<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 1-7077


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


<TABLE>
<S>                                                                  <C>
                        DELAWARE                                                  75-0573444
            (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)
</TABLE>

         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 6,500,000 shares of $100 par value common stock outstanding at
October 31, 1999. The Company's common stock is 100% owned by GTE Corporation.


================================================================================


<PAGE>   2

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                           GTE SOUTHWEST INCORPORATED
                   Condensed 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                            $    189.3     $    184.5      $    530.7     $    538.2
     Network access services                        176.4          174.5           537.9          524.4
     Other services and sales                        98.6          108.2           264.9          282.7
                                               ----------     ----------      ----------     ----------

        Total revenues and sales                    464.3          467.2         1,333.5        1,345.3
                                               ----------     ----------      ----------     ----------

OPERATING COSTS AND EXPENSES
     Cost of services and sales                     158.7          177.6           459.4          507.4
     Selling, general and administrative             68.5           80.3           242.7          224.9
     Depreciation and amortization                   73.7           97.0           225.0          280.5
                                               ----------     ----------      ----------     ----------

        Total operating costs and expenses          300.9          354.9           927.1        1,012.8
                                               ----------     ----------      ----------     ----------

OPERATING INCOME                                    163.4          112.3           406.4          332.5

OTHER (INCOME) EXPENSES
     Interest - net                                  18.7           22.0            55.4           56.1
     Other - net                                       --           (0.2)             --           (0.2)
                                               ----------     ----------      ----------     ----------

INCOME BEFORE INCOME TAXES                          144.7           90.5           351.0          276.6
     Income taxes                                    51.1           31.8           123.9           95.6
                                               ----------     ----------      ----------     ----------

INCOME BEFORE EXTRAORDINARY CHARGE                   93.6           58.7           227.1          181.0
     Extraordinary charge                              --             --              --           (0.5)
                                               ----------     ----------      ----------     ----------

NET INCOME                                     $     93.6     $     58.7      $    227.1     $    180.5
                                               ==========     ==========      ==========     ==========
</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 SOUTHWEST INCORPORATED
                      Condensed Balance Sheets (Unaudited)


<TABLE>
                                                                       September 30,   December 31,
                                                                           1999            1998
                                                                       -------------   ------------
                                                                           (Dollars in Millions)

<S>                                                                    <C>             <C>
ASSETS
Current assets
    Cash and cash equivalents                                           $      2.8      $     10.4
    Receivables, less allowances of $32.4 million and $28.6 million          305.7           286.2
    Accounts receivable from affiliates                                       37.7            57.7
    Inventories and supplies                                                  26.2            16.4
    Net assets held for sale (see Note 4)                                    608.9              --
    Prepayments and other                                                      8.8            23.2
                                                                        ----------      ----------

       Total current assets                                                  990.1           393.9
                                                                        ----------      ----------


Property, plant and equipment, at cost                                     4,266.1         5,793.8
Accumulated depreciation                                                  (2,551.3)       (3,555.7)
                                                                        ----------      ----------

       Total property, plant and equipment, net (a)                        1,714.8         2,238.1
                                                                        ----------      ----------


Prepaid pension costs                                                        235.3           175.8
Other assets                                                                   2.6            21.5
                                                                        ----------      ----------

Total assets                                                            $  2,942.8      $  2,829.3
                                                                        ==========      ==========
</TABLE>

(a) Includes $568.9 million at December 31, 1998, that is now held for sale, see
Note 4.

The accompanying notes are an integral part of these statements.



                                       2
<PAGE>   4




                           GTE SOUTHWEST INCORPORATED
                Condensed Balance Sheets (Unaudited) - Continued


<TABLE>
<CAPTION>
                                              September 30,  December 31,
                                                  1999           1998
                                              -------------  ------------
                                                 (Dollars in Millions)
<S>                                            <C>            <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Current maturities of long-term debt       $    252.7     $    250.3
    Notes payable to affiliates                     148.1          163.0
    Accounts payable                                 88.3           69.0
    Affiliate payables                               37.2           81.7
    Accrued payroll costs                            30.8           43.0
    Other                                           260.1          200.1
                                               ----------     ----------

       Total current liabilities                    817.2          807.1
                                               ----------     ----------


Long-term debt                                      690.2          692.6
Employee benefit plans                              231.9          216.8
Deferred income taxes and other                     217.8          186.4
                                               ----------     ----------

       Total liabilities                          1,957.1        1,902.9
                                               ----------     ----------


Shareholders' equity
    Preferred stock                                   7.6            7.6
    Common stock (6,500,000 shares issued)          650.0          650.0
    Additional paid-in capital                       53.3           48.8
    Retained earnings                               274.8          220.0
                                               ----------     ----------

       Total shareholders' equity                   985.7          926.4
                                               ----------     ----------

Total liabilities and shareholders' equity     $  2,942.8     $  2,829.3
                                               ==========     ==========
</TABLE>

The accompanying notes are an integral part of these statements.



                                       3
<PAGE>   5




                           GTE SOUTHWEST INCORPORATED
                 Condensed Statements of Cash Flows (Unaudited)

<TABLE>
<CAPTION>

                                                                   Nine Months Ended
                                                                      September 30,
                                                               --------------------------
                                                                  1999            1998
                                                               ----------      ----------
                                                                  (Dollars in Millions)
<S>                                                            <C>             <C>
OPERATIONS
    Income before extraordinary charge                         $    227.1      $    181.0
    Adjustments to reconcile income before extraordinary
       charge to net cash from operations:
         Depreciation and amortization                              225.0           280.5
         Provision for uncollectible accounts                        26.0            30.4
         Changes in current assets and current liabilities          (30.3)          (46.4)
         Deferred income taxes and other - net                       24.3           (46.5)
                                                               ----------      ----------

       Net cash from operations                                     472.1           399.0
                                                               ----------      ----------

INVESTING
    Capital expenditures                                           (305.6)         (391.7)
    Other - net                                                       0.5             0.2
                                                               ----------      ----------
       Net cash used in investing                                  (305.1)         (391.5)
                                                               ----------      ----------

FINANCING
    Long-term debt issued                                              --           148.9
    Long-term debt and preferred stock retired, including
       premiums paid on early retirement                             (0.3)          (42.3)
    Dividends paid                                                 (159.4)         (137.0)
    Net change in affiliate notes                                   (14.9)            7.3
    Other - net                                                        --            (2.7)
                                                               ----------      ----------
       Net cash used in financing                                  (174.6)          (25.8)
                                                               ----------      ----------
Decrease in cash and cash equivalents                                (7.6)          (18.3)

Cash and cash equivalents:
    Beginning of period                                              10.4            24.3
                                                               ----------      ----------
    End of period                                              $      2.8      $      6.0
                                                               ==========      ==========
</TABLE>


The accompanying notes are an integral part of these statements.


                                       4
<PAGE>   6





                           GTE SOUTHWEST INCORPORATED
             Condensed 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          $        7.6      $      650.0     $       48.8     $      220.0     $      926.4

Net income                                                                                                  227.1            227.1
Dividends declared                                                                                         (172.3)          (172.3)
Tax benefit of employee stock options exercised                                              4.5                               4.5
                                                 ------------      ------------     ------------     ------------     ------------

Shareholders' equity, September 30, 1999         $        7.6      $      650.0     $       53.3     $      274.8     $      985.7
                                                 ============      ============     ============     ============     ============
</TABLE>



The accompanying notes are an integral part of these statements.


                                       5
<PAGE>   7


                           GTE SOUTHWEST INCORPORATED
               Notes to Condensed Financial Statements (Unaudited)


NOTE 1.  BASIS OF PRESENTATION

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

The unaudited condensed 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
financial statements include all adjustments, which consist only of normal
recurring accruals, necessary to present fairly the financial information for
such periods. These condensed financial statements should be read in conjunction
with the 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.  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, the Company capitalized
software expenditures of $13.5 million and $28.2 million, respectively, for the
three and nine months ended September 30, 1999, which would have previously been
expensed.

NOTE 3.  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 $18.4 million and is reflected as "Selling, general and
administrative" costs and expenses in the condensed 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 4.  NET ASSETS HELD FOR SALE

During the first quarter of 1998, the Company committed to a plan that resulted
in a decision to sell approximately 606,000 switched access lines located in
Arkansas, New Mexico, Oklahoma and Texas. On October 26, 1999, the Company
entered into an agreement to sell approximately 120,000 switched access lines in
Oklahoma to dba Communications, LLC. During September 1999, the Company entered
into an agreement to sell approximately 399,000 switched access lines located in
New Mexico and Texas to dba Communications, LLC. During June 1999, the Company
entered into an agreement to sell approximately 87,000 switched access lines
located in Arkansas to CenturyTel, Inc. All sales will be subject to regulatory
approval and are expected to close in 2000. The associated net assets of all
lines to be sold approximate $608.9 million. These assets consist of property,
plant and equipment, and are classified as "Net assets held for sale" in the
condensed 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 depreciation expense reductions of $25.5 million and $78.4
million for the three and nine months ended September 30, 1999, respectively. No
charges were recorded for the access lines to be sold because their estimated
fair values were in excess of their carrying values. The 606,000 access lines
represent approximately 28% of the average switched access lines that the
Company had in service during 1998, and contributed approximately 24% to 1998
revenues.


                                       6
<PAGE>   8






                           GTE SOUTHWEST INCORPORATED
         Notes to Condensed Financial Statements (Unaudited) - Continued


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.

NOTE 6.  PROPOSED MERGER WITH BELL ATLANTIC CORPORATION

Bell Atlantic and GTE Corporation 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 SOUTHWEST INCORPORATED

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

RESULTS OF OPERATIONS

Net income increased by 59% or $34.9 million and 26% or $46.6 million,
respectively, for the three and nine months ended September 30, 1999, compared
to the same periods in 1998, primarily due to lower operating costs and
expenses. In the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $0.5 million (net of tax benefits of $0.3 million)
reflecting premiums paid on the retirement of high-coupon debt and preferred
stock prior to stated maturity.

<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                  $  189.3     $  184.5     $    4.8             3%
Network access services            176.4        174.5          1.9             1%
Other services and sales            98.6        108.2         (9.6)           (9)%
                                --------     --------     --------
   Total revenues and sales     $  464.3     $  467.2     $   (2.9)           (1)%
                                ========     ========     ========

<CAPTION>

                                  Nine Months Ended
                                     September 30,
                                ---------------------     Increase       Percent
                                  1999         1998      (Decrease)      Change
                                --------     --------    ----------     --------
<S>                             <C>          <C>         <C>            <C>
Local services                  $  530.7     $  538.2     $   (7.5)           (1)%
Network access services            537.9        524.4         13.5             3%
Other services and sales           264.9        282.7        (17.8)           (6)%
                                --------     --------     --------
   Total revenues and sales     $1,333.5     $1,345.3     $  (11.8)           (1)%
                                ========     ========     ========
</TABLE>

Local Services Revenues

Local services revenues for the three months ended September 30, 1999 increased
$4.8 million, while year-to-date revenues decreased $7.5 million compared to the
same periods in 1998. Access line growth of 6% for the three and nine months
ended September 30, 1999, generated additional revenues of $5.5 million and
$17.8 million, respectively, from basic local services, CentraNet(R) services,
Integrated Services Digital Network and Digital Channel Services. In addition,
the quarter and year-to-date had an increase in revenues of $14.3 million from a
surcharge for the recoupment of access price reductions driven by the
implementation of the Texas universal service fund (USF) order reducing access
rates effective September 1999. These increases were partially offset by a $9.5
million and $28.5 million reduction in revenues, respectively, due to the
completion during 1998 of the amortization of a reserve previously established
for potential refunds related to the 1989 Texas rate case. In addition, an
extended area service rate reduction in Texas decreased revenues by $3.1 million
and $7.5 million, respectively. A lower level of non-recurring charges paid by
customers and declining use of public telephones further reduced revenues by
$1.7 million and $0.4 million for the third quarter and year-to-date,
respectively.

Network Access Services Revenues

Third quarter and year-to-date increases in network access services revenues
were driven by 12% and 7% increases in minutes of use, which generated
additional revenues of $10.1 million and $15.2 million, respectively. Special
access revenues grew by $8.3 million and $23.9 million, respectively, as a
result of greater demand for increased bandwidth services by high capacity
users. End user surcharges increased $2.8 million and $6.7 million,
respectively, primarily as a result of implementation of the local number
portability (LNP) surcharge (for further information see "INTERSTATE REGULATORY
DEVELOPMENTS - Number Portability"). Additionally,


                                       8
<PAGE>   10



                           GTE SOUTHWEST INCORPORATED

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

year-to-date revenues increased $10.4 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 $16.6 million and $22.5 million, respectively,
reflecting the impact of mandated interstate and intrastate access price changes
primarily driven by the implementation of the Texas USF order reducing
intrastate access rates effective September 1999. The offset is collected via a
surcharge in local services. Additional decreases of $3.2 million and $9.6
million are related to the 1989 Texas rate case, as discussed in "Local Services
Revenues" above. Also, prior year activities caused an unfavorable variance in
year-to-date results primarily due to access settlement adjustments of $4.3
million.

Other Services and Sales Revenues

Other services and sales revenues decreased for the three and nine month periods
ended September 30, 1999, primarily due to $6.7 million and $22.2 million
declines in toll revenues, related to intraLATA (local access transport area)
toll competition.


<TABLE>
<CAPTION>

OPERATING COSTS AND EXPENSES
(Dollars in Millions)                       Three Months Ended
                                               September 30,
                                          ---------------------                    Percent
                                            1999         1998       Decrease       Change
                                          --------     --------     --------      --------
<S>                                       <C>          <C>          <C>                <C>
Cost of services and sales                $  158.7     $  177.6     $  (18.9)          (11)%
Selling, general and administrative           68.5         80.3        (11.8)          (15)%
Depreciation and amortization                 73.7         97.0        (23.3)          (24)%
                                          --------     --------     --------
   Total operating costs and expenses     $  300.9     $  354.9     $  (54.0)          (15)%
                                          ========     ========     ========

<CAPTION>

                                            Nine Months Ended
                                               September 30,
                                          ---------------------     Increase       Percent
                                            1999         1998      (Decrease)      Change
                                          --------     --------     --------      --------
Cost of services and sales                $  459.4     $  507.4     $  (48.0)           (9)%
Selling, general and administrative          242.7        224.9         17.8             8%
Depreciation and amortization                225.0        280.5        (55.5)          (20)%
                                          --------     --------     --------
   Total operating costs and expenses     $  927.1     $1,012.8     $  (85.7)           (8)%
                                          ========     ========     ========
</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 $15.6 million and $41.7 million for the
third quarter and first nine months of 1999, respectively. Advertising costs
were lower by $1.6 million and $5.7 million respectively, due to reductions in
agency fees and direct mail efficiencies. Also contributing to the third quarter
and year-to-date variances was a decrease of $3.1 million resulting from
favorable adjustments of certain employee benefits and other liabilities during
the third quarter of 1999. Partially offsetting the year-to-date decline was an
increase of $13.8 million resulting from second quarter 1998 favorable
adjustments of certain employee benefits and other liabilities, and a special
charge of $18.4 million associated with employee separation programs completed
in the first quarter of 1999. The third quarter and year-to-date decreases in
depreciation were primarily due to the discontinuation of depreciation on
approximately 606,000 switched access lines held for sale which lowered
depreciation by $25.5 million and $78.4 million, respectively. These decreases
were partially offset by higher depreciation charges of $2.2 million and $22.9
million for the three and nine month periods, respectively, associated with the
investment in additional network facilities resulting from increased demand for
switched access lines.

                                       9
<PAGE>   11


                          GTE SOUTHWEST INCORPORATED

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


OTHER INCOME STATEMENT ITEMS

Interest-net decreased 15% or $3.3 million and 1% or $0.7 million for the three
and nine months ended September 30, 1999, respectively, compared to the same
periods in 1998. The decreases were primarily due to decreases in interest
expense resulting from lower average long-term debt balances.

Income taxes increased 61% or $19.3 million and 30% or $28.3 million for the
three and nine months ended September 30, 1999, respectively, compared to the
same periods in 1998. The increase for the three months was primarily due to an
increase in pretax income. The increase for the nine months was primarily due to
an increase in pretax income and other tax adjustments.

During the first quarter of 1998, the Company recorded an after-tax
extraordinary charge of $0.5 million (net of tax benefits of $0.3 million),
reflecting premiums paid on the retirement of high-coupon debt and preferred
stock prior to stated maturity.


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 also has an existing shelf
registration statement for an additional $600.0 million of debentures.

During the first nine months of 1999 net cash from operations was $472.1 million
compared to $399.0 million for the same period in 1998. The increase in cash
from operations primarily reflects an increase in results from operations.

The Company's capital expenditures during the first nine months of 1999 were
$305.6 million compared to $391.7 million for the same period in 1998. 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 1999 are expected to be less than the 1998 level.

Net cash used in financing activities was $174.6 million during the first nine
months of 1999 compared to $25.8 million for the same period in 1998. This
included dividend payments of $159.4 million during the first nine months of
1999 compared to $137.0 million for the same period in 1998. Short-term
financing, represented by the net change in affiliate notes, decreased $14.9
million for the first nine months of 1999, compared to an increase of $7.3
million for the same period in 1998. During the first nine months of 1999, the
Company retired $0.3 million of long-term debt compared to a total of $42.3
million paid for the retirement of long-term debt and preferred stock in 1998.
The 1998 retirements include a pretax charge of $0.8 million ($0.5 million
after-tax) in premiums paid on the retirement of long-term debt and preferred
stock prior to stated maturity. In January 1998, the Company issued $150.0
million of 6.23% debentures to repay short-term borrowings incurred to finance
the Company's construction program and for general corporate purposes. The
Company recognized an interest rate hedge loss of approximately $2.7 million on
the settlement of forward contracts related to the January 1998 debt issuance.
The loss is being amortized over the life of the associated debt.




                                       10
<PAGE>   12

                          GTE SOUTHWEST INCORPORATED

           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 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.


                                       11
<PAGE>   13

                          GTE SOUTHWEST INCORPORATED

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


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 $113.0 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.

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.


                                       12
<PAGE>   14

                          GTE SOUTHWEST INCORPORATED

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


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
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.


                                       13

<PAGE>   15
                          GTE SOUTHWEST INCORPORATED

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


INTRASTATE REGULATORY DEVELOPMENTS

Texas

In December 1996, the Public Utility Commission of Texas (PUCT) issued decisions
in the Company's arbitration with AT&T, MCI, and Sprint to determine
interconnection, resale and unbundling terms and conditions. The discount rate
for the Company's resold services was set at 22.99%. Interim rates based on the
Company's costs will be used for interconnection and UNEs until permanent
discounts are established upon further investigation into cost methodology. The
Company filed cost studies in June 1997 and revised cost studies in February and
August 1998. GTE has reached an agreement with various carriers in the permanent
UNE case under which the interim UNE rates will continue until the parties'
contracts expire. During 1997, the Company filed lawsuits in the U.S. District
Court challenging portions of the PUCT's determinations. These lawsuits have
been consolidated into a single lawsuit and a decision is anticipated in the
first half of 2000.

In September 1997, the Company appealed an order of the PUCT pertaining to the
manner in which the Company markets long-distance service with GTE Long
Distance, a division of an affiliate company, GTE Communications Corporation.
The Company had proposed that GTE Long Distance would provide a discount on both
the interLATA long-distance service that GTE Long Distance offered as well as a
discount on the intraLATA toll provided by the Company. GTE Long Distance would
absorb the entire discount while the Company would continue to receive its
tariffed rate for the intraLATA toll service. Although the administrative law
judge in the case ruled the offering appropriate, the PUCT reversed the ruling.
The Company appealed the PUCT's ruling in district court. A hearing was held in
December 1998 and the order was reversed, due to inadequate justification, and
remanded to the PUCT. In April 1999, the PUCT vacated its initial order on this
case with no further action taken.

In June 1999, the governor of Texas signed into law significant revisions to the
Public Utility Regulatory Act (PURA), the state's regulatory framework. Included
in the law are provisions which: (1) extend indefinitely a carrier's election
into incentive regulation; (2) allow packaging of services between regulated,
nonregulated and affiliated entities; (3) provide increased pricing flexibility
for non-basic services; and (4) allow in-franchise and out-of-franchise
operations for carriers and their affiliates. Also included are customer
commitments including rate caps for basic and switched access services and the
provision of capital expenditures to provide advanced telecommunication services
statewide. The Company will be working through the coming year to assist the
PUCT in crafting the requisite rules to implement the new PURA amendments, as
well as making the necessary filings to take advantage of the new pricing
flexibility.

Since early 1997, the PUCT has been working with the industry to construct and
implement a state universal service plan. Rules were adopted in December 1997
and an interim sizing of the high cost fund was accepted by the PUCT in December
1998. Beginning in September 1999, the Company will receive an initial $171.0
million annually in fund disbursements and has implemented offsetting reductions
to wholesale switched access rates and intraLATA toll rates. On November 5,
1999, the PUCT granted the Company additional universal service funding as a
result of increased lines receiving universal service support. As of March 1,
2000, the annual fund disbursements will increase to $197.7 million with
offsetting reductions to toll and wholesale switched access rates.


                                       14
<PAGE>   16

                          GTE SOUTHWEST INCORPORATED

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


OTHER DEVELOPMENTS

Proposed Merger with Bell Atlantic Corporation

On July 27, 1998, GTE and Bell Atlantic entered into a merger agreement
providing for the combination of the two companies. Under the terms of the
agreement, which was unanimously approved by the boards 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 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 the first quarter of 1998, the Company committed to a plan that resulted
in a decision to sell approximately 606,000 switched access lines located in
Arkansas, New Mexico, Oklahoma and Texas. On October 26, 1999, the Company
entered into an agreement to sell approximately 120,000 switched access lines in
Oklahoma to dba Communications, LLC. During September 1999, the Company entered
into an agreement to sell approximately 399,000 switched access lines located in
New Mexico and Texas to dba Communications, LLC. During June 1999, the Company
entered into an agreement to sell approximately 87,000 switched access lines
located in Arkansas to CenturyTel, Inc. All sales will be subject to regulatory
approval and are expected to close in 2000. The associated net assets of all
lines to be sold approximate $608.9 million. These assets consist of property,
plant and equipment, and are classified as "Net assets held for sale" in the
condensed 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 depreciation expense reductions of $25.5 million and $78.4
million for the three and nine months ended September 30, 1999, respectively. No
charges were recorded for the access lines to be sold because their estimated
fair values were in excess of their carrying values. The 606,000 access lines
represent approximately 28% of the average switched access lines that the
Company had in service during 1998, and contributed approximately 24% to 1998
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.


                                       15
<PAGE>   17

                          GTE SOUTHWEST INCORPORATED

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


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 $400.0 million. Through September 30, 1999,
expenditures totaled $358.0 million. The current estimate for the cost of
remediation for the Company is approximately $23.2 million. Through September
30, 1999, expenditures totaled $17.0 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 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



                                       16
<PAGE>   18


                          GTE SOUTHWEST INCORPORATED

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


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,
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; and (5) the success 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.



                                       17
<PAGE>   19









PART II.  OTHER INFORMATION

                           GTE SOUTHWEST INCORPORATED


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 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.




                                       18
<PAGE>   20




                                    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 Southwest Incorporated
                                               ---------------------------------
                                                          (Registrant)

Date:           November 10, 1999                 /s/  Stephen L. Shore
          ------------------------------       ---------------------------------
                                                       Stephen L. Shore

                                                         Controller
                                                (Principal Accounting Officer)






                                       19
<PAGE>   21






                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
     Exhibit
     Number                                Description
     -------                               -----------
<S>                        <C>
        12                 Statement re: Calculation of the Ratio of Earnings to Fixed Charges

        27                 Financial Data Schedule
</TABLE>