FORM 10-Q

                                United States
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549



(Mark One)

     |X|          Quarterly Report Pursuant to Section 13 or 15(d) of the
                       Securities Exchange Act of 1934

                 For the quarterly period ended June 30, 1998

                                      or

     |_|          Transition Report Pursuant to Section 13 or 15(d) of the
                       Securities Exchange Act of 1934

                 For the transition period from       to

                        Commission File Number 1-1414

                                 PACIFIC BELL

            Incorporated under the laws of the State of California
               I.R.S. Employer Identification Number 94-0745535

       140 New Montgomery Street, San Francisco, California 94105-3705
                       Telephone Number: (415) 542-9000


THE REGISTRANT, AN INDIRECTLY HELD WHOLLY-OWNED SUBSIDIARY OF SBC COMMUNICATIONS
INC., MEETS THE CONDITIONS SET FORTH IN GENERAL  INSTRUCTION  H(1)(a) AND (b) OF
FORM 10-Q AND IS  THEREFORE  FILING  THIS FORM WITH  REDUCED  DISCLOSURE  FORMAT
PURSUANT TO GENERAL INSTRUCTION H(2).

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No


<PAGE>

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements


PACIFIC BELL AND SUBSIDIARIES
------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
                                      Three months ended  Six months ended
                                            June 30,         June 30,
                                      ----------------------------------
                                         1998     1997    1998     1997
------------------------------------------------------------------------
Operating Revenues
Local service                          $1,167   $1,066  $2,285   $2,093
Network access:
  Interstate                              506      340   1,006      799
  Intrastate                              189      216     369      402
Long-distance service                     306      293     612      598
Other                                     177      178     366      340
------------------------------------------------------------------------
Total operating revenues                2,345    2,093   4,638    4,232
------------------------------------------------------------------------
Operating Expenses
Cost of services and products             850      815   1,697    1,636
Selling, general and administrative       396    1,500     870    1,785
Depreciation and amortization             463      567     914    1,036
------------------------------------------------------------------------
Total operating expenses                1,709    2,882   3,481    4,457
------------------------------------------------------------------------
Operating Income (Loss)                   636     (789)  1,157     (225)
------------------------------------------------------------------------
Other Income (Expense)
Interest expense                         (110)    (124)   (216)    (226)
Other income (expense) - net                2      (32)      -      (28)
------------------------------------------------------------------------
Total other income (expense)             (108)    (156)   (216)    (254)
------------------------------------------------------------------------
Income (Loss) Before Income Taxes and
  Cumulative Effect of Accounting Changes 528     (945)    941     (479)
------------------------------------------------------------------------
Income Taxes                              207     (340)    368     (155)
------------------------------------------------------------------------
Income (Loss) Before Cumulative
  Effect of Accounting Changes            321     (605)    573     (324)
------------------------------------------------------------------------
Cumulative Effect of Accounting
  Changes, net of tax                       -       -        -      345
------------------------------------------------------------------------
Net Income (Loss)                     $   321   $ (605) $  573   $   21
------------------------------------------------------------------------

See Notes to Consolidated Financial Statements.


<PAGE>


PACIFIC BELL AND SUBSIDIARIES
-------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
(Unaudited)
-------------------------------------------------------------------------------
                                                      June 30,    December 31,
                                               --------------------------------
                                                          1998            1997
-------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents                              $    59         $    43
Accounts receivable - net of allowances for
  uncollectibles of $154 and $152                        1,821           1,782
Prepaid expenses                                           111              53
Deferred income taxes                                      395             415
Other current assets                                        49              44
-------------------------------------------------------------------------------
Total current assets                                     2,435           2,337
-------------------------------------------------------------------------------
Property, Plant and Equipment - at cost                 29,352          28,695
  Less: Accumulated depreciation and amortization       18,014          17,442
-------------------------------------------------------------------------------
Property, Plant and Equipment - Net                     11,338          11,253
-------------------------------------------------------------------------------
Other Assets                                               968             749
-------------------------------------------------------------------------------
Total Assets                                           $14,741         $14,339
-------------------------------------------------------------------------------
Liabilities and Shareowner's Equity
Current Liabilities
Intercompany loans                                     $   559         $   542
Current portion of long-term obligations                   104               4
-------------------------------------------------------------------------------
Total debt maturing within one year                        663             546
Accrued taxes                                              536             334
Accounts payable and accrued liabilities                 2,406           2,719
-------------------------------------------------------------------------------
Total current liabilities                                3,605           3,599
-------------------------------------------------------------------------------
Long-Term Debt                                           5,281           5,358
-------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes                                    1,017             957
Postemployment benefit obligation                          918             881
Unamortized investment tax credits                         168             188
Other noncurrent liabilities                               613             569
-------------------------------------------------------------------------------
Total deferred credits and other noncurrent liabilities  2,716           2,595
-------------------------------------------------------------------------------
Shareowner's Equity
Common shares ($1 par value)                               225             225
Capital in excess of par value                           4,593           4,814
Retained earnings (deficit)                             (1,679)         (2,252)
-------------------------------------------------------------------------------
Total shareowner's equity                                3,139           2,787
-------------------------------------------------------------------------------
Total Liabilities and Shareowner's Equity              $14,741         $14,339
-------------------------------------------------------------------------------

See Notes to Consolidated Financial Statements.


<PAGE>


PACIFIC BELL AND SUBSIDIARIES
----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
----------------------------------------------------------------------------
                                                        Six months ended
                                                            June 30,
                                                  --------------------------
                                                        1998           1997
----------------------------------------------------------------------------
Operating Activities
Net income                                            $  573         $   21
Adjustments to reconcile net income to net
cash provided by operating activities:
   Depreciation and amortization                         914          1,036
   Provision for uncollectible accounts                   79            111
   Amortization of investment tax credits                (20)           (21)
   Deferred income tax expense                            90           (299)
   Cumulative effect of accounting changes, net of tax     -           (345)
   Other - net                                          (476)           742
----------------------------------------------------------------------------
Total adjustments                                        587          1,224
----------------------------------------------------------------------------
Net Cash Provided by Operating Activities              1,160          1,245
----------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures                   (957)        (1,015)
----------------------------------------------------------------------------
Net Cash Used in Investing Activities                   (957)        (1,015)
----------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with
original maturities of three months or less               17            128
Issuance of long-term debt                               198              -
Repayment of long-term debt                             (178)            (2)
Equity received from parent                              164             14
Dividends paid                                          (388)          (344)
----------------------------------------------------------------------------
Net Cash Used in Financing Activities                   (187)          (204)
----------------------------------------------------------------------------
Net increase in cash and cash equivalents                 16             26
----------------------------------------------------------------------------
Cash and cash equivalents beginning of year               43             57
----------------------------------------------------------------------------
Cash and Cash Equivalents End of Period               $   59         $   83
----------------------------------------------------------------------------
Cash paid during the six months ended June 30 for:
     Interest                                         $  213         $  213
     Income taxes, net of refunds                     $   94         $   85

See Notes to Consolidated Financial Statements.


<PAGE>


PACIFIC BELL AND SUBSIDIARIES
------------------------------------------------------------------------
STATEMENTS OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
------------------------------------------------------------------------
                                              Capital in     Retained
                                    Common     Excess of     Earnings
                                    Shares     Par Value     (Deficit)
------------------------------------------------------------------------
Balance, December 31, 1997             $225       $4,814       $(2,252)
Net income                                -            -           573
Dividend to shareowner                    -         (388)            -
Net equity from parent                    -          167             -
------------------------------------------------------------------------
Balance, June 30, 1998                 $225       $4,593       $(1,679)
------------------------------------------------------------------------

See Notes to Consolidated Financial Statements.

                                * * * *


SELECTED FINANCIAL AND OPERATING DATA*

At June 30, or for the six months then ended:        1998          1997
                                              ------------  ------------
  Debt ratio.............................          65.44%        68.00%
  Network access lines in service (000)..          17,730        16,940
  Resold lines (000).....................             251           115
  Number of employees....................          45,800        46,630


* SBC is in the process of  revalidating  the access  minutes of use for Pacific
Bell.  While this  process  may  result in a change in the growth  trends of the
quarterly minutes of use, SBC does not expect that the previously disclosed year
to date growth trends will be materially affected.


<PAGE>


PACIFIC BELL AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions

1. BASIS  OF  PRESENTATION  The  consolidated  financial  statements  have  been
   prepared by Pacific  Bell  (PacBell,  which also  includes  its  subsidiaries
   Pacific Bell  Information  Services  and Pacific  Bell  Network  Integration)
   pursuant  to the  rules  and  regulations  of  the  Securities  and  Exchange
   Commission  (SEC) and, in the opinion of management,  include all adjustments
   (consisting  only of normal recurring  accruals)  necessary to present fairly
   the  results  for  the  interim  periods  shown.  PacBell  is a  wholly-owned
   subsidiary of Pacific  Telesis Group (PAC), a wholly-owned  subsidiary of SBC
   Communications  Inc. (SBC). On March 31, 1998, PacBell distributed the shares
   of Pacific  Bell  Directory,  Pacific  Bell  Mobile  Services,  Pacific  Bell
   Internet  Services and PB COMM Switches,  Inc. to PAC.  PacBell has accounted
   for  this  distribution  as a  change  in  reporting  entity.  The  financial
   statements  of all periods  presented  have been  restated to show  financial
   information for the new reporting entity.

   Certain information and footnote disclosures,  normally included in financial
   statements   prepared  in  accordance  with  generally  accepted   accounting
   principles,  have  been  condensed  or  omitted  pursuant  to SEC  rules  and
   regulations.  The  results  for  the  interim  periods  are  not  necessarily
   indicative  of  results  for  the  full  year.  The  consolidated   financial
   statements   contained   herein  should  be  read  in  conjunction  with  the
   consolidated  financial  statements  and notes thereto  included in PacBell's
   1997 Annual Report on Form 10-K filed with the SEC.  Comprehensive income for
   PacBell is the same as net income for all periods presented.

2. CONSOLIDATION The consolidated  financial  statements include the accounts of
   PacBell  and its  subsidiaries.  All  significant  intercompany  transactions
   within PacBell are eliminated in the consolidation process.

3. COMPLETION OF MERGER On April 1, 1997, SBC and PAC completed the merger of an
   SBC subsidiary with PAC, in a transaction in which each outstanding  share of
   PAC  common  stock  was  exchanged  for  1.4629  shares of SBC  common  stock
   (equivalent to approximately 626 million shares;  both the exchange ratio and
   shares  issued  have been  restated  to  reflect  SBC's  first  quarter  1998
   two-for-one stock split, effected in the form of a stock dividend).  With the
   merger,  PAC became a  wholly-owned  subsidiary of SBC. The  transaction  was
   accounted for by SBC as a pooling of interests and a tax-free reorganization.

   Conforming accounting changes
   PacBell's results include merger transaction costs and the effects of changes
   to conform accounting  methodologies between PacBell and SBC for, among other
   items, pensions and postretirement  benefits.  These changes were recorded by
   PacBell in the second  quarter of 1997,  retroactive to January 1, 1997, as a
   cumulative  effect of  accounting  changes of $345 net of  deferred  taxes of
   $239,  and  increased  income before  income taxes and  cumulative  effect of
   accounting changes and net income for the first six months of 1997 by $42 and
   $25. The changes in accounting for pension and  postretirement  benefits were
   to adopt  SBC's  methodology  of  amortizing  gains and losses on assets held
   within those benefit  plans.  Among other costs  relating to the close of the
   merger,  PacBell  recorded  the  present  value of amounts to be  returned to
   California ratepayers as a condition of the merger of $276 ($173 net of tax).


<PAGE>


PACIFIC BELL AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions

   Post-merger initiatives
   During the second quarter of 1997, PacBell recorded after-tax charges of $883
   related to SBC's June 19, 1997  announcement of several  strategic  decisions
   resulting  from the merger  integration  process that began with the April 1,
   1997 closing of its merger with PAC.  These charges  included $107 ($65 after
   tax) of  charges  related  to several  regulatory  rulings  during the second
   quarter of 1997 and $276 ($173 after tax) for the merger approval costs.  The
   decisions  resulted  from an extensive  review of operations  throughout  the
   merged  company  and  include  significant   integration  of  operations  and
   consolidation of some  administrative and support  functions.  Following is a
   discussion of the most significant of these charges.

   Reorganization  SBC is  centralizing  several key functions that will support
   the  operations  of PacBell and two other SBC  subsidiaries,  Nevada Bell and
   Southwestern  Bell Telephone  Company  (SWBell),  including network planning,
   strategic  marketing and  procurement.  It is also  consolidating a number of
   corporate-wide  support  activities,   including  research  and  development,
   information  technology,  financial  transaction  processing  and real estate
   management.  PacBell,  Nevada Bell and SWBell will continue as separate legal
   entities.  These  initiatives  are resulting in the creation of some jobs and
   the  elimination  and  realignment  of  others,  with  many  of the  affected
   employees changing job  responsibilities and in some cases assuming positions
   in other locations.

   PacBell recognized a charge of approximately $127 ($80 net of tax) during the
   second quarter of 1997 in connection with these initiatives.  This charge was
   comprised mainly of postemployment benefits,  primarily related to severance,
   and costs  associated  with  closing  down  duplicate  operations,  primarily
   contract  cancellations.  Other charges  arising out of the merger related to
   relocation,  retraining and other effects of consolidating certain operations
   are being recognized in the periods those charges are incurred.

   Impairments/asset  valuation As a result of SBC's merger  integration  plans,
   strategic  review  of  domestic  operations  and  organizational  alignments,
   PacBell  reviewed  the carrying  values of related  long-lived  assets.  This
   review  included  estimating  remaining  useful  lives  and  cash  flows  and
   identifying assets to be abandoned.  Where this review indicated  impairment,
   discounted  cash flows related to those assets were analyzed to determine the
   amount of the  impairment.  As a result of these  reviews,  PacBell wrote off
   some assets and  recognized  impairments  to the value of other assets with a
   combined  charge of $341 ($219 after tax)  recorded in the second  quarter of
   1997.  These  impairments and writeoffs  related to certain analog  switching
   equipment,   duplicate  or  obsolete   equipment,   cable  within  commercial
   buildings, certain nonoperating plant and other assets.

   Video curtailment/purchase commitments SBC also announced it was scaling back
   its limited direct investment in video services. As part of this curtailment,
   PacBell halted construction on the Advanced  Communications  Network (ACN) in
   California.  As part of an  agreement  with the ACN vendor,  PacBell paid the
   liabilities  of the ACN trust  that  owned  and  financed  ACN  construction,
   incurred costs to shut down all construction  previously  conducted under the
   trust and  received  certain  consideration  from the  vendor.  In the second
   quarter of 1997,  PacBell  recognized  a net expense of $553 ($346 after tax)
   associated with these activities.

4. SOFTWARE  COSTS  PacBell  currently  expenses  costs as incurred for software
   purchased  or  developed  for  internal  use,  except for  initial  operating
   software  costs,  which are  capitalized  and amortized over the lives of the
   associated  hardware.  The American Institute of Certified Public Accountants
   has issued a Statement of Position (SOP) that will require  capitalization of
   certain  computer  software  expenditures  beginning  in 1999,  with  earlier
   adoption  permitted.  


<PAGE>


PACIFIC BELL AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions

   PacBell did not elect to early adopt the provisions of the SOP.  Management
   is currently  evaluating the impact of the change in accounting required by
   the SOP, but is not able to quantify the effect at this time. The SOP would
   tend to cause an increase in net income in the first year of adoption.


<PAGE>


PACIFIC BELL AND SUBSIDIARIES

Item 2.  Management's Discussion and Analysis of Results of Operations
Dollars in millions

RESULTS OF OPERATIONS

Overview  Financial  results for  Pacific  Bell  (PacBell,  which  includes  its
subsidiaries)  for the  first  six  months  of 1998 and 1997 are  summarized  as
follows:

-------------------------------------------------------------------------------
                                                        Six-Month Period
                                                 ------------------------------
                                                                      Percent
                                                      1998     1997   Change
-------------------------------------------------------------------------------
Operating revenues                                $  4,638 $  4,232      9.6%
Operating expenses                                $  3,481 $  4,457    (21.9)%
Income (loss) before cumulative effect of
  accounting changes                              $    573 $   (324)     -
Cumulative effect of accounting changes                 -  $    345      -
Net income                                        $    573 $     21      -
===============================================================================

Net income for the six months  ended June 30,  1997  includes a  cumulative  net
benefit  of  $345  resulting  from  accounting  changes  related  to  conforming
accounting  methodologies between PacBell and SBC Communications Inc. (SBC) for,
among other items, pensions and postretirement benefits.

PacBell's loss before cumulative effect of accounting  changes for the first six
months  of  1997  includes  after-tax  charges  of  $883  reflecting   strategic
initiatives  resulting  from SBC's  comprehensive  review of  operations  of the
merged company and the impact of several recent regulatory rulings. In addition,
the  first  six  months  of  1997  includes  an $87  after-tax  settlement  gain
associated with lump-sum  pension  payments that exceeded the projected  service
and interest costs for 1996  retirements.  Excluding these 1997 one-time charges
and the gain,  PacBell's income before cumulative  effect of accounting  changes
for the first six months of 1998  increased by $101, or 21.4%,  compared to $472
for the first six months of 1997.  The  primary  factors  for this  increase  in
income  before  cumulative  effect of  accounting  changes  during the first six
months of 1998 were growth in demand for services and products.

Operating Revenues PacBell's operating revenues for the second quarter and first
six months of 1997 reflect reductions of $114 related primarily to the impact of
several regulatory rulings.  Excluding these items, PacBell's operating revenues
increased  $292,  or 6.7%  for the  first  six  months  of 1998.  Components  of
operating revenues for the first six months of 1998 and 1997 are as follows:

----------------------------------------------------------------------------
                                                      Six-Month Period
                                              ------------------------------
                                                                    Percent
                                                  1998     1997     Change
----------------------------------------------------------------------------
Local service                                 $  2,285  $ 2,093        9.2%
Network access:
   Interstate                                    1,006      799       25.9
   Intrastate                                      369      402       (8.2)
Long-distance service                              612      598        2.3
Other                                              366      340        7.6
---------------------------------------------------------------
     Total                                     $ 4,638  $ 4,232        9.6%
============================================================================


<PAGE>


PACIFIC BELL AND SUBSIDIARIES

Item 2.  Management's Discussion and Analysis of Results of Operations
Dollars in millions

RESULTS OF OPERATIONS - Continued

      Local service revenues  increased $192 in the first six months of 1998 due
      to increases in demand,  which  account for more than 73% of the increase,
      including  increases in access lines and vertical services  revenues.  The
      number of  access  lines  increased  by 4.6%  since  June 30,  1997,  with
      approximately  41% of access  line  growth due to the sales of  additional
      access  lines  to  existing  residential   customers.   Vertical  services
      revenues,  which include custom calling  services,  call control  options,
      Caller ID and other services, increased by approximately 27% totaling more
      than $245 for the first six months of 1998. Additionally, Federal payphone
      deregulation   implemented  in  April  1997  increased  local  service  by
      approximately $48 and decreased interstate network access by approximately
      $8, long-distance service by approximately $9 and other operating revenues
      by  approximately  $16; the overall impact was a slight  increase in total
      operating revenues.

      Network access  Interstate  network access revenues  increased $207 in the
      first six months of 1998 primarily due to the second quarter 1997 one-time
      charges of $134. These one-time charges included billing claim settlements
      related to the  Percentage  Interstate  Usage  (PIU)  factor  and  several
      Federal  regulatory  issues  including  end-user  charges,  800 data  base
      charges, recovery of certain employee-related expenses and the retroactive
      effect of the  productivity  factor  adjustment  in the Federal  price cap
      filing.  While the  change in the PIU  factor,  which is used to  allocate
      network access usage between interstate and intrastate jurisdictions, also
      had the  effect of  increasing  intrastate  network  access  revenues,  it
      resulted in a slight decline in total network access  revenues due to rate
      differences   between  the  two  jurisdictions.   Without  these  impacts,
      interstate  access  revenues  increased $73 or 7.8%.  The increase was due
      primarily  to   approximately   $86  in  demand  for  access  services  by
      interexchange  carriers,  primarily special access, and growth in end-user
      charges  attributable to an increasing access line base. Also contributing
      to  the  increase   was  the  absence  of  the  1997  revenue   offset  of
      approximately  $23 required for net payments for  long-term  support which
      were  designed to subsidize  universal  service.  This change is discussed
      further in cost of services and products below. Partially offsetting these
      increases   were  the  effects  of  PacBell's   1997  rate   reduction  of
      approximately $37 related to the Federal  productivity  factor adjustment,
      as discussed in PacBell's  1997 Annual  Report on Form 10-K,  and payphone
      deregulation of approximately $8 referred to above in local service.

      Intrastate  network access revenues  decreased $33 in the first six months
      of 1998 due to the 1997 PIU settlements of $32 described above.  Excluding
      this  impact,  intrastate  network  access  revenues  remained  relatively
      unchanged.

      Long-distance  service revenues increased slightly in the first six months
      of 1998. A higher  volume of toll  messages due to the growing  California
      economy  and  alternative  calling  plans  resulted  in a $22  increase in
      revenues.  The  increase  was  partially  offset by the  Federal  payphone
      deregulation  of  approximately  $9  referred  to  in  local  service  and
      implementation   of  the  February  1997  California  high  cost  fund  of
      approximately $6.

      Other  operating  revenues  increased $26 in the first six months of 1998.
      Approximately  80% of  this  increase  was  due to  increased  demand  for
      nonregulated products and services, voice messaging services and equipment
      sales,  partially  offset by  payphone  deregulation  referred to above in
      local service.


<PAGE>


PACIFIC BELL AND SUBSIDIARIES

Item 2.  Management's Discussion and Analysis of Results of Operations
Dollars in millions

RESULTS OF OPERATIONS - Continued

Operating Expenses PacBell's  operating expenses in the first six months of 1997
reflect $1.1 billion of charges  related to SBC's  strategic  initiatives  and a
comprehensive  review of operations of the merged company, the impact of several
regulatory  rulings and a  settlement  gain  associated  with  lump-sum  pension
payments  that  exceeded  the  projected  service  and  interest  costs for 1996
retirements. Excluding these items, PacBell's operating expenses increased $111,
or 3.3%, for the first six months of 1998.  Components of operating expenses for
the first six months of 1998 and 1997 are as follows:

---------------------------------------------------------------------------
                                                    Six-Month Period
                                              -----------------------------
                                                                    Percent
                                                  1998      1997    Change
---------------------------------------------------------------------------
Cost of services and products                 $  1,697  $ 1,636        3.7%
Selling, general and administrative                870    1,785      (51.3)
Depreciation and amortization                      914    1,036      (11.8)
---------------------------------------------------------------
   Total                                      $  3,481  $ 4,457      (21.9)%
===========================================================================

      Cost of services and products for the first six months of 1997 reflect the
      second  quarter 1997 one-time  charges of $19 relating to SBC's  strategic
      initiatives and operational reviews of the merged company. Excluding these
      charges,  costs of services and products  increased  $80, or 4.9%,  in the
      first six months of 1998 due primarily to increased employee  compensation
      of more than $39 (resulting from additional weather related expenditures),
      additional   costs   associated  with  reciprocal   compensation  for  the
      termination of Internet traffic of approximately  $33, increases in merger
      implementation  costs of  approximately  $28,  and  increases in universal
      service  fund (USF)  charges  of  approximately  $42 that were  previously
      reported as an offset  against  network access  revenues.  The current USF
      system  assesses  charges,  recorded  as  expense,  and any  amounts to be
      received  separately.  Previously,  a net payment or receipt for long-term
      support would be recorded as an offset to (or increase in) revenue.  These
      increases  were  partially  offset by net  reductions  of more than $89 in
      costs related to benefits,  contract labor, right-to-use fees and research
      and development costs.  Expenses relating to implementing  customer number
      portability were comparable between 1998 and 1997.

      Selling,  general and  administrative  expense  decreased in the first six
      months of 1998 due to  second  quarter  1997  one-time  charges  of $1,087
      relating to SBC's strategic  initiatives and  operational  reviews.  These
      items were partially  offset by a first quarter of 1997 settlement gain of
      $146 associated with lump-sum pension payments that exceeded the projected
      service and interest costs for 1996 retirements.

      Excluding  these  charges,  selling,  general and  administrative  expense
      increased  $26, or 3.1%, in the first six months of 1998  primarily due to
      increased  costs  associated  with merger  implementation  and other costs
      associated with the  consolidation  of operations since the merger of more
      than  $97 and  second  quarter  pension  settlement  gains  of $63.  These
      increases  were  partially  offset by decreased  contract  labor costs and
      employee   compensation  and  benefits  and  insurance   refunds  totaling
      approximately  $134. A lower level of expenses  has  resulted  during 1998
      from merger initiatives that have already been implemented.

      Depreciation  and  amortization  for the first six months of 1997 reflects
      charges  totaling  $127 to  record  impairment  of plant  and  intangibles
      including   analog   switching   equipment.   Excluding   these   charges,
      depreciation  and  amortization  increased  $5 for the first six months of
      1998. The 


<PAGE>


PACIFIC BELL AND SUBSIDIARIES

Item 2.  Management's Discussion and Analysis of Results of Operations
Dollars in millions

RESULTS OF OPERATIONS - Continued

      increase was primarily due to increased  depreciation expense of
      $47  resulting  from  overall  higher  plant  levels.  This  increase  was
      substantially  offset by reduced  depreciation of $42 on analog  switching
      equipment.

Interest expense decreased $10, or 4.4%, for the first six months of 1998 due to
interest  of $27  associated  with the second  quarter  1997  one-time  charges.
Excluding these one-time charges interest expense increased $17, or 8.5%, due to
increased  interest  expense of  approximately  $6 resulting from an increase in
long-term  debt and interest  related to the merger  approval order amount to be
returned to the California ratepayers of approximately $10.

Other  income  (expense) - net was a net expense of $28 for the first six months
of 1997 due to a second  quarter  one-time  charge  of $30 for  SBC's  strategic
initiatives,  primarily writeoffs of nonoperating plant.  Excluding this charge,
other  income  (expense)  - net was  income  of $2 for the  first six  months of
1997.

Income Tax  expense  for the first six months of 1997  reflect the tax effect of
charges for strategic  initiatives  resulting from SBC's comprehensive review of
operations of the merged company and the impact of several regulatory rulings as
well as taxes on the pension  settlement gain discussed in selling,  general and
administrative  expense.  Excluding these items,  income taxes for the first six
months of 1997 would have been  $307.  Income  taxes for the first six months of
1998 were higher due primarily to higher income before income taxes.

Cumulative  Effect  of  Accounting  Changes,  as  discussed  in  Note  3 to  the
Consolidated  Financial  Statements,  include  the  effect  of  changes  applied
retroactively  to  conform  accounting  methodologies  between  PacBell  and SBC
effective  January 1, 1997.  The cumulative  after-tax  effect of these one-time
changes is $345.



<PAGE>


PACIFIC BELL AND SUBSIDIARIES

Item 2.  Management's Discussion and Analysis of Results of Operations
Dollars in millions

OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS

COMPETITIVE AND REGULATORY ENVIRONMENT

Interconnection  Reciprocal  compensation is  billed to PacBell  by  Competitive
Local Exchange  Carriers  (CLECs) for the  termination of certain local exchange
traffic to CLEC customers. SBC believes that under the Telecommunications Act of
1996 the state commissions only have authority to order reciprocal  compensation
for local traffic,  while only the Federal  Communications  Commission (FCC) has
authority over interstate and interexchange traffic, which is where SBC believes
most   Internet   traffic   terminates.   The   question  of  whether   Internet
communications   should  be  classified  as  local  or  interstate  traffic  for
reciprocal  compensation purposes is the subject of a pending FCC proceeding and
the FCC is expected to rule on this issue in the near future.

The issue of  payment by PacBell  to CLECs of  reciprocal  compensation  for the
termination of Internet traffic to Information  Service Providers (i.e. Internet
Access Providers) is pending before the California  Public Utilities  Commission
(CPUC).

State  commissions in Texas,  Missouri,  and Oklahoma have issued orders finding
that SBC is required to pay CLECs reciprocal compensation for the termination of
Internet traffic to Information Service Providers. In June 1998, a U.S. District
Court  in  Texas   affirmed  the  Texas  Public  Utility   Commission's   (TPUC)
determination,  and upheld payment of reciprocal compensation,  holding that the
TPUC had jurisdiction over the local portion of the traffic and the FCC over the
Internet component.

Similar  treatment of Internet traffic has been applied in Missouri and Oklahoma
with respect to reciprocal compensation arrangements.  In Missouri, the Missouri
Public Service Commission has ordered that reciprocal  compensation for Internet
traffic  should be paid at least  until the FCC  decides  whether  such  traffic
should be considered local or interstate for purpose of reciprocal compensation.
SBC has sought review or reconsideration of all of these cases.

SBC's  subsidiaries  have  been  recording  amounts  sought by the CLECs for the
termination of Internet traffic to Internet Service  Providers as they have been
billed.

Long-distance   Application   SBC   continues  to  seek  entry  into   interLATA
long-distance by requesting favorable  recommendation from state commissions and
approval  from the FCC,  and as necessary  through the courts.  In response to a
July 1998 CPUC initial report,  PacBell has begun collaborative efforts with the
CPUC  and  competitors  to  provide  additional   evidence  regarding  PacBell's
checklist  compliance  efforts. A final vote by the CPUC on whether to recommend
PacBell's application to the FCC is expected by the end of 1998.

Universal  Service In July 1998,  the CPUC  issued a rate  rebalancing  decision
related to its 1996 order on  universal  service.  The CPUC's  decision  will be
implemented  prospectively beginning September 1, 1998 and will reduce PacBell's
non-basic local service,  network access and long distance  service  revenues by
$305 annually to offset the approximately  $305 annually that PacBell expects to
receive from the  California  high cost fund based on CPUC estimates of the cost
of providing universal service.

Beginning  in  February  1997,  PacBell  began  collecting  funds  via  customer
surcharges and  classifying  revenues in  anticipation  of the CPUC's  decision,
utilizing a method similar to the July 1998 order. The CPUC has yet to decide on
the refund  mechanism for funds  collected by PacBell from February 1997 through
August 1998.


<PAGE>


PACIFIC BELL AND SUBSIDIARIES

Item 2.  Management's Discussion and Analysis of Results of Operations
Dollars in millions

OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS - Continued

OTHER BUSINESS MATTERS

New Accounting  Standards In June 1998, the Financial Accounting Standards Board
issued Statement No.  133, "Accounting for  Derivative Instruments and   Hedging
Activities"  (FAS 133) that will require all  derivatives  to be recorded on the
balance sheet at fair value,  and will require changes in the fair values of the
derivatives to be recorded in net income or comprehensive  income.  FAS 133 must
be  adopted  for years  beginning  after  June 15,  1999 with  earlier  adoption
permitted. PacBell currently has no derivative financial instruments.

See Note 4 to the Consolidated  Financial Statements for a discussion of the new
accounting standard on software costs.

Employees  On May 27,  1998,  members of the  Communications  Workers of America
(CWA) ratified the tentative  labor  agreement that was reached on April 7, 1998
between  PacBell and the CWA.  The new  agreement  covers  approximately  34,000
employees of PacBell  through  April 1, 2001.  Among other items,  the agreement
specifies an 11% increase in wages over the life of the contract.

SBC's  Year  2000  Project  SBC  operates   numerous   date-sensitive   computer
applications  and systems  throughout its  businesses.  Since 1996, SBC has been
working to upgrade its networks and computer  systems to properly  recognize the
Year  2000  and  continue  to  process   critical   operational   and  financial
information.  SBC has formed  companywide teams to address and resolve Year 2000
issues,  and processes  have been  developed to  evaluate  and manage the  risks
and costs  associated with preparing all  of its systems and  applications  for 
the new millennium.

SBC is using a four-step  methodology for addressing the issue.  The methodology
includes  inventory and  assessment,  hardware and software  fixes,  testing and
deployment. SBC measures its progress by the number of systems addressed.

Inventory  and   assessment   includes  the   identification   of  items  (i.e.,
line-by-line  review of  software  code,  switch  generics,  etc.) that could be
impacted by the Year 2000 and the  determination  of the work effort required to
get them ready.  These  activities  are nearly  complete.  For all of SBC,  this
process  involves  reviewing  over 300  million  lines of software  code,  1,100
central office switches,  6,800 company  buildings,  conducting an inventory and
assessment  of  100,000  personal  computers,  and  coordinating  with  its  900
suppliers of 12,000 products to obtain adequate assurance they will be compliant
with the Year 2000 or determine and address any appropriate contingency plans or
back up systems.

Hardware and software fixes are the  activities  that will be required to modify
program code,  upgrade computer software and upgrade or replace hardware.  As of
June 30, 1998,  nearly half of the systems to be  addressed by these  activities
were complete.

Testing involves ensuring that hardware and software fixes will work properly in
1999 and beyond and occurs both before and after deployment. Testing began early
in 1998 and will continue  through 1999 to allow for thorough testing before the
Year 2000. Any need for contingency plans or back-up systems would be determined
and addressed during the testing phase.

Deployment  is the  installation  of hardware and software  components in a live
environment. Nearly half of the systems deployment were completed as of June 30,
1998.  


<PAGE>


PACIFIC BELL AND SUBSIDIARIES

Item 2.  Management's Discussion and Analysis of Results of Operations
Dollars in millions

OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS - Continued

Total  expenses for all  of SBC's Year  2000 project  have  been   estimated  to
be less than $250, and SBC has incurred approximately $60 through June 30, 1998.

The activities involved in SBC's Year 2000 project necessarily involve estimates
and  projections,  as described  above, of activities and resources that will be
required in the future.  These  estimates and  projections  could change as work
progresses on the project.


<PAGE>


PACIFIC BELL AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

(a)   Exhibits

      Exhibit 12  Computation of Ratios of Earnings to Fixed Charges.

      Exhibit 27  Financial Data Schedule.

(b)   Reports on Form 8-K

      On April 15, 1998, PacBell filed a Current Report on Form 8-K,
      reporting on Item 5.  Other Events.  The Report contained selected
      restated financial statement information related to PacBell's
      distribution of Pacific Bell Directory, Pacific Bell Mobile Services,
      Pacific Bell Internet Services and PB Comm Switches, Inc. to Pacific
      Telesis Group.


<PAGE>


                                  SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                       PACIFIC BELL




August 13, 1998                        /s/ Robert B. Pickering
                                       Robert B. Pickering
                                       Vice President and Chief Financial
                                       Officer (Principal Accounting/
                                       Financial Officer)