<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K
                             --------------------

          (X)   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                             --------------------

                  For The Fiscal Year Ended December 31, 1996

                                      or

        ( )   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number 1-1414

                                 PACIFIC BELL

A California Corporation                   I.R.S. Employer Number 94-0745535

          140 New Montgomery Street, San Francisco, California 94105

                     Telephone - Area Code (415) 542-9000
                              -------------------

Securities registered pursuant to Section 12(b) of the Act:
    See attached Schedule A.

Securities registered pursuant to Section 12(g) of the Act:  None.

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  REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF PACIFIC TELESIS GROUP, MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION J (1) (a) AND (b) OF FORM 10-K AND
IS  THEREFORE  FILING THIS  FORM WITH  REDUCED  DISCLOSURE FORMAT  PURSUANT TO
GENERAL INSTRUCTION J(2).






















                                    <PAGE>

                                  SCHEDULE A


         Securities registered pursuant to Section 12(b) of the Act*:

            
                                             Name of each exchange
         Title of each class                   on which registered
         -------------------                 -----------------------

   7.250%  Debenture due 02/01/08          New York Stock Exchange
                                           Pacific Stock Exchange

   7.250%  Note due 07/01/02               New York Stock Exchange

   6.250%  Note due 03/01/05               New York Stock Exchange

   7.125%  Debenture due 03/15/26          New York Stock Exchange

   7.500%  Debenture due 02/01/33          New York Stock Exchange

   6.875%  Debenture due 08/15/23          New York Stock Exchange

   6.625%  Debenture due 10/15/34          New York Stock Exchange


   *    Pacific Bell has other  securities outstanding not registered pursuant
        to Section 12(b) of the Act.






































                                    <PAGE>

                               TABLE OF CONTENTS

Item    Description                                                 Page
----    -----------                                                 ----
                                    PART I

 1.     Business (Abbreviated pursuant to General Instruction J(2))... 1

 2.     Properties....................................................11

 3.     Legal Proceedings.............................................12

 4.     Submission of Matters to a Vote of Security Holders (Omitted
        pursuant to General Instruction J(2))

                                    PART II

 5.     Market for Registrant's Common Equity and Related Stockholder
        Matters.......................................................12

 6.     Selected Financial Data (Omitted pursuant to General
        Instruction J(2))

 7.     Management's Discussion and Analysis of Results of Operations.13

 8.     Financial Statements and Supplementary Data...................33

 9.     Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure......................................65

                                   PART III

10.     Directors and Executive Officers of Registrant (Omitted
        pursuant to General Instruction J(2))

11.     Executive Compensation (Omitted pursuant to General
        Instruction J(2))

12.     Security Ownership of Certain Beneficial Owners and Management
        (Omitted pursuant to General Instruction J(2))

13.     Certain Relationships and Related Transactions (Omitted
        pursuant to General Instruction J(2))

                                    PART IV

14.     Exhibits, Financial Statement Schedules and Reports on
        Form 8-K......................................................66


















                                    <PAGE>


                                    PART I


Item 1.  Business.

GENERAL

Pacific Bell(R) (the "Company") was incorporated in 1906 under the laws of the
State  of  California  and   has  its  principal  executive  offices   at  140
New Montgomery Street, San Francisco, California 94105 (telephone number (415)
542-9000).

Through  December  31,  1983,  the Company  was  a  subsidiary  of AT&T  Corp.
("AT&T").   Effective  January 1,  1984, the  Company became  a  subsidiary of
Pacific  Telesis  Group(R) ("Pacific  Telesis"),  one  of  the seven  regional
holding companies ("RHCs") formed  in connection with the 1984  divestiture by
AT&T of its  22 wholly  owned operating telephone  companies ("Bell  Operating
Companies"  or  "BOCs")  pursuant  to  a  consent  decree  settling  antitrust
litigation ("Consent Decree") approved by the United States District Court for
the District of Columbia.

PLANNED MERGER WITH SBC COMMUNICATIONS INC.

On April  1, 1996, SBC Communications Inc. ("SBC") and Pacific Telesis jointly
announced a definitive agreement whereby Pacific Telesis will become a wholly-
owned subsidiary  of SBC.  Under terms of the  merger agreement, each share of
Pacific Telesis  common stock will be exchanged for 0.733 shares of SBC common
stock, subject to adjustment.  The transaction is intended to be accounted for
as a pooling of  interests and to be a tax-free reorganization.  The merger is
subject to certain conditions and regulatory  approvals.  The merger has  been
approved   by  the  shareowners  of  Pacific  Telesis  and  SBC,  the  Federal
Communications Commission ("FCC") and the Public Service Commission  of Nevada
("PSCN").  The U.S. Department  of Justice concluded that the merger  does not
violate  the antitrust  laws.   In  addition,  the California  State  Attorney
General  has told the California Public Utilities Commission ("CPUC") that the
merger will not hurt competition in California and is consistent with emerging
trends.   On  February  21, 1997,  two  California administrative  law  judges
("ALJs") issued a proposed decision approving  the merger but with a number of
conditions, including payments to customers of up to $750 million  and funding
for consumer education efforts  and telecommunications services in underserved
California communities (the "community partnership commitment").  An alternate
proposed  decision, authored by two  Commissioners, which calls  for more than
$286 million in  payments to  California customers and  other conditions,  was
released on March 17, 1997.  A second alternate decision, released  by a third
Commissioner later the same day,  would reduce the payments called for  by the
ALJs' proposal to over $523 million and impose conditions in addition to those
imposed  by  the ALJs'  proposed decision.    Both of  the  proposed alternate
decisions include  the $54.7  million community  partnership commitment.   The
five-member Commission is expected to issue its decision on March  31, 1997 by
adopting  one  of  the proposed  decisions.    If  the Commission  determines,
however,  to  make   substantive  changes  on  March  31st,   additional  CPUC
proceedings would be  required, which would have  the effect of  deferring the
final decision.   If  approval from  the CPUC is  granted, the  transaction is
expected to close early in the second quarter of 1997. Details of the proposed
merger with SBC appear  in "Management's Discussion and Analysis  of Financial

                                       1








                                    <PAGE>


Condition and Results of Operations ("MD&A")."

SBC  is a holding, including certain financial  information appear in  company
whose subsidiaries and affiliates  operate predominately in the communications
services industry.   SBC's subsidiaries  and affiliates  provide landline  and
wireless telecommunications  services  and equipment,  directory  advertising,
publishing and cable television services.  Southwestern Bell Telephone Company
is SBC's  largest subsidiary, providing telecommunications  services in Texas,
Missouri, Oklahoma, Kansas and Arkansas.*




___________________________

* SBC is subject to the informational reporting requirements of the Securities
  Exchange Act of 1934, as amended, and in accordance therewith files reports,
  including reports  on  Form 8-K  which present  proforma combined  condensed
  financial  statements of SBC and Pacific Telesis, proxy statements and other
  information  with the  Securities  and Exchange  Commission  ("SEC").   Such
  reports,  proxy statements and other information may be inspected and copied
  at  the public  reference  facilities maintained  by the  SEC at  Room 1024,
  Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at  the
  SEC's regional  offices located  at 7  World Trade Center,  13th Floor,  New
  York,  New York  10019  and Northwestern  Atrium  Center, 500  West  Madison
  Street, Suite 1400, Chicago, Illinois 60661.  Copies of such material may be
  obtained by mail from the  Public Reference Section of the SEC  at Judiciary
  Plaza, 450 Fifth Street,  N.W. Washington, D.C. 20549, at  prescribed rates.
  The  SEC maintains a World Wide Web site at http://www.sec.gov that contains
  reports, proxy  and information  statements and other  information regarding
  entities that file electronically with the SEC, including SBC.  In addition,
  reports, proxy  statements  and  other  information concerning  SBC  may  be
  inspected  at the  offices  of the  following stock  exchanges on  which the
  common stock  of SBC  is traded:    the New  York Stock  Exchange, 20  Broad
  Street, New  York, New York 10005; the Chicago Stock Exchange, One Financial
  Place,  440 South La Salle Street, Chicago,  Illinois 50504; and the Pacific
  Stock Exchange, 301 Pine  Street, San Francisco, California 94104.   Pacific
  Telesis  does not assume any responsibility for the accuracy or completeness
  of the  information concerning SBC contained in  such documents and does not
  warrant  that  there have  not occurred  events  not yet  publicly disclosed
  concerning SBC included therein.















                                       2








                                    <PAGE>


THE COMPANY AND ITS SUBSIDIARIES

The  Company  and  its  wholly owned  subsidiaries,  Pacific  Bell  Directory,
Pacific Bell Information Services, Pacific  Bell Mobile Services, Pacific Bell
Internet Services,  Pacific Bell Network  Integration, and  others, provide  a
variety  of  communications  and  information services  in  California.  These
services  include:  (1) dialtone  and usage services,  including local service
(both exchange and private line), message toll services within a service area,
Wide  Area Toll Service ("WATS")/800  services within a  service area, Centrex
service  (a central  office-based switching service)  and various  special and
custom  calling services;  (2) exchange  access to interexchange  carriers and
information service providers for the  origination and termination of switched
and  non-switched  (private  line)  voice  and   data  traffic;  (3)  personal
communications services  ("PCS"), a new  generation of wireless  services; (4)
billing services for interexchange carriers and information service providers;
(5) various operator  services; (6) installation  and maintenance of  customer
premises   wiring;   (7) public   communications   services;   (8)   directory
advertising;  (9) selected  information services,  such  as  voice mail;  (10)
Internet access; and (11) network integration services.

Pacific Bell Directory  ("Directory") publishes the Pacific  Bell SMART Yellow
Pages(R).   It  is  the  oldest  and  largest publisher  of  Yellow  Pages  in
California and  is among  the largest Yellow  Pages publishers  in the  United
States.   As  part of its  ongoing small business  advocacy efforts, Directory
produces  an  award-winning publication  in  partnership with  the  U.S. Small
Business Administration.   "Small Business  Success," now in  its ninth  year,
addresses topics of importance to entrepreneurs.

Pacific Bell  Information Services ("PBIS") provides  business and residential
voice  mail and other selected information services.  Current products include
The  Message  Center(SM)  for  home  use,  Pacific  Bell  Voice  Mail(SM)  for
businesses and  Pacific  Bell  Call  Management(SM), a  service  that  handles
incoming  business calls  and connects  computer  databases to  answer routine
customer questions.  

Pacific Bell  Mobile Services  ("PBMS") was  formed to  offer PCS services  in
California and  Nevada.  Unlike  cellular service,  PCS is a  digital wireless
service  that is 100  percent digital  and offers  superior sound  quality and
protection  from eavesdropping  and  cloning.   The  network incorporates  the
Global  System for Mobile Communications ("GSM") standard which is widely used
internationally.  PBMS phones for PCS  feature a built-in pager and  answering
machine.  PBMS began providing service in August 1996 and in Las Vegas, Nevada
in February 1997.  The Company expects a widespread offering of PCS service in
most of California and Nevada by mid-1997.

Pacific Bell  Internet Services ("PBI") was formed in 1995 to provide Internet
access  services to  a broad  range  of customers  in California.   PBI  began
providing Internet access to large businesses in the third quarter of 1995 and
to residential  customers in May  1996.   PBI was one  of the fastest  growing
internet service providers in California in 1996.

Pacific  Bell Network Integration ("PBNI")  began assisting customers with the
implementation of  information technology networks  in mid-1996.   PBNI offers
network  design, installation and  maintenance, as well  as network management
and consulting services.  In December 1996, Pacific Bell unveiled its new ISDN

                                       3








                                    <PAGE>


Home Pack(TM), one of  the nation's first  fully integrated ISDN and  Internet
packages.   The  package  includes  Internet  access  through  Pacific  Bell's
Internet service  network, a terminal  adapter and Internet  browser software.
PBI is responsible for integrating the  whole package and managing delivery of
the hardware and software components.

PRINCIPAL SERVICES

Significant components of the Company's operating revenues are depicted in the
chart below:
                                         % of Total Operating Revenues
                                         -----------------------------
Revenues by Major Category                           1996         1995
----------------------------------------------------------------------
Local Service
   Recurring..............................            27%          28%
   Other Local............................            15%          15%

Network Access
   Carrier Access Charges.................            20%          20%
   End User & Other.......................             7%           7%

Toll Service
   Message Toll Service...................            12%          12%
   Other..................................             1%           1%

Other Service Revenues
   Directory Advertising..................            11%          11%
   Other..................................             7%           6%
                                              -------------------------
TOTAL.....................................           100%         100%

The percentages  of total  operating revenues attributable  to interstate  and
intrastate telephone operations are displayed below:

                                         % of Total Operating Revenues
                                         -----------------------------
                                                  1996          1995
----------------------------------------------------------------------
Interstate telephone operations............        20%           19%
Intrastate telephone operations............        80%           81%
                                               ----------------------
TOTAL......................................       100%          100%
======================================================================

TELECOMMUNICATIONS ACT OF 1996

The  Telecommunications Act  became  effective  on  February  8,  1996.    The
Telecommunications  Act  provides  that  any conduct  or  activity  previously
subject to the Consent Decree occurring after February 8, 1996 will be subject
to  the Communications Act of  1934 (the "Communications  Act"), as amended by
the Telecommunications Act, not the Consent Decree.  (The terms of the Consent
Decree,  with  certain exceptions,  applied generally  to  all BOCs  and their
affiliates.)    The  Telecommunications Act  is  the  broadest  reform of  the
telecommunications    industry   since    the    Communications    Act.    The

                                       4








                                    <PAGE>


Telecommunications Act  essentially opens  all telecommunications  markets and
prohibits  the states from continuing  or establishing any  barriers to entry.
Once the  new law is fully  implemented, consumers will have  many new options
for their local telephone,  long-distance, and cable television  services. The
Telecommunications Act will affect the Company as described below. 

The  Company may request authorization  from the FCC  to provide out-of-region
interLATA  service  and  may  provide certain  incidental  interLATA  services
immediately.    Before it  can provide  interLATA  service that  originates in
California or Nevada, the Company's local markets must be open to competition,
it must  unbundle its network to  other competitors and comply  with the terms
and   conditions    of   a   "competitive   checklist"    specified   in   the
Telecommunications Act.  The Company must request authority to offer in-region
interLATA  service  from the  FCC.   This  service must  initially  be offered
through  a separate  affiliate.   The  separate affiliate  requirement expires
three years after approval, unless extended by the FCC.

The  Company may only engage in electronic publishing disseminated by means of
its basic telephone  service through  a separate affiliate  or joint  venture.
Joint marketing of electronic publishing services by the electronic publishing
affiliate  and the Company is  prohibited, with the  exception of nonexclusive
inbound telemarketing and nondiscriminatory  teaming or business arrangements.
The restrictions on electronic publishing expire in early 2000.

The Telecommunications Act allows  for the continued provision by  the Company
of  intraLATA information  services  (other than  electronic publishing),  and
intraLATA Internet access.   The  Telecommunications Act also  allows for  the
provision  by the  Company  of  interLATA  information storage  and  retrieval
services provided by a separate affiliate to and from the Company's databases.
Full  interLATA  information  services  may be  provided  through  a  separate
affiliate once the  Company obtains  authority to  provide interLATA  services
originating in California.

The Company may provide  a variety of  video programming services directly  to
subscribers in its service areas under regulations that will vary according to
the type  of  services that  are  provided.   The  Company may  provide  video
services over wireless cable, as a common carrier, as a cable system operator,
as  "interactive   on-demand  services,"  or   as  an  "open   video  system."
Interactive on-demand services  would allow unscheduled,  point-to-point video
programming  over the Company's switched  networks on an  on-demand basis.  An
"open  video system"  would allow  the  Company to  select  programming for  a
certain  number  of channels  if demand  exceeds capacity.     An  "open video
system" approved by the FCC would be subject to reduced regulatory burdens.

Subject to certain conditions, the  Telecommunications Act allows the  Company
to collaborate with manufacturers  of telecommunications and customer premises
equipment during  the design  and development  phases.   The Company may  also
engage in  research and enter into  royalty agreements in connection  with the
manufacturing  of telecommunications  and  customer premises  equipment.   The
Company may  manufacture telecommunications  and customer  premises equipment,
subject to certain  restrictions, once  it has obtained  authority to  provide
interLATA  services originating in California.  Such manufacturing may be done
only through a separate affiliate.  The separate affiliate requirement expires
three years after obtaining interLATA authority, unless extended by the FCC.


                                       5








                                    <PAGE>


FEDERAL REGULATION

The  Company  is subject  to  the  jurisdiction of  the  FCC  with respect  to
interstate  access charges and other interstate services. The FCC prescribes a
Uniform System  of Accounts and  interstate depreciation  rates for  operating
telephone  companies.  The FCC also prescribes "separations procedures," which
are  used to allocate  plant investment, expenses, taxes, and reserves between
interstate  services under the jurisdiction of the FCC and intrastate services
under the jurisdiction  of state regulatory authorities.  The  Company is also
required  to file  tariffs  with the  FCC for  the services  it provides.   In
addition,  the FCC  establishes procedures  for allocating costs  and revenues
between regulated and unregulated activities.

Beginning  in 1991,  the FCC  adopted a  price cap  system  of incentive-based
regulation for Local  Exchange Companies ("LECs"), including the  Company. The
Company's access rates were retargeted  to an 11.25 percent rate of return  on
rate base assets.  The FCC's price cap system provides a formula for adjusting
rates annually for changes in inflation less a productivity factor and changes
in  certain  costs  that  are  triggered  by  administrative,  legislative, or
judicial action beyond the control of the LECs.

In March 1995,  the FCC adopted new  interim price cap  rules that govern  the
prices  that the  larger  LECs, including  the  Company, charge  Interexchange
Carriers ("IECs") for access to  local telephone networks.  The  interim rules
require  LECs to  adjust  their  maximum  prices  for  changes  in  inflation,
productivity, and  certain costs  beyond the  control of the  LEC.   Under the
interim plan, LECs may choose  from three productivity factors:  4.0,  4.7, or
5.3 percent.  Election of the 5.3 percent productivity factor  permits the LEC
to  retain all  of its  earnings, whereas election  of the  lower productivity
factors  requires  earnings  above  certain   thresholds  to  be  shared  with
customers.  The Company has chosen  the 5.3 percent productivity factor, which
enables it to retain all of its earnings after July 1, 1996.

The revised  FCC price cap plan was intended to  be an interim plan that would
be revised in  1996.  However, with the passage  of the Telecommunications Act
of 1996, the FCC  is conducting further proceedings to address various pricing
and  productivity issues,  and is  performing a  broader review  of price  cap
regulation in a competitive environment.

The FCC  is also examining  universal service and  access charge rules  during
1997.    Although  the Joint  Federal-State  Board  on  Universal Service  has
recently recommended  a system  that identifies cost  subsidies in  connection
with implementing a plan for universal service, no recommendation has yet been
issued as to the size or method  of recovery of the necessary subsidies.   The
Company expects FCC orders on universal service and access reform in May 1997.

In  August 1996,  the FCC  released a  decision (the  "Interconnection Order")
establishing   guidelines   to   implement    certain   provisions   of    the
Telecommunications Act  which set  rules for opening  local telecommunications
markets to full competition.  The Interconnection Order laid out how new local
exchange  competitors may  connect to  local networks  and set  guidelines and
prices for network  components and  resold services. The  Company, along  with
other  local  telephone  companies,  the National  Association  of  Regulatory
Utility  Commissioners and several state PUCs including the CPUC, appealed the
Interconnection  Order to a  federal court.    On  October 15,  1996, the U.S.

                                       6








                                    <PAGE>


Court of  Appeals  for the  Eighth  Circuit (the  "Eighth  Circuit") issued  a
partial stay of the Interconnection Order, staying the operation and effect of
the pricing  provisions and the so-called "pick and choose" rule (the FCC rule
allowing new entrants  to "pick  and choose" individual  terms from  different
existing interconnection agreements), but allowing the non-pricing elements of
the order to go into effect.    Upon consideration of a petition filed by  the
FCC  and certain  other parties,  the U.S. Supreme  Court issued  a memorandum
decision on  November 12, 1996  refusing to overturn  the stay imposed  by the
Eighth Circuit.

The   Interconnection   Order   also   addressed   the   issue   of   wireless
interconnection,  or the  arrangements under  which LECs  are compensated  for
interconnecting  with  and terminating  traffic  for  commercial mobile  radio
service  ("CMRS")  providers  (including  cellular,  PCS  and  paging).    The
Interconnection Order  ruled that  CMRS providers are  entitled to  reciprocal
compensation   arrangements   for   transport   and   termination   of   local
telecommunications traffic.

In  December 1996, the FCC released a decision (the "Non-accounting Safeguards
Order")  establishing  rules to  implement  safeguards  other than  accounting
requirements that will apply when BOCs offer interLATA service that originates
in their  regions.  Pacific  Telesis, together with another  RHC, appealed one
aspect of the Non-accounting Safeguards Order to the U.S. Court of Appeals for
District of Columbia Circuit (the  "D.C. Circuit").  In February,  the parties
to the appeal petitioned  the D.C. Circuit to  summarily reverse, or  expedite
its review  of, the  Non-accounting Safeguards  Order to  the extent  that the
order prohibits a BOC from  providing interLATA facilities or services to  its
separate affiliate offering  interLATA service  within the BOC's  region.   In
late February the FCC  requested that the D.C. Circuit remand the  case to the
FCC for further  consideration of the issues  raised in the appeal.   The D.C.
Circuit now has both Pacific Telesis' and the FCC's requests under review.

See  "FCC  Regulatory  Framework  Review," "FCC  Recommendation  on  Universal
Service,"  and "FCC Interconnection Order" on pages  18 through 19 in "Item 7.
MD&A" for additional information on the regulation of the Company by the FCC.

STATE REGULATION

As a provider  of telecommunications  services in California,  the Company  is
subject  to regulation  by  the CPUC  with  respect to  intrastate  prices and
services, intrastate depreciation rates, the issuance of securities, and other
matters.

The incentive-based regulatory framework adopted by the CPUC in 1989 is a form
of "price cap"  regulation, which calls for the  Company's sharing of earnings
with customers  at certain earnings levels.   All earnings  below 11.5 percent
are retained  by the Company.   Earnings between 11.5 percent,  which the CPUC
set as  the Company's benchmark  rate of  return, and 15.0 percent  are to  be
shared  equally between  the  Company  and  its  customers.    Earnings  above
15.0 percent  are  to be  shared  70.0 percent  and  30.0 percent  between the
Company and its customers, respectively. 

Under  "price cap"  regulation, the  CPUC requires  the Company  to submit  an
annual price cap  filing to determine  prices for  categories of services  for
each  new  year.   Price  adjustments reflect  the  effects of  any  change in

                                       7








                                    <PAGE>


inflation  less a  productivity  factor as  well  as adjustments  for  certain
exogenous cost  changes. In  December 1995,  the CPUC issued  an order  in its
second  review  of  the  incentive-based  regulatory  framework.    The  order
suspended use of the "inflation minus productivity" component of the price cap
formula  for 1996 through 1998.  This action freezes the price caps on most of
the Company's regulated services for three years except for adjustments due to
exogenous   cost  changes  or  price   changes  approved  through  the  CPUC's
application process.   The Company continues to  believe that the  CPUC should
permanently  eliminate sharing, earnings caps, and all other vestiges of rate-
of-return regulation.

In December  1996, the CPUC adjusted the Company's rates due to exogenous cost
changes  by an annual revenue reduction of approximately $66 million effective
January 1, 1997.  

Effective  January 1,  1995, the  CPUC authorized  toll  services competition.
Management  estimates that, as a result of official competition and unofficial
competitive losses in prior  years, the Company currently serves  less than 50
percent of the business toll market.  The CPUC has also ordered the Company to
offer  expanded  interconnection  to competitive  access  providers.     These
competitors are allowed to  carry the intrastate portion of long  distance and
local  toll  calls between  the Company's  central  offices and  long distance
carriers.   As a result  of the CPUC  order, competitors may choose  to locate
their transmission facilities within or near the Company's central offices.

The CPUC authorized facilities-based  local competition effective January 1996
and resale competition effective March 1996.  Interim rules addressing several
issues, including pricing, resale, interim number portability, interconnection
and the provisioning of  essential network functions to competitors  have been
adopted by the  CPUC. Since the CPUC's authorization of local competition, the
Company  has  negotiated  interconnection  agreements with  more  than  twenty
different  new entrants by early March 1997, and has completed interconnection
arbitration proceedings  with the three largest  interexchange carriers, AT&T,
MCI Communications Corp. and Sprint Corp.  As a result of these voluntary  and
arbitrated agreements,  the  Company is  offering  interconnection,  unbundled
network elements, and resold services at prices and other terms and conditions
approved  by  the  CPUC.  These  interconnection  agreements  allow  immediate
competitive entry into the Company's local markets.  

In  early February 1997, the CPUC had authorized about 90 companies, including
large   and  well-capitalized   long-distance  carriers,   competitive  access
providers,  cable television companies  and other local  exchange providers to
begin  providing  local phone  service in  California.   All of  the Company's
customers have  already chosen  a long-distance  company, and  these companies
have established  widespread customer awareness through  extensive advertising
campaigns over  several years. Since customers may select a competitor for all
their telecommunications services, local  exchange competition may affect toll
and access revenues as well as local service revenues.

The CPUC issued  its final decision on universal service  on October 25, 1996,
establishing an annual California universal service fund of approximately $352
million.  Customers of all telecommunications providers will contribute to the
preservation of affordable telephone  service via a 2.87 percent  surcharge on
all bills for  telecommunications services  provided in California.   The  new
program went into  effect on February  1, 1997.   The Company expects  to draw

                                       8








                                    <PAGE>


approximately $305 million annually from the universal service fund.  However,
to preserve  revenue neutrality, as required by the CPUC decision, the Company
will  reduce  its  prices for  certain  services  to reduce  revenues  by $305
million.  On  March 6, 1997,  the Company filed  its price reduction  proposal
with  the CPUC.   Pending  consideration  of that  proposal by  the CPUC,  the
Company will  reduce its revenues by  $305 million by applying  a surcredit to
customers' bills.

See "CPUC Local Services Competition",  "CPUC Decision on Universal  Service,"
"CPUC Regulatory Framework  Review" and "Competitive  Risk" and "CPUC  Revenue
Rebalancing Shortfall"  on pages 19 through  22 and page 32 in  "Item 7. MD&A"
for additional information on the regulation of  the Company by the CPUC.  See
also "Item 8", Notes F and K to the 1996 Consolidated Financial  Statements on
pages  51  through  53 and  57  through  59 for  a  discussion  of  other CPUC
proceedings.

CHANGING INDUSTRY ENVIRONMENT

With increasing  competition for  existing  services and  the introduction  of
local  services  competition  in California  effective  January  1,  1996, the
Company faces an  increasingly competitive  marketplace.  In  response to  the
competitive  challenge,  management  has   developed  several  key  strategies
intended to provide a consistent, integrated focus for  management's decisions
and actions.   These overarching  strategies are to  strengthen the  Company's
core  telecommunications business,  develop new  markets and  promote balanced
public policy reform.

A strong core  business provides  the essential foundation  to pursue  future-
oriented opportunities.   To strengthen the  core telecommunications business,
management will  continue to upgrade  network and systems  capability, improve
customer  service  and  efficiency, and  retain  and  expand existing  markets
through product and  channel innovation.   See "Strengthen  Core Business"  on
pages 14 through 17 in "Item 7. MD&A" for additional information.

As competition increases in its  core telecommunications business, the Company
will  rely  increasingly  on developing  new  markets  to  create new  revenue
sources.   Toward  that end,  the Company  is actively  creating and  pursuing
markets in  long-distance services, PCS, Internet  access, network integration
and certain new information services.   See "New Markets" on pages  17 through
18 in "Item 7. MD&A" for additional information.

Telecommunications  policy reform  has  been, and  will  continue to  be,  the
subject  of much debate in  Congress, the California  Legislature, the courts,
the FCC and the CPUC.   Management supports public policy reform that promotes
fair competition  and  ensures that  responsibility for  universal service  is
shared  by all  who seek to  provide telecommunications  services. Competition
will  bring great  benefits to  customers by  giving them  the  opportunity to
choose  among  service providers  for  their  telecommunications needs.    See
"Public  Policy" on  pages 18  through 21  in "Item  7. MD&A",  for additional
information.

COMPETITION

Regulatory,  legislative,  and  judicial  actions,  as  well  as  advances  in
technology, have  expanded the types of available  communications products and

                                       9








                                    <PAGE>


services and the number of companies offering such services.  Various forms of
competition, including price and service competition, are growing steadily and
are already  having an effect on the Company's earnings.  An increasing amount
of  this  competition  is  from  large  companies  with  substantial  capital,
technological,  and  marketing  resources.  Currently,  competitors  primarily
consist of interexchange carriers,  competitive access providers, and wireless
companies. The Company  also faces competition from cable television companies
and others.   Although  the Company will  face significant competition  in its
provision  of telephone and new services, management believes that the Company
has  a  reputation for  high  quality  services and  that  the  key strategies
outlined above will provide an effective competitive response.

TELEPHONE SERVICES COMPETITION

The  characteristics  of  the California  market  make  it  attractive to  new
competitors.  The  Company's business and residence revenues and profitability
are concentrated among  a small portion  of its customer  base and  geographic
areas.  Competitors need only serve selected portions of the Company's service
area to compete for the majority of its business and residence usage revenues.
High-margin  customers are clustered in high-density areas such as Los Angeles
and Orange County,  the San  Francisco Bay  Area, San  Diego, and  Sacramento.
California  is also  attractive because   it  has one  of the  lowest switched
access  rates in the country.   By combining the low  switched access rate and
discounted  resale rates, competitors have the ability to price their services
at   relatively  low  rates  while   maintaining  high  margins.    Reselling,
particularly under the Company's discounted rates, allows competitors to offer
local service with little or no investment.

See  "CPUC  Local Services  Competition" and  "Competitive  Risk" on  pages 19
through 20 and  21 through 22 in "Item  7. MD&A," and "Item 8," Note  L to the
1996 Consolidated Financial Statements  on pages 60 through 61  for additional
information on current developments in telephone services competition.

Directory Advertising

Other  producers  of  printed  directories offer  products  that  compete with
certain Pacific Bell SMART  Yellow Pages products. Competition is  not limited
to other printed directories, but includes newspapers, radio, television, and,
increasingly,  direct  mail and  directories offered  over  the Internet.   In
addition, new advertising  and information  products may  compete directly  or
indirectly  with the  SMART Yellow  Pages.   With  the  introduction of  local
exchange competition, Pacific Bell Directory will have to acquire the listings
of  other providers for its  products, and competing  directory publishers may
ally themselves with other telecommunications providers.












                                      10








                                    <PAGE>


Internet Access

The  Company  faces  competition in  the  provision  of  Internet access  from
established  Internet access  providers, cable television,  long-distance, and
other telephone companies.

Network Integration

The Company faces competition in the provision of network integration services
primarily from value added distributors with professional services and network
management capability, including large telecommunication services providers.

PCS

The  Company faces  competition  in the  provision of  PCS  services from  the
holders  of the other licenses  in such areas.  In  addition, the Company must
compete with established providers of cellular service.

FORWARD-LOOKING STATEMENTS

When  used in this Form 10-K, the words "expects", "anticipates", "estimates",
"believes"  and  words  of  similar  import  may  constitute  "forward-looking
statements" within the  meaning of Section 17A of the  Securities Act of 1933,
as amended.  Such statements, which include statements contained in "Business"
and  "MD&A"  concerning  projections  of  revenue  growth  and  statements  of
management's objectives  and expectations  as to  levels of  expenditures, are
subject  to  risks  and  uncertainties,   including  those  set  forth   under
"Competitive  Risk" and  "Regulation" and  elsewhere in  this Form  10-K, that
could cause actual results  to differ materially from those  projected.  These
forward-looking statements  speak only as of  the date of this  Form 10-K. The
Company expressly disclaims any obligation or  undertaking to publicly release
any updates or revisions to any forward-looking statements contained herein to
reflect any  change in the  Company's expectations with regard  thereto or any
change in events,  conditions or circumstances on which  any such statement is
based.

Item 2. Properties.

The  properties  of the  Company  do not  lend  themselves  to description  by
character  and  location  of principal  units.    At  December 31,  1996,  the
percentage distribution of  total telephone  plant by major  category for  the
Company was as follows:














                                      11








                                    <PAGE>


Telecommunications Property, Plant, and Equipment                  1996
-----------------------------------------------------------------------
Land and buildings (occupied principally by central offices).       10%

Cable and conduit............................................       40%

Central office equipment.....................................       35%

Other........................................................       15%
                                                               --------
Total........................................................      100%
=======================================================================

At December 31, 1996  the Company's central office  equipment was utilized  to
approximately 90 percent of capacity.

Substantially  all  of  the  installations of  central  office  equipment  and
administrative offices are in buildings and on land owned by the Company. Many
garages,  business  offices,  and  telephone  service  centers  are  in rented
quarters.

As of December  31, 1996, about 25 percent of the  network access lines of the
Company  were  in Los  Angeles  and  vicinity and  about  25  percent were  in
San Francisco  and vicinity.  The Company provided approximately 76 percent of
the total  access lines in  California as of December  31, 1996.   The Company
does not  furnish local service in  certain sizable areas of  California which
are served by non-affiliated telephone companies.

Item 3.  Legal Proceedings.

Not Applicable.

                                    PART II

Item  5.    Market for  Registrant's  Common  Equity  and Related  Stockholder
Matters.

The Company has  224,504,982 shares  of common stock  outstanding without  par
value.   There is no  public trading  market for the  Company's common  stock.
Pacific Telesis Group,  incorporated in 1983  under the laws  of the State  of
Nevada, holds all the Company's outstanding shares.















                                      12








                                    <PAGE>


Item 7.  Management's Discussion and Analysis of Results of Operations

OVERVIEW

Pacific  Bell(R)  (the  "Company,")  which  when  used  herein   includes  its
subsidiaries:  Pacific Bell  Directory,  Pacific  Bell  Information  Services,
Pacific Bell  Mobile Services,  Pacific Bell  Internet Services, Pacific  Bell
Network  Integration, and  others) provides  local exchange  services, network
access, local toll services,  directory advertising, Internet access, Personal
Communications  Services   ("PCS")  and   selected  information   services  in
California.   The Company is  a wholly owned subsidiary  of Pacific Telesis(R)
Group ("Pacific Telesis"). 

The  Company's primary financial goal is to  build long-term value for Pacific
Telesis'  shareowners.   Management's  business  strategies  of expanding  and
strengthening the core telecommunications business, developing new markets and
promoting public  policy reform have returned the  Company to solid growth and
continue to build value not only for Pacific Telesis shareowners, but also for
its customers and employees.  

To further enhance  shareowner, customer and employee  value, and to meet  the
challenges  of our dramatically changing  industry, the Board  of Directors of
Pacific  Telesis  announced  a  plan  on  April 1,  1996  to  merge  with  SBC
Communications Inc. ("SBC").

PLANNED MERGER

The decision  to merge Pacific Telesis  with SBC was based  on a comprehensive
evaluation of the economic, financial, regulatory and technological factors in
the  telecommunications industry.     Management  believes  that the  combined
financial  resources,  access  to  national  and  international  markets,  and
technologies of the  combined companies will better  enable them to take  full
advantage of the  growth opportunities provided by the  Telecommunications Act
of  1996. This  combination will  better position  Pacific Telesis  in today's
competitive telecommunications  environment.   The merger  is based  on growth
opportunities  which  will  bring at  least  1,000  new jobs  to  the combined
companies  in California, as well as the  headquarters of four of the combined
companies' operations.

The merger  has been approved by  the shareowners of Pacific  Telesis and SBC,
the  Federal   Communications  Commission  ("FCC")  and   the  Public  Service
Commission of Nevada ("PSCN").  The  U.S. Department of Justice concluded that
the  merger does not violate the antitrust  laws.  In addition, the California
State Attorney  General has  told the  California Public  Utilities Commission
("CPUC") that  the  merger will  not  hurt competition  in  California and  is
consistent  with  emerging  trends.   On  February  21,  1997, two  California
administrative  law judges issued a proposed decision approving the merger but
with a number of conditions, including payment of up to $750 million.  
Management does  not  agree with  the  level  of payment  or  the  restrictive
conditions  and intends  to work towards  their reduction  or elimination.   A
proposed decision by the administrative  law judges is not binding.   The CPUC
is expected  to review  the full case  and the  proposed decision and  issue a
final  decision by March 31, 1997.   Depending on the final CPUC decision, the
merger could close in early second quarter. (See "Merger Agreement" under Note
K on page 57.)

                                      13








                                    <PAGE>


Management believes the merger will broaden investors' options by creating one
of  the   nation's  largest  national   and  international  telecommunications
businesses.    The  merger  will enhance  competition  in  the  communications
industry and  position the combined companies  to continue to grow  and pursue
new opportunities in these increasingly competitive markets.   

KEY STRATEGIES

With  increasing competition for existing  services, the opening  of local and
toll   services  competition   in  California,  and   the  enactment   of  the
Telecommunications Act  of 1996, the Company faces an increasingly competitive
marketplace.   Management's key strategies  provided a strong  response to the
competitive challenge, as reflected by the Company's strong growth in revenues
for  1996. The  business strategies  of expanding  and strengthening  the core
telecommunications  business,  developing  new markets  and  promoting  public
policy reform further the Company's goal of being  the customers' first choice
for their telecommunications needs.

Strengthen Core Business
------------------------

A strong core  business provides  the essential foundation  to pursue  future-
oriented opportunities.  To strengthen the  core telecommunications  business,
management  will continue to  upgrade network and  systems capability, improve
customer service  and  efficiency,  and retain  and  expand  existing  markets
through product and channel innovation.

Upgrade Network and Systems Capabilities

In order  to offer the  products and services customers  want, now and  in the
future, the  Company continues to invest  heavily in improvements to  the core
telecommunications  networks.  The  Company  spent  a  total  of $2.4  billion
primarily on the telecommunications  networks during 1996. The focus  of these
investments has  been in  the advanced  digital technologies discussed  below.
These  technologies enable the Company  to provide new  products and services,
increase  network quality  and reliability,  increase transmission  speed, and
reduce costs.

                                                           December 31
                                                           -----------
Technology Deployment                                      1996   1995
------------------------------------------------------------------------
Access lines served by digital switches................     79%    73%
Access lines with SS-7 capability......................     99%    98%
Access lines with ISDN accessibility...................     91%    85%
Miles of installed optical fiber (thousands)...........     522    467
------------------------------------------------------------------------

Digital switches and optical fiber, a technology using thin filaments of glass
or  other transparent materials to  transmit coded light  pulses, increase the
capacity and reliability of transmitted data while reducing maintenance costs.
Signaling  System  7 ("SS-7")  permits faster  call  setup and  custom calling
services.   Integrated Services  Digital Network ("ISDN")  allows simultaneous
transmission  of  voice, data,  and  video over  a single  telephone  line. In
addition,  the  Company is  deploying  Synchronous  Optical Network  ("SONET")

                                      14








                                    <PAGE>


interfaces  within  the  fiber  infrastructure.    SONET  is  an international
standard for high-speed fiber optics transmission.

In December 1994, the Company contracted for the purchase of  up to $2 billion
of Advanced Communications Network  ("ACN") facilities, which incorporated new
technologies.  During 1995,  the ability to deploy the  facilities outstripped
the  ACN  vendors'   ability  to  deliver  necessary  products  and  software.
Accordingly,  management decided  to  suspend construction  at certain  sites,
which reduced the expected cost  to less than $700 million.  If ACN facilities
meet  certain quality  and  performance  criteria  (the "Network  Test"),  the
Company  is  committed  to purchase  the  ACN  facilities  in  1998.   If  ACN
facilities fail the Network Test, the Company will not be committed to buy the
ACN  facilities but might be liable to  reimburse the principal ACN vendor for
some construction costs  up to $300 million.  If  competition or other factors
affect  the Company's ability to  recover its investment  in these facilities,
the value of the ACN facilities could be materially impaired.

Improve Customer Service and Efficiency

The Company also has invested in  its networks to enhance service quality, key
to winning and keeping customers in a competitive market.  According to a 1996
telecommunications  study  performed by  J. D.  Power and  Associates, Pacific
Telesis ranked second in customer satisfaction for local residential telephone
service.   The Company is  in a  service industry and  the quality  of service
provided is still the most essential part of what the Company sells.

In April 1996, the Company introduced a Pacific  Bell Awards program, designed
to reward customers for continuing to choose Pacific Bell.  The program offers
rewards from more than  20 partners that include airlines,  computer companies
and restaurants.  The Pacific Bell Awards program helps promote brand name and
also  encourages customers to subscribe  to Pacific Telesis'  new products and
services such as wireless PCS and Digital TV. 

Recognizing  the diversity of our  customers, the Company  provides service in
multiple  languages to  many bilingual  or non-English  speaking customers  in
California, particularly those linked  to the Pacific Rim  and to Central  and
South America.   The number of  customers whose service was  provided in other
languages has grown by 129  percent since 1990, contributing to the  Company's
revenues.   Strong brand name recognition and  an excellent reputation in many
ethnic  market segments will enhance  opportunity for Pacific  Telesis when it
enters the long distance business.  

Superior  service is delivered by  employees in the  Company's workforce whose
capabilities and cultures  match the diversity and demands of  the market.  In
1996,  the U.S. Department  of Labor also  recognized this effort  and honored
Pacific  Telesis  with its  Opportunity  2000 award  for  fostering employment
opportunities and employee diversity.

To prosper in a competitive environment, the Company  must continue to provide
outstanding  customer service while improving efficiency.   The Company's core
process  reengineering  ("CPR")  projects  have  resulted  in  better,  faster
customer service  with greater  efficiency.   CPR is  a  method for  achieving
significant increases  in performance  by rethinking basic  business processes
and  systems.    For  example,  the  Company reduced  the  number  of  network
operations  centers  from 25  to  two.   The  new  centers,  which were  fully

                                      15








                                    <PAGE>


operational  in early 1996,  require fewer employees  to operate than  the old
centers and each serves as a fully  operational backup for the other.  And  in
1995, the Company created  customer service centers to improve the response to
service activation and repair calls.   With many functions consolidated in the
centers, significant time savings and service improvements have  been achieved
by reducing hands-off between functional work groups.  Reengineering processes
and  other efforts contributed to the improvement in efficiency as measured by
the change in the Company's employees per 10,000 access lines to 26.6 in  1996
from 28.8 in 1995.


Retain and Expand Existing Markets

Stimulating  usage of  the  Company's  existing  networks  is  the  most  cost
effective way  to increase revenues.   The  Company is increasing  its use  of
alternative sales channels and targeted advertising to stimulate usage.  Focus
areas  include high-growth  data markets,  voice mail,  additional residential
lines, and custom calling services.

The market for high-speed  data transmission, or the Pacific  Bell FasTrak(SM)
data services, grew rapidly in 1996 due to focused marketing campaigns and the
improved  economy.  The Company's ISDN  volumes in 1996 increased 94.2 percent
from 1995.   Volumes for other FasTrak data services  increased as follows for
1996 over the prior year:   Frame Relay increased  111.5 percent  and Switched
Multimegabit  Data  Service ("SMDS")  increased   60.3  percent.   Frame Relay
technology allows  a customer  to transmit  126 pages of  data per  second and
enables the customer to move data quickly between  widely dispersed local area
networks.  SMDS  allows users  to  buy whatever  bandwidth  they need,  and to
upgrade it later if desired. 

In  December  1996, the  Company began  testing  the delivery  of Asynchronous
Transfer  Mode ("ATM")  high-speed  data to  the  desktop over  the  telephone
network  using Asymmetric Digital Subscriber Line ("ADSL") technology.  ATM is
considered the multimedia switching  technology of the future.   ATM functions
over ADSL, a technology  that delivers higher bandwidth over  copper telephone
lines.   The Company has  been conducting a  limited ADSL trial in  San Ramon,
California since the fall of 1996.

Changes  in technology  and  telecommuting are  fueling  increased demand  for
additional  telephone lines in the home.  The Company provides approximately 2
million  residential access  lines  that are  in  addition to  the  customer's
primary line.  Customers  want extra  lines  for data  transmission,  Internet
access, fax machines, and  convenience.  Similarly, demand for  custom calling
services, such as call waiting, grew more than 11 percent in 1996 as customers
asked  for  greater  convenience  and   more  control  over  their   telephone
communications.   Caller ID, another  custom calling service,  was launched in
July 1996 and  displays the telephone number of the calling  party on a device
that attaches to, or is part of, a customer's telephone.

The success of the Company's voice mail products continued in  1996. Customers
value such  features as the  ability of the service  to answer the  phone even
when they  are on the line.  They also like remote  message retrieval features
and  the  reliability of  the network.  Voice  mailbox equivalents  in service
increased 17.9 percent in 1996 to about 1.7 million.


                                      16








                                    <PAGE>


Capital expenditures for  the Company in  1997 are forecast  to be about  $2.3
billion.   This amount includes  approximately $2.0 billion  primarily for the
cost  of upgrading  and maintaining  the core  telecommunications network  and
system  capabilities.   The  remainder of  this amount  includes  the cost  of
building the PCS network.


New Markets
-----------

As  competition  intensifies  in  its core  telecommunications  business,  the
Company  will rely  increasingly on  developing new  products and  services to
create new revenue sources.  Toward that end, the Company is actively creating
and pursuing markets in  PCS, Internet access, network integration,  and other
information services.

In November 1996,  Pacific Bell Mobile  Services ("PBMS") launched PCS  in San
Diego, California,  and in February 1997,  in Las Vegas, Nevada.   Unlike most
cellular service, PCS  is a  digital wireless service,  offers superior  sound
quality,  and protection  from  eavesdropping and  cloning.  The network  will
incorporate the Global System for Mobile Communications ("GSM") standard which
is widely used in  Europe.  PBMS phones for  PCS feature a built-in  pager and
answering  machine.    PBMS is  selling  PCS as  an  off-the-shelf  product in
approximately 100  retail stores across San  Diego County and  about 60 retail
stores in Las Vegas.  PBMS plans to offer PCS service in San Francisco and Los
Angeles  in the  second  quarter of  1997.   Management  expects a  widespread
offering  of  PCS  service  in most  of  California  and  Nevada  by mid-1997.
Although  management  anticipates significant  competition,  particularly from
established cellular  companies, it believes  that digital technology  and the
Company's reputation for superior service will position our offering well with
the customer.
 
Pacific  Bell Internet Services  ("PBI") provides Internet  access services to
business customers and in May 1996 rolled out its service to consumers.  It is
estimated that between 30 and 40 percent of all Internet traffic originates or
terminates  in  California.   In  1996,  PBI  added over  65,000  customers in
California  and Nevada.  Pacific  Bell  Network  Integration ("PBNI"),  a  new
business  initiated in  mid-1996,  was formed  to  assist customers  with  the
implementation of information  technology networks by  providing state-of-the-
art  network management and consulting services. In November 1996, the Company
unveiled its new  ISDN Home Pack(TM), the nation's first fully integrated ISDN
and  Internet package.    The package  includes  Internet access  through  the
Company's  Internet  Service network,  a  digital modem  and  Internet browser
software.   PBI handles the  Internet access  and customized  software of  the
package.  PBNI  is responsible for integrating the  whole package and managing
delivery of the hardware and software components.

In  1996, Pacific  Bell Interactive  Media ("PBIM")  launched Pacific  Bell At
Hand(SM),  an  Internet  web  site  (www.athand.com) designed  with  focus  on
California.    California  merchants  and consumers  distribute,  receive  and
exchange  information  in   one  of  the  Internet's  most   dynamic  markets.
Categories  such as Entertainment and  Leisure, Sports and  the newly released
Real Estate provide users an intimate look at restaurants, golf courses, state
parks,  multiple listing entries, and  other advertiser provided  content.  In
1997, PBIM will continue to add to its merchant directory lineup.

                                      17








                                    <PAGE>


Management sees these new markets as attractive investment opportunities  even
though substantial start-up costs will be incurred.

Public Policy
-------------

Telecommunications  policy reform  has  been, and  will  continue to  be,  the
subject  of much debate in  Congress, the California  Legislature, the courts,
the FCC  and the CPUC.  Management supports public policy reform that promotes
fair  competition and ensures that the responsibility for universal service is
shared by all who seek to provide telecommunications services.


Telecommunications Legislation

In  February 1996, the  Telecommunications Act  of 1996  was signed  into law,
easing certain restrictions imposed by the Communications Act of 1934  and the
1984 Cable  Act, and replacing the 1982 Consent Decree.  Among the provisions,
the  new  law allows  telephone companies  and  cable television  companies to
compete  in  each  others' markets,  and  permits  the  former Bell  Operating
Companies to apply  to the FCC for  authority to offer long-distance  service,
subject  to certain  conditions.   Once  the  new  law is  fully  implemented,
consumers will have many new options for their local telephone, long-distance,
and cable television services.  (See "FCC Recommendation on Universal Service"
and "FCC Interconnection Order" below.)


FCC Recommendation on Universal Service

In  November 1996,  the Joint  Federal-State Board  on Universal  Service (the
"Board")  issued  a  recommendation  on  how  to  implement  sections  of  the
Telecommunications Act  of 1996 regarding  universal service.   Generally  the
plan creates  a system that  identifies cost subsidies in  rural and high-cost
areas.    However, the  Board  deferred  a  recommendation on  how  large  the
subsidies should be.   The Board also recommended creation  of a $2.25 billion
fund for  providing discounted services to schools and libraries.  The FCC has
until May 1997 to issue a final decision on this matter.

FCC Interconnection Order

In  August 1996,  the FCC  released a  decision (the  "Interconnection Order")
establishing guidelines to implement the Telecommunications Act of 1996, which
sets  rules for opening local  telecommunications markets to full competition.
The  Interconnection Order lays out how  long distance companies and other new
competitors may connect  to local networks and sets  guidelines and prices for
network  components.    Management  believes that  the  Interconnection  Order
undermines the intent of  the Telecommunications Act of  1996 by, among  other
things,  denying states  a  role  in managing  and  setting  prices for  local
markets.  Management is also concerned that the order requires local telephone
companies to offer wholesale network services at unrealistically low prices. 

Pacific  Telesis, along  with other  local telephone  companies,  the National
Association of Regulatory Utility Commissioners  and state PUCs, including the
CPUC, appealed the Interconnection Order  to a federal court.  On  October 15,
1996,  the  U.S. Court  of  Appeals  for the  Eighth  Circuit  (the "Court  of

                                      18








                                    <PAGE>


Appeals") issued a partial  stay of the  Interconnection Order that stays  the
operation and effect of the pricing provisions and the "pick and choose" rule,
but allows the non-pricing  elements of the order to go into  effect. The U.S.
Supreme Court  issued a memorandum decision  on November 12, 1996  refusing to
overturn  the stay imposed by the  Court of Appeals.  The  Court of Appeals is
expected to issue a decision by mid-1997.  

The   Interconnection   Order   also   addressed   the   issue   of   wireless
interconnection,  or  the arrangements  under  which  local exchange  carriers
("LECs") are compensated for interconnecting with and terminating traffic  for
commercial mobile  radio service  ("CMRS") providers (including  cellular, PCS
and paging).  The Interconnection Order ruled that CMRS providers are entitled
to reciprocal compensation arrangements for transport and termination of local
telecommunications traffic. On November 1, 1996, the Court of Appeals lifted a
part of the stay described above with respect to  the non-price aspects of the
FCC's  reciprocal compensation rules for CMRS providers.   As a result of this
order, the Company is currently renegotiating its CMRS contracts and  by early
February  1997, had signed agreements  with six CMRS  providers, including the
major California providers.

FCC Regulatory Framework Review

The FCC  adopted new interim  price cap rules  in 1995 that govern  the prices
that the larger LECs, including the Company, charge interexchange carriers for
access to local  telephone networks.   The interim rules  require the LECs  to
adjust their maximum prices for changes in inflation, productivity and certain
costs beyond the control of  the LEC.  Under the interim plan, LECs may choose
from three productivity factors:   4.0, 4.7 or 5.3  percent.  Election of  the
5.3 percent productivity factor permits the LEC to retain all of its earnings,
whereas the other  lower productivity  factors require earnings  to be  shared
with  customers.    As  in  1995, the  Company  again  chose  the  5.3 percent
productivity  factor  that  will enable  it  to  retain  all  of its  earnings
effective July  1, 1996.   The higher productivity  factor was  chosen because
management believes that  it will be  more than offset  by elimination of  the
sharing mechanism.

The revised FCC price cap plan was  intended to be an interim plan that  would
be revised in  1996.  However, with the passage  of the Telecommunications Act
of 1996, the FCC is conducting further proceedings to address  various pricing
and productivity  issues, and  is performing  a  broader review  of price  cap
regulation  in a competitive environment.  Additionally, the FCC has indicated
that  it will  also  examine universal  service  (see "FCC  Recommendation  on
Universal Service" on page 18) and access charge rules during 1997.

Management  continues to  believe that  the  FCC should  adopt pure  price cap
regulation and eliminate the productivity factor, sharing and earnings cap.

CPUC Local Services Competition

The  CPUC authorized  facilities-based  local  services competition  effective
January  1996 and  resale competition  effective March  1996.   Several issues
still  need  to be  resolved  before the  CPUC  issues final  rules  for local
competition.  These issues  include final  rates for  resale, presubscription,
implementation of  number  portability and  LEC  provisioning and  pricing  of
essential  network functions to competitors.   In order to provide services to

                                      19








                                    <PAGE>


resellers,  the Company will use operating support systems currently in place,
and  it  is  also   building  electronic  ordering  systems  and   a  customer
care/billing center.  Costs to  implement local competition, especially number
portability,  will be  material and  it is  uncertain whether  regulators will
allow for recovery of these  costs.  The CPUC expects to issue  final rules on
presubscription in early 1997 and  final rates and rules for all  other issues
in late 1997.

Management believes that  all markets should be open to  all competitors under
the same rules at the same time,  and that a truly open competitive market, in
which  the   Company  can  compete  without   restrictions,  offers  long-term
opportunity to build the business and maximizes benefit for the consumer.

CPUC Decision on Universal Service

The  CPUC issued its final decision on  universal service on October 25, 1996,
establishing an annual California universal service fund of approximately $352
million.  Customers of all telecommunications providers will contribute to the
preservation of affordable telephone  service via a 2.87 percent  surcharge on
all bills for  telecommunications services  provided in California.   The  new
program went into effect on February 1, 1997. 

Management  is concerned  that the  decision underestimates  the true  cost of
providing universal telephone service.   While $305 million of the  total $352
million is expected to be paid to the Company initially, this  is far short of
the Company's estimate  of the true cost of providing  universal service.  The
Company  developed a  Cost Proxy  Model to  calculate the  cost of  service in
California.  That model estimated the average cost of providing  service to be
$27 per line per month.   The CPUC uses the model  in a modified form for  the
new program, but has determined that the  average cost is only $20.30 per line
per  month.    The  universal  service fund  provides  full  funding  for  the
difference between the  adopted CPUC cost and price only  for those lines with
costs above $20.30.  The Company's price for basic  service, including federal
charges, is $14.75.   Lines that cost more than  $14.75, but less than  $20.30
will not  receive any funding.   About 25  percent of the  Company's residence
primary lines qualify for funding. 

In order  to  ensure revenue  neutrality, the  Company must  reduce its  rates
dollar for dollar for any  funds it receives from the newly  created universal
service fund.   This reduction will  initially be accomplished by  means of an
across-the-board  surcredit on  all  of the  Company's  products and  services
except for residential basic exchange services.   The order allows the Company
to  file an application to replace the initial across-the-board surcredit with
permanent  price  reductions for  those  services  that previously  subsidized
universal services.

The final decision also establishes a discount program for schools, libraries,
certain   community-based  organizations   and  municipal-   and  county-owned
hospitals and clinics.  Carriers providing services at a discounted price will
be  reimbursed from a newly created California Teleconnect Fund. This discount
program will be funded by a separate surcharge of 0.41 percent on the bills of
customers of all telecommunications carriers in California.    




                                      20








                                    <PAGE>


CPUC Regulatory Framework Review

In December 1995,  the CPUC issued  an order in  its review of  the regulatory
framework in  California.   The order  suspended use  of the  "inflation minus
productivity" component of the price cap  formula for 1996 through 1998.  This
action freezes  the price caps on most of the Company's regulated services for
the  years 1996 through 1998 except for  adjustments due to exogenous costs or
price  changes approved through the  CPUC's application process.   In December
1996, the CPUC adjusted the  Company's rates due to exogenous cost  changes by
an  annual revenue reduction of approximately $66 million effective January 1,
1997.

Management continues  to believe  that the  CPUC should adopt  pure price  cap
regulation and  permanently eliminate sharing,  earnings caps,  and all  other
vestiges of rate-of-return regulation.  

COMPETITIVE RISK 

Regulatory,  legislative  and  judicial  actions,  as  well  as  advances   in
technology, have expanded the  types of available communications products  and
services and the number of companies offering such services.  Various forms of
competition  are growing  steadily  and are  already having  an effect  on the
Company's earnings.  An  increasing amount of  this competition is from  large
companies with  substantial capital,  technological, and  marketing resources.
Currently,   competitors  primarily   consist   of   interexchange   carriers,
competitive  access providers, and wireless companies.  The Company also faces
competition from cable television companies and others. 

Effective January 1,  1995, the  CPUC authorized toll  services competition.  
Management estimates  that share losses since January 1, 1995 have been in the
five  to six percent range.  However, this  loss combined with losses prior to
the official opening  of this  market has  resulted in  the Company  currently
serving  less than 50 percent of the business toll market.  In April 1995, the
CPUC also ordered the Company to offer expanded interconnection to competitive
access  providers.   These  competitors are  allowed  to carry  the intrastate
portion  of long-distance and local  toll calls between  the Company's central
offices and  long distance carriers.   Competitors may choose to  locate their
transmission facilities within or near the Company's central offices.

Effective January 1, 1996, the CPUC authorized local exchange competition.  By
early February 1997,  the CPUC  had authorized about  90 companies,  including
large   and  well-capitalized  long   distance  carriers,  competitive  access
providers,  and  cable television  companies  to begin  providing  local phone
service in California,  and 38  additional applications were  pending.   These
companies  are prepared to  compete in major  local exchange markets  and many
have  already  deployed switches  or other  facilities.  All of  the Company's
customers have already  chosen a  long distance company,  and these  companies
have established widespread customer  awareness through extensive  advertising
campaigns over several years.

Local exchange  competition may affect  toll and access  revenues, as well  as
local service revenues,  since customers may select a competitor for all their
telecommunications services.  Local exchange competition may also affect other
service revenues as Pacific Bell Directory will  have to acquire listings from
other  providers for its products, and competing directory publishers may ally

                                      21








                                    <PAGE>


themselves with other telecommunications  providers.  Management estimates the
CPUC's proposed local competition rules could materially reduce revenue growth
for the Company's regulated California operations by late 1997.

The  characteristics  of  the California  market  make  it  attractive to  new
competitors. The  Company's business and residence  revenues and profitability
are concentrated  among a small  portion of its  customer base and  geographic
areas.  Competitors need only serve selected portions of the Company's service
area to compete for the majority of its business and residence usage revenues.
High-margin  customers are clustered in high-density areas such as Los Angeles
and Orange  County, the San  Francisco Bay  Area, San  Diego, and  Sacramento.
California is also attractive because it has one of the lowest switched access
rates  in  the country.    By  combining the  low  switched  access rates  and
discounted  resale rates, competitors have the ability to price their services
below the Company's prices  while maintaining high margins.   Reselling allows
competitors to offer local services with little or no investment.

Management believes that now that our markets are open to all competitors, the
Company should be granted access to markets that are currently closed to LECs.
A truly  open competitive  market, in  which the  Company can  compete without
restrictions, offers long-term opportunity to build the business and maximizes
benefits  for  consumers.     Management  believes   its  key  strategies   of
strengthening  the  core  business  by  upgrading  its  network   and  systems
capabilities, improving  customer service  and efficiency,  expanding existing
markets,  developing  new markets  and  promoting public  policy  reform, will
provide a strong response to its competitive challenge.  (See "Key Strategies"
on page 14.)



RESULTS OF OPERATIONS

The following discussions and data summarize the results of  operations of the
Company for 1996 compared to 1995.

                                                         %
Operating Statistics                        1996       Change      1995
---------------------------------------------------------------------------
Capital expenditures ($ millions)..        2,419         26.3     1,915
Total employees at December 31.....       45,589         -3.4    47,202
Employees per
  ten thousand access lines*.......         26.6         -7.6      28.8
===========================================================================
*  Excludes Pacific Bell Directory and Pacific Bell Mobile Services employees.

Earnings  for 1996  were $1,255 million.   1996 earnings  included a one-time,
non-cash after-tax gain of  $85 million associated with a change in accounting
for directory publishing revenues and expenses, which was substantially offset
by a  number of other one-time  items.  (See "Cumulative  Effect of Accounting
Change"  under Note  A on  page 43.)   Earnings for  1996 reflect  the revenue
growth  from increased customer demand for local telephone products associated
with marketing efforts  and California's growing  economy.  Earnings  remained
stable despite substantial increases  in expenditures associated with entering
new   businesses,  increased   demand  and   regulatory  mandates   for  local
competition.

                                      22








                                    <PAGE>


  
Management  cannot predict the effects  on earnings for  1997 from competition
and  issues remaining to be resolved with  the Telecommunications Act of 1996.
Management anticipates earnings dilution  from the development of  new markets
and increased local competition, but believes that the California economy will
continue to  improve and  that  our history  of effective  cost controls  will
continue. (See "Planned Merger" through "Competitive Risk" on pages 13-22.)


Volume Indicators
-----------------
                                                       %  
                                           1996     Change         1995
---------------------------------------------------------------------------
Switched access lines at Dec. 31
 (thousands).......................      16,119        4.1      *15,480
   Residence.......................      10,029        3.6       *9,677
   Business........................       5,879        5.1       *5,594
   Other...........................         211        1.0          209

   ISDN access lines at Dec. 31
    (thousands, included in above).         101       94.2           52

Total interexchange carrier access
  minutes-of-use (millions)........      63,338        9.2       58,020
   Interstate......................      35,200       11.0       31,712
   Intrastate......................      28,138        7.0       26,308

Toll messages (millions)...........       5,158        7.4        4,802
Toll minutes-of-use (millions).....      15,876        9.6       14,488

Voice mailbox equivalents at Dec. 31
  (thousands)......................       1,696       17.9        1,438

Custom calling services at Dec. 31
  (thousands)......................       7,936       11.0       *7,152
===========================================================================
*  Restated.

The  total number of  access lines in  service at  December 31, 1996,  grew to
16.119 million, an increase of 4.1  percent for the year, up from  3.0 percent
in 1995.  The residential access line growth rate increased to 3.6 percent for
1996, up from 1.9  percent in 1995 reflecting the growing  California economy.
The growth rate  in business access lines was 5.1 percent in 1996, up from 4.8
percent  in 1995.   The  growth  in business  access lines  reflects increased
employment levels in California.  The number of  ISDN lines in service grew to
101 thousand, an  increase of  94.2 percent for  1996, as customers  increased
telecommuting and demanded faster data transmission and Internet access.

Access minutes-of-use represent the volume of traffic carried by interexchange
carriers  over the Company's local  network.  Total  access minutes-of-use for
1996  increased by 9.2 percent over 1995.   The increase in access minutes-of-
use was  primarily attributable to  economic growth.  The growth rate  of 10.8
percent in 1995 was higher than 1996 due to  the introduction of toll services
competition  in  1995.   In  California,  the  official  introduction of  toll

                                      23








                                    <PAGE>


services competition in January  1995 had the effect of  increasing intrastate
access minutes-of-use.   This phenomenon  occurs because the  Company provides
access service to competitors who complete local toll calls over the Company's
network.


Toll messages  and minutes-of-use are comprised  of Message Telecommunications
Service  and  Optional  Calling  Plans  ("local toll")  as  well  as  WATS and
terminating  800  services.    In  1996,  toll   minutes-of-use  increased  by
9.6 percent compared to an increase of 4.1 percent for 1995.  The increase was
driven primarily by economic growth.

Management cannot predict the effects on volumes for 1997 from competition and
issues  remaining  to be  resolved with  the  Telecommunications Act  of 1996.
However,  management believes  that the  California  economy will  continue to
improve and that its business strategies will position  the Company to compete
effectively  in  the  changing  telecommunications industry.    (See  "Planned
Merger" through "Competitive Risk" on pages 13-22.)


Operating Revenues
------------------

($ millions)                             1996          Change       1995
---------------------------------------------------------------------------
Total operating revenues......         $9,446            $584     $8,862
                                                         6.6%
---------------------------------------------------------------------------

Revenues  for 1996  increased from  1995 primarily  due to  increased customer
demand driven by the expansion of  business data services, strong usage levels
for new custom calling  services, increases in access line  and minutes-of-use
volumes,  and growth in directory advertising. The Company's marketing efforts
and California's growing economy contributed to the increased customer demand.
Increases in  1996 revenues  were  partially offset  by  $51 million  of  rate
reductions due to FCC price cap orders. Revenues for the six months ended June
30, 1996, decreased  about $60 million due to the FCC price cap filing for the
twelve months ending June 30, 1996. For the 1996 annual access tariffs filings
effective July 1, 1996, revenues increased approximately $10 million. The CPUC
price  cap  order effective  January  1, 1996,  had  a minimal  effect  on the
Company's revenues  due to  an order  in December 1995  suspending use  of the
"inflation minus productivity"  component of  the price cap  formula for  1996
through 1998.   This action  freezes the price caps  on most of  the Company's
regulated  services through 1998 except for adjustments due to exogenous costs
or price changes approved  through the CPUC's application process.  (See "CPUC
Regulatory Framework  Review" on  page 21.)   Primary  factors affecting  1996
revenue changes from 1995 are summarized in the table below.









                                      24








                                    <PAGE>


CHANGE IN 1996 REVENUES FROM 1995:
                                                                     Total
                                         Price                      Change
                                          Cap           Customer      from
($ millions)                            Orders   Misc.    Demand      1995
--------------------------------------------------------------------------
Local service.......................     $  -      $14      $200      $214
Network access:
 Interstate.........................      -51       37       137       123
 Intrastate.........................        -      -23        34        11
Toll service........................        -      -20        84        64
Other service revenues..............        -       72       100       172
                                        -----    -----     -----     -----
Total operating revenues............     $-51      $80      $555      $584
==========================================================================

Local service revenues include  basic monthly service fees and  usage charges.
Fees and charges for  custom calling services, coin phones,  installation, and
service  connections are  also included  in this  category.  The  $200 million
increase in customer demand for local service is the result of the 4.1 percent
growth in access lines and the 11.0 percent growth in custom calling services,
such as  call waiting, generated  by the  improved economy  in California  and
effective marketing. 

Network  access  revenues reflect  charges  to interexchange  carriers  and to
business and residential customers for access to the Company's local networks.
The  $137  million  increase in  interstate  network  access  revenues due  to
customer  demand reflects increased  interexchange carrier  access minutes-of-
use,  as well  as  increased access  lines.   The  $34  million demand-related
increase  in intrastate network access  revenues also resulted  from growth in
access minutes-of-use.

Toll  service revenues include charges for  local toll as well as 800 services
within  service area boundaries.  The increase  of $84 million in toll service
revenues due to customer demand  was driven primarily by increased  local toll
usage resulting  from  California's growing  economy.   The  customer  demand-
related  increases in local toll  service was partially  offset by competitive
losses in 800 services.  Interexchange carriers currently have the competitive
advantage  of  being able  to  offer these  services  both within  and between
service areas.  

Other  service revenues  are generated  from a  variety of  services including
directory advertising,  information services, PCS, Internet  services, network
integration  and billing  and  collection services  provided  by the  Company.
Increases  in  other  service  revenues   reflect  growth  in  the   Company's
information  services and directory advertising due to continued growth in the
California  economy.   In addition,  other service  revenues for  Internet and
network integration increased over  1995 primarily due to the  introduction of
these new services.

Management  cannot predict the effects  on revenues for  1997 from competition
and issues remaining to be resolved  with the Telecommunications Act of  1996.
However,  management believes  that the  California economy  will continue  to
improve and that its business strategies will  position the Company to compete
effectively  in  the  changing  telecommunications industry.    (See  sections

                                      25








                                    <PAGE>


"Planned Merger" through "Competitive Risk" on pages 13-22.)

Operating Expenses
------------------

($ millions)                            1996       Change          1995
---------------------------------------------------------------------------
Total operating expenses......        $7,142         $203        $6,939
                                                     2.9%      
---------------------------------------------------------------------------

The increase in total operating expenses for 1996 reflects the Company's costs
for increased demand for  products and services, new business  initiatives and
costs  incurred to  prepare for  local competition.   Increased  expenses were
partially  offset by  cost reductions  from  the Company's  ongoing efficiency
efforts and savings due to changes in employee benefit plans  and benefit plan
assumptions.  Primary factors affecting expense changes are summarized below.


CHANGE IN 1996 OPERATING EXPENSES FROM 1995:
                                                                      Total
                                                                     Change
                                 Salaries   Employee           Subsi-  from
($ millions)                     & Wages*  Benefits*  Misc.*  diaries  1995
---------------------------------------------------------------------------
Cost of products and services..      $38      $-121     $55     $ 6    $-22
Customer operations  
  and selling expenses.........        9        -74      26      89      50
General, administrative
  and other expenses...........       27          4     178     -29     180
Depreciation and amortization..        -          -      -3      -2      -5
                                    ----       ----    ----    ----    ----
Total operating expenses.......      $74      $-191    $256     $64    $203
===========================================================================
*  Excludes Pacific Bell subsidiaries.

Excluding its subsidiaries,  the Company's salary  and wage expense  increased
$74 million in 1996, primarily due to wage increases associated with new labor
agreements  effective  August 1995  and  overtime  due to  increased  business
volumes.   These increases were  somewhat offset by  force reduction programs.
(See "Status of  Restructuring Reserve" on page 28.)   Due to increased demand
for  products  and   services  and  entry  into  new   businesses,  management
anticipates that the  workforce will increase in  1997 and related salary  and
wage expense will also increase.

Excluding its subsidiaries, the  Company's employee benefits expense decreased
$191  million in 1996.  This  decrease was due primarily to  the net effect of
changes  in  employee  benefit plans  and  changes  in  employee benefit  plan
assumptions  and  the  discontinued  application  of  Statement  of  Financial
Accounting Standards No. ("SFAS")  71, "Accounting for the Effects  of Certain
Types  of Regulation."  (See Note B - "Discontinuance of Regulatory Accounting
- SFAS 71"  on page 44, Note  E - "Employee Retirement  Plans" on page 48  and
Note F - "Other  Postretirement Benefits" on page 51.)   Despite 1997 expected
force increases, management anticipates that  the changes in employee  benefit
plans and benefit plan assumptions will continue to produce savings in 1997.

                                      26








                                    <PAGE>


Excluding its  subsidiaries, the Company's increase  in miscellaneous expenses
in  1996 primarily reflects costs  incurred to prepare  for local competition,
increased costs for  software and contract services  associated with increased
demand for products and services.

The Company's subsidiaries' customer operations and selling expenses increased
primarily  due to new business  initiatives, such as  PCS, Internet access and
network integration.

The  Company's  subsidiaries'  general,   administrative  and  other  expenses
decreased  in 1996  primarily  due  to  reduced  software  expenses  and  cost
containment efforts.

Management anticipates total operating expenses to increase in 1997 due to new
business initiatives and  increased demand.   Also, costs  to implement  local
competition,  especially  number portability,  will  be  material  and  it  is
uncertain whether regulators  will allow for  recovery of these  costs.   (See
"CPUC Local Services Competition" on page 19.)  In addition, over the next few
years,  management is expecting to incur additional expenditures to modify its
software to operate correctly for the year 2000.


Interest Expense
----------------
                                                             
($ millions)                               1996        Change      1995
---------------------------------------------------------------------------
Interest expense .................         $363          $-47      $410
                                                       -11.5%
---------------------------------------------------------------------------

Interest expense decreased in 1996 due primarily to a change in classification
of interest  capitalized during construction from an item of other income to a
reduction in interest expense due to the discontinued application of SFAS  71.
(See Note B - "Discontinuance of Regulatory Accounting - SFAS 71" on page 44.)



Other Income (Expense)-Net
--------------------------

($ millions)                           1996          Change         1995
---------------------------------------------------------------------------
Other income (expense)-net........       $4            $-21          $25
                                                     -84.0%
---------------------------------------------------------------------------

Other income  (expense)-net decreased  in 1996  primarily due  to a  change in
classification of interest  capitalized during  construction from  an item  of
other income to  a reduction of interest expense and  interest income from tax
refunds received  in 1995.   These  decreases  were partially  offset by  bond
redemption  costs incurred in 1995 associated with redemption of the Company's
debentures.



                                      27








                                    <PAGE>


Income Taxes
------------

($ millions)                             1996        Change        1995
---------------------------------------------------------------------------
Income taxes.........................    $775          $206        $569
                                                   
                                                      36.2%      
Effective tax rate (%)...............    39.8                      37.0
---------------------------------------------------------------------------

Income tax expense increased for 1996 primarily due to  higher pre-tax income,
tax adjustments  and tax refunds received in 1995.  Effective January 1, 1997,
California's maximum statutory tax rate will decrease from 9.3 percent to 8.84
percent.   Due  to this  rate  reduction, at  December 31,  1996, the  Company
revalued its net deferred tax assets.  This revaluation increased state income
tax expense $10 million for 1996, which contributed to the  overall income tax
expense increase for 1996.

Cumulative Effect of Accounting Change
--------------------------------------

During fourth quarter 1996,  Pacific Bell Directory ("Directory")  changed its
method  of  recognizing directory  publishing  revenues  and related  expenses
effective January  1,  1996.   Directory  previously recognized  revenues  and
expenses  related  to publishing  using  the "amortized"  method,  under which
revenues  and  expenses were  recognized over  the  lives of  the directories,
generally one year.  Under the new "issue basis" method, revenues and expenses
will be recognized when the directories are issued.  The  cumulative after-tax
effect of applying the  new method to prior years is recognized  as of January
1, 1996 as  a one-time, non-cash gain  applicable to continuing  operations of
$85 million.   The gain is net  of deferred taxes of  $58 million.  The  first
three quarters  of 1996 were restated  to reflect the new  method.  Management
believes this change to the issue basis method is preferable because it is the
method generally followed in  the publishing industry and better  reflects the
operating activity of the business.  This accounting change is not expected to
have a  significant net  income effect  on future  periods.  (See  "Cumulative
Effect of Accounting Change" under Note A on page 43.)

Extraordinary Item
------------------

Effective third quarter  1995, for external financial reporting  purposes, the
Company  discontinued the application of  SFAS 71, an  accounting standard for
entities subject  to traditional regulation.   As a  result, during  1995, the
Company recorded a non-cash, extraordinary, after-tax charge  of $3.4 billion.
(See Note B - "Discontinuance of Regulatory Accounting - SFAS 71" on page 44.)

Status of Restructuring Reserve
-------------------------------

In  1991, a $201  million reserve was  established for the  cost of management
force  reduction programs through 1994.  A  balance of $77 million remained at
the  end of  1993. An  additional $1,020  million reserve  was established  in
December  1993 to record the  incremental cost of  force reductions associated
with  restructuring  the  Company's  business  processes  through  1997.  This

                                      28








                                    <PAGE>


restructuring  was  expected  to allow  the  Company  to  eliminate more  than
14,000 employee  positions  from  1994  through 1997.  After  considering  new
positions  expected   to  be  created,   a  net  reduction   of  approximately
10,000 positions  was  anticipated. In  addition,  the  Company has  relocated
employees  in  conjunction   with  consolidating  business  offices,   network
facilities, installation and collection centers, and other operations.  

The Company's gross  force reductions under the  restructuring plan, excluding
subsidiaries, totaled 4,142 employees  in 1996.  Total gross  force reductions
for the first three years of the plan, 1994 through 1996, totaled 14,181.  Net
force reductions were 1,926 for 1996  and 9,168 for the three-year period 1994
through  1996.  The  pace of net  force loss moderated  in 1996 due  to strong
volume growth.

Annual cash  savings are expected to  reach approximately $1 billion  when the
restructuring  is completed  in 1997.   In  1996, expense  savings due  to the
restructuring  totaled approximately  $757 million  primarily from  savings in
labor costs due to cumulative force reductions since restructuring began.

Charges to the restructuring  reserve in 1996 totaled $126  million, including
cash  outlays  of $190  million  and a  $64 million  non-cash  charge reversal
described  below.    In  1995,  the  Company  charged  $219   million  to  the
restructuring  reserve  for  the  cost  through  1997  of enhanced  retirement
benefits  negotiated in the  1995 union contracts.   These costs  will be paid
from  pension fund assets and do not  require current outlays of the Company's
funds.   Based on its experience, in 1996 the  Company revised its estimate of
these  retirement costs.   Consequently,  $64 million  of these  1995 non-cash
charges were reversed in 1996.  There was no  effect on net income from either
the  1995 charge or the  1996 change in this estimate.   Management expects to
use the remaining reserve balance  during 1997.  (See Note C  - "Restructuring
and Curtailment Charges" on page 46.) 

The table below sets forth the status and activity in the reserve.

($ millions)                                        1996     1995     1994
---------------------------------------------------------------------------
Reserve for force reductions and restructuring:

    Balance - beginning of year..............      $ 219    $ 819   $1,097 
    Additions................................          -       -         -
    Charges: cash outlays ...................       -190     -381     -216 
             noncash ........................         64     -219      -62
                                                 --------------------------
    Balance - end of year....................      $  93    $ 219   $  819
===========================================================================

CREDIT RATINGS

In August 1996,  Moody's Investors Services,  Inc. ("Moody's") downgraded  the
Company's debentures  and notes to A1  from Aa3 and the  shelf registration of
debt securities to (P)A1 from (P)Aa3.  The downgrades were prompted by Moody's
concerns about the  ability of the  Company to continue  to generate the  same
level  of  highly   predictable  cash  flows  in   an  increasingly  uncertain
competitive and regulatory environment. 


                                      29








                                    <PAGE>


In  April 1996,  reflecting  the announcement  of  the merger  agreement  with
SBC Communications Inc. ("SBC"), Standard  & Poor's Corporation reaffirmed its
rating  of Double-A-Minus ("AA-") on  the Company's debentures  and its credit
rating outlook as negative.  (See "Merger Agreement" under Note K on page 57.)
Also  reflecting the  merger  agreement announcement,  Duff and  Phelps Credit
Rating Co. reaffirmed its ratings of Duff 1+ and Double-A-Minus ("AA-") on the
Company's commercial paper and debentures, respectively.

The following are commercial paper and bond ratings for the Company:

                                                                 Duff and 
                            Moody's Investors   Standard &   Phelps Credit
                               Services, Inc.  Poor's Corp.     Rating Co.
                            -----------------  ------------  -------------
Commercial Paper............        Prime-1         A-1+          Duff 1+ 
Long- and Intermediate-
   Term Debt................             A1          AA-              AA- 
---------------------------------------------------------------------------
The above ratings  reflect the views of the rating agencies and are subject to
change.    The  ratings   should  be  evaluated  independently  and   are  not
recommendations to buy, sell, or hold the securities of the Company.



































                                      30








                                    <PAGE>


PENDING REGULATORY ISSUES
   
Uniform Systems of Account ("USOA") Turnaround Adjustment
---------------------------------------------------------

In May 1995, the Company filed  an application with the CPUC to eliminate  the
USOA  Turnaround  Adjustment effective  January  1,  1995.    This  Turnaround
Adjustment  is a vestige of traditional rate-of-return regulation and has been
in effect  since 1988.  Because of the adjustment, the Company's revenues were
reduced by over $23  million each year from 1988 through 1995.   1996 and 1997
revenues are  subject to refund.   These adjustments were  intended to reflect
annual  revenue requirement reductions resulting from the CPUC's adoption of a
capital-to-expense  accounting  change in  1988.   The  CPUC  held evidentiary
hearings in  October 1995 addressing  whether the  USOA Turnaround  Adjustment
should be eliminated.   The CPUC's Office of Ratepayer  Advocates has proposed
that the Company be ordered to permanently reduce its revenues by $106 million
effective January  1, 1996.  Another intervenor  has proposed that the Company
should be  ordered to  reduce its  annual  revenues by  $43 million  effective
January 1, 1996,  with additional revenue reductions of about $11 million made
on a cumulative basis  over the next ten  years. After year ten,  the proposed
revenue  reduction  would be  about $155  million  permanently for  each year.
Management cannot predict the outcome of this matter.

Revenues Subject to Refund 
--------------------------

In  1992, the CPUC  issued a decision  adopting, with  modification, SFAS 106,
"Employers' Accounting  for Postretirement Benefits Other  than Pensions," for
regulatory  accounting purposes.    Annual price  cap  decisions by  the  CPUC
granted the Company  approximately $100 million in each of the years 1993-1996
for partial recovery  of higher costs  under SFAS 106.   However, the CPUC  in
October 1994 reopened the  proceeding to determine the criteria  for exogenous
cost treatment and whether the Company should continue to recover these costs.
The CPUC's order held that related revenues collected after October 12,  1994,
are subject  to refund  plus interest.   It  is possible  that the CPUC  could
decide  this issue  in  the near  term, and  that  the decision  could  have a
material adverse  effect on the Company.   Related revenues subject  to refund
totaled  about $221  million  at  December  31,  1996.    Management  believes
postretirement benefits  costs are appropriately recoverable  in the Company's
price cap filings.

Other Billing and Collecting ("OB&C")
-------------------------------------

The  FCC adopted new rules  for recovery of  OB&C expenses which  will go into
effect mid-March 1997.  The  new rules shift an additional 25  percent of OB&C
costs from the  intrastate to  the interstate jurisdiction.   The shift  could
result in revenue reductions of approximately  $40 million a year.  Management
is evaluating options to mitigate the effect on revenues.  







                                      31








                                    <PAGE>


Property Tax Investigation
--------------------------

In  1992, a  settlement  agreement  was reached  between  the  State Board  of
Equalization,  all  California  counties,  the  State  Attorney  General,  and
28 utilities, including  the Company,  on a specific  methodology for  valuing
utility property for property tax  purposes for a period of eight  years.  The
CPUC  opened an  investigation  to determine  if  any resulting  property  tax
savings should  be returned to customers.   Intervenors have asserted  that as
much as $20 million  of annual property  tax savings should  be treated as  an
exogenous cost  reduction in the  Company's annual price  cap filings.   These
intervenors have also asserted that past property tax savings totaling as much
as approximately $70 million as of December 31, 1996, plus  interest should be
returned  to customers. Management believes that,  under the CPUC's regulatory
framework, any property tax savings  should be treated only as a  component of
the calculation of shareable earnings not as an exogenous cost.  In an Interim
Opinion issued  in June 1995,  the CPUC decided to  defer a final  decision on
this  matter pending resolution of  the criteria for  exogenous cost treatment
under  its regulatory  framework.   The  criteria are  being  considered in  a
separate  proceeding  initiated for  rehearing  of  the CPUC's  postretirement
benefits other than  pensions decision discussed above.   It is possible  that
the CPUC could decide this issue in the near term, and that the decision could
have a material adverse effect on the Company.

CPUC Revenue Rebalancing Shortfall
----------------------------------

In September 1995, the Company filed with the CPUC for $214 million of revenue
increases.    The  request was  to  compensate  the  Company for  the  revenue
shortfall  that  resulted   from  the  CPUC's  price   rebalancing  plan  that
accompanied  the  official  introduction   of  toll  services  competition  on
January 1, 1995.   Revenue reductions due to lower prices  were intended to be
offset by  other price increases  and by increased network  usage generated by
the lower prices.   Demand growth as a result  of local toll price  reductions
fell far short of the level anticipated by the CPUC.  As a result, the revenue
neutrality intended by the CPUC was not  achieved.  On February 19, 1997,  the
CPUC  denied the  Company's  petition.    Management is  currently  evaluating
whether to appeal the order.


SALE OF BELLCORE

In  November 1996,  the owners  of Bell  Communications  Research ("Bellcore")
reached an agreement to sell the company to Science Applications International
Corp.    Bellcore  is  a  leading  provider  of  communications  software  and
consulting services.   It is  owned by the  Company and six  of the  telephone
regional holding companies formed  at the divestiture of  AT&T Corp. in  1984.
The  sale is expected to  be finalized by the end  of 1997 after obtaining the
necessary regulatory approvals.







                                      32








                                    <PAGE>


Item 8.  Financial Statements and Supplementary Data

REPORT OF MANAGEMENT

The management of Pacific  Bell is responsible for preparing  the accompanying
financial  statements and for their integrity and objectivity.  The statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis and  management believes they are not  misstated
due to  material fraud or error.  In  instances where exact measurement is not
possible, the financial statements include amounts based on management's  best
estimates  and judgments.    Management also  prepared  the other  information
contained in this annual financial review and is responsible for its  accuracy
and consistency with the financial statements.

The  Company's financial  statements have  been audited  by Coopers  & Lybrand
L.L.P.,  independent  accountants,  whose  appointment has  been  ratified  by
Pacific  Telesis'  shareowners.   Management  has  made available  to  Coopers
& Lybrand L.L.P. all the Company's financial records and related data, as well
as  the minutes of directors' meetings.  Furthermore, management believes that
all of its representations made to Coopers & Lybrand L.L.P. during their audit
are valid and appropriate.

Management has established  and maintains  a system of  internal control  that
provides  reasonable  assurance as  to the  integrity  and reliability  of the
financial statements,  the  protection  of assets  from  unauthorized  use  or
disposition,  and the    prevention and    detection of  fraudulent  financial
reporting.  The system  of internal control provides for  appropriate division
of  responsibility and is documented  by written policies  and procedures that
are   communicated  to   employees  with  significant roles  in  the financial
reporting  process  and are  updated  as  necessary.   Management  continually
monitors the system of internal control for compliance, and maintains a strong
internal auditing program that independently assesses the effectiveness of the
internal  controls and recommends  improvements when necessary.   In addition,
as  part of  their  audit  of  the  Company's  financial  statements,  Coopers
& Lybrand  L.L.P. have  obtained a  sufficient understanding  of the  internal
control structure to determine the nature, timing and extent of audit tests to
be  performed.  Management has  considered the internal  auditors' and Coopers
& Lybrand L.L.P.'s recommendations concerning the Company's system of internal
control and has  taken actions that  it believes are cost-effective  under the
circumstances to  respond appropriately to these  recommendations.  Management
believes  that the  Company's  system  of  internal  control  is  adequate  to
accomplish the objectives discussed.

Management  also recognizes  its  responsibility to  foster  a strong  ethical
climate  that enables  the Company  to  conduct its  affairs according  to the
highest standards of personal  and corporate conduct.  This  responsibility is
characterized  and reflected in the Company's code of corporate conduct, which
is publicized  throughout the Company.   The code of conduct  addresses, among
other things:  potential conflicts of interest; compliance with domestic laws,
including those relating to foreign transactions and financial disclosure; and
the confidentiality  of  proprietary information.    The Company  maintains  a
systematic program to assess compliance with these policies.

The Audit Committee  of the Board of  Directors is responsible for  overseeing
the Company's  financial  reporting  process  on behalf  of  the  Board.    In

                                      33








                                    <PAGE>


fulfilling its responsibility, the Committee recommends to the Board,  subject
to  shareowner  ratification,  the  selection  of  the  Company's  independent
accountants.   During 1996,  the Committee  consisted of  four members of  the
Board  who  are neither  officers  nor  employees  of  the Company.  It  meets
regularly  with   representatives  of  management,  internal   audit  and  the
independent accountants to review internal accounting controls and accounting,
auditing and financial  reporting matters.   During 1996,  the Committee  held
five meetings.   The Company's  internal auditors and  independent accountants
periodically meet alone with  the Committee to discuss the  matters previously
noted and have direct access to it for private communication at any time.














































                                      34








                                    <PAGE>


                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareowner of Pacific Bell:

We  have  audited the  consolidated  financial  statements  and the  financial
statement  schedule  of Pacific  Bell (a  wholly  owned subsidiary  of Pacific
Telesis Group)  and Subsidiaries  (the "Company") as  listed in Item  14(a) of
this  Form 10-K.    These financial  statements  and the  financial  statement
schedule  are  the responsibility  of management.    Our responsibility  is to
express an opinion on  these financial statements and the  financial statement
schedule based on our audits.

We  conducted  our  audits  in  accordance  with  generally accepted  auditing
standards.   Those  standards require  that we  plan and  perform an  audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and  disclosures in the financial statements.  An audit
also  includes  assessing  the  accounting  principles  used  and  significant
estimates  made by  management, as  well as  evaluating the  overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our  opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pacific Bell and
Subsidiaries as of December 31, 1996  and 1995 and the consolidated results of
their  operations and  their cash  flows for  each of  the three years  in the
period  ended  December  31,  1996  in  conformity  with  generally   accepted
accounting principles.  In  addition, in our opinion, the  financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken  as a whole, presents  fairly, in all material  respects, the
information required to be included therein.

As discussed in Note A to the Consolidated Financial Statements, the Company's
Pacific Bell Directory subsidiary changed  its method of recognizing directory
publishing  revenues and  related expenses  effective January  1, 1996.   Also
discussed in Note A, the Company  discontinued its application of Statement of
Financial Accounting Standards No. 71 during 1995.


/s/ Coopers & Lybrand L.L.P.
San Francisco, California
February 27, 1997













                                      35








                                    <PAGE>



                       PACIFIC BELL AND SUBSIDIARIES                       
                     CONSOLIDATED STATEMENTS OF INCOME                     

                                             For the Year Ended December 31
                                             ------------------------------
(Dollars in millions)                             1996      1995      1994
---------------------------------------------------------------------------
OPERATING REVENUES                                                         
Local service................................  $ 3,956   $ 3,742   $ 3,385 
Network access:                                                             
  Interstate.................................    1,805     1,682     1,561 
  Intrastate.................................      718       707       731 
Toll service.................................    1,274     1,210     1,984 
Other service revenues.......................    1,693     1,521     1,406 
                                             ------------------------------
TOTAL OPERATING REVENUES.....................    9,446     8,862     9,067 
---------------------------------------------------------------------------
OPERATING EXPENSES                                                         
Cost of products and services................    1,788     1,810     1,898 
Customer operations and                                                    
  selling expenses...........................    1,876     1,826     1,846 
General, administrative, and other expenses..    1,652     1,472     1,437 
Depreciation and amortization ...............    1,826     1,831     1,758 
                                             ------------------------------
TOTAL OPERATING EXPENSES.....................    7,142     6,939     6,939 
---------------------------------------------------------------------------
OPERATING INCOME.............................    2,304     1,923     2,128 
Interest expense.............................      363       410       439 
Other income(expense)-net....................        4        25         3 
---------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY                                  
  ITEM AND CUMULATIVE EFFECT OF                                            
  ACCOUNTING CHANGE..........................    1,945     1,538     1,692 
Income taxes.................................      775       569       621 
---------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND                                       
  CUMULATIVE EFFECT OF ACCOUNTING CHANGE.....    1,170       969     1,071 
Extraordinary item, net of tax (Note B)......      -      (3,360)      -   
Cumulative effect of accounting change,                                    
  net of tax (Note A)........................       85       -         -   
                                             ------------------------------
NET INCOME (LOSS)............................  $ 1,255   $(2,391)  $ 1,071 
===========================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.










                                      36








                                    <PAGE>



                       PACIFIC BELL AND SUBSIDIARIES 
                        CONSOLIDATED BALANCE SHEETS  
                                                          December 31
                                                  -------------------------
(Dollars in millions)                                   1996          1995
---------------------------------------------------------------------------
ASSETS 
Cash and cash equivalents.........................   $    58       $    68 
Accounts receivable - net of allowances                              
  for uncollectibles of $161 and $131.............     1,956         1,475 
Prepaid expenses and other current assets.........       486           802 
                                                  -------------------------
Total current assets..............................     2,500         2,345 
                                                  -------------------------
Property, plant, and equipment - at cost..........    28,372        26,688 
  Less:  accumulated depreciation.................   (16,699)      (15,608)
                                                  -------------------------
Property, plant, and equipment - net..............    11,673        11,080 
                                                  -------------------------
Other noncurrent assets...........................       476           474 
                                                  -------------------------
TOTAL ASSETS......................................   $14,649       $13,899 
===========================================================================
LIABILITIES AND SHAREOWNER'S EQUITY  
Accounts payable and accrued liabilities..........   $ 2,077       $ 2,109 
Debt maturing within one year.....................       287           781 
Other current liabilities.........................       469           552 
                                                  -------------------------
Total current liabilities.........................     2,833         3,442 
                                                  -------------------------
Long-term obligations.............................     5,364         4,608 
                                                  -------------------------
Deferred income taxes.............................       476           321 
                                                  -------------------------
Other noncurrent liabilities and deferred credits.     2,049         2,417 
                                                  -------------------------
Commitments and contingencies (Note K)  
 
Common stock ($1.00 stated value; 300,000,000                              
  shares authorized; 224,504,982 shares issued                             
  and outstanding)................................       225           225 
Additional paid-in capital........................     6,100         5,387 
Accumulated deficit...............................    (2,398)       (2,501)
                                                  -------------------------
Total shareowner's equity.........................     3,927         3,111 
                                                  -------------------------
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY.........   $14,649       $13,899 
===========================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.





                                      37








                                    <PAGE>



                       PACIFIC BELL AND SUBSIDIARIES 
              CONSOLIDATED STATEMENTS OF SHAREOWNER'S EQUITY 
 

                                             For the Year Ended December 31
                                             ------------------------------
(Dollars in millions)                             1996      1995      1994
---------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of year.................   $  225    $  225    $  225 
                                              -----------------------------
Balance at end of year.......................      225       225       225 
---------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL 
Balance at beginning of year.................    5,387     5,169     5,168 
Equity investment by parent..................      713       218         1 
                                              -----------------------------
Balance at end of year.......................    6,100     5,387     5,169 
---------------------------------------------------------------------------
(ACCUMULATED DEFICIT) REINVESTED EARNINGS
Balance at beginning of year.................   (2,501)      830       761 
Net income (loss)............................    1,255    (2,391)    1,071 
Dividends declared...........................   (1,151)     (943)     (998)
Other changes................................       (1)        3        (4)
                                              -----------------------------
Balance at end of year.......................   (2,398)   (2,501)      830 
---------------------------------------------------------------------------
TOTAL SHAREOWNER'S EQUITY....................   $3,927    $3,111    $6,224 
===========================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
























                                      38








                                    <PAGE>



                         PACIFIC BELL AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                             For the Year Ended December 31
                                             ------------------------------
(Dollars in millions)                               1996     1995     1994
---------------------------------------------------------------------------
CASH FROM (USED FOR) OPERATING ACTIVITIES 
Net income (loss)............................... $ 1,255  $(2,391) $ 1,071 
Adjustments to reconcile net income (loss) 
  to cash from operating activities: 
    Extraordinary item..........................       -    3,360        -
    Cumulative effect of accounting change......     (85)       -        -
    Depreciation and amortization...............   1,826    1,831    1,758 
    Changes in deferred income taxes............     251      121        1 
    Amortization of investment tax credits......     (47)     (52)     (63)
    Changes in operating assets and liabilities:                           
      Accounts receivable.......................    (219)      55      (12)
      Prepaid expenses and other                                           
        current assets..........................     (32)     (29)     (13)
      Other noncurrent assets...................     (43)     (25)     (25)
      Accounts payable and accrued                                         
        liabilities.............................      14      149      170 
      Other current liabilities.................     (83)     (16)      40 
      Noncurrent liabilities and                                           
        deferred credits........................    (321)    (367)      (7)
    Other adjustments, net......................       6       25      (18)
                                                ---------------------------
Cash from operating activities..................   2,522    2,661    2,902 
---------------------------------------------------------------------------
CASH FROM (USED FOR) INVESTING ACTIVITIES 
Additions to property, plant, and equipment.....  (2,334)  (1,964)  (1,612)
Other investing activities, net.................     (29)      19        2 
                                                ---------------------------
Cash used for investing activities..............  (2,363)  (1,945)  (1,610)
---------------------------------------------------------------------------
   
   
   
                             (Continued next page)















                                      39








                                    <PAGE>



                       PACIFIC BELL AND SUBSIDIARIES   
                   CONSOLIDATED STATEMENTS OF CASH FLOWS 
                                  (Continued)
                                             For the Year Ended December 31
                                             ------------------------------
(Dollars in millions)                               1996     1995     1994
---------------------------------------------------------------------------
                                                    
CASH FROM (USED FOR) FINANCING ACTIVITIES                                  
Equity infusion from parent.....................     713      218        1 
Proceeds from issuance of long-term debt........     495        -        - 
Retirements of long-term debt...................       -     (514)     (11)
Dividends paid..................................  (1,151)    (943)    (998)
Increase (decrease) in short-term borrowings    
  with original maturities of 90 days or less,    
  net...........................................    (504)     526     (287)
Other financing activities, net.................     278        3        8 
                                                ---------------------------
Cash used for financing activities..............    (169)    (710)  (1,287)
---------------------------------------------------------------------------
Increase (decrease) in cash and  
  cash equivalents..............................     (10)       6        5 
Cash and cash equivalents at January 1..........      68       62       57 
                                                ---------------------------
Cash and cash equivalents at December 31........ $    58  $    68  $    62 
===========================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.



























                                      40








                                    <PAGE>



                         PACIFIC BELL AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Consolidated Financial Statements include the accounts of Pacific Bell and
its  wholly   owned  subsidiaries:   Pacific  Bell  Directory,   Pacific  Bell
Information  Services, Pacific  Bell  Mobile Services,  Pacific Bell  Internet
Services, Pacific Bell  Network Integration, and  others (the "Company").  The
Company  is  a  wholly  owned  subsidiary  of  Pacific  Telesis  Group.    All
significant intercompany  balances and transactions have been eliminated.  The
consolidated financial  statements reflect reclassifications  made to  conform
with  the current year presentation.   These reclassifications  did not affect
net income or shareowner's equity.

The  Company's principal  business, communications  and  information services,
accounts for substantially  all of its revenues.   The Company provides  local
exchange services, network access, local toll services, directory advertising,
Internet access, and selected information services in California.

Use of Estimates

The preparation of financial statements in conformity  with generally accepted
accounting principles  requires management  to make estimates  and assumptions
that  affect the amounts reported in the financial statements and accompanying
notes.  Actual results could differ from those estimates.

Regulatory Accounting

Effective  third quarter 1995, for  external financial reporting purposes, the
Company  discontinued the application  of Statement  of Financial   Accounting
Standards  No. ("SFAS") 71, "Accounting for   the  Effects of  Certain   Types
of  Regulation," an  accounting standard for  entities subject  to traditional
regulation. (See  Note B  -  "Discontinuance of  Regulatory Accounting  - SFAS
71" on page 44.)

Property, Plant, and Equipment

Property, plant, and equipment (which consists primarily of telecommunications
plant dedicated to providing telecommunications  services) is carried at cost.
The cost  of  self-constructed plant  includes  employee wages  and  benefits,
materials,  capitalized interest  during  the construction  period, and  other
costs.   Capital leases are  recorded at the  present value of  future minimum
lease payments.   Expenditures in excess  of $500 that increase  the capacity,
operating efficiency, or useful  life of an individual asset  are capitalized.
Expenditures for maintenance and repairs are charged to expense.  






                                      41








                                    <PAGE>


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

No   gain  or   loss  is   recognized  on   the  disposition   of  depreciable
telecommunications  plant.   At  the time  of retirement  of telecommunication
property,  plant, and equipment,  the original cost of  the plant retired plus
cost   of  removal  is  charged  to  accumulated  depreciation.    Accumulated
depreciation is credited with salvage value or insurance recovery, if any.
                     
Depreciation expense  is  computed using  the  straight-line method  based  on
management's estimate of  economic lives for  various categories of  property,
plant, and equipment.  

The   Company  continues  to  invest  heavily  in  improvements  to  its  core
telecommunications network. The Company has also made investments  in Internet
access.    These technologies  are subject  to  technological risks  and rapid
market changes due to new products and services  and changing customer demand.
These changes  may result in  changes to the  estimated economic lives  or net
realizable value of these assets.

The Company  carries catastrophic insurance coverage with large deductibles on
its telecommunications switching and building  assets, and is self-insured for
its outside telecommunications plant.

Cash and Cash Equivalents

Cash  equivalents   include  all  highly  liquid   monetary  instruments  with
maturities of ninety  days or  less from the  date of purchase.   In its  cash
management practices, the Company maintains zero-balance disbursement accounts
for  which funds  are made  available as checks  are presented  for clearance.
Checks outstanding are included in accounts payable.  

Income Taxes

Pacific Telesis Group allocates  consolidated taxes as  if the Company were  a
separate taxpayer.  The Company records its share of the consolidated taxes as
tax  liabilities and  pays  amounts due  to  tax authorities  through  Pacific
Telesis Group.

Deferred income taxes  are provided to  reflect the tax  effects of  temporary
differences  between  the  carrying  amounts  of assets  and  liabilities  for
financial reporting purposes and the amounts used for tax purposes.

Investment tax credits earned  prior to their repeal by the  Tax Reform Act of
1986  are amortized as reductions in tax expense  over the lives of the assets
which gave rise to the credits.

Advertising Costs

Costs for advertising products and services or corporate image are expensed as
incurred.






                                      42








                                    <PAGE>


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

Computer Software Costs

The  costs of computer  software purchased or  developed for  internal use are
expensed  as incurred.  However,  initial operating system  software costs are
capitalized and amortized over the lives of the associated hardware.

Change in Accounting for Postretirement Costs

Effective  January   1,  1993,  the  Company  adopted  SFAS  106,  "Employers'
Accounting for Postretirement Benefits Other than Pensions."  Annual price cap
decisions by  the CPUC granted the Company approximately $100 million for each
of the  years 1993-1997 for partial  recovery of its higher  costs. However, a
CPUC order  held that revenues collected after October 12, 1994 are subject to
refund.  (See "Revenues Subject to Refund" in Note K on page 59.)

Change in Estimates

In 1996,  management amended the salaried  pension plan, which changed  from a
final pay plan to a cash  balance plan.  As a  result of the approval of  this
plan  amendment,  the Company  updated  its actuarial  assumptions  to reflect
changes  in market interest rates  and recent actuarial  experience. (See Note
E -  "Employee Retirement Plans" on page 48 and Note F - "Other Postretirement
Benefits" on page 51.)

Cumulative Effect of Accounting Change

Effective  January 1,  1996, Pacific  Bell Directory ("Directory"),  a wholly-
owned subsidiary of the  Company, changed its method of  recognizing directory
publishing  revenues and  related expenses.   Directory  previously recognized
revenues  and expenses  related  to publishing  using the  "amortized" method,
under  which revenues  and  expenses were  recognized  over the  lives of  the
directories, generally one year.  Under the new "issue basis" method, revenues
and expenses will be recognized when the directories are issued.  

Management  believes this  change  to the  issue  basis method  is  preferable
because  it is the  method generally followed  in the  publishing industry and
better reflects the operating activity of the business.


The cumulative after-tax effect of  applying the new method to prior  years is
recognized as  of January 1, 1996  as a one-time, non-cash  gain applicable to
net income of $85 million.  The gain is net of deferred taxes of  $58 million.


The effect of applying the new method for the twelve months ended December 31,
1996 is a non-cash gain included in income before extraordinary item 








                                      43








                                    <PAGE>


A.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

and cumulative  effect of accounting change of $3 million. The total effect of
the change is a non-cash gain included in net income of $88 million.

Pro forma results,  assuming the issue  basis method had  been applied  during
prior periods, are as follows:

                                             For the year ended December 31
                                             ------------------------------
(Dollars in millions)                             1996      1995       1994
----------------------------------------------------------------------------
Pro Forma (Unaudited)
--------------------
Income before extraordinary item...........     $1,170      $982     $1,057
Net income (loss)..........................     $1,170   $(2,378)    $1,057

As Reported
-----------
Income before extraordinary item...........     $1,170      $969     $1,071
Net income (loss)..........................     $1,255   $(2,391)    $1,071


B. DISCONTINUANCE OF REGULATORY ACCOUNTING - SFAS 71

Effective third quarter  1995, for external financial  reporting purposes, the
Company discontinued the application  of SFAS 71, "Accounting for  the Effects
of Certain Types of  Regulation," an accounting standard for  entities subject
to traditional  regulation. As a  result, during 1995  the Company recorded  a
non-cash, extraordinary, after-tax charge  of $3.4 billion, net of  a deferred
income tax benefit of $2.4 billion.   The  charge includes a write-down of net
telephone plant and the elimination of net  regulatory assets as summarized in
the following table.

(Dollars in millions)                                  Pre-Tax  After-Tax 
-------------------------------------------------------------------------
Increase in telephone plant and equipment                       
  accumulated depreciation.....................         $4,819     $2,842 
Elimination of net regulatory assets...........            962        518 
                                                       ------------------ 
Total..........................................         $5,781     $3,360 
=========================================================================

The Company historically accounted for the economic effects of   regulation in
accordance with the provisions of SFAS 71.  Under SFAS 71, the Company 
depreciated telephone plant  using lives  prescribed by regulators  and, as  a
result  of  actions  of regulators,  deferred  recognizing  certain  costs, or
recognized  certain  liabilities  (referred  to  as  "regulatory  assets"  and
"regulatory liabilities").







                                      44








                                    <PAGE>


B. DISCONTINUANCE OF REGULATORY ACCOUNTING - SFAS 71 (Cont'd)

Effective  third  quarter  1995,  management  determined  that,  for  external
financial reporting purposes, it was no  longer appropriate for the Company to
use the special  SFAS 71  accounting rules for entities subject to traditional
regulation.  Management's decision to change to the general   accounting rules
used by competitive enterprises  was based upon an assessment  of the emerging
competitive  environment in California.  The Company's prices for its products
and  services  are  being driven  increasingly  by  market  forces instead  of
regulation.  

In 1995, the $4.8  billion increase in the Company's  accumulated depreciation
for its telephone  plant reflects  the adoption of  new, shorter  depreciation
lives.  The estimated  useful lives historically prescribed by  regulators did
not keep up with the rapid pace of technology.  The Company's previous and new
asset lives are compared in the following table.

Asset Lives (in years)                                   Old       New
---------------------------------------------------------------------------
Copper cable......................................     19-26        14
Digital switches..................................      16.5        10
Digital circuits..................................  9.6-11.5         8
Fiber optic cable.................................     28-30        20
Conduit...........................................        59        50
---------------------------------------------------------------------------

The discontinuance of  SFAS 71  for external financial  reporting purposes  in
1995 by the  Company also required  the elimination of  net regulatory  assets
totaling $962 million.   Regulators sometimes include costs in allowable costs
for ratemaking purposes in a period other than the period in which those costs
would  be charged to expense under general  accounting rules.   The accounting
for  these  timing  differences   created  regulatory  assets  and  regulatory
liabilities on the Company's balance sheet. 

Significant  changes occurred  in the  Company's balance  sheet  in 1995  as a
result  of the  discontinuance  of SFAS  71.   Details of  the Company's   net
regulatory assets that  have been  eliminated are displayed  in the  following
table.


















                                      45








                                    <PAGE>


B. DISCONTINUANCE OF REGULATORY ACCOUNTING - SFAS 71 (Cont'd)

(Dollars in millions) 
------------------------------------------------------------------------
Regulatory assets/(liabilities) due to:
Deferred pension costs*......................................      $460 
Unamortized debt redemption costs**..........................       337 
Deferred compensated absence costs*..........................       206 
Unamortized purchases of property, plant, and 
  equipment under $500.......................................        82 
Deferred income taxes***.....................................      (159)
Other........................................................        36 
                                                                   ---- 
Total........................................................      $962 
========================================================================
*    Previously included primarily in "Other noncurrent assets" in the
     Company's balance sheets.
**   Previously included in "Long-term obligations."
***  Previously included in "Other  current liabilities" and "Other noncurrent
     liabilities and deferred credits."


Due  to  the  discontinued application  of  SFAS 71,  pension  costs  for both
intrastate and  interstate  operations  are  now  determined  under  SFAS  87,
"Employers' Accounting for  Pensions," and SFAS 88, "Employers' Accounting for
Settlements  and  Curtailments  of  Defined  Benefit  Pension  Plans  and  for
Termination  Benefits."  Capitalized  interest cost is  reported as  a cost of
telephone plant  and equipment  and  as a  reduction in  interest expense,  as
required  by   SFAS  34, "Capitalization  of  Interest Cost."    Prior to  the
discontinuance of SFAS 71,   the Company recorded an allowance for  funds used
during  construction,   which  included   both  interest  and   equity  return
components, as  a cost of plant and  as an item in  miscellaneous income.  The
Company's accounting and reporting for regulatory purposes are not affected by
the  discontinued  application of  SFAS  71 for  external  financial reporting
purposes.


C. RESTRUCTURING AND CURTAILMENT CHARGES

During  1993,  the Company  recorded a  pre-tax  restructuring charge  of $977
million  to recognize the incremental cost of force reductions associated with
restructuring its internal business processes through 1997.  This charge is to
cover the incremental  severance costs associated  with terminating more  than
14,000 employees from 1994 through 1997.  It is also to  cover the incremental
costs of consolidating and streamlining  operations and facilities to  support
this downsizing  initiative.  The remaining reserve balance as of December 31,
1996 and 1995 was $93 and $219 million, respectively.









                                      46








                                    <PAGE>


D. INCOME TAXES

The components of income tax expense for each year are as follows:

(Dollars in millions)                           1996       1995      1994 
--------------------------------------------------------------------------
Current:
   Federal.................................     $442       $406      $549 
   State and local income taxes............      130        122       166 
    
                                              ----------------------------
Total current..............................      572        528       715 

Deferred:
  Federal..................................      184         66       (24)
  State and local income taxes.............       66         27        (7)
                                              ----------------------------
Total deferred.............................      250         93       (31)
                                              
Amortization of investment
  tax credits - net........................      (47)       (52)      (63)
                                               ---------------------------
Total income taxes ........................     $775       $569      $621 
==========================================================================

Significant components  of the Company's  deferred tax assets  and liabilities
are as follows:
                                                           December 31
                                                        -------------------
(Dollars in millions)                                   1996         1995
---------------------------------------------------------------------------
Deferred tax (assets)/liabilities due to:
  Depreciation and amortization.................        $947         $891 
  Employee benefits.............................        (420)        (431)
  Restructuring reserve.........................         (54)        (124)
  Customer rate reductions......................        (110)        (128)
  Other, net....................................        (292)        (446)
                                                       ------       ------
Net deferred tax (assets)/liabilities...........         $71        $(238) 
                                                       ======       ======
Amounts recorded in consolidated 
  balance sheets:
  Deferred tax assets*..........................        $405        $ 559 
                                                       ======       ======
  Deferred tax liabilities*.....................        $476        $ 321  
                                                       ======       ======

===========================================================================
*  Reflects  reclassification of  certain  current and  noncurrent amounts  by
   federal and state tax jurisdictions to a net presentation.  Amounts include
   both  current and noncurrent portions.  (See Note M - "Additional Financial
   Information" on page 62 for current and noncurrent deferred tax assets.)




                                      47








                                    <PAGE>


D.  INCOME TAXES (Cont'd)

In  1996  the State  of California  reduced the  corporate  tax rate  from 9.3
percent to  8.84 percent, effective  for taxable  years beginning on  or after
January 1, 1997.  In accordance with generally accepted accounting principles,
deferred  tax assets  and liabilities at  December 31,  1996 were  revalued to
reflect the lower tax rate.  This revaluation increased state tax expense, net
of federal tax, and decreased net income $10 million in 1996.

An  income  tax expense  related to  the cumulative  effect of  the accounting
change in 1996 for the change in accounting for directory revenue and expenses
is $58 million. (See Note A - "Cumulative Effect of Accounting Change" on page
43.)
 
An income  tax benefit related  to the  extraordinary charge in  1995 for  the
discontinued  application of SFAS 71  for depreciated telephone  plant is $2.0
billion and for regulatory assets and  liabilities is $0.4 billion.  (See Note
B  - "Discontinuance  of Regulatory Accounting  - SFAS  71" on page  44.)  The
reasons for differences  each year between the  effective income tax  rate and
applying the statutory  federal income tax rate to income  before income taxes
are provided in the following reconciliation:

                                                   1996      1995    1994  
---------------------------------------------------------------------------
Statutory federal income tax rate (%).........     35.0      35.0    35.0  
Increase (decrease) in taxes resulting from:
   Amortization of investment tax credits.....     (1.6)     (3.4)   (3.6) 
   Plant basis differences - net of 
      applicable depreciation.................        -       2.1     2.0  
   Interest during construction...............        -      (1.1)   (0.6) 
   State income taxes - net of federal
      income tax benefit......................      6.5       6.2     6.1  
   Excess deferred taxes......................        -      (2.9)   (2.8) 
   Other .....................................     (0.1)      1.1     0.6  
                                                  -------------------------
Effective income tax rate (%).................     39.8      37.0    36.7  
===========================================================================


E. EMPLOYEE RETIREMENT PLANS

Defined Benefit Plans

The Company  provides pension, death,  and survivor benefits  to substantially
all  of its employees through  participation in certain  Pacific Telesis Group
defined benefit pension plans.  Non-salaried plan benefits are based on a flat
dollar amount  and vary  according to  job classification,  age, and years  of
service. Salaried plan benefits accrue in  a separate account balance based on
a fixed percentage of each employee's monthly salary with interest. 







                                      48








                                    <PAGE>


E.  EMPLOYEE RETIREMENT PLANS (Cont'd)

The Company is responsible for contributing enough to the pension plans, while
the employee still is working, to ensure that adequate funds  are available to
provide   the  benefit  payments  upon  the   employee's  retirement.    These
contributions  are made  to an  irrevocable trust  fund in  amounts determined
using  the aggregate  cost  actuarial method,  one  of the  actuarial  methods
specified  by the Employee Retirement  Income Security Act  of 1974 ("ERISA"),
subject to ERISA and Internal Revenue Code limitations.

The Company reports pension costs and related obligations under the provisions
of SFAS 87 and  SFAS 88.  However, prior to  discontinuing application of SFAS
71  during  1995, the  Company recognized  pension  costs consistent  with the
methods  adopted for  ratemaking.   Pension  costs  recognized under  SFAS  71
reflected a  California Public  Utilities Commission ("CPUC")  order requiring
the continued use of the aggregate cost method for intrastate operations and a
Federal  Communications Commission ("FCC") requirement to use SFAS 87 and SFAS
88 for  interstate operations.   (See Note B  - "Discontinuance of  Regulatory
Accounting - SFAS 71" on page 44.)  As required by regulatory accounting under
SFAS 71,  pension cost in the  table below excludes the  intrastate portion of
the Company's SFAS 87 costs of $79 for 1994. 


Annual pension cost recognized in the financial statements during each year
presented is:

Pension Cost                                     1996       1995     1994 
--------------------------------------------------------------------------
(Dollars in millions)

Current year pension cost...................    $(174)      $ 76     $ 28 
Settlements and curtailments................        -          -      (10)
                                             -----------------------------
Pension cost (credit) recognized............    $(174)      $ 76     $ 18 
==========================================================================





















                                      49








                                    <PAGE>


E.  EMPLOYEE RETIREMENT PLANS (Cont'd)

                                                         December 31
                                                   -----------------------
Pension Obligation                                     1996         1995
--------------------------------------------------------------------------
(Dollars in millions)

Accumulated Benefit Obligation.................      $7,443       $8,835
Vested Benefit Obligation......................      $6,904       $7,747
--------------------------------------------------------------------------
Accrued pension cost liability recognized in
   the consolidated balance sheets.............        $814       $1,061
--------------------------------------------------------------------------
Present value discount rate (%)................         7.5         7.25
Long-term rate of return on plan assets (%)....         9.0          9.0
==========================================================================

Liabilities  and  expenses  for  employee  benefits  are  based  on  actuarial
assumptions.   These  actuarial assumptions  are subject  to change  over time
which could have a material impact on the Company's financial statements.

The  assets  of the  plans  are  primarily  composed of  common  stocks,  U.S.
Government   and  corporate   obligations,  index   funds,  and   real  estate
investments.  The plans' projected benefit obligations for employee service 
to date  reflect the Company's  expectations of  the effects of  future salary
progression and benefit increases.

In March 1996, Pacific Telesis Group  amended the salaried pension plan from a
final pay plan to a cash balance plan  effective July 1, 1996.  As a result of
this plan amendment, in second quarter  1996 Pacific Telesis Group updated its
actuarial assumptions to reflect  changes in market interest rates  and recent
experience,  including a  change in  its assumption  concerning future  ad hoc
increases  in pension benefits.   Taken together,  the change in  plan design,
discount  rate,  assumed  long-term  rate  of  return  and  other  assumptions
increased  net income by approximately $150 million  during 1996.  An enhanced
transition benefit, based on frozen  pay and service as of June 30,  1996, was
established to preserve benefits  already accrued by salaried employees  under
the final pay plan.  Effective January 1, 1995, the salaried pension  plan was
amended to cap net  credited service for pension  benefits at 30 years or,  if
greater,  the amount  of the  employee's  service on  January 1,  1995.   Upon
adoption, this amendment affected approximately 800 employees.

During 1996, 1995 and 1994, special pension benefits and  cash incentives were
offered in  connection  with the  Company's  restructuring and  related  force
reduction program.  Effective  October 1, 1995, pension benefit  increases may
be  offered  to  various groups  of  non-salaried  employees  under 1995  plan
amendments  which  increase benefits  for  specified  groups who  elect  early
retirement under incentive programs.  On March 28, 1994, the Company 







                                      50








                                    <PAGE>


E.  EMPLOYEE RETIREMENT PLANS (Cont'd)

offered a special pension  benefit that removed any age discount from pensions
for management employees who were eligible to retire with a service pension on
that date.    Also during  1994,  pension benefit  increases were  offered  to
various groups  of  non-salaried employees  under  1992 plan  amendments  that
increase benefits  for  specified  groups who  elect  early  retirement  under
incentive programs.  Approximately  1,500, 1,900 and 3,400 employees  left the
Company  during 1996, 1995 and  1994, respectively, under  early retirement or
voluntary and involuntary  severance programs.   Annual pension cost  excludes
($64),  $219 and  $62  million of  additional  pension  costs charged  to  the
Company's restructuring reserve in 1996, 1995 and 1994, respectively.

The  Company  has  entered  into  labor  negotiations  with  union-represented
employees in the past  and expects to do so  in the future.   Pension benefits
have  been included in these  negotiations, and improvements  in benefits have
been made periodically.   Additionally, the Company has increased  benefits to
pensioners on an ad hoc basis.  While no assurance can be offered with respect
to future  increases, management's  expectations for future  benefit increases
other than ad hoc increases have been considered in determining pension costs.

Defined Contribution Plans

The  Company  also participates  in  certain  Pacific Telesis  Group-sponsored
defined  contribution retirement  plans covering substantially  all employees.
These  plans include  the Pacific  Telesis Group  Supplemental Retirement  and
Savings   Plan  for  Salaried   Employees,  and  the   Pacific  Telesis  Group
Supplemental  Retirement   and   Savings  Plan   for   Nonsalaried   Employees
(collectively, the "Savings Plans").

The  Company's contributions  to the  Savings Plans  are based  on matching  a
portion of employee contributions.  All matching employer contributions to the
Savings  Plans are made through a leveraged employee stock ownership ("LESOP")
trust.  Total  Company contributions to  these plans, including  contributions
allocated to  participant accounts through the LESOP trust, were $65, $68, and
$64 million in 1996, 1995, and 1994, respectively.

F.   OTHER POSTRETIREMENT BENEFITS

Substantially  all  retirees  and  their  dependents  are  covered  under  the
Company's   plans   for  medical,   dental   and   life  insurance   benefits.
Approximately  43,000 retirees were eligible to receive benefits as of January
1,  1996.   Currently,  the  Company  pays the  full  cost  of retiree  health
benefits. However, by 1999, all employees retiring after 1990 will pay a share
of the  costs of medical coverage  that exceeds a defined  dollar medical cap.
Such future cost  sharing provisions  have been reflected  in determining  the
Company's  postretirement  benefit  costs.   The  Company  retains  the right,
subject  to  applicable  legal  requirements,  to  amend  or  terminate  these
benefits.







                                      51








                                    <PAGE>


F.   OTHER POSTRETIREMENT BENEFITS (Cont'd)

Effective  January  1,  1993, the  Company  adopted  SFAS 106.    The standard
requires that  the cost  of retiree  benefits be  recognized in  the financial
statements from an employee's date of hire until the employee becomes eligible
for these benefits.   Previously, the Company expensed these  retiree benefits
as  they were paid.  The Company  is amortizing the transition obligation over
20 years from the date of  adoption.  The transition obligation represents the
unrecognized cost  of benefits that  had already  been earned by  retirees and
active employees when the new standard was adopted.  

The Company's periodic expense under  SFAS 106 in 1996 and 1995,  as displayed
in the  table below,  increased  from $103  million in  1992  under the  prior
method.  Because the Company's higher  costs are being  partially recovered in
revenues,  the increased costs have not materially affected reported earnings.
(See  "Change in Accounting  for Postretirement Costs" in  Note A on page 43.)
However, a  CPUC order held that related  revenues collected after October 12,
1994 are subject  to refund. (See  "Revenues Subject to  Refund" in Note K  on
page 59.)

The components of net periodic postretirement benefit cost are as follows:

(Dollars in millions)                              1996           1995
---------------------------------------------------------------------------
Service cost..................................     $ 44           $ 49 
Interest cost on accumulated postretirement
  benefit obligation..........................          
                                                    232            256 
Actual return on plan assets..................     (181)          (246) 
Net amortization and deferral of items subject 
  to delayed recognition......................      162            268 
                                                   -----          -----
Net periodic postretirement benefit cost......     $257           $327 
===========================================================================

The  Company  partially funds  the  obligation  by contributing  to  Voluntary
Employees' Beneficiary Association trusts.  Plan assets are invested primarily
in domestic and international stocks and domestic investment-grade bonds.

In March 1996, in conjunction  with a change in the pension  plan assumptions,
management revised the assumed  discount rate used to measure  the accumulated
postretirement  benefit obligation and remeasured plan  assets.  These changes
did not have a material effect on 1996  net income.  In addition, in 1996  the
medical trend rate  decreased to 6.0  percent, which  increased net income  by
approximately $17 million during 1996 in comparison to 1995.












                                      52








                                    <PAGE>


F. OTHER POSTRETIREMENT BENEFITS (Cont'd)

The funded status of the plans follows:
                                                          December 31 
                                                      --------------------
(Dollars in millions)                                 1996            1995
--------------------------------------------------------------------------
Accumulated postretirement benefit obligation: 
  Retirees...................................       $2,137          $2,250 
  Eligible active employees...................         246             216 
  Other active employees......................         745             769 
                                                    ------          ------ 
Total accumulated postretirement benefit 
  obligation..................................       3,128           3,235 
Less:
  Fair value of plan assets*..................      (1,508)         (1,217) 
  Transition obligation.......................      (1,515)         (1,609) 
Plus:
  Unrecognized net gain**.....................         427             164 
  Unrecognized prior service cost.............          36              38 
                                                    ------          ------ 
Accrued net postretirement benefit obligation 
  recognized in the consolidated 
  balance sheets..............................      $  568           $ 611 
===========================================================================
*  Fair value of plan assets reflects an estimated allocation of the Company's
   portion of Pacific Telesis Group plans' assets.

** The unrecognized net  gain is  amortized over the  expected future  service
   lives of approximately 16 years  and reflects differences between actuarial
   assumptions and actual experience.  It  also includes the impact of changes
   in actuarial assumptions.

Liabilities  and  expenses  for  employee  benefits  are  based  on  actuarial
assumptions.     The  assumed  discount   rate  to  measure   the  accumulated
postretirement  benefit  obligation  was  7.50  percent  and 7.25  percent  at
December 31, 1996 and 1995, respectively.  The 1996 expense  was calculated at
7.25 percent  until March.   The remainder of  1996 expense was  calculated at
7.75 percent.  The 1996 accrued postretirement benefit obligation and the 1997
expense are based on  an assumed annual increase  in health care costs of  6.0
percent.  Increasing  the assumed health care cost trend  rates by one percent
each  year would  increase the  December  31, 1996  accumulated postretirement
benefit obligation by $402 million and would increase the combined service and
interest  cost components of net periodic postretirement benefit cost for 1996
by $35 million. A 9.0 percent long-term rate-of-return on assets is assumed in
calculating  postretirement  benefit costs.  These  actuarial assumptions  are
subject  to change  over  time, which  could  have a  material  impact on  the
Company's financial statements. 








                                      53








                                    <PAGE>


G.  STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
   
The Company  is a wholly owned subsidiary of Pacific Telesis Group ("PTG") and
as such does not  issue options or stock appreciation rights  ("SARs")  on its
own  stock.  However, key employees  of the  Company have  outstanding options
and SARs  that  were granted   under  the  PTG 1994 Stock  Incentive Plan (the
"Stock Plan") and a previous plan (collectively, the "Plans").

Options granted  under the Plans  were granted  as nonqualified options  or as
incentive stock options, and  portions were granted in conjunction  with SARs.
The original  exercise price of each  outstanding option and SAR  was equal to
the  fair  market value  of PTG's  common stock  on  the date  of grant.   The
exercise price of each option may be paid in cash or by surrendering shares of
PTG's common stock already  owned by the holder, or with a combination of cash
and such shares.  Options and associated SARs ordinarily become exercisable at
stated times beginning at least one year after the date of grant.  The term of
any option or SAR cannot exceed ten years.

PTG  applies Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its plans.
Accordingly,  no compensation expense has  been recognized by  the Company for
options and SARs granted  to Company employees resulting from  PTG stock-based
compensation plans.  Had  compensation cost for  the PTG's stock option  plans
been determined based upon the  fair value at the grant date for  awards under
these plans consistent  with the optional expense measurement method described
in  SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income would have been reduced by approximately $1.3 million for 1996 and $0.3
million for 1995.  The pro forma effect on net income for 1996 and 1995 is not
representative of the  pro forma effect on net income  in future years because
it does not  take into consideration pro forma compensation expense related to
grants made prior to 1995.

The weighted-average  fair value, on  the date  of grant,  of options  granted
during  1996 and  1995 is estimated  at $2.91  and $2.80,  respectively.  Fair
value  is determined  using the  Black-Scholes option-pricing  model with  the
following weighted-average  assumptions  used for  grants  in 1996  and  1995,
respectively:  dividend yield of 8.0  and 7.2 percent,  expected volatility of
23.4 and  17.0 percent, risk-free  interest rate of  6.0 and 7.0  percent, and
expected lives of 5 years.

















                                      54








                                    <PAGE>


H.   DEBT AND LEASE OBLIGATIONS

Long-term  obligations as of December 31, 1996  and 1995 consist of debentures
of  $4,045 and  $3,545 million,  respectively, and  corporate notes  of $1,150
million each year.  Maturities and interest rates of long-term obligations are
summarized as follows:
                                                         December 31
                                                  ------------------------
Maturities and Interest Rates                         1996          1995
--------------------------------------------------------------------------
                                                    (Dollars in millions)

1999                  4.625%....................    $  100        $  100 
2000                  4.625%....................       125           125 
2001                  8.700%....................       200           200 
2002-2043             5.875% to 8.500%..........     4,770         4,270 
                                                     ---------------------
                                                     5,195         4,695 
Long-term capital lease obligations.............       276            18 
Unamortized discount-net of premium.............      (107)         (105)
                                                     ---------------------
Total long-term obligations.....................    $5,364        $4,608 
==========================================================================

In  February 1997, the CPUC approved the  Company's application to issue up to
$1.75 billion of  long- and  intermediate-term debt and  preferred securities.
The proceeds  may be used  to redeem  maturing debt, to  refinance other  debt
issues and to  finance construction expenditures  or acquisition of  property.
The CPUC's  authorization is in effect  until the full $1.75  billion has been
issued.   The  Company also  has remaining  authority from the  Securities and
Exchange Commission to issue up to $150 million of long- and intermediate-term
debt through a shelf registration filed in April 1993.

During  1996,  the Company  entered into  a  leasing arrangement  with Pacific
Telesis  Group to  finance equipment associated  with the buildout  of the PCS
network.   As of December 31,  1996 the obligation remaining  is $270 million.
These  leases are  classified as  capital leases  and the  related assets  are
classified as property, plant and equipment.


















                                      55








                                    <PAGE>


H. DEBT AND LEASE OBLIGATIONS (Cont'd)

As of December 31, 1996 and 1995, the weighted average interest rate on short-
term  borrowings  was  6.64 percent  and  5.84  percent,  respectively.   Debt
maturing  within one  year  in  the  balance  sheets  consists  of  short-term
borrowings  and the portion of  long-term obligations that  matures within one
year as follows:
                                                          December 31
                                                      
                                                     --------------------
(Dollars in millions)                                 1996           1995
-------------------------------------------------------------------------
Commercial paper..........................            $200           $701
Advances from Pacific Telesis Group.......              73             76
                                                    ---------------------
Total short-term borrowings...............             273            777

Current maturities of
  long-term obligations...................              14              4
                                                    ---------------------
Total debt maturing within one year.......            $287           $781
==========================================================================

Lines of Credit

The Company has various  uncommitted lines of credit with certain banks. These
arrangements  do not  require compensating  balances or  commitment fees  and,
accordingly, are subject to  continued review by the lending  institutions. As
of December 31, 1996 and 1995, the total unused lines of credit available were
approximately $2.8 and $2.7 billion, respectively.

I.   FINANCIAL INSTRUMENTS

The  following table  presents  the estimated  fair  values of  the  Company's
financial instruments:

                                                   December 31
                                      --------------------------------------  
                                           1996               1995
                                      --------------------------------------
                                              Estimated            Estimated
                                     Carrying      Fair   Carrying      Fair
(Dollars in millions)                  Amount     Value     Amount     Value
----------------------------------------------------------------------------
Cash and cash equivalents........      $   58    $   58    $   68     $   68
Debt maturing within one year....         287       287       781        781
Deposit liabilities..............         268       268       357        357
Long-term debt...................       5,088     5,088     4,590      4,881
============================================================================








                                      56








                                    <PAGE>


I.   FINANCIAL INSTRUMENTS (Cont'd)

The following methods and assumptions were used to estimate the fair values of
each category of financial instrument:

The fair values of cash  and cash equivalents, debt maturing within  one year,
and  deposit liabilities  approximate their  carrying amounts  because  of the
short-term maturities of these instruments.

The fair value of long-term debt issues was estimated based on the net present
value  of  future expected  cash flows,  which  were discounted  using current
interest  rates and current market  prices. The carrying  amounts of long-term
debt include the unamortized net discount.

J.   RELATED PARTY TRANSACTIONS

The  Company receives  certain services  associated with  corporate functions,
e.g.,  legal, financial,  external affairs  and governmental  relations, human
resources and corporate  strategy, performed  on the Company's  behalf by  its
parent, Pacific Telesis Group.  Costs  incurred by Pacific Telesis Group which
are  attributable  to the  Company are  charged directly  to the  Company. The
Company is  also charged for  its proportionate share of  other indirect costs
incurred by Pacific  Telesis Group.   Total costs  charged by  Pacific Telesis
Group  and included in general,  administrative, and other  expenses were $141
million, $110 million and $81 million in 1996, 1995 and 1994, respectively.

The  Company provides  non-telecommunications and  telecommunications services
including local, toll  and access  services to certain  Pacific Telesis  Group
affiliated   companies.  Revenues   recorded   for   these  services   totaled
$68 million, $7 million and $21 million in 1996, 1995 and 1994, respectively.

In 1996, the Company  entered into a leasing arrangement with  Pacific Telesis
Group.  (See Note H - "Debt and Lease Obligations" on page 55.)

K. COMMITMENTS AND CONTINGENCIES

Merger Agreement

On April  1, 1996, SBC Communications Inc.  ("SBC") and Pacific Telesis Group,
the Company's parent, jointly announced a definitive agreement whereby Pacific
Telesis Group  will become a wholly-owned  subsidiary of SBC.   Under terms of
the  merger agreement,  each share  of Pacific  Telesis common  stock will  be
exchanged for 0.733  shares of SBC  common stock, subject  to adjustment.   On
July 31, 1996,  the shareowners of Pacific Telesis Group  and SBC approved the
transaction, which previously  had been  approved by the  respective Board  of
Directors of each company.










                                      57








                                    <PAGE>


K. COMMITMENTS AND CONTINGENCIES (Cont'd)

The  transaction is intended to be accounted for as a pooling of interests and
to  be a tax-free reorganization.   Adjustments typically  associated with the
pooling of interests method are to  conform  accounting policies of the merged
entities.  Management is unable to determine if these policy changes and other
merger-related adjustments will be material.  

The merger  is subject  to certain  conditions and  regulatory approvals.   On
January 31, 1997, the FCC approved the merger, and in  November 1996, the U.S.
Department of  Justice announced it  had concluded  that the  merger does  not
violate  the  antitrust  laws   and  accordingly  that  it  was   closing  its
investigation  into  the  merger.    In  December  1996,  the  Public  Service
Commission  of Nevada ("PSCN") approved  the merger with  the stipulation that
Nevada Bell customers be paid the greater of $4 million or 2.0 percent  of the
amount, if any, ordered by the CPUC to be paid to Pacific Bell customers.  The
payment to Nevada Bell customers is conditioned  on closing of the merger.  In
addition, the  California State Attorney  General has told  the CPUC that  the
merger will not hurt competition in California and is consistent with emerging
trends.

On September 30, 1996, the Office of Ratepayer Advocates ("ORA"), the consumer
interest  branch of the  CPUC, filed testimony  in the CPUC  merger proceeding
recommending  a  $2.1 billion  rebate to  customers  payable over  five years.
Pacific  Telesis  Group  does not  agree  with  the  ORA's recommendation  and
believes no customer  rebate or payment should be required  in connection with
the merger. 

On  February 21,  1997,  two California  administrative  law judges  issued  a
proposed  decision approving  the  merger but  with  a number  of  conditions,
including  payment of up to $750 million.   Management does not agree with the
level of payment  or the restrictive  conditions and  intends to work  towards
their reduction or elimination.  A proposed decision by the administrative law
judges is not binding.   The CPUC is expected to review the full  case and the
proposed decision and issue a  final decision by March 31, 1997.  Depending on
the final CPUC decision, the merger could close in early second quarter.

Purchase Commitments

In December 1994, the Company contracted for the purchase of  up to $2 billion
of Advanced Communications Network  ("ACN") facilities, which incorporated new
technologies.  During 1995,  the ability to deploy the  facilities outstripped
the  ACN  vendors'   ability  to  deliver  necessary  products  and  software.
Accordingly,  management decided  to  suspend construction  at certain  sites,
which reduced the  expected cost to less than $700 million.  If ACN facilities
meet  certain quality  and  performance  criteria  (the "Network  Test"),  the
Company  is  committed  to purchase  the  ACN  facilities  in  1998.   If  ACN
facilities fail the Network Test, the Company will not be committed to buy the
ACN  facilities but might be liable to  reimburse the principal ACN vendor for
some construction costs  up to $300 million.  If  competition or other factors
affect  the Company's ability to  recover its investment  in these facilities,
the value of the ACN facilities could be materially impaired.




                                      58








                                    <PAGE>


K. COMMITMENTS AND CONTINGENCIES (Cont'd)

As of  December 31, 1996, the  Company had purchase commitments  of about $208
million  remaining  in connection  with its  previously announced  program for
deploying an all digital switching platform with ISDN and SS-7 capabilities.

Revenues Subject to Refund

In 1992,  the CPUC issued a decision adopting, with modification, SFAS 106 for
regulatory  accounting purposes.    Annual price  cap  decisions by  the  CPUC
granted the Company approximately $100 million in each of  the years 1993-1997
for partial  recovery of higher  costs under SFAS 106.   However, the  CPUC in
October 1994 reopened the  proceeding to determine the criteria  for exogenous
cost treatment and whether the Company should continue to recover
these costs.   The  CPUC's order  held that  related revenues  collected after
October  12, 1994 are subject to refund plus interest. It is possible that the
CPUC could  decide this issue  in the near term,  and that the  decision could
have a material adverse effect on the Company.  Related revenues totaled about
$221  million  at  December  31,  1996.    Management  believes postretirement
benefits  costs  are  appropriately recoverable  in  the  Company's  price cap
filings.

Property Tax Investigation

In  1992,  a  settlement agreement  was  reached  between the  State  Board of
Equalization,  all California  counties, the  State Attorney  General, and  28
utilities, including  Pacific  Bell, on  a  specific methodology  for  valuing
utility property for property tax purposes  for a period of eight years.   The
CPUC  opened an  investigation  to determine  if  any resulting  property  tax
savings should be  returned to customers.   Intervenors have asserted  that as
much as $20  million of annual  property tax savings  should be treated as  an
exogenous cost reduction  in the Company's  annual price  cap filings.   These
intervenors have also asserted that past property tax savings totaling as much
as approximately $70 million as of December 31, 1996, plus  interest should be
returned to customers.  Management believes that, under  the CPUC's regulatory
framework, any property tax savings  should be treated only as a  component of
the calculation of shareable earnings not as an exogenous cost.  In an Interim
Opinion issued  in June 1995,  the CPUC decided to  defer a final  decision on
this  matter pending resolution of  the criteria for  exogenous cost treatment
under  its regulatory  framework.   The  criteria  are being  considered  in a
separate  proceeding  initiated for  rehearing  of  the CPUC's  postretirement
benefits other  than pensions decision discussed  above.  It is  possible that
the CPUC could decide this issue in the near term, and that the decision could
have a material adverse effect on the Company.












                                      59








                                    <PAGE>


L. COMPETITIVE RISK 

Regulatory,  legislative  and  judicial  actions,   as  well  as  advances  in
technology, have expanded the  types of available communications  products and
services and the number of companies offering such services.  Various forms of
competition are  growing steadily  and  are already  having an  effect on  the
Company's  earnings.  An increasing  amount of this  competition is from large
companies with  substantial capital,  technological, and  marketing resources.
Currently,   competitors   primarily   consist   of   interexchange  carriers,
competitive  access providers, and wireless companies.  The Company also faces
competition from cable television companies and others. 

Effective January 1,  1995, the  CPUC authorized toll  services competition.  
Management estimates that share losses since  January 1, 1995 have been in the
five to six percent range.   However, this loss combined with losses  prior to
the  official opening of  this market  has resulted  in the  Company currently
serving less than 50 percent of the  business toll market.  In April 1995, the
CPUC also ordered the Company to offer expanded interconnection to competitive
access  providers.   These  competitors are  allowed  to carry  the intrastate
portion  of long-distance and local  toll calls between  the Company's central
offices and long  distance carriers.  Competitors may choose  to locate  their
transmission facilities within or near the Company's central offices.

Effective January 1, 1996, the CPUC authorized local exchange competition.  By
early February 1997,  the CPUC  had authorized about  90 companies,  including
large   and  well-capitalized   long-distance  carriers,   competitive  access
providers, and cable television companies to begin providing local 
phone service  in California,  and  38 additional  applications were  pending.
These  companies are prepared to  compete in major  local exchange markets and
many have already  deployed switches or other facilities. All of the Company's
customers have already  chosen a  long-distance company,  and these  companies
have established widespread  customer awareness through  extensive advertising
campaigns over several years.

Local  exchange competition  may affect toll  and access revenues,  as well as
local service revenues, since  customers may select a competitor for all their
telecommunications services.  Local exchange competition may also affect other
service revenues as Pacific Bell Directory will have  to acquire listings from
other  providers for its products, and competing directory publishers may ally
themselves with other telecommunications  providers.  Management estimates the
CPUC's proposed local competition rules could materially reduce revenue growth
for the Company's regulated California operations by late 1997.

The  characteristics  of  the California  market  make  it  attractive to  new
competitors. The  Company's business and residence  revenues and profitability
are  concentrated among  a small portion  of its customer  base and geographic
areas.  Competitors need only serve selected portions of the Company's service
area to compete for the majority of its business and residence usage revenues.
High-margin  customers are clustered in high-density areas such as Los Angeles
and  Orange County,  the San Francisco  Bay Area,  San Diego,  and Sacramento.
California is also attractive because it has one of the lowest switched access
rates  in  the country.    By  combining the  low  switched  access rates  and
discounted  resale rates, competitors have the ability to price their services
below the Company's prices  while maintaining high margins.   Reselling allows
competitors to offer local services with little or no investment.

                                      60








                                    <PAGE>


L. COMPETITIVE RISK (Cont'd)

Management believes that now that our markets are open to all competitors, the
Company should be granted access to markets that are currently closed to LECs.
A  truly open competitive  market, in  which the  Company can  compete without
restrictions, offers long-term opportunity to build the business and maximizes
benefits  for  consumers.     Management  believes   its  key  strategies   of
strengthening  the  core  business  by   upgrading  its  network  and  systems
capabilities, improving  customer service and  efficiency, expanding  existing
markets,  developing  new markets  and  promoting public  policy  reform, will
provide a strong response to its competitive challenge.  













































                                      61








                                    <PAGE>


M.   ADDITIONAL FINANCIAL INFORMATION
                                                            December 31
                                                      ---------------------
(Dollars in millions)                                    1996        1995
---------------------------------------------------------------------------
Prepaid expenses and other current assets:
     Prepaid directory expenses...................     $   45     $   316
     Miscellaneous prepaid expenses...............         37          27
     Notes and other receivables..................         92          83
     Materials and supplies.......................         34          57
     Current deferred tax benefits................        119         221
     Pacific Telesis Group and subsidiaries.......         82          23
     Deferred compensation trusts.................         71          63
     Other........................................          6          12
                                                      -------     -------
Total............................................     $   486     $   802
===========================================================================
Property, plant, and equipment - net:
     Land and buildings...........................    $ 2,870     $ 2,754
     Cable and conduit............................     11,250      10,910
     Central office equipment.....................      9,935       9,394
     Furniture, equipment, and other..............      3,020       2,835
     Construction in progress.....................      1,297         795
                                                      -------     -------
                                                       28,372      26,688
     Less accumulated depreciation................    (16,699)    (15,608)
                                                      -------     -------
Total............................................     $11,673     $11,080
===========================================================================
Other noncurrent assets:
     Deferred charges.............................    $    73     $    30
     Investments..................................        117         105
     Deferred tax benefits........................        286         338
     Other........................................          -           1
                                                      -------     -------
Total.............................................    $   476     $   474
===========================================================================



















                                      62








                                    <PAGE>


M. ADDITIONAL FINANCIAL INFORMATION (Cont'd)

                                                            December 31
                                                      ---------------------
(Dollars in millions)                                    1996        1995
---------------------------------------------------------------------------
Accounts payable and accrued liabilities:
  Accounts payable:
     Pacific Telesis Group and subsidiaries.......    $    30    $     37 
     AT&T and subsidiaries........................        144         224 
     Trade........................................        579         498 
     Payroll......................................         24          51 
     Checks outstanding...........................        396         276 
     Other:
       Incentive awards payable...................        180         187 
       Other......................................        340         383 
  Interest accrued................................        131         120 
  Advance billing and customers' deposits.........        253         333  
                                                      -------      -------
Total.............................................    $ 2,077     $ 2,109 
===========================================================================

Other current liabilities:
     Accrued compensated absences..................   $   258     $   272 
     Restructuring reserve.........................        93         219 
     Other.........................................       118          61 
                                                      -------      ------ 
Total.............................................    $   469     $   552 
===========================================================================

Other noncurrent liabilities and deferred credits:
     Unamortized investment tax credits............   $   236     $   283 
     Accrued pension cost liability................       814       1,061 
     Workers' compensation.........................       172         163 
     Accrued postretirement benefit obligation.....       568         611 
     Other.........................................       259         299 
                                                      -------     ------- 
Total..............................................   $ 2,049     $ 2,417 
===========================================================================

















                                      63








                                    <PAGE>


M. ADDITIONAL FINANCIAL INFORMATION (Cont'd)

                                                  For the Year Ended
                                                      December 31
                                         ---------------------------------
(Dollars in millions)                      1996         1995         1994
--------------------------------------------------------------------------
Other service revenues:
    Directory advertising............... $1,051       $1,012       $  984
    Billing and collections.............     90          109           77
    Information services................    178          148          113
    Other...............................    374          252          232
                                          ------      ------       ------
Total................................... $1,693       $1,521       $1,406
==========================================================================
Interest expense:
    Gross interest expense.............. $  411       $  421       $  439
    Less capitalized interest...........    (48)         (11)           -
                                          ------       ------      ------
Net interest expense...................  $  363       $  410       $  439
==========================================================================
Other income(expense) - net:
    Allowance for funds used during
      construction...................... $    -       $   36       $   28
    Interest income.....................      9           27            5
    Other...............................     (5)         (38)         (30)
                                          ------       ------      ------
Total................................... $    4       $   25       $    3
==========================================================================
Advertising expense..................... $  125       $   93      $    96
==========================================================================
Cash payments for:
    Interest............................ $  395       $  410      $   377
    Income taxes........................ $  574       $  550      $   762
==========================================================================

Major Customer

Nearly all  of the Company's  operating revenues were  from telecommunications
and  information services.  Approximately 7 percent, 10 percent and 11 percent
of  these revenues  were earned  in  1996, 1995  and  1994, respectively,  for
services  provided to AT&T Corp.  No other customer accounted for more than 10
percent of revenues.













                                      64








                                    <PAGE>


QUARTERLY FINANCIAL DATA
(Unaudited)
                                           (Dollars in millions)
                                 ------------------------------------------
       1996                       First*     Second*
                                                         Third*   Fourth**
---------------------------------------------------------------------------
   Operating revenues..........    $2,327     $2,364    $ 2,315     $2,440
   Operating income............       605        629        530        540
   Cumulative effect of 
      accounting change........        85          -          -          -
   Net income .................       393        314        262        286
---------------------------------------------------------------------------

       1995                         First     Second    Third***    Fourth
---------------------------------------------------------------------------
   Operating revenues..........    $2,212     $2,186    $ 2,228     $2,236
   Operating income............       470        494        507        452
   Extraordinary item..........         -          -     (3,360)         -
   Net income (loss)...........       246        243     (3,102)       222

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

*   During fourth quarter 1996,  Pacific Bell Directory changed its  method of
    recognizing directory  publishing revenues and related  expenses effective
    January  1, 1996 to a preferable method.   The cumulative after-tax effect
    of applying  the new method to prior years is  recognized as of January 1,
    1996 as  a  one-time, non-cash  gain  of $85  million.   The  first  three
    quarters  of  1996  were  restated  to  reflect  the  new  method.    (See
    "Cumulative Effect of Accounting Change" under Note A on page 43.)

**  Fourth  quarter 1996  results  reflect a  number  of one-time  items  that
    reduced earnings by $47 million.

*** Third  quarter 1995 results reflect an after-tax extraordinary charge as a
    result of the Company's discontinuance of regulatory accounting. (See Note
    B - "Discontinuance of Regulatory Accounting - SFAS 71" on page 44.)


Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure.

No  disagreements with the Company's independent accountants on any accounting
or financial disclosure  matters occurred  during the period  covered by  this
report.












                                      65








                                    <PAGE>


                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

   (a)  Documents filed as part of the report:

        (1)  Financial Statements:

             Report of Management...............................33

             Report of Independent Accountants..................35

             Financial Statements:

                  Consolidated Statements of Income.............36

                  Consolidated Balance Sheets...................37

                  Consolidated Statements of Shareowner's
                  Equity........................................38

                  Consolidated Statements of Cash Flows.........39

                  Notes to Consolidated Financial Statements....41

        (2)  Financial Statement Schedule:

             II - Valuation and Qualifying Accounts.............69

             Financial statement  schedules other than listed  above have been
             omitted  because the  required  information is  contained in  the
             Consolidated Financial Statements  and Notes thereto,  or because
             such schedules are not required or applicable.























                                      66








                                    <PAGE>


                                 EXHIBIT INDEX


(3)  Exhibits:

Exhibits  identified  in  parentheses  below  as  on  file  with  the SEC  are
incorporated herein by reference  as exhibits hereto.  All  other exhibits are
provided as part of the electronic transmission.

  Exhibit
  Number                       Description
  -------                      -----------

   3a     Articles  of Incorporation of Pacific Bell,  as amended and restated
          to January 11, 1993 (Exhibit (3)a to Form SE filed March 26, 1993 in
          connection with the Company's Form 10-K for 1992).

   3b     By-Laws of Pacific Bell,  as amended to February 26,  1996. (Exhibit
          3b to Form 10-K for 1995)

   4      No  instrument  which defines  the rights  of  holders of  long- and
          intermediate-term debt of Pacific Bell and its subsidiaries is filed
          herewith  pursuant   to  Regulation  S-K,   Item  601(b)(4)(iii)(A).
          Pursuant to this regulation, Pacific Bell hereby agrees to furnish a
          copy of any such instrument to the SEC upon request.

   12     Computation of Ratio of Earnings to Fixed Charges.

   18     Preferability Letter on Discretionary Accounting Change.

   23     Consent of Coopers & Lybrand L.L.P.

   24     Powers of  Attorney executed  by Directors and  Officers who  signed
          this Form 10-K.

   27     Financial Data Schedule for Pacific Bell Form 10-K.

The Company  will furnish  to a  security holder  upon request  a copy  of any
exhibit at cost.

(b)       Reports on Form 8-K:
          No reports on Form 8-K were filed in the fourth quarter of 1996.














                                      67








                                    <PAGE>


                                  SIGNATURES

Pursuant to  the  requirements of  Section  13 or  15  (d) 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.

                                   PACIFIC BELL

                                   BY /s/ Peter A. Darbee
                                      -------------------------
                                      Peter A. Darbee, 
                                      Vice President, Chief 
                                      Financial Officer and Controller
                                      (Principal Financial and
                                      Accounting Officer)


                                   DATE:  March 28, 1997

Pursuant to  the requirements  of the  Securities Exchange  Act of  1934, this
report has  been  signed below  by  the following  persons  on behalf  of  the
registrant and in the capacities and on the date indicated.

David W. Dorman,*   Chairman of the Board, President and Chief Executive 
                    Officer

/s/ Peter A. Darbee, Vice President, Chief Financial Officer and Controller
 
Gilbert F. Amelio,* Director                      Lewis E. Platt,* Director

William P. Clark,* Director                           Toni Rembe,* Director

Herman E. Gallegos,* Director                  S. Donley Ritchey,* Director

Frank C. Herringer,* Director               Richard M. Rosenberg,* Director

Mary S. Metz,* Director

*BY  /s/ Peter A. Darbee
     -----------------------
     Peter A. Darbee, attorney-in-fact

DATE:  March 28, 1997













                                      68








                                    <PAGE>


                      PACIFIC BELL AND SUBSIDIARIES

              SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                             (Dollars in millions)

---------------------------------------------------------------------------
   Col. A           Col. B             Col. C            Col. D     Col. E
---------------------------------------------------------------------------
Allowance for Doubtful Accounts
-------------------------------
                                    Additions
                              ----------------------
                                  (1)         (2)
                                Charged     Charged             
                 Balance at    to Costs    to Other             Balance at
                End of Prior and Expenses  Accounts  Deductions   End of
                   Period         (a)         (b)         (c)     Period
---------------------------------------------------------------------------
Year 1996          $131           $129        $216        $315      $161
Year 1995          $132           $166        $147        $314      $131
Year 1994          $136           $135        $143        $282      $132
===========================================================================

(a)  Provision  for uncollectibles as stated in the Consolidated Statements of
     Income includes certain direct write-offs which are not reflected in this
     account.
(b)  Amounts in  this  column reflect  items of  uncollectible interstate  and
     intrastate  accounts receivable  purchased from and  billed for  AT&T and
     other interexchange carriers under contract arrangements.
(c)  Amounts in this column include items written off, net of amounts that had
     previously been written off but subsequently recovered.

Reserve for Restructuring
-------------------------
                                    Additions
                              ----------------------
                                  (1)         (2)
                 Balance at     Charged     Charged              Balance at
                End of Prior   to Costs     to Other   Deduction   End of
                   Period     and Expenses  Accounts      (D)      Period
---------------------------------------------------------------------------
Year 1996        $  219           $  -         $ -        $126    $   93
Year 1995        $  819           $  -         $ -        $600    $  219
Year 1994        $1,097           $  -         $ -        $278    $  819
===========================================================================


(d) The 1996, 1995 and 1994 amounts reflect $(64), $219 and $62 million of
    costs, respectively, for enhanced retirement benefits paid from pension
    fund assets which do not require current outlays of the Company's funds. 
    The 1996 reversal of $64 million resulted from revised estimates of these
    retirement costs.




                                      69








                                    <PAGE>


                                 EXHIBIT INDEX


Exhibits  identified  in  parentheses  below  as on  file  with  the  SEC  are
incorporated herein by reference as  exhibits hereto.  All other exhibits  are
provided as part of the electronic transmission.

  Exhibit
  Number                       Description
  -------                      -----------

   3a     Articles of Incorporation  of Pacific Bell, as  amended and restated
          to January 11, 1993 (Exhibit (3)a to Form SE filed March 26, 1993 in
          connection with the Company's Form 10-K for 1992).

   3b     By-Laws of Pacific Bell,  as amended to February 26,  1996. (Exhibit
          3b to Form 10-K for 1995)

   4      No  instrument  which defines  the rights  of  holders of  long- and
          intermediate-term debt of Pacific Bell and its subsidiaries is filed
          herewith   pursuant  to  Regulation   S-K,  Item  601(b)(4)(iii)(A).
          Pursuant to this regulation, Pacific Bell hereby agrees to furnish a
          copy of any such instrument to the SEC upon request.

   12     Computation of Ratio of Earnings to Fixed Charges.

   18     Preferability Letter on Discretionary Accounting Change.

   23     Consent of Coopers & Lybrand L.L.P.

   24     Powers of Attorney  executed by  Directors and  Officers who  signed
          this Form 10-K.

   27     Financial Data Schedule for Pacific Bell Form 10-K.






















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