<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, 1995

                                      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....................................................   9

 3.       Legal Proceedings.............................................   9

 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.......................................................   9

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

 7.       Management's Discussion and Analysis of Results of Operations.  10

 8.       Financial Statements and Supplementary Data...................  31

 9.       Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure......................................  59

                                   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......................................................  60


















                                    <PAGE>

                                    PART I

Item 1.  Business.

Except for historical information contained herein, this Annual Report on Form
10-K  contains forward-looking  statements  that involve  potential risks  and
uncertainties.   Pacific Bell's  (the "Company") actual  results could  differ
materially  from  those  discussed  herein.    Factors  that  could  cause  or
contribute  to such  differences  include,  but  are  not  limited  to,  those
discussed herein. Readers  are cautioned not to place undue  reliance on these
forward-looking  statements  which speak  only  as of  the date  hereof.   The
Company  undertakes no  obligation to  revise or update  these forward-looking
statements to  reflect events  or circumstances after  the date  hereof or  to
reflect the occurrence of unanticipated events.

GENERAL

Pacific  Bell  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 (the  "Corporation"), 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 (the "Court").

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)  billing services
for  interexchange carriers  and  information service  providers; (4)  various
operator  services;  (5) installation  and  maintenance  of customer  premises
wiring;  (6) public  communications   services;  (7)  directory   advertising;
(8) selected information  services, such as  voice mail; (9)  Internet access;
and (10) 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.



                                       1








                                    <PAGE>

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

Pacific  Bell  Mobile  Services   ("PBMS")  was  formed  in  1994   to  pursue
opportunities in personal communications services ("PCS"), a new generation of
wireless services  geared to  the business  and consumer  markets.   In  1995,
Pacific Telesis Mobile Services, a wholly owned subsidiary of the Corporation,
obtained two licenses to offer PCS services in California and  Nevada from the
Federal  Communications  Commission  ("FCC").  PBMS  will  design,  construct,
manage, and market services for the network.  Management expects a  widespread
offering of PCS services by early 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
plans to provide residential service in 1996.

Pacific  Bell  Network  Integration ("PBNI")  was  formed  in  1995 to  pursue
opportunities  in the  network  integration business.    In 1995,  PBNI  began
offering network design, installation  and maintenance, and network management
services  for  business data  communication networks.    PBNI will  expand its
service offerings in 1996.


 





























                                       2








                                    <PAGE>

PRINCIPAL SERVICES:

Significant components of the Company's operating revenues are depicted in the
chart below:
                                              % of Total Operating Revenues
                                              -----------------------------
Revenues by Major Category                        1995         1994*
---------------------------------------------------------------------------
Local Service
     Recurring..............................       28%          22% 
     Other Local............................       15%          15% 

Network Access
     Carrier Access Charges.................       20%          18% 
     End User & Other.......................        7%           7% 

Toll Service
     Message Toll Service...................       12%          21% 
     Other..................................        1%           1% 

Other Service Revenues
     Directory Advertising..................       11%          11% 
     Other..................................        6%           5% 
                                                ------         -----
TOTAL.......................................      100%         100% 
===========================================================================

*    Restated to conform to current year presentation.

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

                                              % of Total Operating Revenues
                                              -----------------------------
                                                  1995         1994 
---------------------------------------------------------------------------
Interstate telephone operations............        19%          18% 
Intrastate telephone operations............        81%          82% 
                                                 -----        -----
TOTAL......................................       100%         100% 
===========================================================================
















                                       3








                                    <PAGE>

CONSENT DECREE

Under the terms of the  Consent Decree, all territory  served by the BOCs  was
divided  into geographical  areas called  "Local Access  and Transport  Areas"
("LATAs," also referred to as "service  areas").  The Consent Decree generally
prohibited BOCs  and their affiliates* from  providing communications services
that  cross service  area  boundaries;  however,  the  networks  of  the  BOCs
interconnect with carriers that provide such services (commonly referred to as
"interexchange carriers").

The Consent Decree provided that the RHCs shall not engage in certain lines of
business.   The Consent Decree provided that the Court might waive the line of
business restrictions (i.e.,  grant a "Waiver") upon a  showing that there was
no substantial  possibility that the RHCs  could use monopoly  power to impede
competition in  the market  they sought  to enter.   The Court  placed certain
conditions on the Waivers it granted.  

Under the Consent Decree, the  principal restrictions initially prohibited the
provision  of  interexchange  telecommunications,  information  services,  and
telecommunications equipment and  the manufacturing of telecommunications  and
customer  premises  equipment  ("CPE").    The  telecommunications  businesses
originally permitted by the Consent Decree  included the provision of exchange
telecommunications** and exchange access  services, CPE, and printed directory
advertising.  The information  services  prohibition was  lifted  in 1991.  On
December  3, 1987, the Court interpreted the manufacturing restriction to mean
that the RHCs were prohibited from designing and developing telecommunications
equipment  and CPE as well as from fabricating them.  In March 1995, the Court
granted a Waiver that allowed the RHCs to provide telecommunications equipment
to unaffiliated parties.  In  March 1995, the Court  also granted a Waiver  to
allow the Corporation to  own and operate certain facilities  to receive video
programming and to provide limited interexchange video services.

On  February 8, 1996, President Clinton signed into law the Telecommunications
Act  of  1996 (the  "Telecommunications  Act").    The Telecommunications  Act
provides that any conduct or activity previously subject to the Consent Decree
that occurs after  February 8, 1996 will be subject  to the Communications Act
of 1934 (the "Communications  Act"), not the Consent  Decree.  See  discussion
under "Telecommunications Act" below.






___________________________

*   The  terms  of  the  Consent  Decree,  with  certain  exceptions,  applied
    generally to all BOCs and their affiliates.

**  "Exchange  telecommunications"  under  the  Consent  Decree included  toll
    services within a service area as well as local service.






                                       4








                                    <PAGE>

STATE REGULATION

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

The CPUC adopted a new regulatory framework ("NRF"), which is a form of "price
cap" regulation, for  the Company  in October 1989.   In  June 1994, the  CPUC
reduced   the  Company's  benchmark  rate  of  return  from  13.0  percent  to
11.5 percent.  Earnings between  11.5 percent and 15.0 percent will  be shared
equally  between the Company and  its customers.   Earnings above 15.0 percent
will  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
inflation  less a  productivity  factor as  well  as adjustments  for  certain
exogenous cost changes.  In December 1995, the CPUC issued an order in Phase I
of  its second review of  the NRF.  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.  

Phase II  of the CPUC's second review was scheduled  to begin in January 1996.
The  review  was to  consider the  continued  applicability of  earnings caps,
sharing, and other items.  In February 1996, an Assigned Commissioner's Ruling
suggested  that this  phase be  deferred until the  next review  scheduled for
1998.  Comments on the ruling were filed in March 1996.  The Company has asked
that certain of these issues be reviewed in 1996.

See  Item  7  below,  Management's  Discussion  and  Analysis  of  Results  of
Operations ("MD&A")  under the headings "CPUC  Revenue Rebalancing Shortfall,"
"CPUC   Regulatory  Framework  Review,"   "Local  Services  Competition,"  and
"Universal  Service" on pages 15 through 17  for additional information on the
regulation  of the  Company  by  the CPUC,  which  is  incorporated herein  by
reference.

See  MD&A under the headings  "Uniform System of  Accounts ("USOA") Turnaround
Adjustment," "Revenues Subject to Refund," and "Property Tax Investigation" on
pages  29   through  30,   "Change  in  Accounting   for  Postretirement   and
Postemployment  Costs" in Note A to the 1995 Consolidated Financial Statements
on  page 41 and "Revenues Subject  to Refund" and "Property Tax Investigation"
in Note K to the 1995 Consolidated Financial Statements on pages 54 through 55
for a discussion of other  CPUC proceedings, including the application  of the
USOA   Turnaround   Adjustment,  regulatory   and  ratemaking   treatment  for
postretirement  benefits  in connection  with  the  adoption of  Statement  of
Financial  Accounting  Standards No.  106, and  the regulatory  and ratemaking
treatment of certain  property tax  savings, which is  incorporated herein  by
reference.





                                       5








                                    <PAGE>

FEDERAL REGULATION

The  Company  is subject  to  the  jurisdiction of  the  FCC  with respect  to
interstate  access charges  and other  matters. 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 separate 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 carriers  ("LECs"). The Company's  access rates
were retargeted to a new 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 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 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, 1995.

See MD&A  under the heading "FCC  Regulatory Framework Review" on  page 15 for
additional  information on the regulation of the  Company by the FCC, which is
incorporated herein by reference.

TELECOMMUNICATIONS ACT

The  Telecommunications Act  became  effective  on  February  8,  1996.    The
Telecommunications  Act  is  the  broadest reform  of  the  telecommunications
industry since the Communications  Act. The 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. 










                                       6








                                    <PAGE>

The Company may provide out-of-region interLATA service and certain incidental
interLATA  services immediately.  Before it can provide interLATA service that
originates  in  California,  the  Company  must  open  its  local  markets  to
competition,  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  services 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 through  a  separate
affiliate,  teaming  arrangement,  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.   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  and  interLATA Internet  access  may be
provided  through a separate affiliate  once the Company  obtains authority to
provide interLATA services originating  in its state.  Some  Internet services
are  also electronic  publishing services  and are  subject to  the electronic
publishing restrictions.

The Company may  provide a variety  of video programming services  directly to
subscribers  in its service area 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 network 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.

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 its state.










                                       7








                                    <PAGE>

COMPETITION

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, 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. The Company will face significant competition in  its provision of
telephone and new services.  However, management believes that the Company has
a reputation for high quality services.

Telephone Services Competition

See MD&A  under the headings "Local Services  Competition" on pages 16 through
17 and  "Competitive Risk" on pages  18 through 19 for  information on current
developments in  telephone services competition that the  Company faces, which
is incorporated herein by reference.

Directory Advertising

Other  producers  of printed  directories  offer  products  that compete  with
certain Pacific Bell Directory 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
listings  from  other  providers for  its  products,  and competing  directory
publishers may ally themselves with other telecommunications providers.

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 will  face 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  will face 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.





                                       8








                                    <PAGE>

Item 2. Properties.

The  properties of  the  Company  do not  lend  themselves to  description  by
character and  location  of  principal  units.   At  December  31,  1995,  the
percentage distribution of  total telephone  plant by major  category for  the
Company was as follows:

Telecommunications Property, Plant, and Equipment                       1995
----------------------------------------------------------------------------
Land and buildings (occupied principally by central offices).........    10%

Cable and conduit....................................................    41%

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

Other................................................................    14%
                                                                        ----
Total................................................................   100%
============================================================================

At December  31, 1995 the Company's  central office equipment was  utilized to
approximately 93 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, 1995, 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 77 percent of
the  total access lines in California on December  31, 1995.  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.

Additional information about  the Company's common  shares and dividends  paid
monthly thereon is  in the  Consolidated Financial Statements  under "Item  8.
Financial  Statements and Supplementary Data," which is incorporated herein by
reference.




                                       9








                                    <PAGE>

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

OVERVIEW

Pacific Bell (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,  and selected  information
services in  California. The Company is  a wholly owned subsidiary  of Pacific
Telesis Group (the "Corporation").

The  Company's vision is to  enrich people's lives  through communications and
access  to information, education, and entertainment services.  Its mission is
to  build  customer   loyalty  and   be  the  customer's   first  choice   for
telecommunications  and information services; to foster a culture that ensures
employee  commitment;  and  to  build  value  for  its  shareowners.    To  be
successful, the Company must continue to  balance the needs of its three major
stakeholders: customers, employees, and the Corporation's shareowners.

KEY STRATEGIES

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 three key strategies intended
to  provide a  consistent,  integrated focus  for  management's decisions  and
actions.     These  overarching   strategies  are   to  strengthen   the  core
telecommunications business,  develop new  markets, and promote  public policy
reform.

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 improve customer service and reduce costs, upgrade
network and systems capability, and retain and expand existing markets through
product and channel innovation.

Improve Customer Service and Reduce Costs

To ensure a high degree of  customer satisfaction, the Company interviews more
than 18,000 customers each month to monitor performance.  The  majority of the
interviews are event driven and designed to measure customer satisfaction with
recent transactions.   Also, a  portion of  employee pay is  based on  meeting
customer  satisfaction targets.   The cumulative  percentage of  the Company's
business and  residence market customers  responding "good" or  "excellent" in
1995 interviews is displayed below.








                                      10








                                    <PAGE>


                                   Service       Service     Account
                              Provisioning   Maintenance   Servicing
----------------------------------------------------------------------------
Business Market (%)                   90.8          84.7        89.6
Residence Market (%)                  92.0          81.7        90.4
----------------------------------------------------------------------------

The  Company continues its commitment to total quality management practices as
a proven way to improve processes and increase customer satisfaction.  In this
area Pacific Bell has been recognized as a quality leader.   In December 1995,
Governor  Wilson of California awarded  Pacific Bell the  Golden State Quality
Award.  The award, modeled after the Malcolm Baldrige National Quality  Award,
is  designed to recognize California companies that continually strive for the
achievement  of organizational  excellence.   The  award recognizes  companies
whose employees, at all levels, understand their company's vision and mission,
and can relate their own roles to the business strategy.  In addition, several
of  the  Company's  special  access ordering,  provisioning,  and  maintenance
centers were registered under ISO 9000, an international quality standard.

To prosper in a competitive environment,  the Company must continue to provide
outstanding customer  service while  lowering costs.   To  improve operational
efficiencies  and  reduce  cost,  the  Company is  implementing  core  process
reengineering ("CPR").  CPR is a method for achieving significant increases in
performance by fundamentally rethinking  basic business processes and systems.
CPR projects have  resulted in  better, faster customer  service, and  reduced
costs.   For  example, a  major  focus of  1995 was  the creation  of 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  hand-offs
between functional work groups.  Similarly, the Company has reduced the number
of network  operations centers from 25  to two.   Each center acts as  a fully
functional backup center for  the other. Both new centers were  operational by
early  1996.   The new  consolidated centers  require approximately  250 fewer
employees to operate than the old centers.

Another effort  is the Company's plan to reduce real estate occupancy costs by
as  much as  25 percent  over five  years by  encouraging employees  to pursue
alternative working  arrangements such as telecommuting,  virtual offices, and
shared offices.   Expense savings  will result from  consolidating operations,
terminating leases, and eventually  selling surplus properties.  In  1995, the
Company reduced its annual real estate occupancy costs by over $9 million.

To provide faster customer service, the Company  has implemented a new process
called "quick dialtone."  Quick dialtone allows the customer to access certain
repair,  911, and business office numbers, even after service is disconnected.
It  requires  less processing  to initiate  telephone  service and  allows the
Company  to  activate  service within  about  two  hours.   Eighty  percent of
California  residences  were  equipped for  quick  dialtone  in  1995.   Quick
dialtone makes it easy for customers to choose Pacific Bell.

As  a result of reengineering processes and other efforts, the Company reduced
its workforce 6.0 percent during 1995.




                                      11








                                    <PAGE>


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 network. The Company spent  a total of $1.9 billion on  the
telecommunications network  during 1995.  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                                     1995        1994
---------------------------------------------------------------------------
Access lines served by digital switches................   73%          65%
Access lines with SS-7 capability......................   98%          95%
Access lines with ISDN accessibility...................   85%          79%
Miles of installed optical fiber (thousands)...........   467          413
===========================================================================

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. 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.
In  addition, the Company  is deploying Synchronous  Optical Network ("SONET")
interfaces  within  the  fiber  infrastructure.    SONET  is  an international
standard for high-speed fiber optics transmission.

The  Company is working with AT&T Corp. to  develop and field test an Advanced
Communications Network  ("ACN")  in  California.   In  addition  to  providing
advanced  telecommunications services,  the new  network will  offer customers
alternatives  to existing cable television providers.  The ACN technology that
management has  selected is  a hybrid  fiber/coaxial cable  architecture. This
technology  should be  cost effective  to deploy  and operate,  and  allow the
Company  to  achieve significant  operational  savings.   In  1995, management
decided to concentrate development and deployment  of the ACN in San Diego and
the San Francisco Bay  Area, two  of the Company's  most competitive  markets.
Construction will be slower than originally planned. 

Management  is continuing  to  reevaluate its  capital  program for  1996  but
currently anticipates capital spending in 1996 to be slightly higher than 1995
levels.   The capital program  includes the cost of  upgrading and maintaining
the core telecommunications network and systems capabilities, meeting customer
demand for new access lines, and building the Personal Communications Services
("PCS") network,  but excludes most  of the costs  of the ACN.   The Company's
capital expenditures related to a contract with AT&T Corp. for construction of
the  ACN are expected to be  deferred until 1998. The  Company is committed to
purchase these facilities in 1998 if they meet certain quality and performance
criteria.   Management  now expects  the purchase  amount to  be less  than $1
billion in 1998, which is lower than the previous forecast.  The  Company will
lease certain operational portions of the  facilities prior to 1998 during the
construction period.


                                      12








                                    <PAGE>

Retain and Expand Existing Markets

Stimulating usage of the Company's existing network 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 is growing rapidly.  The Company's
ISDN sales  more than doubled in 1995.   The Company also offers several other
high-speed data transmission products tailored to a customer's specific needs.
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.  Switched Multimegabit Data Service ("SMDS") allows users
to  buy whatever  bandwidth they  need, and  to upgrade  it later  if desired.
Asynchronous  Transfer Mode ("ATM") is a high bandwidth technology that allows
a  customer  to transmit  50,000  pages of  data  per second,  or  to transmit
broadcast-quality video. 

The success of  the Company's voice mail products continued in 1995. 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 27 percent in 1995 to about 1.4 million.

Changes  in  technology and  telecommuting  are fueling  increased  demand for
additional telephone  lines in  the home.   The Company  began a  promotion in
December 1995 designed  to increase  the number of  second residential  access
lines.   The Company  provides  approximately 1.7  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 eight percent in 1995 as  customers asked for greater
convenience and more control over their telephone communications.

In  May  1995,  the  Federal  Communications  Commission  ("FCC")  established
national  rules  affecting  how  carriers, including  the  Company,  may offer
calling party identification services  ("Caller ID").  Caller ID  displays the
telephone number of the calling party on a device that attaches to, or is part
of, a customer's telephone.  The FCC ruling preempts certain of the California
Public Utilities Commission's ("CPUC") restrictions that made providing Caller
ID in California uneconomic.  In June 1995, the CPUC appealed the FCC's ruling
to the  U.S. Court of Appeals for the Ninth Circuit, which subsequently upheld
the FCC's ruling in January 1996.  The ruling is subject to further appeal.

The FCC rules require that  a customer notification plan be approved  by state
regulators before  Caller ID services can  be offered.  In  December 1995, the
CPUC ordered the Company  to revise its customer notification plan and allowed
partial recovery  of the plan's cost.  The  Company intends to offer Caller ID
services beginning in June 1996 at the same time it begins passing the calling
party's  number  on interstate  calls  in compliance  with  the FCC  rules. To
protect  customer   privacy,  the  Company  will   automatically  provide  the
capability  for per  call  blocking, which  is  accomplished by  the  customer
dialing  *67 before  dialing  the telephone  number.   The  Company will  also
provide per line blocking at the customer's request.


                                      13








                                    <PAGE>

Develop New Markets
-------------------

As competition  becomes more fierce  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  pursuing
opportunities in video services, PCS, and Internet access.

In July  1995, the  FCC approved the  Company's applications for  authority to
offer  video dialtone  services  in specific  locations  in California.    The
approval allows the Company to begin installing the video-specific  components
of  its ACN.   Subject  to regulatory  approvals, the  Company plans  to begin
offering video services in  San Diego and the San Francisco  Bay Area in 1996.
The Telecommunications Act of  1996 terminates the FCC's video  dialtone rules
and  regulations  but  allows  the  continued  construction  and operation  of
previously  approved   video   dialtone  systems.   (See   "Telecommunications
Legislation" on page 15.) The FCC has until July 1996 to issue regulations for
an open video system.   Management continues to analyze the  impact of the new
legislation on its ACN plans.

In 1995, the Corporation obtained  licenses from the FCC to offer  PCS to over
30  million potential customers  in California and  Nevada.  PCS  is a digital
wireless service offering  mobility for  both voice  and data  communications.
Pacific Bell  Mobile Services has begun  to deploy its network  to provide PCS
throughout California and  Nevada.   The network will  incorporate the  Global
System  for Mobile  Communications ("GSM")  standard which  is widely  used in
Europe.  Management is working with the industry to resolve issues relating to
hearing aid  interference  and compatibility  common to  all digital  systems.
Management  expects  a  widespread offering  of  PCS  service  by early  1997.
Although  management anticipates  significant  competition, particularly  from
established  cellular  companies,  it  believes that  digital  technology  and
Pacific Bell's reputation for superior service will be competitive advantages.

In 1995, the Company formed a subsidiary and announced  an aggressive campaign
to  provide  Internet  access  services  to  a  broad  range  of  customers in
California.  One-third  of all  Internet traffic originates  or terminates  in
California.    One-quarter  of the  commercial  domains  on  the Internet  are
California  based.   The  Company began  providing  Internet access  to  large
businesses in the third quarter  of 1995 and will provide residential  service
in 1996.

Management  expects the  Company to  incur substantial  start-up costs  in the
development of  these new markets, but  continues to see these  new markets as
attractive investment opportunities.

Promote Public Policy Reform
----------------------------

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.  Competition
will  bring great  benefits to  customers by  giving them  the opportunity  to
choose among service providers for their telecommunications needs.


                                      14








                                    <PAGE>


Telecommunications Legislation

In   February  1996,   the   President  signed   into   law  a   comprehensive
telecommunications  bill  that  eases  certain  restrictions  imposed  by  the
Communications Act of 1934 and the 1984 Cable Act, and which replaces the 1982
Consent Decree  for events subsequent  to the  date of enactment.   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.    Long-distance services  must  be
offered  through a separate affiliate. Once  the new law is fully implemented,
consumers will have many new options for their local telephone, long-distance,
and cable television services.

FCC Regulatory Framework Review

In March  1995, the FCC  adopted new interim price  cap rules that  govern the
prices  that  the  larger  local  exchange  carriers ("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 require  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, 1995.  

In  adopting the interim plan,  the FCC required  LECs to prospectively reduce
their  earnings  by 0.7  percent  for  each year  the  LEC  elected the  lower
3.3 percent productivity factor during 1991-94. For  the Company this resulted
in a 2.1 percent reduction.  The Company has formally contested this reduction
as well  as other adjustments  associated with  the interim plan  in the  U.S.
Court  of Appeals for the District of  Columbia ("the Court"). In August 1995,
the Court agreed to expedite review of these adjustments. 

The FCC  plans to adopt permanent  rules in 1996 to replace  the interim price
cap plan  following a rulemaking  proceeding. Management continues  to believe
that  the FCC  should  adopt  pure  price cap  regulation  and  eliminate  the
productivity factor, sharing, and earnings caps.

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.  Management cannot  predict
the outcome of this matter.



                                      15








                                    <PAGE>


CPUC Regulatory Framework Review

In December  1995, the CPUC issued  an order in Phase  I of 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 three years except for adjustments due to exogenous cost  changes or price
changes  approved  through the  CPUC's application  process.  Phase II  of the
CPUC's second  review was scheduled to begin in  January 1996.  The review was
to  consider the continued applicability  of earnings caps,  sharing and other
items.  In  February 1996,  an Assigned Commissioner's  Ruling suggested  that
this phase be deferred until the next  review scheduled for 1998.  Comments on
the ruling were filed on March 8, 1996.  The Company has asked that certain of
these issues be  reviewed in  1996. 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.

Local Services Competition

In  December  1995, the  CPUC issued  rules  concerning local  exchange market
competition.  The CPUC authorized  30 other facilities-based competitive local
carriers  ("CLCs")  to  begin  providing  local phone  service  in  California
beginning January 1,  1996.  The new rules provide  for interconnection of the
CLCs'  networks to the  Company's networks.   All CLCs must  provide access to
emergency services.   For the first  time, the Company and  GTE California are
able to compete in each other's territory.

The CPUC has  also announced that  competitors who lease  lines from LECs  for
resale will be able to offer  local telephone service beginning in March 1996.
In March  1996 the CPUC adopted a decision specifying terms and conditions for
resale competition.  Pending the completion of cost studies, the decision sets
interim  wholesale prices for certain  services about 17  percent below retail
prices.    Wholesale basic  residential service  will  be initially  priced 10
percent below retail prices, both of which are below the Company's costs since
basic  residential service  is subsidized.  Management believes  that a  truly
competitive market cannot be sustained with below-cost pricing.

In November 1995,  the Company  and MFS Communications  Company, Inc.  reached
agreement  on terms and conditions for the interconnection of their respective
networks and for the use  of the Company's local lines.  In  January 1996, the
Company  reached an  interconnection agreement  under the  CPUC's December 20,
1995 preferred framework with  Teleport Communications Group.  The  Company is
also negotiating interconnection agreements with other carriers.

The  CPUC  expects  to resolve  remaining  issues and  issue  final  rules for
implementing competition  in  all  California  telecommunications  markets  by
January 1, 1997.  Issues to  be finalized include LEC pricing flexibility, LEC
provisioning  and  pricing  of  essential network  functions  to  competitors,
presubscription, the  price of interim number  portability, universal service,
and final resale prices, terms, and conditions. 






                                      16








                                    <PAGE>


Management supports the expansion of local telephone competition and  believes
that all markets should be open to all competitors under the same rules at the
same time.  Management is concerned that the final local competition rules may
not provide  the Company with  an opportunity  to earn a  fair rate-of-return.
The Company has filed testimony showing that the effect of the CPUC's proposed
final  local  competition  rules,  taken together  with  possible  unfavorable
decisions on other pending regulatory issues, would deprive the Company of the
opportunity to earn  a fair rate-of-return. The filing shows that the proposed
final  local competition rules  alone could substantially  reduce the rate-of-
return  on the Company's regulated California operations in 1996, depending on
the outcome of the unresolved issues discussed above.

Universal Service

In a December 1995 report to the California Legislature, the CPUC outlined its
proposal  to continue universal telephone service as competition begins in the
local  telephone market.    The  CPUC  proposed to  define  basic  service  as
including  the ability  to place  and receive  calls; access  to long-distance
carriers  and  directory assistance;  free  access to  emergency  and customer
services; and other services.  The CPUC also proposed establishing a High Cost
Voucher  Fund to  subsidize companies  serving high-cost  areas. All  carriers
providing  local phone service must offer adaptive telephone equipment for the
deaf and  disabled  and  reduced  "lifeline" rates  for  qualified  low-income
customers. 

If the  California Legislature authorizes it  to proceed, the CPUC  intends to
finalize the definition of basic  service, establish a revenue source for  the
High Cost  Voucher Fund, and identify high-cost  areas eligible for subsidy in
June  1996.   Management  believes that  universal  service issues  should  be
resolved before resale competition  is authorized; however, resale competition
is  scheduled to  begin in  March 1996,  and the  final decision  establishing
universal service funding is scheduled for August 1996.

On  the federal  level,  the  Telecommunications  Act  of  1996  requires  the
establishment of  a Federal State Joint  Board to make  recommendations on the
definition, preservation, and advancement of  universal service no later  than
November 1996.  The FCC must implement these recommendations no later than May
1997.  The  Telecommunications Act  of 1996 permits  periodic redefinition  of
universal  service.    It  also  states  that  all  service  providers  should
contribute  to the  preservation and  advancement of  universal service  on an
equitable and  nondiscriminatory basis.   The Telecommunications  Act of  1996
also states that there should be specific, predictable, and sufficient federal
and state mechanisms  to preserve and advance  universal service.  The  states
may establish  their own universal  service policies and  regulations provided
that they do not conflict with the federal regulations implemented by the FCC.











                                      17








                                    <PAGE>


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. In
May  1995,  the CPUC  required the  Company  to permit  Centrex  customers who
purchase certain  optional routing features to  route local toll calls  to the
carrier of their choice.  Management estimates that the Company  lost about an
additional five  to six  percent of  the total local  toll services  market to
competitors  in 1995.    Management further  estimates  that, as  a  result of
official  competition and  unofficial competitive losses  in prior  years, the
Company currently serves less than 60 percent of the business toll market. 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.    As  a  result  of  the  CPUC  order,
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. The
CPUC approved 30 companies, including large and well-capitalized long-distance
carriers,  competitive access  providers,  and cable  television companies  to
begin  providing local  phone  service in  California.   These  companies  are
prepared to compete  in major  local exchange  markets and  many have  already
deployed  switches  or  other  facilities.    In  addition,  cable  television
companies  currently  have wires  which  pass  more  than 90  percent  of  the
Company's residential  customers and  have already  announced plans  for major
build-outs to  compete in the  local exchange  market.  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 final local competition rules alone could substantially reduce
the rate-of-return on  the Company's regulated California  operations in 1996,
depending on the outcome of certain unresolved issues in the local competition
rules proceeding.






                                      18








                                    <PAGE>


The  unique  characteristics  of  the  California  market  makes  the  Company
vulnerable  to competition.  The Company's business and residence revenues and
profitability  are highly 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.  Competitors are  expected to  target the  high-usage,
high-profit customers.

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.

RESULTS OF OPERATIONS

The  following discussions and data summarize the results of operations of the
Company for 1995 compared to 1994.

                                                       %
Operating Statistics                     1995      Change       1994
----------------------------------------------------------------------------
Capital expenditures ($ millions)..     1,915         17.1     1,635
Total employees at December 31.....    47,202         -6.0    50,207
Employees per
  ten thousand access lines*.......      28.8         -8.9      31.6
============================================================================

*    Excludes  Pacific  Bell  Directory   and  Pacific  Bell  Mobile  Services
     employees.

The  Company reported a loss of $2,391 million for 1995.  The reported loss is
due primarily to  a non-cash, extraordinary charge to  net income during third
quarter  1995 of  $3.4 billion, after  taxes.   The  charge resulted  from the
Company's discontinued  application of  special accounting rules  for entities
subject to traditional  regulation and  its change to  the general  accounting
rules used by competitive enterprises.

Revenue shortfalls also contributed to the decline in earnings.  Demand growth
as a result of the  January 1995 local toll price reductions fell far short of
the  level  anticipated by  the CPUC.   As  a  result, the  revenue neutrality
intended by the  CPUC's price rebalancing  order was  not achieved. Price  cap
revenue  reductions ordered by the CPUC  and the FCC further reduced earnings.
Additional  pressure  on  earnings  resulted from  incremental  labor  expense
associated with the severe storms in 1995.  Pressure on earnings was mitigated
by the Company's continuing cost containment initiatives.









                                      19








                                    <PAGE>

Management expects that  earnings may  increase slightly in  1996 compared  to
1995 earnings excluding the  extraordinary item.  Any increase,  however, will
be significantly dependent on pending regulatory decisions regarding the terms
and conditions for local competition,  and the amount of market share  loss as
competition continues  to grow. 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  cost controls
will continue to succeed.   (See "Develop New  Markets" on page 14  and "Local
Services Competition" on page 16.)   In the long-term, stimulated usage of the
core  telephone  network,  development  of  new  markets,  and  the  continued
expansion of the  California economy should  provide opportunity for  stronger
earnings.

Volume Indicators
-----------------
                                                    %
                                       1995       Change        1994
---------------------------------------------------------------------------
Switched access lines at Dec. 31
 (thousands).......................   15,495        3.0       *15,043
   Residence.......................    9,691        2.0        *9,499
   Business........................    5,595        4.8        *5,337
   Other...........................      209        1.0          *207

ISDN access lines at Dec. 31
  (thousands, included in above)          52      136.4            22

Interexchange carrier access
  minutes-of-use (millions)........   58,020       10.8        52,383
   Interstate......................   31,712        3.7        30,581
   Intrastate......................   26,308       20.7        21,802

Toll messages (millions)...........    4,802        8.1         4,442
Toll minutes-of-use (millions).....   14,488        4.1        13,918

Voice mailbox equivalents at Dec. 31
  (thousands)......................    1,438       27.0         1,132

Custom calling services at Dec. 31
  (thousands)......................    7,169        8.3        6,620 
===========================================================================
*    Restated.

The total  number of  access lines in  service at December  31, 1995,  grew to
15,495 thousand, an increase of 3.0 percent for the year, up  from 2.9 percent
in 1994.  The growth rate in business access lines was 4.8 percent in 1995, up
from 4.2  percent in  1994.   The  growth in  business  access lines  reflects
increased  employment  levels in  California.   The  number of  ISDN  lines in
service grew to  52 thousand, an increase  of 136.4 percent  for the year,  as
customers increased  telecommuting and  demanded faster data  transmission and
Internet  access.   The  residential  access  line  growth  rate  declined  to
2.0 percent for  1995, from 2.2 percent in 1994.  The lower residential growth
rate   compared  to  the  business   growth  rate  reflects  weak  residential
construction in California.



                                      20








                                    <PAGE>

Access minutes-of-use represent the volume of traffic carried by interexchange
carriers  over  the  local network.    Total  access  minutes-of-use for  1995
increased by  10.8 percent over 1994.   The increase  in access minutes-of-use
was primarily attributable to  economic growth and the effect of toll services
competition. The official introduction of toll 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  1995,  toll  minutes-of-use  increased  by
4.1 percent compared to an increase of 1.4 percent for 1994.  The increase was
driven primarily by  economic growth as well as  lower prices.  On  January 1,
1995,  the Company lowered the price of  its local toll services by an average
of 40  percent.  The Company  also began offering new  discount calling plans.
Residential customers receive an  automatic 15 percent off toll  charges above
five  dollars per month while  businesses receive an  automatic 20 percent off
toll charges  over $15  per month.    High-volume customers  can receive  even
larger discounts.  Price decreases stimulated demand slightly but the increase
fell far short of levels predicted in the CPUC's order. 

For a discussion of voice mail products and custom calling  services, see page
13 under "Retain and Expand Existing Markets."

A  growing California  economy should  allow current  volume growth  trends to
continue into  1996.  However, this  may be completely or  partially offset by
competitive  losses  due  to  the CPUC's  authorization  of  local competition
beginning January 1, 1996.

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

($ millions)                          1995          Change       1994
----------------------------------------------------------------------------
Total operating revenues......      $8,862           -$205     $9,067
                                                     -2.3%
----------------------------------------------------------------------------

Revenues were reduced from 1994 primarily because demand growth as a result of
lower  prices was  less than  assumed in  the CPUC-ordered  price rebalancing.
Revenues were also  reduced because of price cap revenue reductions ordered by
the CPUC  and FCC under incentive-based  regulation as well as  the effects of
toll services competition.













                                      21








                                    <PAGE>

Effective January 1, 1995, the CPUC allowed long-distance companies and others
to  officially compete with  the Company in  providing local toll  services in
California.   That decision also rebalanced  prices for most  of the Company's
regulated services so  that the  Company could remain  competitive in the  new
environment.  The CPUC intended this decision to be initially revenue neutral.
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.
Although the  Company  observed  some increased  usage  during  1995,  calling
volumes were  far below  levels forecasted  by the CPUC  and far  below levels
necessary to achieve revenue neutrality.
 
The decreases in total operating revenues from price rebalancing and price cap
orders  were  partially  offset  by  a  net  increase  in  customer  demand of
$318 million.    Comparative revenues  were also  increased by  a CPUC-ordered
refund  of $27 million in the second  quarter of 1994 related to the Company's
payment processing system.

Primary factors affecting revenue changes are summarized below:

                                                                     Total
                                            Price                   Change
                                    Price     Cap         Customer    from 
($ millions)                  Rebalancing  Orders    Misc.  Demand    1994 
----------------------------------------------------------------------------
Local service................        $379   -$125     $ 79   $ 24     $357
Network access:
 Interstate..................          20     -46       75     72      121
 Intrastate..................        -213     -17        3    203      -24
Toll service.................        -616     -48      -53    -57     -774
Other service revenues.......          15      -1       25     76      115
                                    -----   -----    -----  -----    -----
Total operating revenues.....       -$415   -$237     $129   $318    -$205
============================================================================

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  $24 million
increase in customer demand for local service is the result of the 3.0 percent
growth in access lines and the  8.3 percent growth in custom calling services,
such as call waiting, generated by the improved economy in California. 

Network  access revenues  reflect  charges to  interexchange  carriers and  to
business  and residential customers for access to the Company's local network.
The $72 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  $203  million demand-related  increase  in
intrastate  network  access  revenues  also  resulted  from  growth  in access
minutes-of-use.   The official introduction  of competition in  the local toll
market in January 1995 had the effect of increasing access usage revenues.








                                      22








                                    <PAGE>


Toll  service revenues  include charges  for local  toll as  well as  WATS and
800 services  within  service  area boundaries.    The  decreases  in customer
demand-related toll service  revenues primarily result from  competition.  The
Company has  lost and  continues  to lose  WATS and  800  service business  to
interexchange carriers who  have the  competitive advantage of  being able  to
offer  these services  both  within and  between  service areas.    Management
estimates that the Company lost an additional five to six percent of the local
toll  services  market to  competitors in  1995.   Partially  offsetting these
reductions  were  increased usage  revenues  resulting  from general  economic
growth and lower prices.

Other  service revenues  are generated  from a  variety of  services including
directory  advertising,  information  services,  and  billing  and  collection
services.  Other service  revenues for 1995 include an increase in information
service revenues of $35 million,  chiefly due to the success of  the Company's
business  and  residential voice  mail  products.   Voice  mailbox equivalents
increased 27 percent in 1995.

Looking ahead, in addition to the effects of local services competition on the
Company's revenues  in 1996, the  FCC's annual  access charge order  that took
effect August 1,  1995, required  the Company  to reduce  revenues about  $123
million annually.

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

($ millions)                         1995        Change         1994
----------------------------------------------------------------------------
Total operating expenses......     $6,939           $0        $6,939
                                                     -      
----------------------------------------------------------------------------

Total  operating expenses  for  1995 in  comparison to  1994 were  flat, which
reflects  the   Company's  continuing  cost  reduction   efforts  and  reduced
settlements expense, despite increased  depreciation and software expenses and
the costs resulting from severe  storm damage in early 1995.   Primary factors
affecting expense changes are summarized below.



















                                      23








                                    <PAGE>


                            Pacific Bell Expenses                     
                          (excluding subsidiaries)                    Total
                     -----------------------------------             Change
                      Salaries  Employee  Settle-            Subsid-   from
($ millions)           & Wages  Benefits   ments   Misc.     iaries    1994
----------------------------------------------------------------------------
Cost of products and
  services.............   -$21       -$38    -$79    $ 50       $ -    -$88
Customer operations and 
  selling expenses.....    -23        -17       -      -2        22     -20
General, administrative,
  and other expenses...    -41          4       -       -        71      34
Property & other taxes.      -          -       -       1         -       1
Depreciation and
  amortization........       -          -       -      69         4      73
                        ------     ------  ------  ------    ------  ------
Total operating
  expenses.............   -$85       -$51    -$79    $118       $97     $ 0
============================================================================

At Pacific  Bell, excluding  subsidiaries, salary  and wage  expense decreased
$85 million in 1995,  primarily as a  result of a  net workforce reduction  of
3,114 employees.   The effect of the declining  workforce was partially offset
in 1995 by increased overtime for storm and flood repairs and by a $29 million
increase  related to higher compensation rates.  Management expects salary and
wage  expense to  decline further  in 1996  due to  continued force  reduction
programs (see "Status of Restructuring Reserve" on page 27).

At Pacific  Bell, excluding subsidiaries, employee  benefits expense decreased
$51  million primarily due to the Company's ongoing health care cost-reduction
efforts and continued force  reduction programs.  Management  expects employee
benefits  expense  to decline  further  in  1996 due  to  the  continued force
reduction programs and changes in actuarial assumptions.

Decreases in salaries  and wages  and employee benefits  expense forecast  for
1996  will  be  partially  offset  by  increases  associated  with  new  labor
agreements.  The new agreements were effective August 1995 and  feature a 10.5
percent  wage increase,  a 14  percent pension  increase, and  other increased
benefits  over three  years.   Management estimates  that the  agreements will
result in increased costs of approximately $550 million over three years. This
estimate does  not include  savings that may  result from the  continued force
reduction programs.

Pacific Bell's settlements  expense for  1995 decreased primarily  due to  the
CPUC-ordered  price rebalancing,  which eliminated  reimbursements to  certain
other local exchange carriers for calls terminating in their territories.

Pacific Bell's miscellaneous cost of products and services increased primarily
due to increased software purchases in 1995.







                                      24








                                    <PAGE>

Depreciation  expense increased $73 million  in 1995  primarily due  to higher
depreciation rates ordered  by the CPUC effective January  1, 1995, and higher
telecommunications  plant  balances.  Depreciation  expense  is  expected   to
increase in 1996 due to the continuing upgrade of the  core telecommunications
network.  (See "Upgrade Network and Systems Capabilities" on page 12.)

Pacific  Bell subsidiaries'  general and  administrative expense  increased in
1995 primarily due to non-recurring software expenses.

Interest Expense
----------------
                                                          
($ millions)                            1995        Change      1994
----------------------------------------------------------------------------
Interest expense .................      $410          -$29      $439
                                                     -6.6%
----------------------------------------------------------------------------

Interest  expense  decreased  in  1995  primarily  due   to  interest  expense
associated  with a  CPUC refund  order in  1994.   The decrease  was partially
offset by  interest expense  associated with increased  short-term borrowings.
Interest expense in 1996  is expected to decrease due to  the reclassification
of interest  during construction from  an item  of miscellaneous  income to  a
reduction in interest expense associated with the discontinuance  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 41.)

Miscellaneous Income
--------------------

($ millions)                        1995          Change         1994
----------------------------------------------------------------------------
Miscellaneous income..........       $25             $22           $3
                                                       -
----------------------------------------------------------------------------

Miscellaneous income increased  in 1995  primarily due to  interest income  of
approximately $24 million from tax  refunds received in 1995 related  to prior
years and unrealized  gains on  trust assets under  an executive  compensation
deferral plan.  These increases were partially offset by bond redemption costs
associated  with  the  redemption  of  debentures.    Miscellaneous income  is
expected to  decrease in 1996 due  to the reclassification of  interest during
construction from an item  of miscellaneous income to a reduction  in interest
expense associated with the discontinuance of SFAS 71.












                                      25








                                    <PAGE>

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

($ millions)                          1995        Change        1994
----------------------------------------------------------------------------
Income taxes......................... $569          -$52        $621
                                                   -8.4%      
Effective tax rate (%)............... 37.0                      36.7
----------------------------------------------------------------------------

The decrease in income tax expense for 1995 was primarily due to lower pre-tax
income.

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

The  Company historically has 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 other actions  of regulators, deferred recognizing certain  costs or
recognized  certain  liabilities  (referred  to  as  "regulatory  assets"  and
"regulatory liabilities").

Effective  third  quarter  1995,  management  determined  that,  for  external
financial reporting purposes, it is  no longer appropriate for the  Company to
continue  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.    Prices for  the
Company's products and services are being driven increasingly by market forces
instead of regulation.

The discontinued application  of SFAS  71 required the  Company, for  external
financial  reporting  purposes,  to write  down  the  carrying  amount of  its
telephone plant and to eliminate its regulatory assets and liabilities.   As a
result, the  Company recorded in 1995 a non-cash, extraordinary charge of $3.4
billion,  which is net of a  deferred income tax benefit  of $2.4 billion. The
telephone plant write-down portion  of the charge reflects a  pre-tax increase
in accumulated depreciation of approximately $4.8 billion to recognize shorter
estimated  lives in  a  competitive market.    The extraordinary  charge  also
includes a pre-tax adjustment  of $962 million to eliminate  regulatory assets
and liabilities.   The discontinuance of  SFAS 71 was made  in accordance with
SFAS  101, "Accounting for the Discontinuance of Application of FASB Statement
No. 71."     (See also  Note B  - "Discontinuance  of Regulatory  Accounting -
SFAS 71" on page 41.)

In  future years, the discontinuance of SFAS  71 is not expected to materially
affect depreciation expense, net  income, or cash flow.  This action will  not
affect the Company's  planned network investments. The  discontinuance of SFAS
71 is  a change for  external financial  reporting only and  has no effect  on
customers.






                                      26








                                    <PAGE>


Cumulative Effect of Prior Year Accounting Change
-------------------------------------------------

Effective  January  1,  1993,  the  Company   adopted  SFAS  112,  "Employers'
Accounting for Postemployment Benefits."  SFAS 112 require  a change from cash
to   accrual  accounting   by  recording   a  cumulative   catch-up-charge  at
implementation.   A one-time, non-cash charge was recorded against earnings of
$148 million, which  is net of a deferred income tax  benefit of $103 million.
The annual periodic expense does not  differ materially from expense under the
prior method.

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
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.  The  Company  also  expects  to  relocate
approximately 10,000 employees  as it  consolidates business  offices, network
facilities, installation and collection centers, and other operations.

Pacific Bell's gross force reductions under the  restructuring plan, excluding
subsidiaries, totaled 4,187 employees  in 1995.  Total gross  force reductions
for the first two years of the plan, 1994 and 1995, totaled 10,039.  Net force
reductions were  3,114 for 1995  and 7,242  for the two-year  period 1994  and
1995.   Management  now believes  both total  gross and  net force  reductions
through 1997 are likely to exceed its original forecasts.

Annual cash savings are  expected to reach  approximately $1 billion when  the
restructuring is completed.  In 1995, expense savings due to the restructuring
totaled approximately $500 million  primarily from savings in labor  costs due
to cumulative force reductions since restructuring began.

Charges  to the restructuring reserve  in 1995 totaled  $600 million including
$219  million  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.
Because the cost  of enhanced retirement  benefits was  recognized in full  in
1995, charges to the restructuring reserve in 1996 and 1997 are expected to be
approximately  $100 million  less in  each  of the  respective years  than the
original forecast. 










                                      27








                                    <PAGE>

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

($ millions)                                    1995      1994    1993 
------------------------------------------------------------------------
Reserve for force reductions and restructuring:

    Balance - beginning of year..............  $ 819    $1,097  $  101 
    Additions................................      -         -   1,020 
    Charges: cash outlays ...................   -381      -216     -24 
             noncash ........................   -219       -62       - 
                                              ------------------------
    Balance - end of year....................  $ 219    $  819  $1,097 
========================================================================

BOND RATINGS

In May 1995, Duff  and Phelps, Inc. lowered the rating of  the Company's bonds
from Double-A ("AA") to  Double-A-Minus ("AA-").  The rating  action reflected
price cap revenue reductions, toll services competition,  and proposed interim
rules on  local services  competition.  The  rating action also  reflected the
expected financing requirements of the Company's ACN and PCS networks.  

In  August 1995, Standard and  Poor's Corporation removed  bond and commercial
paper ratings of the Company from "CreditWatch," where they were placed in May
1995 following  the release by the CPUC of its proposed interim rules on local
services competition.  Standard & Poor's Corporation stated that the long-term
rating outlook for the Company is negative.

In March 1996, Moody's  Investors Services, Inc. ("Moody's") placed  the long-
term debt rating of the Company  under review for possible downgrade.  Moody's
expressed concerns  about external financing requirements  associated with the
Company's ACN and wireless initiatives.

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

---------------------------------------------------------------------------
                        Moody's Investors     Standard &        Duff and
Commercial Paper:         Services, Inc.      Poor's Corp      Phelps, Inc.
-------------------     -----------------     -----------      ------------
Pacific Bell               Prime-1               A-1+             Duff 1+

Long and Intermediate-
Term Debt:
----------------------
Pacific Bell                 Aa3                 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.







                                      28








                                    <PAGE>

ADOPTION OF NEW ACCOUNTING STANDARDS
------------------------------------

Under  SFAS  123, "Accounting  for  Stock-Based  Compensation," companies  are
required to  provide new disclosures about  stock options based on  their fair
value  at the  date of  the grant.   This  new rule  is required  in financial
statements for  fiscal years  beginning  after December  15, 1995.   SFAS  123
provides  for an option to disclose pro-forma effects of stock compensation on
net income and  earnings per share or  charge stock compensation  to earnings.
The Company intends to  adopt the disclosure-only alternative in  its December
31, 1996 consolidated financial statements.

PENDING REGULATORY ISSUES

Uniform System of Accounts ("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 have
been reduced by over $23 million each year since 1988.  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  Company  has  strongly
recommended that  this adjustment be  discontinued effective January  1, 1995,
which  would result in  a one-time revenue  increase of  $23 million for 1995.
The CPUC's Division  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 revenues permanently by $112 million over the next ten years and
reduce its  revenues by an additional $43  million on January 1,  1996.  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.

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

In 1992, the  CPUC issued a  decision adopting, with  modification, SFAS  106,
"Employers' Accounting  for Postretirement  Benefits Other Than  Pension," 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.  These  related revenues totaled  about
$122  million  at  December  31, 1995.    Management  believes  postretirement
benefits  costs  are  appropriately recoverable  in  the  Company's price  cap
filings.   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.




                                      29








                                    <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.  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 $60 million plus interest should
be  returned  to  customers.    Management  believes  that  under  the  CPUC's
regulatory  framework, any  property tax savings  should only be  treated as a
component of the  calculation of  shareable earnings.   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.   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.

SALE OF BELLCORE

In April 1995, Bellcore announced a decision  by its owners to pursue the sale
of Bellcore.   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 owners have retained  two investment banking firms in  connection with the
proposed sale.   A final decision regarding  the disposition of  interests and
the structure of such a transaction has yet to be  determined. Any transaction
will be subject  to necessary approvals.  (See Note  M - "Additional Financial
Information" on page 56.)























                                      30








                                    <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 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 the
Corporation's 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.















                                      31








                                    <PAGE>

Financial Statements and Supplementary Data (cont'd)

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 interests;  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
fulfilling its responsibility, the Committee recommends to the  Board, subject
to  shareowner  ratification,  the  selection  of  the  Company's  independent
accountants.   During 1995,  the Committee  consisted of  five 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 1995,  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.

































                                      32








                                    <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  the   Company's  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, 1995 and 1994 and the  consolidated results of
their operations  and their  cash flows for  each of  the three  years in  the
period  ended  December  31,  1995  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
discontinued application of Statement of Financial Accounting Standards No. 71
during  1995,  and  adopted  new   accounting  rules  for  postretirement  and
postemployment benefits in 1993.


/s/ Coopers & Lybrand L.L.P.
San Francisco, California
February 22, 1996















                                      33








                                    <PAGE>

                         PACIFIC BELL AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF INCOME




                                             For the Year Ended December 31
                                             ------------------------------
(Dollars in millions)                            1995     1994*       1993* 
---------------------------------------------------------------------------
OPERATING REVENUES
Local service................................ $ 3,742    $3,385    $ 3,411 
Network access - interstate..................   1,682     1,561      1,572 
Network access - intrastate..................     707       731        679 
Toll service.................................   1,210     1,984      2,035 
Other service revenues.......................   1,521     1,406      1,358 
                                             ------------------------------
TOTAL OPERATING REVENUES.....................   8,862     9,067      9,055 
---------------------------------------------------------------------------
OPERATING EXPENSES
Cost of products and services................   1,810     1,898      1,945 
Customer operations and selling expenses.....   1,826     1,846      1,796 
General, administrative, and other expenses..   1,288     1,254      1,459 
Property and other taxes.....................     184       183        181 
Restructuring charges........................       -         -      1,567 
Depreciation and amortization................   1,831     1,758      1,703 
                                             ------------------------------
TOTAL OPERATING EXPENSES.....................   6,939     6,939      8,651 
---------------------------------------------------------------------------
OPERATING INCOME.............................   1,923     2,128        404 
Interest expense.............................     410       439        429 
Miscellaneous income (expense)...............      25         3        (29)
---------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES............   1,538     1,692        (54)
Income tax expense (benefit).................     569       621        (72)
---------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
  ACCOUNTING CHANGES AND EXTRAORDINARY ITEM..     969     1,071         18 
Cumulative effect of accounting change,
  net of tax (Note A)........................       -         -       (148)
Extraordinary item, net of tax (Note B)......  (3,360)        -          -
                                             ------------------------------
NET INCOME (LOSS)............................ $(2,391)   $1,071    $  (130)
===========================================================================
*    Restated to conform to current year presentation.

The  accompanying Notes  are an  integral part  of the  Consolidated Financial
Statements.









                                      34








                                    <PAGE>

                        PACIFIC BELL AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                                                           December 31
                                                   -----------------------
(Dollars in millions)                                   1995        1994*
---------------------------------------------------------------------------
ASSETS
Cash and cash equivalents..........................  $    68      $    62
Accounts receivable - net of allowances
  for uncollectibles of $131 and $132..............    1,475        1,531
Prepaid expenses and other current assets..........      802          950
                                                   ------------------------
Total current assets...............................    2,345        2,543
                                                   ------------------------
Property, plant, and equipment.....................   26,688       26,107
Less:  accumulated depreciation....................   15,608       10,243
                                                   ------------------------
Property, plant, and equipment - net...............   11,080       15,864
                                                   ------------------------
Deferred charges and other noncurrent assets.......      474          963
                                                   ------------------------
TOTAL ASSETS.......................................  $13,899      $19,370
===========================================================================
LIABILITIES AND SHAREOWNER'S EQUITY
Accounts payable and accrued liabilities...........  $ 2,109      $ 1,993
Debt maturing within one year......................      781          255
Other current liabilities..........................      552          953
                                                   ------------------------
Total current liabilities..........................    3,442        3,201
                                                   ------------------------
Long-term obligations..............................    4,608        4,752
                                                   ------------------------
Deferred income taxes..............................      321        2,315
                                                   ------------------------
Other noncurrent liabilities and deferred credits..    2,417        2,878
                                                   ------------------------
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.........................    5,387        5,169
Reinvested earnings (deficit)......................
                                                      (2,501)         830
                                                   ------------------------
Total shareowner's equity..........................    3,111        6,224
                                                   ------------------------
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY..........  $13,899      $19,370
===========================================================================
*    Restated to conform to current year presentation.

The  accompanying Notes  are an  integral part  of the  Consolidated Financial
Statements.





                                      35








                                    <PAGE>

                        PACIFIC BELL AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF SHAREOWNER'S EQUITY


                                            
      
                                             For the Year Ended December 31
                                             ------------------------------
(Dollars in millions)                            1995       1994      1993 
---------------------------------------------------------------------------
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................    5,169     5,168      5,168 
Equity investment by parent.................      218         1          - 
                                             ------------------------------
Balance at end of year......................    5,387     5,169      5,168 
---------------------------------------------------------------------------
REINVESTED EARNINGS (DEFICIT)
Balance at beginning of year................      830       761      1,898 
Net income (loss)...........................   (2,391)    1,071       (130)
Dividends declared..........................     (943)     (998)    (1,007)
Other changes...............................        3        (4)         - 
                                             ------------------------------
Balance at end of year......................   (2,501)      830        761 
---------------------------------------------------------------------------
TOTAL SHAREOWNER'S EQUITY...................   $3,111    $6,224     $6,154 
===========================================================================

The  accompanying Notes  are an  integral part  of the  Consolidated Financial
Statements.























                                      36








                                    <PAGE>

                        PACIFIC BELL AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS

                                             For the Year Ended December 31
                                             ------------------------------
(Dollars in millions)                               1995    1994*    1993*
---------------------------------------------------------------------------
CASH FROM (USED FOR) OPERATING ACTIVITIES
Net income (loss)................................ $(2,391) $1,071    $(130)
Adjustments to reconcile net income (loss)
  to cash from operating activities:
     Cumulative effect of accounting change......       -       -      148 
     Restructuring charges.......................       -       -    1,567 
     Extraordinary item..........................   3,360       -        - 
     Depreciation and amortization...............   1,831   1,758    1,703 
     Deferred income taxes.......................     121       1     (525)
     Unamortized investment tax credits..........     (52)    (63)     (48)
     Allowance for funds used during construction     (36)    (28)     (34)
     Changes in operating assets and liabilities:
        Accounts receivable......................      55     (12)     (71)
        Prepaid expenses and other 
           current assets........................     (29)    (13)      16 
        Deferred charges and other
           noncurrent assets.....................     (25)    (25)      76 
        Accounts payable and accrued
           liabilities...........................     149     170       75 
        Other current liabilities................     (16)     40      (18)
        Noncurrent liabilities and
           deferred credits......................    (367)     (7)     (19)
     Other adjustments, net......................      61      10       31 
                                                  -------------------------
Cash from operating activities...................   2,661   2,902    2,771 
---------------------------------------------------------------------------
CASH FROM (USED FOR) INVESTING ACTIVITIES
Additions to property, plant, and equipment......  (1,964) (1,612)  (1,802)
Other investing activities, net..................      19       2      (11)
                                                  -------------------------
Cash used for investing activities...............  (1,945) (1,610)  (1,813)
---------------------------------------------------------------------------
*    Restated to conform to current year presentation.



                            (Continued next page)













                                      37








                                    <PAGE>

                        PACIFIC BELL AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (continued)


                                             For the Year Ended December 31
                                             ------------------------------
(Dollars in millions)                             1995      1994     1993
---------------------------------------------------------------------------
CASH FROM (USED FOR) FINANCING ACTIVITIES
Equity infusion from parent..................     218          1        - 
Proceeds from issuance of long-term debt.....       -          -    2,578 
Retirements of long-term debt................    (514)       (11)  (2,669)
Dividends paid...............................    (943)      (998)  (1,007)
Increase (decrease) in short-term
  borrowings, net............................     526       (287)     133 
Other financing activities, net..............       3          8        7 
                                              -----------------------------
Cash used for financing activities...........    (710)    (1,287)    (958)
---------------------------------------------------------------------------
Increase in cash and 
  cash equivalents...........................       6          5        - 

Cash and cash equivalents at January 1.......      62         57       57 
                                              -----------------------------
Cash and cash equivalents at December 31.....    $ 68      $  62    $  57 
===========================================================================
*    Restated to conform to current year presentation.

The  accompanying Notes  are an  integral part  of the  Consolidated Financial
Statements.


























                                      38








                                    <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 Balance Sheets for 1994 as well as the Consolidated Statements of
Income and  Consolidated Statements of  Cash Flows  for 1994 and  1993 reflect
certain reclassifications made  to conform to  the current year  presentation.
The Company's investment in Bellcore is accounted for under the equity method.

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, the  Company   discontinued  accounting  under
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 41.)

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.   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.  










                                      39








                                    <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  by  straight  line depreciation  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  telephone
network.  These  technologies are  subject  to technological  risks  and rapid
market changes due to  new products and services and changing customer demand.
This may result in changes to the estimated useful lives 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 plant telecommunications assets.

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.









                                      40








                                    <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.   Costs
for subsequent  additions or  modifications to  operating system software  are
expensed as incurred.

Change in Accounting for Postretirement and Postemployment 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 1993-1996 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 54.)

Effective  January  1,  1993,  the  Company  adopted  SFAS  112,   "Employers'
Accounting  for   Postemployment  Benefits."   A  one-time,  non-cash   charge
representing prior benefits earned was recorded in 1993 which reduced earnings
by $148 million.  The charge  was  net of  a deferred  income  tax benefit  of
$103 million.   The annual  periodic expense under  SFAS 112  does not  differ
materially from  expense under the  prior method.  (See also Note  F -  "Other
Postretirement and Postemployment Benefits" on page 49.)

B.   DISCONTINUANCE OF REGULATORY ACCOUNTING - SFAS 71

Effective third   quarter 1995,  the Company discontinued  its application  of
SFAS 71 in  accordance with the provisions  of SFAS 101, "Accounting   for the
Discontinuance  of  Application  of FASB  Statement No. 71."  As a result, the
Company recorded a non-cash, extraordinary charge of $3.4 billion during third
quarter which  is 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").





                                      41








                                    <PAGE>

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

Effective  third  quarter  1995,  management  determined  that,  for  external
financial reporting  purposes, it is  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.  Prices for the Company's products and
services are being driven increasingly by market forces instead of regulation.

The $4.8  billion increase  in  accumulated depreciation  for 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 also
required  the  elimination of  the Company's 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 balance sheet.

Significant changes have occurred in the Company's balance sheets  as a result
of  the discontinuance of SFAS  71.  Details  of  net  regulatory assets which
have been eliminated are displayed in the following table.
                                                              
(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 "deferred charges  and other noncurrent
     assets" in the balance sheets.
**   Previously included in "long-term obligations."
***  Previously included in "other  current liabilities" and "other noncurrent
     liabilities and deferred credits."


                                      42








                                    <PAGE>

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

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 of  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,
1995 and 1994 was $219 and $819 million, respectively.

In addition, the Company recorded a $590 million pre-tax expense to accelerate
recognition of a portion  of its embedded post-retirement benefits  costs that
would  otherwise  have  been recorded  over  the  next  19 years.  Accelerated
recognition  of these costs was  required under the  curtailment provisions of
SFAS  106 because the Company  expects to significantly  reduce its workforce.
Because Pacific  Telesis Group already  recognized all of  its post-retirement
benefit transition costs in the first quarter 1993, this additional charge did
not affect its consolidated financial statements.






















                                      43








                                    <PAGE>

D.   INCOME TAXES

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

Income Tax Expense                             1995      1994*      1993*
---------------------------------------------------------------------------
                                                 (Dollars in millions)
Current:
  Federal..................................    $406      $549        $519 
  State and local income taxes.............     122       166         156 
                                              -----------------------------
Total current..............................     528       715         675 

Deferred:
  Federal..................................      66       (24)       (548)
  State and local income taxes.............      27        (7)       (148)
                                               ----------------------------
Total deferred.............................      93       (31)       (696)
                                               ----------------------------
Amortization of investment
tax credits - net..........................     (52)      (63)        (51)
                                               ----------------------------
Total income tax expense (benefit).........    $569      $621        $(72)
===========================================================================

Significant components of  the Company's deferred  tax assets and  liabilities
are as follows:
                                                           December 31
                                                        -------------------
Deferred Tax Assets and Liabilities                     1995         1994*
---------------------------------------------------------------------------
                                                      (Dollars in millions)
Deferred tax (assets)/liabilities due to:
  Depreciation and amortization....................    $ 891       $2,885 
  Employee benefits................................     (431)        (371)
  Restructuring reserve............................     (124)        (359)
  Customer rate reductions.........................     (128)        (146)
  Other, net.......................................     (446)         (74)
                                                       ------      -------
Net deferred tax (assets)/liabilities..............    $(238)      $1,935 
                                                       ======      =======
Amounts recorded in consolidated 
  balance sheets:
  Deferred tax assets**............................    $ 559       $  380 
                                                       ======      =======
  Deferred tax liabilities**.......................    $ 321       $2,315 
                                                       ======      =======
===========================================================================

*    Restated to conform to current year presentation.

**   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 56 for current deferred tax benefits.)


                                      44








                                    <PAGE>

D.   INCOME TAXES (Cont'd)

An income  tax benefit  related to  the extraordinary charge  in 1995  for the
discontinued application  of SFAS 71 for  depreciated telecommunications 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 41.)

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:

Effective Tax Rate                                1995      1994      1993
----------------------------------------------------------------------------
Statutory federal income tax rate (%)........    35.0       35.0      35.0 
Increase (decrease) in taxes resulting from:
  Amortization of investment tax credits.....    (3.4)      (3.6)     92.9 
  Plant basis differences - net of 
     applicable depreciation.................     2.1        2.0     (63.6)
  State income taxes - net of federal
     income tax benefit......................     6.2        6.1      (9.2)
  Excess deferred taxes......................    (2.9)      (2.8)     70.1 
  Other differences..........................       -          -       7.2 
                                                ----------------------------
Effective income tax rate (%)................    37.0       36.7     132.4 
============================================================================

The 1993  effective tax rate was higher than in  subsequent years due to lower
pre-tax income  caused  by the  restructuring  charge and  the  postretirement
benefits curtailment.


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 are based on a percentage of final five-year
average pay and vary according to age and years of service.

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.








                                      45








                                    <PAGE>

E.  EMPLOYEE RETIREMENT PLANS (Cont'd)

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  CPUC order  requiring  the continued  use of  the aggregate  cost
method for intrastate  operations and an  FCC requirement to  use SFAS 87  and
SFAS  88  for interstate  operations.    (See  Note  B  -  "Discontinuance  of
Regulatory Accounting - SFAS 71" on page 41).

During  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 are
being  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 offered a
special  pension  benefit which  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  which
increase  benefits  for specified  groups  who  elect early  retirement  under
incentive  programs.  Approximately 1,900 and 3,400 employees left the Company
during  1995 and 1994, respectively,  under early retirement  or voluntary and
involuntary severance programs.

Annual pension  cost in the following  table excludes $219 and  $62 million of
additional  pension costs charged  to the  Company's restructuring  reserve in
1995 and 1994, respectively.  As required by regulatory accounting  under SFAS
71, pension  cost in the table  below also excludes the  intrastate portion of
the  Company's  SFAS 87  costs  of  $79 and  $53  million  for 1994  and  1993
respectively.  As discussed above, the Company discontinued the application of
SFAS 71 during 1995.  (See Note B - "Discontinuance of Regulatory Accounting -
SFAS 71" on page 41).























                                      46








                                    <PAGE>

E.  EMPLOYEE RETIREMENT PLANS (Cont'd)

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

Pension Cost                                  1995       1994      1993
--------------------------------------------------------------------------
(Dollars in millions)

Current year pension cost...................  $ 76       $ 28      $ 10 
Settlements and curtailments................     -        (10)      (10)
                                             -----------------------------
Pension cost recognized.....................  $ 76       $ 18      $  0 
==========================================================================

The amounts shown above for annual pension cost reflect the effects of strong
fund asset performance in prior years and IRS funding limitations.

                                                       December 31
                                                --------------------------
Pension Obligation                                 1995            1994
--------------------------------------------------------------------------
(Dollars in millions)

Accumulated Benefit Obligation.................   $8,835          $8,008
Vested Benefit Obligation......................   $7,747          $7,174
--------------------------------------------------------------------------
Accrued pension cost liability recognized in
   the consolidated balance sheets..............  $1,061          $  753
--------------------------------------------------------------------------
Present value discount rate (%)................     7.25             8.0
Long-term rate of return on plan assets (%)....      9.0             8.0
==========================================================================

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.




















                                      47








                                    <PAGE>

E.   EMPLOYEE RETIREMENT PLANS (Cont'd)

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.

Effective  December 31,  1993,  the  salaried  pension  plan  was  amended  to
permanently remove the age  discount from pension benefits for  employees with
30 or  more years of  net credited  service.  Effective  January 1, 1995,  the
salaried pension plan was also 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, these amendments affected  approximately 400
and 800 employees, 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
have been reflected 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 $68, $64, and
$64 million in 1995, 1994, and 1993, respectively.


















                                      48








                                    <PAGE>

F.   OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

Substantially  all  retirees  and  their  dependents  are  covered  under  the
Company's   plans   for  medical,   dental   and   life  insurance   benefits.
Approximately  41,000 retirees were eligible  to receive these  benefits as of
January 1, 1995.  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.

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 1995 and 1994, as displayed
in the table  below, increased from a level  of $103 million in costs  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  and
Postemployment Costs" in Note  A on page 39.)  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 54.)

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

(Dollars in millions)                              1995           1994
---------------------------------------------------------------------------
Service cost..................................     $ 49           $ 57 
Interest cost on accumulated postretirement
  benefit obligation..........................      256            251 
Actual return on plan assets..................     (246)           (17)
Net amortization and deferral.................      268             45 
                                                   -----          -----
Net periodic postretirement benefit cost......     $327           $336 
=========================================================================














                                      49








                                    <PAGE>

F.   OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (Cont'd)

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

The funded status of the plans follows:
                                                          December 31 
                                                      --------------------
 (Dollars in millions)                                1995            1994
 
----------------------------------------------------------------------------
Accumulated postretirement benefit obligation: 
   Retirees....................................     $2,250          $2,250 
   Eligible active employees...................        216             264 
   Other active employees......................        769             784 
                                                    ------          ------ 
 Total accumulated postretirement benefit 
   obligation..................................      3,235           3,298 
 Less:
   Fair value of plan assets*..................     (1,217)           (860)
   Transition obligation.......................     (1,609)         (1,704)
 Plus:
   Unrecognized net gain/(loss)**..............        164            (157)
   Unrecognized prior service cost.............         38               - 
                                                    ------           ------
 Accrued net postretirement benefit obligation 
   recognized in the consolidated 
   balance sheets.............................      $  611           $ 577 
============================================================================

*    Fair  value  of  plan assets  reflects  an  estimated  allocation of  the
     Company's portion of Pacific Telesis Group plans' assets.

**   The  unrecognized net gain/(loss)  is amortized over  the future expected
     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.




















                                      50








                                    <PAGE>

F.   OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (Cont'd)

Liabilities  and  expenses  for  employee  benefits  are  based  on  actuarial
assumptions.    The  assumed  discount  rate  used  to  measure  the  year-end
accumulated postretirement benefit obligation was 7.25 percent and 8.0 percent
for  1995 and 1994, respectively. The  1995 accumulated postretirement benefit
obligation  and  the 1996 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, 1995
accumulated postretirement benefit obligation by $415 million and increase the
combined service  and interest cost components of  net periodic postretirement
benefit cost for 1995 by $39 million. An 8.75 percent long-term rate-of-return
on assets is assumed  in calculating postretirement  benefit costs.  Based  on
the plans' historical return on  assets, the assumed long-term rate  of return
will be  increased to  9.0 percent  in 1996.  These actuarial assumptions  are
subject to  change  over time,  which  could have  a  material impact  on  the
Company's financial statements. 

Effective January  1, 1993, the  Company adopted SFAS  112 for accounting  for
postemployment  benefits  which  required  a  change  from  cash  to   accrual
accounting.   Postemployment benefits offered  by the Company  include workers
compensation, disability benefits, medical benefit continuation, and severance
pay.   These benefits are paid  to former or inactive  employees who terminate
without retiring.   A one-time,  non-cash charge  representing prior  benefits
earned was recorded in 1993 which reduced earnings by $148 million. The charge
was net of a deferred income tax benefit of $103 million.  The annual periodic
expense under SFAS 112 does not differ materially from expense under the prior
method.

G.   DEBT AND LEASE OBLIGATIONS

Long-term obligations as  of December 31, 1995 and 1994  consist of debentures
of  $3,545 and  $4,047 million,  respectively, and  corporate notes  of $1,150
million each year.   Maturities  and interest rates  of long-term  obligations
follow:






















                                      51








                                    <PAGE>

G.   DEBT AND LEASE OBLIGATIONS (Cont'd)

                                                         December 31
                                                  ------------------------
Maturities and Interest Rates                         1995          1994
--------------------------------------------------------------------------
                                                    (Dollars in millions)

1999                  4.625%....................    $  100        $  100 
2000                  4.625%....................       125           125 
2001-2043             6.000% to 9.125%..........     4,470         4,972 
                                                   -----------------------
                                                     4,695         5,197 
Long-term capital lease obligations.............        18            16 
Unamortized discount-net of premium.............      (105)         (461)
                                                   -----------------------
Total long-term obligations.....................    $4,608        $4,752 
==========================================================================

At December 31,  1995, the Company  had remaining authority  from the CPUC  to
issue up to  $1.25 billion of long- and intermediate-term debt.   The proceeds
may be used  only to redeem maturing debt and to  refinance other debt issues.
The  Company  had  remaining  authority  from   the  Securities  and  Exchange
Commission  to issue up  to $650 million  of long- and  intermediate-term debt
through  a shelf  registration.  In February  1996,  the Company  issued  $250
million of  intermediate-term debt  under these  authorities.   (See Note J  -
Subsequent Event on page 54.)

As of December 31, 1995 and 1994, the weighted average interest rate on short-
term  borrowings  was  5.82 percent  and  6.05  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)                              1995           1994
--------------------------------------------------------------------------
Commercial paper..........................          $701          $  -
Advances from Pacific Telesis Group.......            76           249
Notes payable to banks....................             -             2
                                                 -------------------------
Total short-term borrowings...............           777           251
                                                 -------------------------
Current maturities of
long-term obligations.....................             4             4
                                                 -------------------------
Total debt maturing within one year.......          $781          $255
==========================================================================









                                      52








                                    <PAGE>

G.   DEBT AND LEASE OBLIGATIONS (Cont'd)

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, 1995 and 1994, the total unused lines of credit available were
approximately $2.7 and $2.2 billion, respectively.

H.   FINANCIAL INSTRUMENTS

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

                                      December 31, 1995    December 31, 1994
                                      -----------------    -----------------
                                           Estimated           Estimated
                                        Carry      Fair   Carrying    Fair
(Dollars in millions)                  Amount     Value    Amount*   Value
----------------------------------------------------------------------------
Cash and cash equivalents........       $   68   $   68    $   62   $   62
Debt maturing within one year....          781      781       255      255
Deposit liabilities..............          357      357       305      305
Long-term debt...................       $4,590   $4,881    $4,736   $4,578
============================================================================

*    Restated to conform to current year presentation.

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. The carrying amounts include unamortized net discount.


















                                      53








                                    <PAGE>

I.   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 $110
million, $81 million and $76 million in 1995, 1994 and 1993, 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 $7 million,
$21 million and $30 million in 1995, 1994 and 1993, respectively.

J.   SUBSEQUENT EVENT

In February 1996,  the Company issued $250 million of 5.875 percent debentures
due February 15, 2006.  The debentures may  not be redeemed prior to maturity.
The proceeds  from the sale of  the debentures were used  to reduce short-term
debt incurred to retire debentures totaling $500 million in December 1995.

K.   COMMITMENTS AND CONTINGENCIES

Purchase Commitments

In December 1994, the Company contracted for the purchase  of up to $2 billion
of Advanced Communications Network  facilities which will incorporate emerging
technologies.  The Company is committed  to purchase these facilities in  1998
if they meet certain quality and performance criteria.  Management expects the
purchase amount to be less than $1 billion in 1998.

The  Company has  purchase  commitments of  about  $274 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 1993-1996
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.   Related  revenues totaled about  $122
million at  December 31,  1995.   Management believes  postretirement benefits
costs are appropriately recoverable in the Company's price cap filings.  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 financial results.





                                      54








                                    <PAGE>

K. COMMITMENTS AND CONTINGENCIES (Cont'd)

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.  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 $60 million 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.   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 financial results.

L.   COMPETITIVE RISK

The  Company is facing increasing  competition for existing  and new services.
Currently,   competitors   primarily   consist   of   interexchange  carriers,
competitive  access providers and wireless  companies.  Soon  the Company will
face competition from cable television companies and others. 

In 1995  the CPUC authorized  toll services  competition and also  ordered the
Company  to offer  expanded interconnection  to competitive  access providers.
Effective January  1, 1996,  the CPUC authorized  local exchange  competition.
Local  exchange competition may  affect toll and  access revenues, as  well as
local exchange 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.

The  unique  characteristics  of  the  California  market  make   the  Company
vulnerable to competition.  The Company's business and residence  revenues and
profitability  are highly 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. Competitors are expected to target the high-usage, high-
profit customers.







                                      55








                                    <PAGE>

M.   ADDITIONAL FINANCIAL INFORMATION
                                                            December 31
                                                      ----------------------
(Dollars in millions)                                     1995       1994*
----------------------------------------------------------------------------
Prepaid expenses and other current assets:
     Prepaid directory expenses...................    $   316     $   323
     Miscellaneous prepaid expenses...............         27          23
     Notes and other receivables..................         83          63
     Materials and supplies.......................         57          60
     Current deferred tax benefits................        221         380
     Pacific Telesis Group and subsidiaries.......         23          29
     Deferred compensation trusts.................         63          52
     Other........................................         12          20
                                                      -------     -------
Total.............................................    $   802     $   950
============================================================================
Property, plant, and equipment - net:
     Land and buildings...........................    $ 2,754     $ 2,636
     Cable and conduit............................     10,910      10,566
     Central office equipment.....................      9,394       9,444
     Furniture, equipment, and other..............      2,835       2,892
     Construction in progress.....................        795         569
                                                      -------     -------
                                                       26,688      26,107
     Less: accumulated depreciation...............     15,608      10,243
                                                      -------     -------
Total.............................................    $11,080     $15,864
============================================================================
Deferred charges and other noncurrent assets:
     Deferred charges.............................    $    30     $    67
     Deferred compensated absence.................          -         212
     SFAS 87 pension deferral.....................          -         430
     Investment in Bellcore.......................         27          28
     Other investments............................         78          49
     Postretirement benefits prefunding...........          -         176
     Deferred tax benefits........................        338           -
     Other........................................          1           1
                                                      -------     -------
Total.............................................    $   474     $   963
============================================================================

*    Restated to conform to current year presentation.














                                      56








                                    <PAGE>

M.   ADDITIONAL FINANCIAL INFORMATION (Cont'd)

                                                            December 31
                                                      ----------------------
(Dollars in millions)                                    1995        1994*
----------------------------------------------------------------------------
Accounts payable and accrued liabilities:
  Accounts payable:
     Pacific Telesis Group and subsidiaries.......    $    37    $     52 
     AT&T and subsidiaries........................        224         218 
     Trade........................................        498         474 
     Payroll......................................         51          43 
     Checks outstanding...........................        276         319 
     Other:
       Incentive awards payable...................        187         224 
       Other......................................        383         250 
  Interest accrued................................        120         127 
  Advance billing and customer deposits...........        333         286  
                                                      -------     ------- 
Total............................................     $ 2,109     $ 1,993 
============================================================================

Other current liabilities:
     Accrued compensated absence...................   $   272     $   281 
     Deferred regulatory liabilities (SFAS 109)....         -         145 
     Restructuring reserve.........................       219         441 
     Other.........................................        61          86 
                                                      -------      ------ 
Total.............................................    $   552     $   953 
============================================================================

Other noncurrent liabilities and deferred credits:
     Unamortized investment tax credits............   $   283     $   464 
     Accrued pension cost liability................     1,061         753 
     Deferred regulatory liabilities (SFAS 109)....         -          40 
     Workers' compensation.........................       163         175 
     Restructuring reserve.........................         -         378 
     Accrued postretirement benefit obligation.....       611         577 
     Other.........................................       299         491 
                                                      -------     ------- 
Total.............................................    $ 2,417     $ 2,878 
============================================================================
*    Restated to conform to current year presentation.   














                                      57








                                    <PAGE>

M.   ADDITIONAL FINANCIAL INFORMATION (Cont'd)

                                                  For the Year Ended
                                                      December 31
                                         ---------------------------------
(Dollars in millions)                      1995         1994*       1993*
--------------------------------------------------------------------------
Other service revenues:
    Directory advertising............... $1,012       $  984      $  989 
    Billing and collections.............    109           77          79 
    Information services...............     148          113          82 
    Other...............................    252          232         208 
                                          ------      ------      ------ 
Total................................... $1,521       $1,406      $1,358 
==========================================================================
Interest expense:
    Gross interest expense.............  $  421       $  439      $  429 
    Less: Capitalized interest.........     (11)           -           - 
                                          ------      ------      ------ 
Net interest expense...................  $  410       $  439      $  429 
==========================================================================
Miscellaneous income (expense):
    Allowance for funds used during
      construction...................... $   36        $  28      $   35 
    Interest income.....................     27            5           5 
    Other...............................    (38)         (30)        (69)
                                          ------      ------      ------ 
Total................................... $   25      $     3      $  (29)
==========================================================================
Advertising expense..................... $   93      $    96      $   61 
============================================================================
Cash payments for:
    Interest............................ $  410      $   377      $  614 
    Income taxes........................ $  550      $   762      $  744 
============================================================================

*    Restated to conform to current year presentation.

Major Customer

Nearly  all of the Company's revenues were from telecommunications and related
services.  Approximately  10 percent, 11 percent  and 11 percent  of operating
revenues  were earned  in  1995, 1994  and  1993, respectively,  for  services
provided to AT&T Corp.   No other customer accounted for  more than 10 percent
of operating revenues.












                                      58








                                    <PAGE>

QUARTERLY FINANCIAL INFORMATION
(Unaudited)
                                           (Dollars in millions)
                                 -------------------------------------------
         1995                     First      Second      Third     Fourth
----------------------------------------------------------------------------
    Total 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
----------------------------------------------------------------------------

         1994*                    First      Second      Third     Fourth
----------------------------------------------------------------------------
    Total Operating Revenues.... $2,247      $2,209    $ 2,285     $2,326
    Operating Income............    526         529        580        493
    Net Income..................
                                 $  276      $  256    $   292     $  247

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

*    Restated to conform to current year presentation.

Second  quarter  1994  results reflect  an  after-tax  charge  of $29  million
resulting from a CPUC order related to customer late payment charges.

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 41.)


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.





















                                      59








                                    <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...............................    31

               Report of Independent Accountants..................    33

               Financial Statements:

                    Consolidated Statements of Income.............    34

                    Consolidated Balance Sheets...................    35

                    Consolidated Statements of Shareowner's
                    Equity........................................    36

                    Consolidated Statements of Cash Flows.........    37

                    Notes to Consolidated Financial Statements....    39

          (2)  Financial Statement Schedule:

               II - Valuation and Qualifying Accounts.............    63

               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.
























                                      60








                                    <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.

     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.

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

(b)  Reports on Form 8-K:

     Form 8-K, Date of Report November 17, 1995, was filed with the  SEC under
     Item 5 describing a class action complaint.
















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                                    <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 22, 1996

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

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 22, 1996














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                                    <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)
                                Booked as   Charged             
                 Balance at    Reductions   to Other             Balance at
                End of Prior  to Revenues   Accounts  Deductions   End of
                   Period         (a)         (b)         (c)      Period
---------------------------------------------------------------------------
Year 1995          $132           $166        $147        $314      $131
Year 1994          $136           $135        $143        $282      $132
Year 1993          $127           $147        $140        $278      $136 
===========================================================================

(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)
                                Charged     Charged             
                 Balance at    to Costs     to Other             Balance at
                End of Prior  and Expenses  Accounts  Deductions   End of
                   Period         (d)         (e)         (f)      Period
---------------------------------------------------------------------------
Year 1995        $  819           $  -         $ -        $600    $  219
Year 1994        $1,097           $  -         $ -        $278    $  819 
Year 1993        $  101           $977         $43        $ 24    $1,097 
===========================================================================

(d) In  1993   recorded  a  pre-tax  restructuring  charge  to  recognize  the
    incremental cost of force reductions.
(e) Amounts in this column reflect items capitalized to construction.
(f) The  1995  and  1994  amounts  reflect  $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.  




                                      63








                                    <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.

     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.

     2    Computation of Ratio of Earnings to Fixed Charges.

     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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