UNITED STATES


SECURITIES AND
EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





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FORM 10-Q





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(Mark one)





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended September 30, 2002





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





A Delaware Corporation

I.R.S. Employer Identification No. 75-0573444





1095 Avenue of the Americas, Room 3868, New York, New York 10036





Telephone Number (212) 395-2121





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THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q
AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).





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  ̈




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PART IFINANCIAL INFORMATION





Item 1.    Financial Statements





GTE SOUTHWEST INCORPORATED





CONDENSED STATEMENTS OF INCOME





Three Months Ended September 30,


Nine Months Ended September 30,(Dollars in Millions) (Unaudited)

2002

2001


2002

2001OPERATING REVENUES (including $14.2, $22.5, $57.3 and $59.2 from affiliates)

$
336.2

$
341.9


$
1,009.4

$
1,031.6Operations and support expense (exclusive of items show below) (including $60.4, $61.1, $173.3 and $152.8 to
affiliates)


205.9


188.4



564.9


501.5Depreciation and amortization


73.0


72.0



212.4


210.3278.9


260.4



777.3


711.8OPERATING INCOME


57.3


81.5



232.1


319.8OTHER INCOME AND (EXPENSE), NET (including $0, $(2.8), $.1 and $(9.9) from affiliates)


.1


(2.8
)


.4


(9.9
)INTEREST EXPENSE (including $1.2, $.3, $2.9 and $.7 to affiliate)


12.8


10.3



40.0


34.5INCOME BEFORE PROVISION FOR INCOME TAXES


44.6


68.4



192.5


275.4PROVISION FOR INCOME TAXES


16.8


25.2



72.5


101.0NET INCOME

$
27.8

$
43.2


$
120.0

$
174.4





See Notes to Condensed Financial Statements.




1




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GTE SOUTHWEST INCORPORATED





CONDENSED BALANCE SHEETS








(Dollars in Millions)

September 30, 2002

December 31, 2001(Unaudited)ASSETSCURRENT ASSETSCash

$
12.0

$
12.1Short-term investments


1.1


48.3Accounts receivable:Trade and other, net of allowances for uncollectibles of $33.7 and $23.1


185.5


189.5Affiliates


80.2


68.0Material and supplies


25.3


28.5Prepaid expenses


9.8


20.6Deferred income taxes


8.8


.9Other


31.7


33.3354.4


401.2PLANT, PROPERTY AND EQUIPMENT


4,846.6


4,736.2Less accumulated depreciation


3,011.5


2,922.41,835.1


1,813.8PREPAID PENSION ASSET


479.7


441.7OTHER ASSETS


60.9


64.5TOTAL ASSETS

$
2,730.1

$
2,721.2





See Notes to Condensed Financial Statements.




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GTE SOUTHWEST INCORPORATED





CONDENSED BALANCE SHEETS





(Dollars in Millions, Except Per Share Amount)

September 30, 2002


December 31, 2001(Unaudited)LIABILITIES AND SHAREOWNERS INVESTMENTCURRENT LIABILITIESDebt maturing within one year:Notes payable to affiliates

$
166.5


$
105.4Accounts payable and accrued liabilities:Affiliates


106.8



80.9Other


119.4



212.1Other current liabilities


130.6



120.4523.3



518.8LONG-TERM DEBT


647.5



647.1EMPLOYEE BENEFIT OBLIGATIONS


274.8



268.2DEFERRED CREDITS AND OTHER LIABILITIESDeferred income taxes


296.1



258.8Unamortized investment tax credits






.1Other


70.6



67.4366.7



326.3SHAREOWNERS INVESTMENTCommon stock(one share, without par value, at September 30, 2002; $100 stated value, authorized 6,500,000 shares,
outstanding 6,500,000 shares at December 31, 2001)


650.0



650.0Contributed capital


448.3



448.3Accumulated deficit


(180.5
)


(137.5
)917.8



960.8TOTAL LIABILITIES AND SHAREOWNERS INVESTMENT

$
2,730.1


$
2,721.2





See Notes to Condensed Financial Statements.




3




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GTE SOUTHWEST INCORPORATED





CONDENSED STATEMENTS OF CASH FLOWS





Nine Months ended September 30,(Dollars in Millions) (Unaudited)

2002


2001NET CASH PROVIDED BY OPERATING ACTIVITIES

$
275.1


$
308.5CASH FLOWS FROM INVESTING ACTIVITIESNet change in short-term investments


47.2



29.4Capital expenditures


(221.2
)


(242.1
)Change in note receivable from affiliate






12.8Other, net


.7



(.3
)Net cash used in investing activities


(173.3
)


(200.2
)CASH FLOWS FROM FINANCING ACTIVITIESPrincipal repayments of capital lease obligations






(1.0
)Change in notes payable to affiliates


61.1



35.1Dividends paid


(163.0
)


(144.0
)Net cash used in financing activities


(101.9
)


(109.9
)NET CHANGE IN CASH


(.1
)


(1.6
)CASH, BEGINNING OF PERIOD


12.1



9.7CASH, END OF PERIOD

$
12.0


$
8.1





See Notes to Condensed Financial Statements.




4




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GTE SOUTHWEST INCORPORATED





NOTES TO CONDENSED FINANCIAL STATEMENTS


(Unaudited)





1.    Basis of Presentation





GTE Southwest Incorporated is a wholly owned subsidiary of GTE Corporation (GTE), which is a wholly owned subsidiary of Verizon Communications Inc. (Verizon Communications). The accompanying unaudited
condensed financial statements have been prepared based upon Securities and Exchange Commission rules that permit reduced disclosure for interim periods. These financial statements reflect all adjustments that are necessary for a fair presentation
of results of operations and financial position for the interim periods shown including normal recurring accruals. The results for the interim periods are not necessarily indicative of results for the full year. The balance sheet at December 31,
2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For a more complete discussion
of significant accounting policies and certain other information, you should refer to the financial statements included in our 2001 Annual Report on Form 10-K.





We have reclassified certain amounts from prior years data to conform to the 2002 presentation.





2.     Adoption of New Accounting Standards





Goodwill and Other
Intangible Assets





Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under prescribed
conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The goodwill impairment test under SFAS No. 142 requires a two-step approach, which is performed at the reporting unit level, as defined in SFAS No. 142. Step one identifies potential
impairments by comparing the fair value of the reporting unit to its carrying amount. Step two, which is only performed if there is a potential impairment, compares the carrying amount of the reporting units goodwill to its implied value, as
defined in SFAS No. 142. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for an amount equal to that excess. Intangible assets that do not have indefinite
lives are amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The adoption of SFAS No. 142 did not impact our results of
operations or financial position because we had no goodwill or other intangible assets at December 31, 2001 and 2000.





Impairment or Disposal of Long-Lived Assets





Effective January 1, 2002, we adopted SFAS No.
144. This standard supersedes SFAS No. 121 and the provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, with regard to reporting the effects of a disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for assets to be disposed of by sale and addresses several SFAS
No. 121 implementation issues. The adoption of SFAS No. 144 did not have a material effect on our results of operations or financial position.





3.    Recent Accounting Pronouncements





Asset Retirement Obligations





In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This standard provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. We
are required to adopt SFAS No. 143 effective January 1, 2003. We are currently evaluating the impact this new standard will have on our future results of operations or financial position.




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GTE SOUTHWEST INCORPORATED





Debt Extinguishment





In April 2002, the FASB issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other things, eliminates the requirement that all gains and losses on the extinguishment of debt
must be classified as extraordinary items on the income statement, thereby permitting the classification of such gains and losses as extraordinary items only if the criteria of APB No. 30 are met. We are required to adopt this provision of SFAS No.
145 effective January 1, 2003 and, upon adoption, we will reclassify in our statements of income previously reported extraordinary charges for the early extinguishment of debt to income from continuing operations.





Exit or Disposal Activities





In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). EITF Issue No. 94-3 required accrual of liabilities related to exit and disposal activities at a plan (commitment) date. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of this standard are effective for exit or disposal activities that are initiated after December 31, 2002.





4.    Dividend





On November 1, 2002, we
declared and paid a dividend in the amount of $60.0 million to GTE.





5.    Shareowners Investment





Common Stock

Contributed Capital

Accumulated Deficit(Dollars in Millions)Balance at December 31, 2001

$
650.0

$
448.3

$
(137.5
)Net income








120.0Dividends declared to GTE








(163.0
)Balance at September 30, 2002

$
650.0

$
448.3

$
(180.5
)





Net income and comprehensive income were the same for the nine
months ended September 30, 2002 and 2001.





On August 9, 2002, pursuant to an amendment to our Certificate of
Incorporation, we exchanged all of our issued and outstanding shares of Common Stock, without par value, for one share of Common Stock, without par value.





6.    Commitments and Contingencies





Various legal actions and
regulatory proceedings are pending to which we are a party and claims which, if asserted, may lead to other legal actions. We have established reserves for specific liabilities in connection with regulatory and legal matters that we currently deem
to be probable and estimable. We do not expect that the ultimate resolution of pending regulatory and legal matters in future periods will have a material effect on our financial condition, but it could have a material effect on our results of
operations.





Several regulatory matters may require us to refund to customers a portion of the revenues collected
in the current and prior periods. The outcome of each pending matter, as well as the time frame within which each matter will be resolved, is not presently determinable.





Regulatory conditions to the Bell Atlantic  GTE merger include commitments to, among other things, promote competition and the widespread deployment of advanced
services, while helping to ensure that consumers continue to receive high-quality, low cost telephone services. In some cases, there are significant penalties associated with not meeting these commitments. The cost of satisfying these commitments
could have a significant impact on net income in future periods.




6




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GTE SOUTHWEST INCORPORATED





7.    Investment in Verizon Ventures III Inc.





In December, 2000, we transferred certain advanced data assets to an affiliated company, Verizon Ventures III Inc. (Ventures III) in exchange for common stock of Ventures III. This transfer was done to satisfy a condition of
the Federal Communications Commissions (FCC) approval of the Bell Atlantic  GTE merger, which required the provision of advanced data services through a separate affiliate. Throughout 2000 and 2001, we continued to invest in Ventures III
through the transfer of additional assets. As a result of the transfers, we acquired an ownership interest in Ventures III, which we accounted for under the equity method of accounting.





In September 2001, the FCC issued an order eliminating this merger condition. Following the FCC order, we made necessary filings with our state regulatory commission for
approval of the transfer of these assets back to us. During the fourth quarter of 2001, after required state regulatory approvals were obtained, Ventures III transferred these assets to us. In consideration of the transfer of these assets, we
surrendered our common stock in Ventures III and remitted cash compensation.





No gain or loss was recognized as a
result of the reintegration of the advanced data assets to us. This reintegration did not have a material effect on our results of operations or financial condition.





8.    Employee Severance and Other





In
connection with the Bell Atlantic-GTE merger on June 30, 2000, we incurred charges associated with employee severance of $30.0 million. These costs, as recorded under SFAS No. 112, Employers Accounting for Postemployment Benefits,
represent the benefit costs for the separation of management employees who were entitled to benefits under pre-existing separation plans, as well as an accrual of ongoing SFAS No. 112 obligations for GTE employees. The severances in connection with
the Bell Atlantic-GTE merger are complete.





During the fourth quarter of 2001, we recorded a charge of $4.5
million for the voluntary and involuntary separation of employees in accordance with SFAS No. 112. During the second quarter of 2002, we recorded a charge of $3.2 million in accordance with SFAS No. 112 associated with employee severance. As of
September 30, 2002, a total of approximately 130 management and associate employees have been separated under the 2001 and 2002 severance programs. The remaining severance liability relating to these programs is $3.3 million, which includes future
payments to employees separated as of September 30, 2002. We expect to complete the severance programs within a year of when the respective charges were recorded. Employee benefit costs are recorded in Operations and Support Expense in our Statement
of Income.





In addition, during the second quarter of 2002, we recorded an impairment charge of $8.4 million
driven by our financial statement exposure to WorldCom Inc.




7




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GTE SOUTHWEST INCORPORATED





Item 2.    Managements Discussion and Analysis of Results of Operations (Abbreviated pursuant to General Instruction H(2).)





This discussion should be read in conjunction with the Condensed Financial Statements and Condensed Notes to Financial Statements.





RESULTS OF OPERATIONS





We reported net income of $120.0 million for the nine month period ended September 30, 2002, compared to net income of $174.4 million for the same period in 2001. Our reported results included the
following special items:





Employee Severance





During the second quarter of 2002, we recorded a charge of $3.2 million in accordance with Statement of Financial Accounting Standards (SFAS) No. 112, Employers
Accounting for Postemployment Benefits, associated with employee severance.





WorldCom Inc.





During the second quarter of 2002, we recorded an impairment charge of $8.4 million driven by our financial statement exposure to WorldCom
Inc. (WorldCom).





WorldCom, including its affiliates, purchases dedicated local exchange capacity from us to
support its private networks and we also charge WorldCom for access to our local network. In addition, we sell local wholesale interconnection services and provide billing and collection services to WorldCom. We purchase long distance and related
services from WorldCom. On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection.





During the
third quarter of 2002, we recorded revenues earned from the provision of primarily network access services to WorldCom of $15.8 million. If WorldCom terminates contracts with us for the provision of services, our operating revenues would be lower in
future periods. Lower revenues as a result of canceling contracts for the provision of services could be partially offset, in some cases, by the migration of customers on the terminated facilities to us or other carriers who purchase capacity and/or
interconnection services from us.





At September 30, 2002, accounts receivable from WorldCom, net of a provision
for uncollectibles, was $4.2 million. We continue to closely monitor our collections on WorldCom account balances. WorldCom is current with respect to its post-bankruptcy obligations. We believe that we are adequately reserved for the potential risk
of non-payment of pre-bankruptcy receivables from WorldCom.





OPERATING REVENUES


(Dollars in Millions)





Nine Months Ended September 30,2002

2001Local services

$
567.0

$
588.0Network access services


339.1


336.3Long distance services


16.5


19.6Other services


86.8


87.7Total

$
1,009.4

$
1,031.6





We recognize service revenues based upon usage of our local
exchange network and facilities and contract fees. We recognize product and other service revenues when the products are delivered and accepted by the customers and when services are provided in accordance with contract terms.




8




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GTE SOUTHWEST INCORPORATED





LOCAL SERVICES





20022001

(Decrease)Nine Months

$
(21.0
)

(3.6
)%





Local service revenues are earned from the provision of local
exchange, local private line, wire maintenance, voice messaging and value-added services. Value-added services are a family of services that expand the utilization of the network, including products such as Caller ID, Call Waiting and Return Call.
The provision of local exchange services not only includes retail revenues, but also includes local wholesale revenues from unbundled network elements (UNEs), interconnection revenues from competitive local exchange carriers (CLECs), certain data
transport revenues and wireless interconnection revenues.





Local service revenues decreased in the first nine
months of 2002 primarily due to rate reductions resulting from expanded calling area service implementations effective January 1, 2002 and lower billings to CLECs for interconnection of their network with our network. In addition, the effect of
lower demand and usage of some basic wireline services also contributed to the decrease in local service revenue. Our switched access lines in service declined 2.8% from September 30, 2001 primarily reflecting the impact of the economic slowdown and
competition. Technology substitution has also affected local service revenue growth, as indicated by lower demand for residential access lines.





NETWORK ACCESS SERVICES





20022001

IncreaseNine Months

$
2.8

.8
%





Network access service revenues are earned from end-user
subscribers and from long distance and other competing carriers who use our local exchange facilities to provide usage services to their customers. Switched access revenues are derived from fixed and usage-based charges paid by carriers for access
to our local network. Special access revenues originate from carriers and end-users that buy dedicated local exchange capacity to support their private networks. End-user access revenues are earned from our customers and from resellers who purchase
dial-tone services.





The increase in network access revenues in the first nine months of 2002 was mainly
attributable to higher customer demand for special access services. This growth primarily reflects a strong demand in the business market for high-capacity, high-speed digital services. This increase was substantially offset by mandated price
reductions on interstate and intrastate access services and other regulatory decisions. Network access revenue growth was also offset by lower demand for switched access services due, in part, to the weakened economy and technology substitution.





LONG DISTANCE SERVICES





20022001

(Decrease)Nine Months

$
(3.1
)

(15.8
)%





Long distance revenues are earned primarily from calls made to
points outside a customers local calling area, but within our service area (intraLATA toll). IntraLATA toll calls originate and terminate within the same LATA, but generally cover a greater distance than a local call. These services are
regulated by the Texas Public Utility Commission (TPUC) except where they cross state lines. Other long distance services that we provide include 800 services and Wide Area Telephone Service (WATS). We also earn revenue from private line and
operator services associated with long distance calls.





Long distance service revenues declined in the first nine
months of 2002 primarily due to the effect of competition. Technology substitution and lower access line growth due to the slowing economy also affected long distance service revenue growth.




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GTE SOUTHWEST INCORPORATED





OTHER SERVICES





20022001

(Decrease)Nine Months

$
(.9
)

(1.0
)%





Our other services include such services as billing and collections
for long distance carriers and affiliates, facilities rentals to affiliates and non-affiliates, public (pay) telephone and customer premises equipment (CPE). Other service revenues also include fees paid by customers for non-publication of telephone
numbers and multiple white page listings, fees paid by an affiliate for usage of our directory listings and fees paid by an affiliate for the provision of sales agent services.





Other service revenues declined in the first nine months of 2002 primarily due to lower revenues from CPE sales. This decrease was partially offset by higher rates charged
to customers for late payment fees.





OPERATING EXPENSES


(Dollars in Millions)





OPERATIONS AND SUPPORT





20022001

IncreaseNine Months

$
63.4

12.6
%





Operations and support expenses consist of employee costs and other
operating expenses. Employee costs consist of salaries, wages and other employee compensation, employee benefits and payroll taxes. Other operating expenses consist of contract services including centralized services expenses allocated from
affiliates, rent, network software costs, operating taxes other than income, the provision for uncollectible accounts receivable, reciprocal compensation, and other costs.





The increase in operations and support expenses was mainly attributable to the effect of a favorable adjustment recorded in 2001 associated with the previous sale of
assets. Employee costs increased due to salary and wage increases and higher benefit costs, partially offset by the effect of declining workforce levels. In addition, operations and support expenses included higher costs associated with
uncollectible accounts receivable. As described earlier, in 2002, we recorded a charge of $3.2 million associated with employee severance costs and a charge of $8.4 million associated with uncollectible accounts receivable from WorldCom. Pension
income (excluding settlement gains and losses) was $27.9 million and $30.6 million for the nine month periods ended September 30, 2002 and 2001, respectively.





These cost increases were partially offset by lower interconnection and related costs associated with reciprocal compensation arrangements.





DEPRECIATION AND AMORTIZATION





20022001

IncreaseNine Months

$
2.1

1.0
%





Depreciation expense is principally based on the composite group
remaining life method and straight-line composite rates. This method provides for the recognition of the cost of the remaining net investment in telephone plant, less anticipated net salvage value, over the remaining asset lives. This method
requires the periodic revision of depreciation rates.





Depreciation and amortization expense increased in the
first nine months of 2002 primarily due to growth in depreciable telephone plant. This increase was partially offset by the effect of lower rates of depreciation.




10




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GTE SOUTHWEST INCORPORATED





OTHER RESULTS


(Dollars in Millions)





OTHER INCOME AND (EXPENSE), NET





20022001

IncreaseNine Months

$
10.3

104.0
%





Other income and (expense), net includes equity income (losses),
interest income and other nonoperating income and expense items. As a result of the reintegration of Verizon Ventures III Inc. (Ventures III) completed in the fourth quarter of 2001, we no longer recognize equity income (losses) from this investment
(See Note 7 to the Condensed Financial Statements).





The increase in other income and (expense), net, was
primarily attributable to the effect of equity losses recognized in 2001 from our investment in Ventures III.





INTEREST EXPENSE





20022001

IncreaseNine Months

$
5.5

15.9
%





Interest expense includes costs associated with borrowing and
capital leases, net of capitalized interest costs. We capitalize interest associated with the acquisition or construction of plant assets. Capitalized interest is reported as a cost of plant and a reduction in interest expense.





Interest expense increased in the first nine months of 2002, as compared to the same period in 2001, primarily due to the
effect of higher average levels of short-term debt with an affiliate and additional interest expense associated with settlements and tax-related matters.





EFFECTIVE INCOME TAX RATES





Nine Months Ended September 30,2002

37.7
%2001

36.7
%





The effective income tax rate is the provision for income taxes as
a percentage of income before provision for income taxes. Our effective income tax rate was higher for the nine months ended September 30, 2002, as compared to the same period in 2001, primarily due to an increase in the effective income tax rate
for state income taxes. This increase was partially offset by the effect of equity losses associated with our investment in Ventures III, which were recorded in 2001, for which we did not recognize income tax benefits.





OTHER MATTERS





Recent
Accounting Pronouncements





Asset Retirement Obligations





In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This standard provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement
obligations in the period in which the obligations are incurred and capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. We are required
to




11




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GTE SOUTHWEST INCORPORATED





adopt SFAS No. 143 effective January 1, 2003. We are currently evaluating the impact this new standard will have on our future results of operations or financial position.





Debt Extinguishment





In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other
things, eliminates the requirement that all gains and losses on the extinguishment of debt must be classified as extraordinary items on the income statement, thereby permitting the classification of such gains and losses as extraordinary items only
if the criteria of Accounting Principles Board Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, are met. We are required to adopt this provision of SFAS No. 145 effective January 1, 2003 and, upon adoption, we will reclassify in our statements of income previously reported extraordinary charges for the early extinguishment
of debt to income from continuing operations.





Exit or Disposal Activities





In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard
addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). EITF Issue No. 94-3 required accrual of liabilities related to exit and disposal activities at a plan (commitment) date. SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this standard are effective for exit or disposal activities that are initiated after December 31, 2002.





Compensation for Internet Traffic





We continue to incur expenditures related to reciprocal compensation arrangements with CLECs and other carriers to terminate calls on their network.





On April 27, 2001, the Federal Communications Commission (FCC) released an order addressing intercarrier compensation for dial-up connections for Internet-bound traffic.
The FCC found that Internet-bound traffic is interstate and subject to the FCCs jurisdiction. Moreover, the FCC again found that Internet-bound traffic is not subject to reciprocal compensation under Section 251(b)(5) of the 1996 Act. Instead,
the FCC established federal rates per minute for this traffic that decline from $0.0015 to $0.0007 over a three-year period. The FCC order also sets caps on the total minutes of this traffic that may be subject to any intercarrier compensation and
requires that incumbent local exchange carriers must offer to pay reciprocal compensation for local traffic at the same rate as they are required to pay on Internet-bound traffic. On May 3, 2002, the U.S. Court of Appeals for the District of
Columbia Circuit rejected the justification relied upon by the FCC in its April 27, 2001 order, and remanded the order for further proceedings. It did not vacate the interim pricing rules established in that order.





Several parties requested rehearing, asking the court to vacate the underlying order. Those requests were denied in a series of orders
released on September 24, 2002, and September 25, 2002. As a result, the FCCs underlying order remains in effect.




12




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GTE SOUTHWEST INCORPORATED





Item 4.    Controls and Procedures





(a) Evaluation of disclosure controls and procedures.





Our chief executive officer and chief
financial officer have evaluated the effectiveness of the registrants disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934), as of a date within 90 days of the filing date of
this quarterly report (Evaluation Date), that ensure that information relating to the registrant which is required to be disclosed in this report is recorded, processed, summarized and reported, within required time periods. They have concluded that
as of the Evaluation Date, the registrants disclosure controls and procedures were adequate and effective to ensure that material information relating to the registrant and its consolidated subsidiaries would be made known to them by others
within those entities, particularly during the period in which this quarterly report was being prepared.





(b)
Changes in internal controls.





There were no significant changes in the registrants internal controls or in
other factors that could significantly affect these controls subsequent to the Evaluation Date, nor were there any significant deficiencies or material weaknesses in these controls requiring corrective actions.




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GTE SOUTHWEST INCORPORATED





PART IIOTHER INFORMATION





Item
1.    Legal Proceedings





There were no proceedings reportable under this Item.





Item 6.    Exhibits and Reports on Form 8-K





(a) Exhibits:





Exhibit Number12

Computation of Ratio of Earnings to Fixed Charges.





(b) There were no Current Reports on Form 8-K filed during the
quarter ended September 30, 2002.




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GTE SOUTHWEST INCORPORATED





SIGNATURES





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 INCORPORATEDBy:

/s/    EDWIN F. HALLEdwin F. Hall Controller


Date: November 13, 2002





UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 6, 2002.




15




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GTE SOUTHWEST INCORPORATED





CERTIFICATIONS





I, Lawrence T. Babbio, Jr., certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-Q of GTE Southwest Incorporated;
| | -- |  | ---------------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: November 13, 2002



/s/    Lawrence T. Babbio, Jr.Lawrence T. Babbio, Jr. Chairman of the Board and Chief Executive Officer




16




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GTE SOUTHWEST INCORPORATED





CERTIFICATIONS





I, Lawrence R. Whitman, certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-Q of GTE Southwest Incorporated;
| | -- |  | ---------------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: November 13, 2002



/s/    Lawrence R. WhitmanLawrence R. Whitman Chief Financial Officer




17




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GTE SOUTHWEST INCORPORATED





EXHIBIT INDEX





Exhibit Number12

Computation of Ratio of Earnings to Fixed Charges.




18