Company) is incorporated under the laws of the
State of California and is a subsidiary of GTE Corporation (GTE).

The unaudited condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, in the opinion of management of the Company, the
condensed consolidated financial statements include all adjustments, which
consist only of normal recurring accruals, necessary to present fairly the
financial information for such periods. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 1998 Annual Report on
Form 10-K.

Reclassifications of prior year data have been made, where appropriate, to
conform to the 1999 presentation.

NOTE 2. DEBT

In January 1999, the Company issued $225.0 million of 5.50% Series G Debentures,
due 2009. The net proceeds were applied toward the repayment of short-term
borrowings used to finance the Company's construction program and for general
corporate purposes.

NOTE 3. CAPITALIZED SOFTWARE

Effective January 1, 1999, the Company adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." As a result of adopting SOP 98-1, in the third quarter and first
nine months of 1999 the Company capitalized $14.0 million and $29.3 million,
respectively, of software expenditures, which would have previously been
expensed.

NOTE 4. SPECIAL CHARGE

In 1999, GTE continued the review of its operations and cost structure to ensure
they were consistent with its growth objectives. In connection with this ongoing
review, GTE initiated employee separation programs that resulted in a one-time
charge for GTE during the first quarter of 1999. The charge pertaining to the
Company totaled $19.9 million and is reflected as "Selling, general and
administrative" costs and expenses in the condensed consolidated income
statements. The components of the charge include separation programs and related
benefits such as outplacement and benefit continuation costs. These programs
were completed during the first quarter of 1999.

NOTE 5. RECENT ACCOUNTING PRONOUNCEMENT

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company is
currently assessing the impact of adopting SFAS No. 133, as amended, which is
effective January 1, 2001.


                                       6
<PAGE>   8

                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY
  Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

NOTE 6. NET ASSETS HELD FOR SALE

During May 1999, the Company entered into an agreement to sell approximately
46,000 switched access lines located in California and Arizona to Citizens
Utilities Company. This sale consummates the Company's previously announced 1998
plan to sell selected access lines located in California and Arizona. The sale
is subject to regulatory approval and is expected to close in 2000. The
associated net assets, which approximate $40.5 million, consist of property,
plant and equipment, and are classified as "Net assets held for sale" in the
condensed consolidated balance sheet as of September 30, 1999. The Company
intends to continue to operate all of these assets until sold. Based on the
decision to sell, however, the Company stopped recording depreciation expense
for these assets, resulting in a year-to-date depreciation expense reduction of
$6.3 million for 1999. No charges were recorded for the access lines to be sold
because their estimated fair values were in excess of their carrying values. The
access lines sold represented approximately 1% of the average switched access
lines that the Company had in service during 1998, and contributed approximately
1% to 1998 consolidated revenues.

NOTE 7. PROPOSED MERGER WITH BELL ATLANTIC CORPORATION

Bell Atlantic and GTE have announced a proposed merger of equals under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common
stock for each share of GTE common stock that they own.

The merger is expected to qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. The completion of the merger is subject to a
number of conditions, including certain regulatory approvals and receipt of
opinions that the merger will be tax-free. At annual meetings held in May 1999,
the shareholders of each company approved the merger.



                                       7
<PAGE>   9

                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

Item 2.     Management's Discussion and Analysis of Financial Condition
                            And Results of Operations

RESULTS OF OPERATIONS

Net income for the three months ended September 30, 1999 decreased $11.0
million, or 5%, primarily due to lower revenues and sales, partially offset by
lower operating costs and expenses. Net income for the nine months ended
September 30, 1999 increased $42.1 million, or 8%, primarily due to an increase
in network access services revenues and a decrease in cost of services and sales
expenses, partially offset by a decrease in other services and sales revenues
and an increase in depreciation and amortization expense and income tax expense.


<TABLE>
<CAPTION>
REVENUES AND SALES
(Dollars in Millions)                  Three Months Ended
                                          September 30,
                                 -----------------------------     Increase        Percent
                                     1999             1998        (Decrease)       Change
                                 ------------     ------------    -----------      -------
<S>                              <C>              <C>             <C>              <C>
    Local services               $      368.3     $      362.5    $       5.8           2%
    Network access services             294.6            282.6           12.0           4%
    Other services and sales            191.3            258.4          (67.1)        (26)%
                                 ------------     ------------    -----------
      Total revenues and sales   $      854.2     $      903.5    $     (49.3)         (5)%
                                 ============     ============    ===========
</TABLE>


<TABLE>
<CAPTION>
                                      Nine Months Ended
                                        September 30,
                                -----------------------------     Increase        Percent
                                    1999             1998        (Decrease)       Change
                                ------------     ------------    -----------      -------
<S>                             <C>              <C>             <C>              <C>
   Local services               $    1,080.2     $    1,083.6    $      (3.4)         --
   Network access services             863.8            751.4          112.4          15%
   Other services and sales            561.0            643.2          (82.2)        (13)%
                                ------------     ------------    -----------
     Total revenues and sales   $    2,505.0     $    2,478.2    $      26.8           1%
                                ============     ============    ===========
</TABLE>

Local Services Revenues

Local services revenues increased $5.8 million for the three month period and
decreased $3.4 million for the nine month period ending September 30, 1999,
compared to the same periods in 1998. Regulatory issues resulting from favorable
resolution of items in 1998, and a 1999 regulatory surcredit related to the
Company's annual price filing, resulted in revenue decreases of $18.1 million
and $35.6 million, respectively. Additionally, overpayments from the Universal
Service Fund (USF) related to the Lifeline support program in the first quarter
of 1998, which the Company was required to refund back to the USF in 1999,
contributed $7.1 million to the year-to-date decrease. These decreases were
partially offset by growth in switched access lines of 4%, which generated an
additional $8.0 million and $28.9 million, respectively, in basic local services
revenues and CentraNet(R) services revenues. Additionally, an increase in demand
for enhanced custom calling features resulted in increases of $7.1 million and
$10.2 million, respectively. Further contributing favorably to the third quarter
of 1999 was a 1998 timing issue of $8.2 million related to digital channel
service (DCS).

Network Access Services Revenues

Minutes of use increased 2% and 8%, generating additional revenues of $5.4
million and $30.1 million, respectively, for the three and nine months ended
September 30, 1999, compared to the same periods in 1998. Special access
revenues grew by $16.5 million and $47.3 million, respectively, as a result of
greater demand for increased


                                       8
<PAGE>   10

                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

           Management's Discussion and Analysis of Financial Condition
                      And Results of Operations - Continued

bandwidth services by high capacity users. Additionally, year-to-date revenues
increased $34.0 million, resulting from the sharing provisions of the Federal
Communications Commission's (FCC) 1997 price cap recorded in the first quarter
of 1998. Partially offsetting the three and nine month increases are decreases
of $10.7 million and $24.4 million, respectively, reflecting the impact of
mandated interstate and intrastate access price changes.

Other Services and Sales Revenues

Other services and sales revenues decreased $67.1 million for the third quarter
and $82.2 million for the nine-month period ended September 30, 1999, compared
to the same periods in 1998. The decreases were partially the result of reduced
toll revenues of $10.6 million and $45.7 million, respectively, resulting from
intraLATA (local access transport area) toll competition. In addition, the
timing of directory advertising revenues contributed $28.1 million to the
decreases for both periods. Rent revenues declined $10.4 million in the third
quarter and increased $4.9 million year-to-date.


<TABLE>
<CAPTION>
OPERATING COSTS AND EXPENSES
(Dollars in Millions)                          Three Months Ended
                                                  September 30,
                                          -----------------------------     Increase        Percent
                                              1999             1998        (Decrease)       Change
                                          ------------     ------------    -----------      -------
<S>                                       <C>              <C>             <C>              <C>
    Cost of services and sales            $      188.7     $      204.9    $     (16.2)         (8)%
    Selling, general and administrative           93.8            120.6          (26.8)        (22)%
    Depreciation and amortization                155.2            146.3            8.9           6%
                                          ------------     ------------    -----------
      Total operating costs and expenses  $      437.7     $      471.8    $     (34.1)         (7)%
                                          ============     ============    ===========
</TABLE>


<TABLE>
<CAPTION>
                                              Nine Months Ended
                                                 September 30,
                                         -----------------------------     Increase        Percent
                                             1999             1998        (Decrease)       Change
                                         ------------     ------------    -----------      -------
<S>                                      <C>              <C>             <C>              <C>
   Cost of services and sales            $      639.6     $      720.9    $     (81.3)        (11)%
   Selling, general and administrative          338.6            344.9           (6.3)         (2)%
   Depreciation and amortization                462.9            437.9           25.0           6%
                                         ------------     ------------    -----------
     Total operating costs and expenses  $    1,441.1     $    1,503.7    $     (62.6)         (4)%
                                         ============     ============    ===========
</TABLE>

Total operating costs and expenses declined for the three and nine months ended
September 30, 1999, compared with the same periods in 1998. Due to the
employee-reduction program initiated earlier this year and the resulting
settlement of pension obligations, the Company was able to immediately recognize
pension plan gains that have accumulated in excess of the employee obligations.
These favorable pension settlement gains were $70.7 million in the third quarter
and $100.9 million for the first nine months of 1999. Additionally, reduced
labor and benefits, due to productivity improvements, and adjustments of certain
employee benefits in the third quarter of 1999, contributed $8.3 million and
$42.4 million to the third quarter and year-to-date decreases, respectively.
Partially offsetting the decreases are additional data processing costs of $14.2
for the three and nine months ended September 30, 1999. The year-to-date
decrease is partially offset by a one-time special charge of $19.9 million
associated with employee separation programs completed in the first quarter of
1999. Further offsetting the year-to-date decrease in expense is an increase of
$41.1 million resulting from second quarter 1998 favorable adjustments of
certain employee benefits and other liabilities, which reduced 1998 expenses.
Higher depreciation charges associated with the investment in additional network
facilities resulting from increased demand for switched access lines, and
amortization of capitalized software right-to-use (RTU) fees, contributed $11.5
million and $31.3 million to the increase in depreciation and amortization
expense for both the three and nine months ended September 30, 1999,
respectively.


                                        9
<PAGE>   11
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

           Management's Discussion and Analysis of Financial Condition
                      And Results of Operations - Continued


The third quarter and year-to-date increases in depreciation and
amortization are partially offset by decreases of $2.6 million and $6.3 million,
respectively, resulting from the discontinuation of depreciation on
approximately 46,000 switched access lines held for sale (for further
information see "OTHER DEVELOPMENTS - Planned Asset Sales").

OTHER INCOME STATEMENT ITEMS

Interest - net increased 8% or $2.5 million and 13% or $12.3 million for the
third quarter and nine months ended September 30, 1999, respectively, compared
to the same periods in 1998, primarily due to higher average debt balances.

Income tax expense decreased 5% or $8.9 million for the three months and
increased 9% or $32.9 million for the nine months ended September 30, 1999,
respectively, compared to the same periods in 1998. These variances are
primarily due to corresponding changes in pretax income.

CAPITAL RESOURCES AND LIQUIDITY

Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction of
new plant, modernization of facilities and payment of dividends. The Company
generally funds its construction program from operations, although external
financing is available. Short-term financing can be obtained through borrowings
from GTE or GTE Funding Incorporated, an affiliate of the Company. The Company
participates with other affiliates in a $1.5 billion, 364-day syndicated
revolving line of credit and has access to an additional $2.0 billion in
short-term liquidity through GTE and GTE Funding Incorporated's committed
bi-lateral revolving lines of credit. The Company has an existing shelf
registration statement outstanding for an additional $275.0 million of
debentures.

Net cash from operations was $1,074.2 million during the first nine months of
1999, compared to $967.4 million for the same period in 1998. The increase
primarily reflects a decrease in working capital requirements combined with
improved results from operations.

Net cash used in investing activities during the first nine months of 1999
consisted primarily of capital expenditures, which were $415.3 million compared
to $510.9 million for the same period in 1998. The majority of new investment is
being made to meet the demands of growth, to modernize facilities and to develop
and install new software, all of which are required to support new products and
enhanced services. The overall anticipated capital expenditures for 1999 are
expected to be less than the total capital expenditures incurred during 1998.

Net cash used in financing activities was $667.7 million during the first three
quarters of 1999 compared to $463.4 million for the same period in 1998. This
included dividend payments of $557.8 million in the first nine months of 1999
compared to $496.6 million for the same period in 1998. Short-term financing,
represented by the net change in affiliate notes, decreased $332.2 million in
the first three quarters of 1999 compared to a decrease of $14.3 million for the
same period in 1998. Long-term debt of $0.1 million was retired during the first
nine months of 1999 compared to $150.1 million retired during the first nine
months of 1998. The Company issued $200.0 million of 6.75% debentures in May
1998 to repay short-term borrowings. The Company issued $225.0 million of 5.50%
debentures in January 1999. The net proceeds were applied toward the repayment
of the Company's short-term borrowings used to finance the Company's
construction program and for general corporate purposes.


                                       10
<PAGE>   12
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

           Management's Discussion and Analysis of Financial Condition
                      And Results of Operations - Continued


INTERSTATE REGULATORY DEVELOPMENTS

During the third quarter of 1999, regulatory and legislative activity at both
the state and federal levels continued to be a direct result of the
Telecommunications Act of 1996 (Telecommunications Act). Along with promoting
competition in all segments of the telecommunications industry, the
Telecommunications Act was intended to preserve and advance universal service.

GTE continued in the third quarter of 1999, to meet the wholesale requirements
of new competitors. To date, GTE has signed interconnection agreements with
other carriers, providing them the capability to purchase individual unbundled
network elements (UNEs), resell retail services and interconnect
facilities-based networks. Several of these interconnection agreements were the
result of the arbitration process established by the Telecommunications Act, and
incorporated prices or terms and conditions based upon the Federal
Communications Commission (FCC) rules that were subsequently overturned by the
Eighth Circuit Court (Eighth Circuit) in July 1997. GTE challenged a number of
such agreements in federal district courts during 1997.

GTE's position in these challenges was supported by the Eighth Circuit's July
1997 decision stating that the FCC had overstepped its authority in several
areas concerning implementation of the interconnection provisions of the
Telecommunications Act. In January 1999, the U.S. Supreme Court (Supreme Court)
reversed in part and affirmed in part the Eighth Circuit's decisions. The
Supreme Court reversed the Eighth Circuit's determination that the FCC had no
jurisdiction over pricing. As a result, the pricing rules established by the FCC
are now subject to review on their merits by the Eighth Circuit. On the other
hand, the Supreme Court vacated the FCC rule setting forth the UNEs that
incumbent local exchange carriers (ILECs) are required to provide to competitive
local exchange carriers (CLECs). This latter ruling has led to a proceeding
before the FCC concerning what elements had to be offered and under what
conditions.

In September 1999, the FCC voted on the matter and the order was issued on
November 5, 1999. The FCC reaffirmed that incumbents must provide unbundled
access to five of the original seven network elements. ILECs are no longer
required to provide unbundled operator services, including directory assistance.
In addition, in certain circumstances, local and tandem switching need not be
unbundled. The FCC also found that state commissions can require ILECs to
unbundle additional elements as long as they are consistent with the
requirements of the Telecommunications Act and the national policy framework
instituted in the FCC's order. Furthermore, the order precludes states from
removing network elements from the FCC's list of unbundling obligations.

In June 1999, the Eighth Circuit established a schedule for addressing the
issues it did not decide in 1998. The major issues are: (1) the FCC's cost
methodology used to set prices, (2) its methodology for setting wholesale
discounts, (3) the "proxy rates" it set for interconnection, UNEs, and wholesale
discounts, (4) whether ILECs should be required to combine UNEs that are not
already combined, and (5) whether the FCC can require ILECs to provide "superior
quality" to competitors than what the ILEC provides to itself. Parties to this
action have filed briefs and participated in oral arguments on September 17,
1999. A court decision is expected during the first quarter of 2000.

Universal Service

GTE is active before both state and federal regulators advocating development
and implementation of measures that will meet the requirements of the universal
service provisions of the Telecommunications Act. Specifically, GTE urges
regulators to identify and remove all hidden subsidies and to provide an
explicit replacement mechanism.

In October 1998, the FCC issued an order selecting a cost model for universal
service. On October 22, 1999, the FCC adopted an order selecting the cost inputs
for the federal universal service cost model. Due to unforeseen delays, the FCC
has now moved the implementation date of the new universal service mechanism for
non-rural


                                       11
<PAGE>   13
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

           Management's Discussion and Analysis of Financial Condition
                      And Results of Operations - Continued


carriers to January 2000. As a result, many state regulators are awaiting FCC
action so they can design their universal service programs to be complementary
with the FCC program.

In July 1999, the United States Court of Appeals for the Fifth Circuit (Fifth
Circuit) affirmed in part, reversed in part, and remanded in part the FCC's
universal service regime. The FCC filed a Motion For Stay of the Fifth Circuit's
mandate so that additional time could be granted to address the implementation
issues associated with changing its existing methods of assessment and carrier
recovery of universal service contributions. GTE and several other parties also
asked the Fifth Circuit for rehearing on several issues. However, in September
1999 the Fifth Circuit denied all motions for stay and/or rehearing, and
established November 1, 1999 as the effective date for the original decision.

On October 8, 1999, the FCC released two orders in response to the Fifth Circuit
decision. One order permits ILECs to continue to recover their universal service
contributions from access charges or to establish end user charges. The second
order changed the contribution basis for school/library funding to eliminate
calculations based upon intrastate revenues.

On November 4, 1999, the FCC released an order dealing with implementation of
the new FCC federal high cost support mechanism for non-rural ILECs. The
effective date for the new federal universal service plan is January 1, 2000.
This plan will take contributions to the federal fund and distribute them to
states with higher than average costs. The role of state commissions is to
ensure reasonable comparability within the borders of a state. Federal high cost
support will be calculated by comparing the nationwide average cost with each
state's average cost per line, and providing federal support for only states
that exceed 135% of the nationwide average. To guard against rate shock, the FCC
also adopted a "hold harmless" approach so that the amount of support provided
to each non-rural carrier under the new plan will not be less than the amount
provided today.

Price Cap

In May 1999, the U.S. Court of Appeals for the District of Columbia (Court)
released a decision regarding the FCC's choice of a 6.5% price cap productivity
factor in a 1997 order. The Court found the FCC's choice of a 6.0% base factor
and a 0.5% Consumer Productivity Dividend to be inadequately supported. The
Court remanded the matter back to the FCC for further action and established an
April 2000 date by which the FCC must complete its deliberations. The Court also
stayed application of its order, allowing the status quo use of the 6.5%
productivity factor pending conclusion of the FCC's further review.

Interstate Access Revision

Effective July 1999, access charges were further reduced using a 6.5%
productivity factor in compliance with FCC requirements to reflect the impacts
of access charge reform and in making the Company's 1999 Annual Filing. The
total annual financial impact of the reduction was $113 million. Similar filings
during 1997 and 1998 had already resulted in price reductions.

In July 1999, GTE, along with a coalition of local exchange and long-distance
companies, submitted a proposal for interstate access charge and universal
service reform to the FCC. The proposal would accelerate the shift in access
revenue recovery from per-minute to flat-rated charges, set a schedule for
elimination of the price cap productivity factor, and provide more explicit
support for universal service. In September 1999, the FCC put the coalition's
proposal out for public comment.


                                       12
<PAGE>   14
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

           Management's Discussion and Analysis of Financial Condition
                      And Results of Operations - Continued


In August 1999, the FCC released an order pertaining to access reform and
pricing flexibility. The order grants price cap LECs immediate flexibility under
certain circumstances to deaverage certain access services and permits the
introduction of new services on a streamlined basis, without prior FCC approval.

Advanced Telecommunications Services

The Telecommunications Act required the FCC to "encourage the deployment on a
reasonable and timely basis of advanced telecommunications capability to all
Americans." Further, the FCC was required to conduct a proceeding aimed at
determining the availability of advanced telecommunications, and to take action
to remove barriers to infrastructure investment and to promote competition.

In March 1999, the FCC released an order adopting a number of new collocation
rules designed to make competitive entry easier and less costly. These rules
specify how ILECs will manage such items as alternate collocation arrangements,
security, space preparation cost allocation, provisioning intervals, and space
exhaustion. GTE has appealed this order to federal court. The FCC also released
a Further Notice of Proposed Rulemaking (FNPRM) seeking comment on spectrum
compatibility issues and line sharing. Line sharing is a concept wherein two or
more service providers are allowed to use the same local loop (e.g., voice and
xDSL). An order from the FCC on line sharing is expected in the fourth quarter
of 1999.

Number Portability

In December 1998, the FCC released an order establishing cost recovery rules for
local number portability (LNP) that permitted the recovery of carrier-specific
costs directly related to the provision of long-term LNP via a federally
tariffed end-user monthly charge. GTE subsequently filed an LNP tariff with the
FCC, and in March 1999 instituted an end-user number portability fee. This
charge is levied on all business and residence customers because all customers
benefit from the competitive environment created by LNP capability. In June
1999, GTE's tariffed LNP charge was reviewed and accepted by the FCC at $0.36
per access line.

Internet Service Traffic

ILECs are required to provide open access to all Internet service providers
(ISPs), while cable television operators are not. Several major cable television
operators providing Internet access through cable modem facilities are only
offering their affiliated ISPs to consumers. Cable television operators that do
allow customers to select non-affiliated ISPs often require the customer to also
pay for their affiliated ISP's service (i.e., to pay twice for the same
service). GTE has been active in encouraging municipalities engaged in reviewing
cable television mergers or franchise renewals to require cable modem open
access as a condition for approval. The City of Portland, Oregon was first to
adopt such a requirement and AT&T has appealed that decision. Arguments took
place November 1, 1999 before the Ninth Circuit Court.

In October 1999, GTE's Internetworking unit filed an antitrust lawsuit
contending that cable TV providers' refusal to provide ISPs with "open access"
to cable modem platforms is a violation of federal antitrust law. The lawsuit
filed in the U.S. District Court in Pittsburgh, names Tele-Communications, Inc.,
(now a unit of AT&T Corp.), Comcast Corp., and Excite@Home and seeks an
injunction to require open access and damages.

GTE's interconnection contracts with CLECs specify that parties compensate each
other for the exchange of local traffic, defined as traffic that is originated
by an end user of one party and terminating to the end user of the other party
within GTE's current local serving area. It is GTE's position that ISP traffic
does not satisfy the definition of local traffic, and that no compensation
should be paid to CLECs that switch this traffic to their ISP customers. In a



                                       13
<PAGE>   15
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

           Management's Discussion and Analysis of Financial Condition
                      And Results of Operations - Continued


recent ruling, the FCC has clarified that ISP traffic is largely interstate,
does not "terminate" in GTE's local serving area, and based on an end-to-end
analysis of the call, is not local traffic. Consistent with this recent ruling,
GTE has been disputing and litigating bills from CLECs on these calls.

INTRASTATE REGULATORY DEVELOPMENTS

Open Access and Network Architecture Development

The Open Access and Network Architecture Development (OANAD) proceeding, is a
multi-phased proceeding to establish cost study methodologies and permanent
prices for UNEs, resold services and collocation. The Company's pricing agenda
(rate rebalancing and pricing flexibility) is highly dependent on the costing
issues being resolved in this proceeding.

In December 1998, the California Public Utilities Commission (CPUC) issued a
decision that adopted the Pacific Bell nonrecurring cost study for both Pacific
Bell and the Company. The Company's application for rehearing of this decision
was denied. A CPUC decision on the Company's UNE cost study is expected in the
first quarter of 2000. Hearings for the Company's UNE prices will be set after
cost studies are approved.

In March 1996, the CPUC issued a decision adopting an interim discount on resold
services of 12% and indicated that a permanent discount would be addressed in
the OANAD proceeding. In October 1997, during another phase of the proceeding,
the Company submitted testimony regarding the proper cost model and the
resulting permanent resale discount. Hearings were held in November and December
1997. Opening and reply briefs were filed in January 1998 and February 1998,
respectively. Eight parties submitted testimony and four cost models will be
subject to review. The CPUC's goal is to select one model to determine the
proper resale discount. A final order is anticipated during the second quarter
of 2000.

A collocation phase was added to the OANAD proceeding in June 1998 to determine
appropriate methods of collocation and to establish prices for the adopted
methods. The Company, Pacific Bell and AT&T/MCI submitted cost studies in
October 1998. Hearings were held in February and March of 1999, and a final
decision is expected in the fourth quarter of 1999.

Operations Support Systems

An important component in facilitating competitor entry into the local services
market is the development of performance measurements and standards. This
activity is being covered in the Operations Support Systems (OSS) proceeding. In
January 1999, a Joint Partial Settlement Agreement (JPSA) regarding performance
measurements was filed by the Company, Pacific Bell and various CLECs with the
CPUC. In August 1999, the CPUC issued a final decision approving the JPSA and
addressing previously unresolved issues related to performance measurements. In
the Change Management Process (CMP) Phase of this proceeding, the CPUC issued a
draft decision in October 1999 that approves, with qualification, two
uncontested Joint Settlement Agreements. The proposed decision establishes a
procedure whereby Pacific Bell, GTE, and interested CLECs may amend changes to
OSS interfaces and creates an orderly structure under which these changes can be
rolled out. A separate phase of the OSS proceeding is addressing the assessment
of penalties for non-parity performance.

Open Market Transition

In November 1998, the CPUC issued a decision which granted the Company an
interim surcharge in the amount of $0.02 per line per month for recovery of
implementation costs for local competition. The Company, as well as other


                                       14
<PAGE>   16
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

           Management's Discussion and Analysis of Financial Condition
                      And Results of Operations - Continued


carriers, filed petitions seeking an extension of time to impose the surcharge
on end users. In July 1999, the CPUC concluded that since applicants have
demonstrated that certain fundamental aspects of the surcharge required
rehearing, and because there was no longer any reason to defer consideration of
a final surcharge order, the CPUC revised its order issued in November 1998 to
proceed directly with a reasonableness review without imposing an interim
surcharge in customer billings. In August 1999, the Company and Pacific Bell
submitted revised open market transition (OMT) costs to be recovered. The
reasonableness of these costs will be reviewed by the CPUC in a contested
proceeding during the first half of 2000.

Merger

In December 1998, GTE and Bell Atlantic filed a Joint Application in California
requesting approval of the GTE/Bell Atlantic merger. California has a statutory
requirement for rate-regulated public utilities to share with their ratepayers
at least fifty percent of the forecasted merger-related net cost savings
attributable to the regulated intrastate Category I and II services. The
applicants estimate the total amount of such net savings is $162.7 million over
four years, the present value of which is $111.7 million. The applicants propose
to allocate fifty percent of the present value of the net savings, or
approximately $55.9 million, to California ratepayers in three ways: (1) an
annual surcredit of $10.4 million for a four-year period that would apply to
local, toll and access services with the exception of basic residential service;
(2) by increasing the level of the Company's corporate donations by $2.5 million
per year for ten years to a "Community Collaborative" that will disburse funds
in underserved communities to promote access to telecom services, education, and
other goals; and (3) continuing the Company's Universal Lifeline Telephone
Service program for three years at $1.3 million per year. Evidentiary hearings
were held in July 1999, and the Administrative Law Judge's proposed decision is
expected in December, 1999. The final decision from the California Commission is
due in January, 2000.

OTHER DEVELOPMENTS

Proposed Merger with Bell Atlantic Corporation

Bell Atlantic and GTE have announced a proposed merger of equals under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic common
stock for each share of GTE common stock that they own.

The merger is expected to qualify as a pooling of interests, which means that
for accounting and financial reporting purposes the companies will be treated as
if they had always been combined. The completion of the merger is subject to a
number of conditions, including certain regulatory approvals and receipt of
opinions that the merger will be tax-free. At annual meetings held in May 1999,
the shareholders of each company approved the merger.

Both companies are working diligently to complete the merger and are targeting
completion of the merger around the end of the first quarter of 2000. However,
Bell Atlantic and GTE must obtain the approval of a variety of state and federal
regulatory agencies and, given the inherent uncertainties of the regulatory
process, the closing of the merger may be delayed.

Planned Asset Sales

During May 1999, the Company entered into an agreement to sell approximately
46,000 switched access lines located in California and Arizona to Citizens
Utilities Company. This sale consummates the Company's previously announced 1998
plan to sell selected access lines located in California and Arizona. The sale
is subject to regulatory approval and is expected to close in 2000. The
associated net assets, which approximate $40.5 million, consist of


                                       15
<PAGE>   17
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

           Management's Discussion and Analysis of Financial Condition
                      And Results of Operations - Continued


property, plant and equipment, and are classified as "Net assets held for sale"
in the condensed consolidated balance sheet as of September 30, 1999. The
Company intends to continue to operate all of these assets until sold. Based on
the decision to sell, however, the Company stopped recording depreciation
expense for these assets, resulting in a year-to-date depreciation expense
reduction of $6.3 million for 1999. No charges were recorded for the access
lines to be sold because their estimated fair values were in excess of their
carrying values. The access lines sold represented approximately 1% of the
average switched access lines that the Company had in service during 1998, and
contributed approximately 1% to 1998 consolidated revenues.

YEAR 2000 CONVERSION

State of Readiness

GTE has completed Year 2000 remediation, conducted system testing and returned
to production the essential systems that support its domestic telecommunications
businesses. GTE's portion of the public switched telephone network (PSTN) in the
United States has been upgraded for Year 2000, and all of GTE's access lines are
now operating using Year 2000 compliant central office switches and network
elements. All other GTE business units are substantially complete in Year 2000
conversion and testing and are expected to be 100% complete by the end of
November 1999.

GTE's remaining efforts continue through March 2000 and consist of quality
assurance and validation of Year 2000 efforts across businesses; assuring
forward compliance of systems and services; planning for reasonably foreseeable
contingencies associated with the millennium rollover; and operation of our
corporate Year 2000 communications watch center.

Cost to Address Year 2000 Issues

The estimated total multi-year cost of GTE's Year 2000 Program remains unchanged
and is not expected to exceed $400 million. Through September 30, 1999,
expenditures totaled $358 million. The current estimate for the cost of
remediation for the Company is approximately $52.0 million. Through September
30, 1999, expenditures totaled $30.3 million. Year 2000 remediation costs are
expensed in the year incurred. Approximately 68% of GTE's program effort
involves U.S. domestic operations. GTE's majority-owned subsidiaries have not
elected to replace or accelerate the planned replacement of any systems due to
the Year 2000 issue. GTE has begun to reduce the staff assigned to the Year 2000
program. From a program peak of over 1,200 full-time equivalent workers, we are
currently staffed with an estimated 500 full-time equivalent workers (both
company employees and contractors) worldwide.

Risks of Year 2000 Issues

With the completion of conversion and system testing, GTE believes that the risk
of multiple, simultaneous Year 2000 disruptions affecting GTE's ability to
provide basic services has been substantially eliminated. While isolated system
issues may arise, the "most reasonably likely worse case scenario" would be any
disruptions resulting from interoperability issues with other international
carriers that have not completed their Year 2000 efforts or other circumstances
outside of GTE's control.

Contingency Planning

GTE continues to enhance its normal business continuity planning to address
potential Year 2000 interruptions. GTE's disaster preparedness recovery plans
include procedures and activities for a "multi-regional" Year 2000


                                       16
<PAGE>   18
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

           Management's Discussion and Analysis of Financial Condition
                      And Results of Operations - Continued


contingency, if it occurs. GTE has established a corporate Year 2000
communications watch center that is now operational. Located in Dallas, Texas,
the watch center will remain operational (as required) through March 1, 2000.
The initial versions of our contingency plans were completed during the second
quarter of 1999. These contingency plans will be kept current through the
millennium rollover, and are being tested (as appropriate). As of September 30,
1999, 79% of the contingency plans have completed testing, and the remaining
plans are expected to complete testing by the end of November 1999. GTE's Year
2000 contingency plans include business continuity planning; disaster
recovery/emergency preparedness; millennium rollover planning; post millennium
degradation tracking; a network and information technology freeze period;
employee availability and logistics backup planning; "follow-the-sun" time-zone
impact analysis; and coordination with other (non-PSTN) telecommunications
providers.

RECENT ACCOUNTING PRONOUNCEMENT

Derivative Instruments and Hedging Activities

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The statement requires
entities that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It also
requires entities to reflect the gains or losses associated with changes in the
fair value of these derivatives, either in earnings or as a separate component
of comprehensive income, depending on the nature of the underlying contract or
transaction. The Company is currently assessing the impact of adopting SFAS No.
133, as amended, which is effective January 1, 2001.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

In this Management's Discussion and Analysis, the Company has made
forward-looking statements. These statements are based on the Company's
estimates and assumptions and are subject to certain risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Company, as well as those statements
preceded or followed by the words "anticipates," "believes," "estimates,"
"expects," "hopes," "targets" or similar expressions. For each of these
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.

The future results of the Company could be affected by subsequent events and
could differ materially from those expressed in the forward-looking statements.
If future events and actual performance differ from the Company's assumptions,
the actual results could vary significantly from the performance projected in
the forward-looking statements.

The following important factors could affect the future results of the Company
and could cause those results to differ materially from those expressed in the
forward-looking statements: (1) materially adverse changes in economic
conditions in the markets served by the Company; (2) material changes in
available technology; (3) the final resolution of federal, state and local
regulatory initiatives and proceedings, including arbitration proceedings, and
judicial review of those initiatives and proceedings, pertaining to, among other
matters, the terms of interconnection, access charges, universal service, UNEs
and resale rates; (4) the extent, timing, success and overall effects of
competition from others in the local telephone and intraLATA toll service
markets; and (5) the success


                                       17
<PAGE>   19
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

           Management's Discussion and Analysis of Financial Condition
                      And Results of Operations - Continued


and expense of our remediation efforts and those of our suppliers, customers and
all interconnecting carriers in achieving Year 2000 compliance.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the Company's market risks since December
31, 1998.


                                       18
<PAGE>   20

PART II. OTHER INFORMATION

                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY


Item 6.  Exhibits and Reports on Form 8-K.

     (a) Exhibits required by Item 601 of Regulation S-K.

         12    Statement re: Calculation of the Consolidated Ratio of Earnings
               to Fixed Charges

         27    Financial Data Schedule

     (b) The Company filed no reports on Form 8-K during the third quarter of
         1999.


                                       19
<PAGE>   21

                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                            GTE California Incorporated
                                          -------------------------------
                                                   (Registrant)

Date: November 10, 1999                       /s/ Stephen L. Shore
      -----------------                   -------------------------------
                                                  Stephen L. Shore
                                                     Controller
                                           (Principal Accounting Officer)



                                       20
<PAGE>   22



                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT
NUMBER      DESCRIPTION
-------     -----------
<S>         <C>
  12        Statement re: Calculation of the Consolidated Ratio of Earnings
            to Fixed Charges

  27        Financial Data Schedule
</TABLE>