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 September 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

<TABLE>
PACIFIC BELL
----------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
<CAPTION>
                                                    Three months        Nine months 
                                                       ended               ended
                                                   September 30,       September 30,
                                                 ---------------------------------------
                                                     1998      1997     1998       1997
----------------------------------------------------------------------------------------
<S>                                               <C>       <C>      <C>        <C>
Operating Revenues
Local service                                     $ 1,184   $ 1,108  $ 3,469    $ 3,201
Network access:
  Interstate                                          487       456    1,493      1,255
  Intrastate                                          187       194      556        596
Long-distance service                                 313       299      925        897
Other                                                 238       164      604        504
----------------------------------------------------------------------------------------
Total operating revenues                            2,409     2,221    7,047      6,453
----------------------------------------------------------------------------------------
Operating Expenses
Cost of services and products                         866       822    2,563      2,458
Selling, general and administrative                   440       473    1,310      2,258
Depreciation and amortization                         472       441    1,386      1,477
----------------------------------------------------------------------------------------
Total operating expenses                            1,778     1,736    5,259      6,193
----------------------------------------------------------------------------------------
Operating Income                                      631       485    1,788        260
----------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense                                     (104)     (116)    (320)      (342)
Other income (expense) - net                            -        12        -        (16)
----------------------------------------------------------------------------------------
Total other income (expense)                         (104)     (104)    (320)      (358)
----------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes and Cumulative
  Effect of Accounting Changes                        527       381    1,468        (98)
----------------------------------------------------------------------------------------
Income Taxes                                          207       150      575         (5)
----------------------------------------------------------------------------------------
Income (Loss) Before Cumulative Effect of
  Accounting Changes                                  320       231      893        (93)
----------------------------------------------------------------------------------------
Cumulative Effect of Accounting Changes, net of tax     -         -        -        345
----------------------------------------------------------------------------------------
Net Income                                        $   320   $   231  $   893    $   252
----------------------------------------------------------------------------------------

See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>


<TABLE>
PACIFIC BELL
---------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
(Unaudited)
---------------------------------------------------------------------------------
<CAPTION>
                                                    September 30,    December 31,
                                                ---------------------------------
                                                            1998            1997
---------------------------------------------------------------------------------
<S>                                                   <C>             <C>
Assets
Current Assets
Cash and cash equivalents                             $       48      $       43
Accounts receivable - net of allowances for
  uncollectibles of $168 and $152                          1,915           1,782
Prepaid expenses                                             114              53
Deferred income taxes                                        333             415
Other current assets                                          41              44
---------------------------------------------------------------------------------
Total current assets                                       2,451           2,337
---------------------------------------------------------------------------------
Property, Plant and Equipment - at cost                   29,810          28,695
  Less: Accumulated depreciation and amortization         18,353          17,442
---------------------------------------------------------------------------------
Property, Plant and Equipment - Net                       11,457          11,253
---------------------------------------------------------------------------------
Other Assets                                               1,034             749
---------------------------------------------------------------------------------
Total Assets                                             $14,942         $14,339
---------------------------------------------------------------------------------
Liabilities and Shareowner's Equity
Current Liabilities
Intercompany loans                                     $     754       $     542
Current portion of long-term obligations                     104               4
---------------------------------------------------------------------------------
Total debt maturing within one year                          858             546
Accrued taxes                                                405             334
Accounts payable and accrued liabilities                   2,398           2,719
---------------------------------------------------------------------------------
Total current liabilities                                  3,661           3,599
---------------------------------------------------------------------------------
Long-Term Debt                                             5,281           5,358
---------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent
Liabilities
Deferred income taxes                                        992             957
Postemployment benefit obligation                            918             881
Unamortized investment tax credits                           159             188
Other noncurrent liabilities                                 629             569
---------------------------------------------------------------------------------
Total deferred credits and other noncurrent liabilities    2,698           2,595
---------------------------------------------------------------------------------
Shareowner's Equity
Common shares ($1 par value)                                 225             225
Capital in excess of par value                             4,436           4,814
Retained earnings (deficit)                               (1,359)         (2,252)
---------------------------------------------------------------------------------
Total shareowner's equity                                  3,302           2,787
---------------------------------------------------------------------------------
Total Liabilities and Shareowner's Equity                $14,942         $14,339
---------------------------------------------------------------------------------

See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>


<TABLE>
PACIFIC BELL
-----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
-----------------------------------------------------------------------------
<CAPTION>
                                                       Nine months ended
                                                          September 30,
                                                  ---------------------------
                                                        1998           1997
-----------------------------------------------------------------------------
<S>                                                   <C>           <C>
Operating Activities
Net income                                            $  893        $   252
Adjustments to reconcile net income to net cash
  provided by operating activities:
   Depreciation and amortization                       1,386          1,477
   Provision for uncollectible accounts                  116            152
   Amortization of investment tax credits                (29)           (32)
   Deferred income tax expense                           116           (259)
   Cumulative effect of accounting changes, net of tax     -           (345)
   Other - net                                          (795)           469
-----------------------------------------------------------------------------
Total adjustments                                        794          1,462
-----------------------------------------------------------------------------
Net Cash Provided by Operating Activities              1,687          1,714
-----------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures                 (1,533)        (1,490)
-----------------------------------------------------------------------------
Net Cash Used in Investing Activities                 (1,533)        (1,490)
-----------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
 maturities of three months or less                      212           (274)
Issuance of other short-term borrowings                    -            610
Issuance of long-term debt                               198              -
Repayment of long-term debt                             (178)            (2)
Equity received from parent                              164              9
Dividends paid                                          (545)          (569)
-----------------------------------------------------------------------------
Net Cash Used in Financing Activities                   (149)          (226)
-----------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents       5             (2)
-----------------------------------------------------------------------------
Cash and cash equivalents beginning of year               43             57
-----------------------------------------------------------------------------
Cash and Cash Equivalents End of Period               $   48         $   55
-----------------------------------------------------------------------------
Cash paid during the nine months ended September 30 for:
     Interest                                         $  357         $  361
     Income taxes, net of refunds                     $  463         $ (250)

See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>


<TABLE>
PACIFIC BELL
------------------------------------------------------------------------------------
STATEMENTS OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
------------------------------------------------------------------------------------
<CAPTION>
                                                       Capital in       Retained
                                          Common       Excess of        Earnings
                                          Shares       Par Value        (Deficit)
------------------------------------------------------------------------------------
<S>                                          <C>            <C>           <C>
Balance, December 31, 1997                   $225           $4,814        $(2,252)
Net income                                      -                -            893
Dividend to shareowner                          -             (545)             -
Net equity from parent                          -              167              -
------------------------------------------------------------------------------------
Balance, September 30, 1998                  $225           $4,436        $(1,359)
------------------------------------------------------------------------------------

See Notes to Consolidated Financial Statements.
</TABLE>

                                      * * * *

<TABLE>
SELECTED FINANCIAL AND OPERATING DATA

<CAPTION>
At September 30, or for the nine months then ended:           1998             1997
                                                      -------------   --------------
<S>                                                         <C>              <C>
  Debt ratio....................................            65.03%           68.74%
  Network access lines in service (000).........            17,920           17,170
  Access minutes of use (000,000)*..............            54,949           50,929
  Resold lines (000)............................               252              174
  Number of employees...........................            45,650           46,400

*Amounts have been restated.
</TABLE>


<PAGE>


PACIFIC BELL

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 subsidiary Pacific
   Bell  Information  Services)  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 subsidiary.  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 nine  months of 1997 by $63
   and $38. 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).

   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 


<PAGE>


PACIFIC BELL

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

   review of operations  throughout the  merged company  and include significant
   integration  of  operations and  consolidation  of some  administrative   and
   support functions.  The charges related to  the strategic  decisions  totaled
   $1 billion   ($645 after tax).  At  September 30, 1998 and December 31, 1997,
   remaining  accruals  for  anticipated  cash  expenditures  related  to  these
   decisions were approximately $90 and $202. 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. These charges
   totaled $3 ($2 net of tax) in the third quarter of 1997.

   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.  During the third quarter of 1997 PacBell
   recorded the corresponding short-term debt of $610 previously incurred by the
   ACN trust on its balance sheet.

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

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 and anticipates it  will be less than $100.   With comparable  levels
   of  software   expenditures,  the SOP would tend to  increase  net income  in
   comparison  with PacBell's  current method of accounting  for software costs.
   However,  the  increases  would  be  largest  in the  year of  adoption  with
   diminishing levels of increases compared  with current accounting  throughout
   the amortization  period.  Consequently,  given otherwise  comparable  income
   levels excluding software,  and otherwise  comparable software  expenditures,
   the  effect of the SOP would  be to  increase  income in the first  year  and
   decrease  income in each subsequent  year until the number of years  affected
   by the SOP equals the amortization period.


<PAGE>


PACIFIC BELL

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 also includes its
subsidiary, Pacific Bell Information Services) for the first nine months of 1998
and 1997 are summarized as follows:

-------------------------------------------------------------------------------
                                                       Nine-Month Period
                                                 ------------------------------
                                                                      Percent
                                                      1998     1997   Change
-------------------------------------------------------------------------------
Operating revenues                                $  7,047 $  6,453      9.2%
Operating expenses                                $  5,259 $  6,193    (15.1)%
Income (loss) before cumulative effect of
accounting changes                                $    893 $    (93)     -
Cumulative effect of accounting changes                 -  $    345      -
Net income                                        $    893 $    252      -
===============================================================================

Net income for the nine months ended  September  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 nine
months  of  1997  includes  after-tax  charges  of  $884  reflecting   strategic
initiatives  resulting  from SBC's  comprehensive  review of  operations  of the
merged  company,  the impact of several  recent  regulatory  rulings and ongoing
merger integration costs. In addition, the first nine 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  gain,  PacBell's  income  before
cumulative  effect  of  accounting  changes  for the first  nine  months of 1998
increased by $189, or 26.8%, compared to $704 for the first nine months of 1997.
The primary  factor for this  increase  in income  before  cumulative  effect of
accounting changes during the first nine months of 1998 was growth in demand for
services and products.

Operating  Revenues  PacBell's  operating  revenues for the first nine months of
1997  reflect  reductions  of $114  related  primarily  to the impact of several
regulatory  rulings.   Excluding  these  items,   PacBell's  operating  revenues
increased  $480,  or 7.3%,  for the first  nine  months of 1998.  Components  of
operating revenues for the first nine months of 1998 and 1997 are as follows:

----------------------------------------------------------------------------
                                                    Nine-Month Period
                                              ------------------------------
                                                                     Percent
                                                  1998     1997      Change
----------------------------------------------------------------------------
Local service                                 $  3,469  $ 3,201         8.4%
Network access:
   Interstate                                    1,493    1,255        19.0
   Intrastate                                      556      596        (6.7)
Long-distance service                              925      897         3.1
Other                                              604      504        19.8
-------------------------------------------------------------------
     Total                                    $  7,047  $ 6,453         9.2%
============================================================================


<PAGE>


PACIFIC BELL

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

RESULTS OF OPERATIONS - Continued

      Local service revenues increased $268 in the first nine months of 1998 due
      to increases in demand,  which accounts for more than 83% of the increase,
      including increases in access lines,  vertical services and data revenues.
      The number of access  lines  increased by 4.4% since  September  30, 1997,
      with  approximately  42%  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 30% and
      totaled  more than $385 for the first nine months of 1998.  Local  service
      revenues also reflect an increase of approximately  $21 due primarily to a
      July 1998 California  Public Utility  Commission  (CPUC) rate  rebalancing
      order  associated  with the  implementation  of the  California  universal
      service fund that went into effect in February 1997. The rate  rebalancing
      shifted revenues from  long-distance and intrastate access revenues during
      the  quarter  with  a  neutral   impact  on  total   operating   revenues.
      Additionally,  Federal  payphone  deregulation  implemented  in April 1997
      caused  local  service  to  increase  by  approximately  $46 and  caused a
      decrease in interstate  network access of approximately $8,  long-distance
      service of approximately $9 and other operating  revenues of approximately
      $7.

      Network access The increase in interstate  network access revenues for the
      first nine months of 1998 reflects second quarter 1997 one-time charges of
      $134. These one-time charges included billing claim settlements related to
      the effect of the change of the Percentage  Interstate  Usage (PIU) factor
      in California 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 1997 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 $104, or 7.5%.
      The increase was due primarily to approximately  $119 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  $36 required for net payments for  long-term  support which
      were  designed to subsidize  universal  service.  This change is discussed
      further in  operations  and  support  below.  Partially  offsetting  these
      increases  were  the  effects  of  PacBell's  annual  rate  reductions  of
      approximately $58 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 $40 in the first nine months
      of 1998 due to the 1997 PIU settlements of $32 described above.  Excluding
      this  impact,  intrastate  network  access  revenues  decreased  slightly,
      attributable in part to the July 1998 rate rebalancing  order discussed in
      local service.

      Long-distance  service revenues  increased $28 in the first nine months of
      1998. This increase was due to a higher volume of toll messages due to the
      growing  California  economy and  alternative  calling plans.  As noted in
      local  service,  the  increase  in  long-distance   service  revenues  was
      partially offset by payphone  deregulation and the rate rebalancing order.


<PAGE>


PACIFIC BELL

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

RESULTS OF OPERATIONS - Continued

      Other operating  revenues increased $100 in the first nine months of 1998.
      Approximately  83% 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.

Operating Expenses Components of operating expenses for the first nine months of
1998 and 1997 are as follows:

---------------------------------------------------------------------------
                                                   Nine-Month Period
                                              -----------------------------
                                                                    Percent
                                                  1998     1997     Change
---------------------------------------------------------------------------
Operations and support                        $  3,873  $   4,716    (17.9)%
Depreciation and amortization                    1,386      1,477     (6.2)
------------------------------------------------------------------
  Total                                       $  5,259  $   6,193    (15.1)%
===========================================================================

PacBell manages its financial and business operations excluding special one-time
or  unusual  charges  and  refers  to  these  adjusted   results  as  normalized
operations.  As discussed in Note 3 to the  Consolidated  Financial  Statements,
PacBell's  operating  expenses  in the first nine  months of 1997  reflect  $1.2
billion of adjustments  for charges related to SBC's  strategic  initiatives,  a
comprehensive  review of operations of the merged company, the impact of several
regulatory rulings and ongoing merger integration costs. In addition,  the first
nine months of 1997 include a first quarter  settlement  gain of $146 associated
with lump-sum pension payments that exceeded the projected  service and interest
costs  for  1996  retirements.   Excluding  these  1997  adjustments,  PacBell's
normalized operating expenses increased $156, or 3.1%, for the first nine months
of 1998.

      Operations   and  support   Components  of  operations   and  support  and
      normalizing  adjustments for the first nine months of 1998 and 1997 are as
      follows:

---------------------------------------------------------------------------
                                                   Nine-Month Period
                                              -----------------------------
                                                                    Percent
                                                 1998      1997     Change
---------------------------------------------------------------------------
Cost of services and products                 $  2,563  $   2,458      4.3%
Selling, general and administrative              1,310      2,258    (42.0)
------------------------------------------------------------------
  Total operations and support                   3,873      4,716    (17.9)
Adjustments                                        -         (963)     -
------------------------------------------------------------------
  Normalized operations and support           $  3,873  $   3,753      3.2%
===========================================================================

      Operations  and  support   consists  of  all  operating   expenses  except
      depreciation  and  amortization.  Operations and support  expenses for the
      first nine months of 1997 reflect $1.1 billion of the adjustments referred
      to above partially offset by the $146 settlement gain described above.

      Excluding these adjustments,  normalized  operations and support increased
      $120, or 3.2%, in the first nine months of 1998.  The relatively low level
      of expense increase has resulted from merger initiatives that have already
      been implemented.


<PAGE>


PACIFIC BELL

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

RESULTS OF OPERATIONS - Continued

      The  overall   increase   was  due   primarily   to  increases  in  merger
      implementation   costs  in  1998  of  approximately   $218,  1997  pension
      settlement  gains relating to 1997 retirees  totaling  approximately  $96,
      increased  costs   associated  with   reciprocal   compensation   for  the
      termination  of Internet  traffic of  approximately  $49, and increases in
      universal  service  fund  (USF)  charges  of  approximately  $64 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.   In  addition,   wages  and  salaries  and  materials  increased
      approximately  $38. These increases were partially offset by reductions in
      use of contract labor of  approximately  $136,  reduced  expenditures  for
      interconnection  and local competition  initiatives of approximately  $100
      and net  reductions  to  benefits,  right-to-use  fees  and  research  and
      development  costs  totaling  approximately  $95. Costs incurred for local
      number portability were comparable for the first nine months of each year.

      Depreciation   and   amortization   Summarization   of  depreciation   and
      amortization expense and normalizing adjustments for the first nine months
      of 1998 and 1997 is as follows:

----------------------------------------------------------------------------
                                                    Nine-Month Period
                                              ------------------------------
                                                                    Percent
                                                  1998     1997     Change
----------------------------------------------------------------------------
Depreciation and amortization                 $   1,386 $   1,477     (6.2)%
Adjustments                                          -       (127)      -
-----------------------------------------------------------------
  Normalized depreciation and amortization    $   1,386 $   1,350      2.7%
===========================================================================

      Depreciation  and  amortization for the first nine months of 1997 reflects
      charges  totaling  $127 to record  impairment  of plant  including  analog
      switching  equipment.   Excluding  these  adjustments,   depreciation  and
      amortization increased $36 for the first nine months of 1998. The increase
      was primarily due to increased  depreciation expense of $72 resulting from
      overall  higher plant levels.  This increase was  substantially  offset by
      reduced depreciation of $42 on analog switching equipment.

Interest  expense  decreased $22, or 6.4%, for the first nine 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 $5, or 1.6%, due
primarily to increased  interest expense resulting from an increase in long-term
debt.

Other income  (expense) - net was a net expense of $16 for the first nine months
of 1997 and included a second quarter one-time charge of $30 for SBC's strategic
initiatives,  primarily writeoffs of nonoperating plant, partially offset by the
recognition  of $11 of  investment  returns on funds held in trust for  deferred
compensation.

Income Taxes for the first nine 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  operations  and
support.  Excluding these items,  income taxes for the first nine months of 1997
would have been $460. Income taxes for the first nine months of 1998 were higher
due  primarily  to higher  income  before  income  taxes.  


<PAGE>


PACIFIC BELL

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

OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS - Continued

Cumulative  Effect  of  Accounting  Changes,  as  discussed  in  Note  3 to  the
Consolidated  Financial  Statements,  includes  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

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

California  Regulation  In  October  1998,  the  CPUC  issued  a final  decision
modifying  the current  regulatory  framework for PacBell  effective  January 1,
1999.  The decision  adopted  PacBell's  proposal  that the current cap on basic
residential rates be continued for three more years, through 2001, with the CPUC
itself having the ability to adjust basic  telephone  rates.  The final decision
also suspended earnings sharing,  rate of return reviews and the use of earnings
caps and  floors  until  the next  review in 2001.  The  decision  also  adopted
PacBell's  proposal to eliminate  depreciation  reviews and granted  PacBell the
freedom to set its own depreciation rates and methodology. It also continued the
suspension of the productivity factor adjustment. In addition, the CPUC decision
eliminated  most future  exogenous  cost  adjustments  including the recovery of
future costs related to a 1993  accounting  change for  postretirement  benefits
other than pensions.  Management  currently  estimates the items embodied within
the new  regulatory  framework  will have the net effect of reducing  revenue by
approximately $100 in 1999.

Telecommunications  Act of 1996 In July  1997,  SBC  brought  suit in the United
States District Court for the Northern District of Texas (U.S.  District Court),
seeking a declaration that parts of the  Telecommunications Act of 1996 (Telecom
Act) are  unconstitutional  on the  grounds  that they  improperly  discriminate
against  PacBell by imposing  restrictions  that  prohibit  PacBell by name from
offering  interLATA  long-distance  and other services that other Local Exchange
Carriers (LECs) are free to provide.  The suit challenged only those portions of
the  Telecom  Act that  exclude  PacBell  from  competing  in  certain  lines of
business.  On December 31, 1997,  the U.S.  District Court ruled in favor of SBC
and  declared  certain  sections of the Telecom  Act  unconstitutional,  thereby
allowing SBC to enter interLATA  long-distance in PacBell's  operating areas. On
September 4, 1998, the United States Court of Appeals for the Fifth Circuit (5th
Circuit) reversed this decision and ruled that the challenged  provisions of the
Telecom Act are  constitutional.  In October  1998,  SBC asked the United States
Supreme Court (Supreme Court) to hear an appeal of the 5th Circuit decision. The
Supreme Court has not yet determined if it will hear this appeal.  If it decides
to accept the case, a decision would not likely occur until 1999.

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 Telecom Act the state
commissions only have authority to order reciprocal  compensation for intrastate
or 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.  In an October 1998 order, the CPUC has taken
the position  that  Internet  communications  is intrastate or local traffic and
ordered  PacBell  to make  payment of  appropriate  reciprocal  compensation  to
certain CLECs. The question whether Internet communications should be classified
as local/intrastate or interstate traffic for reciprocal  compensation  purposes
is the subject of pending  CPUC and FCC  proceedings  and the FCC is expected to
rule on this issue in the near future. PacBell has been recording amounts sought
by certain CLECs for the  termination  of Internet  traffic to Internet  Service
Providers as they have been billed.

Long-distance  Application  In October 1998, the CPUC staff released a report on
PacBell's checklist  compliance  efforts.  The CPUC staff concluded that PacBell
has not met all items of the FCC's  14-point  checklist  required for entry into
in-region interLATA long-distance and made a series of recommendations as to how
PacBell can meet the remaining checklist items. PacBell is working with the CPUC
to address these  remaining  items. A proposed  decision and vote by the CPUC on
whether to recommend PacBell's application to the FCC is expected by late 1998.


<PAGE>


PACIFIC BELL

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

OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS - Continued

Uniform System of Accounts  Rewrite In a 1988 CPUC decision,  PacBell received a
rate increase as a result of an FCC mandated change in accounting which required
the expensing of items that were previously  capitalized.  The decision required
an annual  incremental  rate reduction of $23, but did not address a termination
date for the rate  reduction.  PacBell filed an application in 1995 to terminate
the rate reductions and with  subsequent  CPUC approval,  halted rate reductions
for 1996, 1997 and 1998, pending the outcome of hearings. In September 1998, the
CPUC issued a decision that grants  PacBell's  request to  discontinue  the rate
reductions. The decision became final in October 1998.

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) which 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.

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.  Companywide  teams are in place to address and  resolve  Year 2000
issues and  processes  are  underway to evaluate  and manage the risks and costs
associated with preparing SBC's  date-impacted  systems and networks for the new
millennium.

SBC is using a  four-step  methodology  to address  the issue.  The  methodology
consists of inventory and assessment,  hardware and software fixes,  testing and
deployment.  SBC  measures  its  progress  by tracking  the number of  completed
hardware and software applications,  network components,  personal computers and
building facilities that can correctly process Year 2000 dates.

Inventory and  assessment is estimated to require 20% of the overall  effort and
includes  the  identification  of items (i.e.,  line-by-line  review of software
code, switch generics, vendor products, etc.) that could be impacted by the Year
2000 and the  determination  of the work effort required to get them ready.  The
inventory  and  assessment  phase  has been  completed.  This  process  involved
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 1,200 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.

Making the hardware and software fixes is the second phase of the process and is
estimated to require 25% of the overall effort. This activity involves modifying
program code,  upgrading computer software and upgrading or replacing  hardware.
As of September 30, 1998, more than half of the hardware and software fixes were
accomplished.


<PAGE>

PACIFIC BELL

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

OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS - Continued

Testing involves ensuring that hardware and software fixes will work properly in
1999 and  beyond  and  occurs  both  before  and after  deployment.  Testing  is
estimated to comprise 45% of the overall effort. Testing began early in 1998, is
approximately  one-third  complete,  and will continue through 1999 to allow for
thorough testing before the Year 2000. Any need for contingency plans or back-up
systems are being determined and addressed during the testing phase.

Deployment  involves  placing the "fixed"  systems  into a live  environment  to
ensure they are working properly. Additional testing is done after deployment as
well.  Deployment is estimated to require 10% of the overall effort. Nearly half
of the deployment phase was completed as of September 30, 1998.

SBC  expects  to spend  less than  $250  million  on the  entire  project,  with
approximately  $89 million  spent  through  September  30, 1998.  As testing and
hardware and software  fixes are estimated to require most of the  expenditures,
there is not a strict correlation between expenditures and project completion.

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.

Debt Repurchase Offer On October 29, 1998, PacBell issued an offer to repurchase
up to $925 in  debentures.  PacBell at this time is unable to predict the amount
of debt that will be redeemed by this offer.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.


<PAGE>


PACIFIC BELL

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

      There  were no reports on Form 8-K filed  during the third  quarter  ended
      September 30, 1998.


<PAGE>




                                         SIGNATURE


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

                                       PACIFIC BELL




November 4, 1998                       /s/ Robert B. Pickering
                                       -------------------------
                                       Robert B. Pickering
                                       Vice President and Chief Financial
                                       Officer