<PAGE>   1
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                                 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, 1998

                                       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


                600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
              (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, 1998.  The Company's common stock is 100% owned by GTE Corporation.

--------------------------------------------------------------------------------

<PAGE>   2
PART I.  FINANCIAL INFORMATION

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


<TABLE>
<CAPTION>
                                              Three Months Ended           Nine Months Ended
                                                 September 30,               September 30,
                                             ----------------------     ----------------------
                                               1998          1997         1998          1997
                                             --------      --------     --------      --------
                                                           (Dollars in Millions)
<S>                                          <C>           <C>          <C>           <C>     
REVENUES AND SALES
   Local services                            $  362.5      $  355.5     $1,083.6      $1,061.2
   Network access services                      282.6         235.4        751.4         700.4
   Toll services                                 66.7          97.8        226.3         318.4
   Other services and sales                     191.7         132.6        416.9         332.2
                                             --------      --------     --------      --------
      Total revenues and sales                  903.5         821.3      2,478.2       2,412.2
                                             --------      --------     --------      --------

OPERATING COSTS AND EXPENSES
   Cost of services and sales                   204.9         242.6        720.9         775.4
   Selling, general and administrative          120.6         129.5        344.9         397.8
   Depreciation and amortization                146.3         142.8        437.9         476.5
                                             --------      --------     --------      --------
      Total operating costs and expenses        471.8         514.9      1,503.7       1,649.7
                                             --------      --------     --------      --------
OPERATING INCOME                                431.7         306.4        974.5         762.5

OTHER (INCOME) EXPENSE
   Interest - net                                32.1          25.9         91.5          77.5
   Other - net                                   (2.2)           --         (2.1)          0.6
                                             --------      --------     --------      --------
INCOME BEFORE INCOME TAXES                      401.8         280.5        885.1         684.4
   Income taxes                                 164.3         109.7        357.6         267.8
                                             --------      --------     --------      --------
NET INCOME                                   $  237.5      $  170.8     $  527.5      $  416.6
                                             ========      ========     ========      ========
</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,
                                                      1998           1997
                                                 -------------    ------------
                                                     (Dollars in Millions)
<S>                                                <C>            <C>      
ASSETS
Current assets
   Cash and cash equivalents                       $     5.6      $     9.9
   Receivables, less allowances
     of $67.1 and $65.2                                649.9          618.4
   Accounts receivable from affiliates                  21.8           66.4
   Note receivable from affiliate                         --           14.2
   Inventories and supplies                             61.8           51.1
   Prepaid insurance                                    21.8            6.5
   Deferred income tax benefits                         10.5           19.4
   Other                                                 8.3            9.5
                                                   ---------      ---------
      Total current assets                             779.7          795.4
                                                   ---------      ---------


Property, plant and equipment, at cost              10,503.3       10,077.9
Accumulated depreciation                            (6,621.4)      (6,278.6)
                                                   ---------      ---------
      Total property, plant and equipment, net       3,881.9        3,799.3
                                                   ---------      ---------


Prepaid pension costs                                  812.6          706.5
Other assets                                            28.7           19.1
                                                   ---------      ---------
Total assets                                       $ 5,502.9      $ 5,320.3
                                                   =========      =========
</TABLE>


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,
                                                   1998             1997
                                               ------------     ------------
                                                   (Dollars in Millions)
<S>                                            <C>              <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
   Current maturities of long-term debt        $        0.3     $      150.2
   Notes payable to affiliates                        167.4             95.8
   Accounts payable                                   129.7            181.0
   Affiliate payables                                 130.9            175.3
   Advanced billings and customer deposits             79.9             65.6
   Taxes payable                                      279.1             26.8
   Accrued interest                                    25.1             30.2
   Accrued payroll costs                               97.4             89.2
   Dividends payable                                  170.0            158.2
   Other                                              187.5            192.6
                                               ------------     ------------
      Total current liabilities                     1,267.3          1,164.9
                                               ------------     ------------

Long-term debt                                      1,565.9          1,466.7
Deferred income taxes                                 502.7            394.9
Deferred employee benefit obligations                 195.6            225.4
Other liabilities                                     156.5            272.6
                                               ------------     ------------
      Total liabilities                             3,688.0          3,524.5
                                               ------------     ------------

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                          82.2             82.2
   Retained earnings                                  282.7            263.6
                                               ------------     ------------
      Total shareholders' equity                    1,814.9          1,795.8
                                               ------------     ------------
Total liabilities and shareholders' equity     $    5,502.9     $    5,320.3
                                               ============     ============
</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,         
                                                               ------------------------------
                                                                   1998               1997       
                                                               ------------      ------------
                                                                   (Dollars in Millions)
<S>                                                            <C>               <C>         
OPERATIONS
   Net income                                                  $      527.5      $      416.6
   Adjustments to reconcile net income to net cash
     from operations:
         Depreciation and amortization                                437.9             476.5
         Deferred income taxes                                         98.9              87.4
         Provision for uncollectible accounts                          57.6              60.4
         Changes in current assets and current liabilities             23.2            (100.1)
         Other - net                                                 (177.7)           (129.0)
                                                               ------------      ------------
      Net cash from operations                                        967.4             811.8
                                                               ------------      ------------

INVESTING
   Capital expenditures                                              (510.9)           (396.6)
   Other - net                                                          2.6               3.8
                                                               ------------      ------------
      Net cash used in investing                                     (508.3)           (392.8)
                                                               ------------      ------------

FINANCING
   Long-term debt issued                                              197.6             295.1
   Long-term debt and preferred stock retired,
     including premiums paid on early retirement                     (150.1)           (268.7)
   Dividends                                                         (496.6)           (472.6)
   Decrease in short-term obligations,
     excluding current maturities                                        --             (71.0)
   Net change in affiliate notes                                      (14.3)             98.5
                                                               ------------      ------------
         Net cash used in financing                                  (463.4)           (418.7)
                                                               ------------      ------------

Increase (decrease) in cash and cash equivalents                       (4.3)              0.3

Cash and cash equivalents:
   Beginning of period                                                  9.9              22.2
                                                               ------------      ------------
   End of period                                               $        5.6      $       22.5
                                                               ============      ============
</TABLE>





The accompanying notes are an integral part of these statements.


                                        4
<PAGE>   6

                   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 1997 Annual Report on Form 10-K.

Reclassifications of prior year data have been made, where appropriate, to
conform to the 1998 presentation.

NOTE 2.  DEBT

In May 1998, the Company issued $200.0 million of 6.75% Series F Debentures,
due 2027.  The net proceeds were applied toward the repayment of short-term
borrowings.

In compliance with Statement of Financial Accounting Standards (SFAS) No. 6,
"Classification of Short-Term Obligations Expected to Be Refinanced," long-term
debt as of September 30, 1998 includes $100.0 million of short-term borrowings
in the form of affiliate notes payable.  These affiliate notes payable represent
notes payable to GTE and GTE Funding Incorporated, an affiliate company that
provides short-term financing and investment vehicles and cash management
services for the Company.

NOTE 3.  RECENT ACCOUNTING PRONOUNCEMENTS

Employee Benefit Disclosures

In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits."  This new standard does not change the measurement or recognition of
costs for pension or other postretirement plans.  It standardizes disclosures
and eliminates those that are no longer useful.  The Company will provide the
new disclosures in the 1998 Annual Report on Form 10-K.  The adoption of SFAS
No. 132 will have no impact on the consolidated results of operations or
financial condition.





                                       5
<PAGE>   7



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


Computer Software

In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use."  SOP 98-1 defines internal-use
software and requires that the cost of such software be capitalized and
amortized over its useful life.  Presently, the Company's practice is to
capitalize initial operating system and certain application software and expense
the cost of other software, including right-to-use fees.  The Company is
currently assessing the impact of capitalizing and amortizing the cost of all
types of internal-use software as required by SOP 98-1, effective January 1,
1999. 

Costs of Start-Up Activities

In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities" to provide guidance to all non-governmental entities on
financial reporting of costs of start-up activities.  SOP 98-5 must be adopted
not later than January 1, 1999, and requires that costs of start-up activities
be expensed as incurred instead of being capitalized and amortized.  It applies
to start-up activities and costs of organization of both development stage and
established operating entities.  Based on the Company's current policy for
costs of start-up activities, SOP 98-5 will not have an impact on the
consolidated results of operations or financial condition.

Derivative Instruments and Hedging Activities

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities."  SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.  The
Company is assessing the impact of adopting SFAS No. 133 and intends to
implement as of January 1, 2000.


NOTE 4.   PROPERTY REPOSITIONING

In April 1998, GTE announced its intention to reposition non-strategic access
lines, including some access lines in the states served by the Company. These
lines generally exhibit slower growth characteristics and do not earn their
cost of capital.  Many of these lines are in markets where the Company is
facing competitors who have regulatory advantages in the areas of access
pricing and Universal Service Fund subsidies.  Specifically, access lines in
the states of Arizona and California have been identified for purchase or
trade.  The identified assets constituted approximately 1% of the Company's
total switched access lines and net plant at December 31, 1997. These access
lines generated approximately 1% of the Company's 1997 revenues. The Company's
goal is to reach the first definitive agreement in the first quarter of 1999
and definitive agreements for all properties by mid-year 1999. Transition of
the properties to the buyers will occur during the remainder of 1999 and into
2000.


                                       6
<PAGE>   8
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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



RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in Millions)
                                         September 30,
                                  --------------------------      Increase        Percent
Net income                           1998            1997        (Decrease)       Change
----------                        ----------      ----------     ----------     ----------
<S>                               <C>             <C>            <C>            <C>
   Three months ended             $    237.5      $    170.8     $     66.7            39%
   Nine months ended                   527.5           416.6          110.9            27%
</TABLE>

The three month and nine month increases to net income are primarily the result
of higher revenues from network access services revenues and other revenues and
lower operating costs, partially offset by lower toll revenues.

REVENUES AND SALES
<TABLE>
<CAPTION>
(Dollars in Millions)                Three Months Ended
                                        September 30,
                                  -------------------------      Increase         Percent
                                     1998           1997        (Decrease)         Change
                                  ----------     ----------     ----------      ------------
<S>                               <C>            <C>            <C>             <C>
   Local services                 $    362.5     $    355.5     $      7.0               2%
   Network access services             282.6          235.4           47.2              20%
   Toll services                        66.7           97.8          (31.1)            (32)%
   Other services and sales            191.7          132.6           59.1              45%
                                  ----------     ----------     ----------      
     Total revenues and sales     $    903.5     $    821.3     $     82.2              10%
                                  ==========     ==========     ==========      
</TABLE>


<TABLE>
<CAPTION>
(Dollars in Millions)                Nine Months Ended
                                       September 30,
                                  -------------------------      Increase          Percent
                                     1998           1997        (Decrease)         Change
                                  ----------     ----------     ----------      ------------
<S>                               <C>            <C>            <C>             <C>
   Local services                 $  1,083.6     $  1,061.2     $     22.4               2%
   Network access services             751.4          700.4           51.0               7%
   Toll services                       226.3          318.4          (92.1)            (29)%
   Other services and sales            416.9          332.2           84.7              25%
                                  ----------     ----------     ----------      
     Total revenues and sales     $  2,478.2     $  2,412.2     $     66.0               3%
                                  ==========     ==========     ==========      
</TABLE>

Local Services Revenues

The increases in local services revenues for the third quarter and first nine
months of 1998, compared to the same periods in 1997, are primarily due to the
reversal of a reserve previously recorded for a California Public Utilities
Commission (CPUC) proceeding related to potential annual price cap adjustments
to reflect the revenue requirement impact of the Company's adoption of the
Federal Communications Commission's (FCC's) Rewrite of the Uniform System of
Accounts.  In July 1998, favorable actions of the CPUC staff gave management
indication that this reserve was no longer necessary.  Excluding this revenue
reserve reversal, local services revenues decreased $19.6 million or 6% and
$31.2 million or 3% for the third quarter and first nine months of 1998,
respectively.



                                       7
<PAGE>   9
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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




Factors contributing to the three and nine month decreases ended September 30,
1998, include declines in non-recurring charges of $1.2 million and $17.0
million, respectively, related in part to waivers given to customers. Additional
decreases are in miscellaneous local services such as private line revenues,
contracted voicemail, directory assistance and operator services and Extended
Area Service transitional support payments. In aggregate, these decreases
amounted to $11.3 million and $22.0 million for the three and nine months ended
September 30, 1998, respectively. Also, the impact of the CPUC Implementation
Rate Design supplement, recorded in 1997, contributed $4.4 million and $13.3
million in decreases for the three and nine month periods ended September 30,
1998, respectively. These decreases are partially offset by favorable changes to
basic local services revenues of $16.4 million for the nine month period ended
September 30, 1998, primarily caused by a 5% access line growth. The access line
growth also generated an increase in CentraNet(R) services of $14.1 million for
the nine month period ended September 30, 1998.

Network Access Services Revenues

The increases in network access services revenues for the three and nine month
periods ended September 30, 1998, are partially due to an increase in minutes of
use of 14% and 13%, generating additional revenues of $16.6 million and $46.3
million, respectively.  Special access revenues grew $20.5 million and $47.4
million, respectively, for the three and nine month periods, due to greater
demand for increased bandwidth services by Internet Service Providers and other
high capacity users.  The three and nine month increases are partially offset by
unfavorable impacts of $12.5 million and $34.9 million, respectively, from
sharing provisions and rate changes related to the FCC's 1997 and 1998 price cap
filings along with decreases in cellular access revenues and other intraLATA
(local access transport area) switched access revenues.  In 1997, the FCC
ordered significant changes that altered the structure of access charges
collected by the Company. These changes, effective January 1, 1998, resulted in
a decrease in revenues of $5.2 million and $20.4 million for the three and nine
month periods ended September 30, 1998, respectively.  (For further explanation
of FCC actions see section entitled "FEDERAL REGULATORY DEVELOPMENTS.")

Toll Services Revenues

The decreases in toll services revenues for the three and nine month periods
ended September 30, 1998 are primarily due to reduced toll volumes, resulting
from intraLATA toll competition including 10-10-XXX and 1+ presubscription,
which accounts for $26.7 million and $86.1 million of the decrease,
respectively.





                                       8
<PAGE>   10
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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



Other Services and Sales Revenues

Other services and sales revenues increased for the three and nine month periods
ended September 30, 1998, partially due to an $8.6 million and $19.9 million
increase, respectively, associated with the FCC's order increasing payphone
compensation from interexchange carriers (IXCs) (see section entitled "FEDERAL
REGULATORY DEVELOPMENTS - Payphone Orders") and a $7.3 million and $16.3
million increase in revenues from billing and collection services.  In addition,
both the three and nine month periods experienced increases in directory
advertising revenues of $19.6 million and $14.2 million and equipment rental
revenues of $11.5 million and $7.5 million. Also, higher usage and recurring
charges related to the Tele-Go(R) wireless product contributed to the growth for
the three and nine month periods.


OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
(Dollars in Millions)                           Three Months Ended
                                                  September 30,
                                            -------------------------      Increase         Percent
                                               1998            1997       (Decrease)        Change
                                            ----------     ----------     ----------      ----------
<S>                                         <C>            <C>            <C>              <C>  
   Cost of services and sales               $    204.9     $    242.6     $    (37.7)            (16)%
   Selling, general and administrative           120.6          129.5           (8.9)             (7)%
   Depreciation and amortization                 146.3          142.8            3.5               2%
                                            ----------     ----------     ----------      
     Total operating costs and expenses     $    471.8     $    514.9     $    (43.1)             (8)%
                                            ==========     ==========     ==========      
</TABLE>


<TABLE>
<CAPTION>
(Dollars in Millions)                          Nine Months Ended
                                                  September 30,
                                            -------------------------      Increase         Percent
                                               1998           1997        (Decrease)        Change
                                            ----------     ----------     ----------      ----------
   <S>                                      <C>            <C>            <C>              <C>
   Cost of services and sales               $    720.9     $    775.4     $    (54.5)             (7)%
   Selling, general and administrative           344.9          397.8          (52.9)            (13)%
   Depreciation and amortization                 437.9          476.5          (38.6)             (8)%
                                            ----------     ----------     ----------      
     Total operating costs and expenses     $  1,503.7     $  1,649.7     $   (146.0)             (9)%
                                            ==========     ==========     ==========      
</TABLE>

The decrease in total operating costs and expenses for the nine month period 
ended September 30, 1998 compared to the same period in 1997, is primarily 
due to the following factors: lower labor and benefit costs in 1998, including 
the favorable true-up of certain employee benefits and other liabilities; a 
decrease of $17.7 million due to higher selling and marketing costs in 1997, 
resulting from efforts to stimulate demand for enhanced services and preserve 
market share; and a $7.6 million reduction in costs related to lower switch 
software right-to-use fees. Partially offsetting these decreases for the nine 
month period ended September 30, 1998 are $21.5 million in charges related to 
corrective action taken with Street Address directories and information pages 
(see section entitled "OTHER DEVELOPMENTS") and $18.7 million in charges 
associated with storm damage costs within the Company's service territories.




                                       9
<PAGE>   11
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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




The three month decrease in operating costs and expenses is partially due to 
lower switch software right-to-use fees of $8.9 million in the third quarter of 
1998 compared to the same period in 1997 and $9.8 million caused by higher 
sales and marketing costs in 1997. In addition, lower labor and benefit costs 
in 1998, including the favorable true-up of certain employee benefits and other 
liabilities contributed to the decrease.

The year-to-date decrease in depreciation is the result of lower depreciation
rates, reflecting higher net salvage values of certain telephone plant and
equipment that went into effect in the third quarter of 1997.


OTHER INCOME STATEMENT ITEMS

Interest-net increased 24% or $6.2 million and 18% or $14.0 million for the
three and nine months ended September 30, 1998, respectively, compared to the
same periods in 1997, primarily due to higher average short-term and long-term
debt levels.

Income taxes increased 50% or $54.6 million and 34% or $89.8 million for the
three and nine months ended September 30, 1998, respectively, compared to the
same periods in 1997.  The increases are primarily due to the corresponding
increases 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 the Company's parent, 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 $1.0 billion in short-term liquidity through GTE and GTE Funding
Incorporated's bi-lateral revolving lines of credit.  The Company has an
existing shelf registration statement outstanding for an additional $500.0
million of debentures.

The Company's primary source of funds during the first nine months of 1998 is
cash from operations of $967.4 million compared to $811.8 million for the same
period in 1997.  The increase in cash from operations primarily reflects the
improved results from operations along with a decrease in working capital
requirements, primarily due to the change in accrued taxes and interest.






                                       10
<PAGE>   12
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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


Net cash used in investing activities during the first nine months of 1998 is
$508.3 million compared to $392.8 million for the same period in 1997.  The
majority of new investment is being made to meet the demands of growth,
modernize facilities and develop and install new software, all of which are
required to support new products and enhanced services.  The overall anticipated
capital expenditures for 1998 are expected to be comparable to the total capital
expenditures incurred during 1997.

Net cash used in financing activities is $463.4 million during the first nine
months of 1998 compared to $418.7 million for the same period in 1997.  This
included dividend payments of $496.6 million in the first nine months of 1998
compared to $472.6 million for the same period in 1997.  Short-term financing,
including the net change in affiliate notes, decreased $14.3 million in the
first nine months of 1998, compared to an increase of $27.5 million for the
same period in 1997.  The Company retired $150.1 million of long-term debt and
preferred stock during the first nine months of 1998 compared to $268.7 million
during the first nine months of 1997.  The Company issued $200.0 million of
6.75% debentures in May of 1998.  The proceeds were applied toward the
repayment of the Company's short-term borrowings.

FEDERAL REGULATORY DEVELOPMENTS

Interstate Access Revision

The Company filed interstate access revisions during 1997 that became effective
in June 1997 and July 1997.  Overall, these filings resulted in a net annual
price reduction of $36.9 million.  In December 1997, the FCC issued an order to
file revised access rates effective in January 1998, which resulted in
additional interstate access revenue reductions of approximately $10.0 million
annually.  In 1997, the FCC also ordered significant changes that altered the
structure of access charges collected by the Company, effective in January
1998.  Generally, the FCC reduced and restructured the per minute charges paid
by long-distance carriers and implemented new per-line charges.  The FCC also
created an access charge structure that resulted in different access charges
for residential primary and secondary lines and single line and multi-line
business access lines.  In aggregate, the reductions in usage sensitive access
charges of $35.1 million paid by long-distance carriers were partially offset
by $30.0 million of new per-line charges and the charges paid by end-user
customers.  Effective in July 1998, access charges were further reduced by
$22.8 million annually in compliance with FCC requirements to reflect the
impacts of access charge reform.

The FCC Access Reform Order released in May 1997 revamped the rate structure
through which local and long-distance companies charge customers for using the
local phone network to make long-distance calls.  GTE and numerous other
parties challenged the FCC's decisions in this order before the Eighth Circuit
Court of Appeals based on the belief that the FCC did not eliminate





                                       11
<PAGE>   13
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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



the universal service subsidies hidden within interstate access charges as
directed by the Telecommunications Act of 1996 (TA96), and that the FCC created
additional subsidy charges paid only by business and multi-line residential
customers.  In August 1998, the Eighth Circuit announced its decision on the
multiple appeals of the FCC Access Reform Order.  The opinion denies all of the
petitions for review of the access charge order.  The Company is considering its
options.

In October 1998, the FCC began a proceeding to "refresh the record" used in the
1997 access charge reform proceedings.  The FCC will determine whether to
retain or modify its "market based" access charge reform approach, or to adopt a
"prescriptive" approach.

Universal Service

In May 1997, the FCC released a decision relating to implementation of the
TA96's provision on universal service.  GTE and numerous other parties have
challenged the FCC's decision before the U.S. Court of Appeals for the Fifth
Circuit on the grounds that the FCC did not follow the requirements of the TA96
to develop a sufficient, explicit and competitively neutral universal service
program.  Oral argument is scheduled for December 1998.  A final decision on
the appeal is expected to be issued by mid-1999.

In its Order on Reconsideration dated July 13, 1998, the FCC referred some key
issues back to the Federal-State Joint Board (the Board) on universal service.
The Board's recommendations are due in the fourth quarter of 1998.  In its
October 22, 1998 Order, the FCC selected a "synthesis" model platform for
universal service and plans to select cost inputs by the first quarter of 1999
and a revenue benchmark by mid-1999.  The implementation date of the new
universal service mechanism for non-rural carriers was moved to July 1999.  The
Company is assessing the Order and its options.

The Eighth Circuit Court ruling on FCC access reform (see previous discussion
of "Interstate Access Revision") also impacts universal service.  Specifically,
the FCC is not required to eliminate all implicit subsidies before the explicit
universal service mechanism is implemented in July 1999.

Payphone Orders

On June 4, 1996, the FCC issued its first Report and Order implementing the
payphone compensation provisions of the TA96.  As part of the overall goal of
promoting competition among payphone service providers (PSPs), this order
mandated compensation to all PSPs for all calls originating from payphones,
including credit card and toll-free calls for which PSPs were not previously
compensated.





                                       12
<PAGE>   14
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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




Subsequently, on October 9, 1997, the FCC issued a second Report and Order to
address some of the issues vacated by the U.S. Court of Appeals in Washington,
D.C. concerning the FCC's first Order and Report mentioned above.  In this
second order, the FCC established a new per-call rate of 28.4 cents for
compensation that all PSPs were eligible to receive beginning October 9, 1997.

On April 3, 1998, the FCC issued an order, which granted the IXCs a waiver of
the per-call compensation requirement so that they may pay per-phone instead of
per-call compensation for the payphones for which the FCC had granted
technology waivers.  GTE will receive per-phone compensation under this waiver
until the technology is installed on those payphones that are not currently
capable of measuring per-call detail.

Price Cap

For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan.  This plan limits the rates a carrier may
charge rather than regulating on a traditional rate-of-return basis.  The price
caps for a variety of service categories change annually using a price cap index
(PCI) that is a function of inflation less a predetermined productivity offset.
The FCC's May 1997 Price Cap Order revised the price cap plan for incumbent
price cap local exchange carriers (LECs) by adopting a productivity offset of
6.5%.  This matter is before the FCC as discussed above.

In June 1997, GTE and several other parties challenged the FCC's Price Cap Order
before the Court of Appeals for the District of Columbia Circuit.  The issue
presented for review is whether, in computing its new 6.5% productivity offset,
the FCC arbitrarily manipulated the evidence to achieve a predetermined outcome.
Oral arguments are set for the first quarter of 1999 with a decision expected
later in the year.  Associated with the FCC's current activity to "refresh the
record" for access reform discussed above, the FCC will decide whether the 6.5%
productivity offset should be changed.


STATE REGULATORY DEVELOPMENTS

New Regulatory Framework

Effective January 1, 1990, the CPUC adopted the new regulatory framework (NRF)
for the Company.  Under the NRF, rates are adjusted annually by the PCI, which
is based on inflation minus a productivity improvement factor.  Rates for
partially competitive services, such as Centrex and custom calling features,
may be priced below the price cap within a range set by the CPUC.  Rates are
also adjusted for exogenous events that are beyond the control of management as
defined in this plan.  Fully competitive services, such as directory
advertising, are not subject to pricing limits set by the CPUC.





                                       13
<PAGE>   15
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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




This year, the CPUC instituted its third triennial review of NRF to determine
whether changes should be made to the existing price cap mechanism.  Both
Pacific Bell and the Company supported a pure price cap model in that the
remaining elements of regulation of the level of earnings would be eliminated.
However, the Company disagrees with Pacific Bell's proposal to cap the basic
residential service at its existing rates through year 2001.  A final CPUC
decision, issued in October 1998, imposed (1) continued suspension of the
"Gross Domestic Product Price Index minus X" (Productivity Factor) aspect until
2001, (2) suspension of sharing until 2001, (3) elimination of annual review
and approval of depreciation rate changes, and (4) basic residential service
capped at current rates through 2001.

Extended Area Service Routes

In June 1998, the CPUC issued a decision adopting a policy prospectively
terminating the establishment of new Extended Area Service (EAS) routes within
the territories of the large and mid-sized local exchange companies.  Existing
EAS routes shall be grandfathered for the present time.

Arbitration

In July 1998, the Company filed an Application for Rehearing regarding the
CPUC's denial of the Company's request to modify the AT&T Corp. (AT&T)
Arbitration Decision.  The Company claimed that the CPUC erred in its
conclusion that the Company voluntarily agreed to rebundle unbundled network
elements (UNEs), and failed to recognize that the Company was merely abiding by
federal law, since the FCC rules concerning UNE combinations were in effect at
that time.  The CPUC denied the motion and the Company will appeal.

Competition

In January 1998, the CPUC approved the Company's petition to amend its current
Certificate of Public Convenience and Necessity, to allow additional authority
to operate both as a reseller and facilities-based competitive local exchange
carrier, offering local exchange service within the territories of mid-sized
local exchange carriers.  Authority to commence facilities-based service was
effective in February 1998 and authority to resell services was effective in
April 1998, upon the filing of tariffs.

Open Access and Network Architecture Development Proceeding

In September 1997, the Company submitted cost studies for UNEs and retail
services to the CPUC.  A final order on the Company's UNE costs is anticipated
in the first quarter of 1999 and a final order on UNE prices is anticipated by
the third quarter of 1999.





                                       14
<PAGE>   16
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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



In a separate phase of the Open Access Network Architecture Development
proceeding, the CPUC allowed comments on parties' Operational Support Systems
(OSS) and Non-Recurring Cost (NRC) studies which were submitted in September
1997.  The Company filed a pricing proposal for OSS and NRCs in April 1998
along with testimony regarding what constitutes a "reasonable markup" for UNEs,
arbitrage and price floor determinations.  A final order on these matters is
expected in December 1998.

In additional separate phases of this proceeding, the CPUC held hearings in the
summer of 1997 to determine the appropriate discount for the Company's resale
services.  A decision is expected in the first quarter of 1999.  The CPUC also
opened a phase to determine the costs and the appropriate prices the Company may
charge competitors to collocate facilities in its central offices.  Hearings on
competing cost studies submitted by the Company, Pacific Bell and AT&T/MCI are
set for January 1999, with a final decision due in July 1999.

Property Tax Proceeding 

In 1994, the CPUC issued a proposed order allowing the Company to retain 100%
of the benefits from a reduction in the annual amount of property tax.  A final
order has not been issued.  A ruling in favor of flowing benefits to the
ratepayer would require a refund of the tax reduction for all prior applicable
years.  However, the Company does not believe such a ruling would result in a
material impact to the Company's results of operations, as it has adequately
reserved for this contingency.


OTHER DEVELOPMENTS

In March and April 1998, the Company took action to correct errors discovered
in certain specialty directories known as Street Address directories.  Less
than two percent of the Company's customers with non-published, non-listed and
non-address directory listings had their information erroneously printed in
the Street Address books, which are specialty marketing directories generally
used by a limited number of California businesses on a leased basis.  Once the
full scope of the errors was known, the Company took immediate action to
develop and implement a comprehensive plan to retrieve and replace the
directories in question.  This included seeking and obtaining a temporary
restraining order preventing the use, copy or distribution of the directories
by any remaining holders.  Efforts were also made to contact all customers who
had requested non-published, non-listed or non-address listings, in addition to
the small percentage impacted by the errors.  In September 1998, additional
publication errors relating to a small number of the non-published customers
involved in the Street Address directories problem, were discovered in some
white page directories.  The financial impact, if any, of potential CPUC or
legal actions that may arise as a result of these occurrences cannot be
determined at this time.  





                                       15
<PAGE>   17
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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



RECENT DEVELOPMENTS

Proposed GTE/Bell Atlantic Merger

On July 27, 1998, GTE and Bell Atlantic Corporation (Bell Atlantic) entered
into a merger agreement providing for the combination of the two companies in a
merger of equals transaction.  Under terms of the definitive agreement, which
was unanimously approved by the board of directors of both companies, GTE
shareholders will receive 1.22 shares of Bell Atlantic stock for each GTE share
they own.  The merger is expected to be accounted for as a pooling of
interests, is subject to shareholder and regulatory approval, and is expected
to be completed during the second half of 1999.  For additional information
regarding the merger, refer to the Form 8-K filed by GTE dated July 27, 1998.

Property Repositioning

In April 1998, GTE announced a series of actions designed to further sharpen its
strategic focus and improve its competitive position by repositioning
non-strategic properties and reducing costs.  GTE expects to generate after-tax
proceeds of $2 billion to $3 billion by selling non-strategic or
under-performing operations, and plans to reduce annual costs by more than $500
million through improved efficiencies and productivity while it continues to
invest in new high-growth opportunities.  The impact of this announcement is
under ongoing review.  Specifically, access lines in the states of Arizona and
California have been identified for purchase or trade.  The identified assets
constituted approximately 1% of the Company's total switched access lines and
net plant at December 31, 1997.  These access lines generated approximately 1%
of the Company's 1997 revenues.  The Company's goal is to reach the first
definitive agreement in the first quarter of 1999 and definitive agreements for
all properties by mid-year 1999.  Transition of the properties to the buyers
will occur during the remainder of 1999 and into 2000.

Foreign Language Assistance Center Proceeding

The CPUC is conducting an investigation of allegations that personnel of the
Company destroyed or altered documents during a 1992-1993 CPUC probe of sales
improprieties at the Company's Foreign Language Assistance Center.  During
1997, the Company asked former California Supreme Court Chief Justice Malcolm
M. Lucas to investigate the allegations.  In October 1997, Chief Justice Lucas
submitted his report to the Company and the CPUC.  In response to the Lucas
report, the Company has disciplined four employees.  In February 1998, the CPUC
ordered a formal investigation into the marketing practices of the Foreign
Language Assistance Center as well as allegations that the Company provided
misleading information.  The Company agreed with the CPUC staff to settle this
proceeding for $9.8 million, payable over three years with no interest.  The
settlement is contingent on CPUC approval.  Resolution is expected by year-end
1998.



                                       16
<PAGE>   18
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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



YEAR 2000 CONVERSION

General

The Year 2000 issue concerns the potential inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000, and has industry-wide implications.  GTE has had an active Year 2000
program in place since 1995.  This program is necessary because the Year 2000
issue could impact the telecommunications networks, systems and business
processes at GTE.  Although GTE maintains a significant portion of its own
systems and infrastructure, the Company also depends on certain, material
external supplier products that GTE must verify as Year 2000 compliant in their
condition of use.  GTE's program methodology is very similar to the General
Accounting Office (GAO) methodology, and in 1997 GTE's Year 2000 methodology and
processes were certified by the Information Technology Industry Association of
America.  GTE presently expects that its core operations and essential functions
will be ready for the millennium transition.

State of Readiness

GTE's Year 2000 program is focused on both information technology (IT) and
non-IT systems, including: 1) telecommunications network elements that
constitute the portion of the public switched telephone network (PSTN) for
which GTE is responsible; 2) systems that directly support GTE's
telecommunications network operations and interactions with customers; 3)
legacy software that supports basic business operations, customer premise
equipment and interconnection with other telecommunications carriers; and 4)
systems that support GTE's physical infrastructure, financial operations and
facilities.

Corporate-wide, essential remediation was approximately 63% complete as of
September 30, 1998.  In addition to the essential remediation budget, GTE has
set aside funds equivalent to 12% of GTE's overall Year 2000 budget. These funds
are planned for program closeout and verification in the last six months of 1999
and to address contingencies and millennium program operations and control
through March 2000.  GTE's portion of PSTN in the United States has been
upgraded substantially for Year 2000; 69% of GTE's digital access lines are
already operational using Year 2000 compliant central office switches.
Additionally, over 75% of GTE's legacy software has been remediated. Over the
next nine months GTE's focus will be the deployment of these systems throughout
operations and the testing of those systems under actual operating conditions.






                                       17
<PAGE>   19
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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




Using the nomenclature of the GAO, GTE's Year 2000 program can be characterized
as follows: Management, including transition into the Year 2000, is 43%
complete, with a projected end date of March 2000; Awareness is approximately
60% complete and is expected to continue until June 1999; System Assessment is
approximately 62% complete and is expected to be completed by December 1998;
System Renovation, including supplier products, is approximately 76% complete,
with intended completion by December 1998 for essential functions; Validation,
including enterprise testing in operational environments, is 44% complete, with
an expected completion in June 1999; and Implementation, including regional
deployment, is 63% complete, with an expected completion in June 1999.

In summary, compliant product rollout (deployment) and enterprise testing of
GTE's telecommunications-related businesses, including national and
international interoperability and verification, are presently expected to be
complete by the end of June 1999.  Due to its relatively recent acquisition of
BBN Corporation, GTE's data initiative is presently targeting completion of its
key infrastructure systems by the end of September 1999.

Successful conclusion of GTE's Year 2000 program depends upon timely delivery
of Year 2000-compliant products and services from external suppliers.
Approximately 1,450 of third-party products used by GTE have been determined to
be "vital" products, critical to GTE's business and operations.  As of
September 30, 1998, Year 2000-compliant versions, or suitable alternatives, for
53% of these vital supplier products have been provided.  GTE presently expects
that by December 31, 1998, Year 2000-compliant versions, or suitable
alternatives, of third-party supplier products for GTE's critical or major
legacy and support systems will have been delivered.

Use of Independent Verification and Validation

GTE's Year 2000 program management office has established a corporate-wide
quality oversight and control function that reviews and evaluates quality
reports on the Year 2000 issue.  Each GTE business unit has access to an
independent quality team that evaluates the conversion and testing of legacy
applications and third-party supplier products.  Separately, GTE's corporate
internal and external auditors conduct periodic reviews of each business unit's
Year 2000 activities and report significant findings, if any, to business unit
and corporate management.





                                       18
<PAGE>   20
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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




Cost to Address Year 2000 Issues

The current estimate for the cost of GTE's Year 2000 Program is approximately
$370 million. Through September 30, 1998, expenditures totaled $177 million.
Year 2000 remediation costs are expensed in the year incurred. These
expenditures constitute approximately 6% of the 1998 IT budget and are projected
to be approximately 4% of the 1999 IT budget. The current estimate for the cost
of remediation for the Company is approximately $52 million. Through September
30, 1998 expenditures totaled $22.8 million. GTE has not elected to replace, or
to accelerate the schedule of a planned replacement of, systems due to the Year
2000 issue.

Currently supporting GTE's Year 2000 program worldwide are an estimated 1,000 to
1,200 full-time equivalent workers (both corporate employees and contractors).
Approximately 12% of these full-time equivalent workers are engaged in all
aspects of program management; 30% are engaged in legacy system conversion; 25%
are involved in external supplier management; 30% are involved in testing at all
levels; and 3% are addressing contingency planning and interoperability
operations both nationally and internationally.  Approximately 78% of GTE's
program effort involves U.S. domestic operations of all types.  Twenty-two
percent (22%) of the effort is dedicated to GTE's international operations.

Risks of Year 2000 Issues

GTE has begun to examine the risks associated with its "most reasonably likely
worst case Year 2000 scenarios."  To date, GTE has no indication that any
specific function or system is so deficient in technical progress as to
threaten GTE's present schedule.  GTE's program and plans currently indicate a
compliant network infrastructure to be deployed by the end of June 1999.  A
general, unspecific, schedule shift that would erode progress beyond January 1,
2000, cannot reasonably be calculated.  If, however, there were a schedule
delay lasting no more than six months, such schedule erosion would likely
affect only nonessential systems due to the prioritization of work schedules.

Other scenarios might include a possible but presently unforeseen failure of
key supplier or customer business processes or systems.  This situation could
conceivably persist for some months after the millennium transition and could
lead to possible revenue losses.  GTE's present assessment of its key suppliers
and customers does not indicate that this scenario is likely.

To date, GTE has not encountered any conditions requiring tactical contingency
planning to its existing Year 2000 program; however, contingency planning for
business and network operations and customer contact during 1999 and 2000 is
ongoing.






                                       19
<PAGE>   21
                   GTE CALIFORNIA INCORPORATED AND SUBSIDIARY

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


GTE is bolstering its normal business continuity planning to address potential
Year 2000 interruptions.  In addition, GTE's disaster preparedness recovery
teams are including procedures and activities for a "multi-regional" Year 2000
contingency, if it occurs.  GTE is also developing its plans with respect to
possible occurrences immediately before, during, and after the millennium
transition.  Under consideration are: "follow-the-sun" time-zone impact
analysis; coordination with other (non-PSTN) telecommunications providers; a
Year 2000 "war room" operation to provide high priority recovery support, plans
for key personnel availability, command structures and contingency traffic
routing; and plans for round-the-clock, on-call repair teams.


CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Information contained in this Management's Discussion and Analysis with respect
to expected financial results and future events and trends is forward-looking,
based on the Company's estimates and assumptions and is subject to risks and
uncertainties.  For those 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 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 pending and potential future
federal, state and local regulatory initiatives and proceedings, and judicial
review of those initiatives and proceedings pertaining to, among other matters,
the terms of interconnection, access charges, universal service, unbundled
network elements and resale rates;  (4) the extent, timing, success and overall
effects of competition from others in the local telephone and intraLATA toll
service markets;  (5) the success and expense of our remediation efforts and
those of our suppliers, customers and all interconnecting carriers in achieving
Year 2000 compliance;  and (6) the success of new GTE products, services and
businesses such as bundled services through marketing and sales initiatives.





                                       20
<PAGE>   22



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
          1998.





                                       21
<PAGE>   23
                                    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 12, 1998                   /s/ Stephen L. Shore
     --------------------------         --------------------------------
                                                Stephen L. Shore

                                                    Controller
                                         (Principal Accounting Officer)





                                       22
<PAGE>   24



                                  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>