GTE NORTH INC
10-K405, 1997-03-26
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

For the fiscal year ended        December 31, 1996
                                     or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934

For the transition period from          to

Commission File Number                  0-1210

                             GTE NORTH INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

         WISCONSIN                                       35-1869961
(STATE OR OTHER JURISDICTION OF             (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

      600 Hidden Ridge, HQE04B12 - Irving, Texas                 75038
       (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)

Registrant's telephone number, including area code             972-718-5600

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

                                            NAME OF EACH EXCHANGE ON
        TITLE OF EACH CLASS                     WHICH REGISTERED

              NONE

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


<TABLE>
<S>       <C>                                            <C>
$1.15     SERIES CUMULATIVE PREFERRED STOCK-OH           NO PAR VALUE   
$1.25     SERIES CUMULATIVE PREFERRED STOCK-OH           NO PAR VALUE   
$2.00     SERIES CUMULATIVE PREFERRED STOCK-IN           NO PAR VALUE   
$2.10     SERIES CUMULATIVE PREFERRED STOCK-PA           NO PAR VALUE   
$2.20     SERIES CUMULATIVE PREFERRED STOCK-OH           NO PAR VALUE   
$2.25     SERIES CUMULATIVE PREFERRED STOCK-PA           NO PAR VALUE   
$2.30     SERIES CUMULATIVE PREFERRED STOCK-IL           NO PAR VALUE   
$2.375    SERIES CUMULATIVE PREFERRED STOCK-IL           NO PAR VALUE   
$2.40     SERIES CUMULATIVE PREFERRED STOCK-MI           $50 PAR VALUE  
$2.50     SERIES CUMULATIVE PREFERRED STOCK-IL           NO PAR VALUE   
$2.50     SERIES CUMULATIVE PREFERRED STOCK-IN           NO PAR VALUE   
$2.50C    SERIES CUMULATIVE PREFERRED STOCK-IN           NO PAR VALUE   
$4.50     SERIES CUMULATIVE PREFERRED STOCK-WI           $100 PAR VALUE 
$5.00     SERIES CUMULATIVE PREFERRED STOCK-WI           $100 PAR VALUE 
$7.60     SERIES CUMULATIVE PREFERRED STOCK-IN           NO PAR VALUE   
4.60%     SERIES CUMULATIVE PREFERRED STOCK-MI           $50 PAR VALUE  
5.16%     SERIES CUMULATIVE PREFERRED STOCK-MI           $50 PAR VALUE  

</TABLE>
                  (TITLE OF CLASS)

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  
                                           -----      -----

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K.    X
                 -----

THE COMPANY HAD 978,351 SHARES OF $1,000 STATED VALUE COMMON STOCK OUTSTANDING
AT FEBRUARY 28, 1997. THE COMPANY'S COMMON STOCK IS 100% OWNED BY GTE
CORPORATION.

<PAGE>   2



TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item                                                                               Page
<S>          <C>                                                                       <C>
Part I
       1.    Business                                                                   1

       2.    Properties                                                                 5

       3.    Legal Proceedings                                                          5

       4.    Submission of Matters to a Vote of Security Holders                        5

Part II
       5.    Market for the Registrant's Common Equity and Related                      6
             Shareholder Matters

       6.    Selected Financial Data                                                    7

       7.    Management's Discussion and Analysis of Financial                          8
             Condition and Results of Operations

       8.    Financial Statements and Supplementary Data                               14

       9.    Changes in and Disagreements with Accountants on                          37
             Accounting and Financial Disclosure

Part III
     10.     Directors and Executive Officers of the Registrant                        38

     11.     Executive Compensation                                                    41

     12.     Security Ownership of Certain Beneficial Owners and Management            49

     13.     Certain Relationships and Related Transactions                            49

Part IV
     14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K           50
</TABLE>
<PAGE>   3

PART I

Item 1.  Business

GTE North Incorporated (the Company) was incorporated in Wisconsin on January
27, 1987 and was the successor to the merger of eight telephone companies into
the Company on March 31, 1987.  The Company is a wholly-owned subsidiary of GTE
Corporation (GTE).

The Company has one wholly-owned subsidiary, GTW Telephone Systems
Incorporated, which markets and services telecommunications customer premises
equipment in Wisconsin.  In addition, on August 30, 1995, the Company purchased
certain assets from GTE Telecom Marketing Incorporated (TMC), an affiliated
telephone sales and services company.

The Company's principal line of business is providing communications services
ranging from local telephone service for the home and office to highly complex
voice and data services for various industries.  The Company provides local
telephone service within its franchise areas and intraLATA (Local Access
Transport Area) toll service between the Company's facilities and the
facilities of other telephone companies within the Company's LATAs.  InterLATA
service to other points in and out of the states in which the Company operates
is provided through connection with interexchange (long distance) common
carriers.  These common carriers are charged fees (access charges) for
interconnection to the Company's local facilities.  Business and residential
customers also pay access charges to connect to the local network to obtain
long distance service.  The Company earns other revenues by providing such
services as billing and collection and operator services to interexchange
carriers.

The number of access lines in the states in which the Company operates as of
December 31, 1996, was as follows:

<TABLE>
<CAPTION>
                                                 Access
                   State                      Lines Served
                 ----------                   ------------
                 <S>                               <C>
                 Illinois                          904,598
                 Indiana                           990,725
                 Michigan                          697,137
                 Ohio                              896,498
                 Pennsylvania                      676,675
                 Wisconsin                         512,858
                                                 ---------
                    Total                        4,678,491
                                                 =========
</TABLE>                               


At December 31, 1996, the Company had 11,543 employees.

In 1996, agreements were reached on four contracts with the International
Brotherhood of Electrical Workers (IBEW) and three contracts with the
Communications Workers of America (CWA).  During 1997, six contracts with the
IBEW, two contracts with the CWA, and one contract with the Bakery,
Confectionary and Tobacco Workers (BCTW) will expire.

REGULATORY AND COMPETITIVE TRENDS

The Company is subject to regulation by the regulatory bodies of the states of
Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin as to its
intrastate business operations and by the Federal Communications Commission
(FCC) as to its interstate operations.





                                       1
<PAGE>   4

Advances in technology, together with a number of regulatory, legislative and
judicial actions, continue to accelerate and expand the level of competition
and opportunities available to the Company.  Presently, the Company is subject
to competition from numerous sources, including competitive access providers
(CAPs) for network access services.  In addition, competition from alternative
local-exchange carriers (ALECs), interexchange carriers (IXCs), wireless
carriers and cable providers, as well as more recent entry by media and
computer companies, is expected to increase in the rapidly changing
telecommunications marketplace.

On February 8, 1996, the Telecommunications Act of 1996 (the Telecommunications
Act) became law.  This comprehensive telecommunications reform legislation
addresses a wide range of competitive and regulatory issues that will affect
the future development of local and long distance services, cable television
and information services.  The new law removes regulatory and court-ordered
barriers to competition between segments of the industry, enabling
local-exchange, long distance, wireless and cable companies to compete in
offering voice, video and information services.

The Telecommunications Act requires the FCC and state commissions to open
local-exchange markets and to set new guidelines for interconnection, loosens
restrictions barring local telephone companies from entering the cable
television market, and preserves universal service while equalizing the
responsibility for contribution among all carriers.

Following passage of the Telecommunications Act, the FCC has undertaken to
issue rules governing three areas: interconnection, universal service and
access charge reform.  In August 1996, the FCC released its rules implementing
the provision of number portability and dialing parity in accord with the
Telecommunications Act.  In August 1996, the FCC also adopted its rules
governing interconnection, unbundling of network elements and wholesale prices
and other terms for competitive entry into local-exchange service.  These rules
generally require local-exchange carriers (LECs) to make their services
available to competitors at a wholesale discount and to make their network
elements available to competitors at below-cost prices.  GTE petitioned for
judicial review of these rules on the grounds that they were inconsistent with
the Telecommunications Act.  In October 1996, the U.S. Court of Appeals for the
Eighth Circuit granted GTE's request for stay of the pricing provisions of the
FCC's rules pending the Court's resolution of the merits of GTE's petition.
Oral arguments on the merits were held in January 1997, and the Court's ruling
is expected in the spring of 1997.

GTE is continuing to negotiate with requesting carriers over the terms of
interconnection, unbundled network elements and resale rates.  In some cases,
the parties have been unable to agree within the statutory period for
negotiation and have gone to arbitration before various state regulatory
commissions.  Since November 1996, a number of state commission decisions
determining the prices and terms of unresolved issues have been released (See
Note 11 of the Company's consolidated financial statements included in Item 8).
Subsequent decisions are expected to be issued over a period extending through
the first half of 1997.

The Company has exercised its right under the Telecommunications Act to
challenge state regulatory commission arbitration orders that govern agreements
between the Company and its competitors.  The Company has filed lawsuits in
federal district courts in Illinois, Indiana, Michigan, Ohio, Pennsylvania and
Wisconsin.

In November 1996, the Federal-State Joint Board released its recommended
universal service plan, and in December 1996, the FCC issued its access reform
proposals.  Both proposals incorporate a pricing methodology similar to the one
that GTE is appealing in the interconnection case.  A final order in the
universal service proceeding must be adopted by early May 1997, and a decision
on the access reform proceeding is expected shortly thereafter.

A key provision of the Telecommunications Act eliminated the legal restraints
of the GTE Consent Decree which kept the Company from providing interLATA long
distance services.  This action will simplify GTE's ability to market local,
intraLATA and interLATA service to its customers as a bundled service.  In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market.  In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets.  GTE now offers the service, marketed under the
name GTE Easy Savings Plan (sm), in all 50 states.





                                       2
<PAGE>   5
The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition.  To date, local competition has been
authorized in all 28 states where GTE currently offers local telephone service,
including Illinois, Indiana, Michigan, Ohio, Pennsylvania, and Wisconsin.  In
addition, nineteen states, including Illinois, Indiana, Michigan, Ohio,
Pennsylvania and Wisconsin, have authorized plans that would allow customers to
pre-subscribe to a specific carrier to handle their intraLATA toll calls.
Pre-subscribed customers will simply dial "1" before the telephone number in
order to complete intraLATA calls.  GTE has proposals pending in all nine of
the states which have not ordered implementation.

Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service.  Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives to telephone service
providers to improve productivity and provide the foundation for implementing
pricing flexibility necessary to address competitive entry into the Company's
markets. The state regulatory commissions in Michigan and Wisconsin have
adopted price regulation for intrastate telephone service.  Regulatory
commissions in the states of Illinois, Indiana, Ohio and Pennsylvania continue
to remain under the traditional cost-based, rate-of-return regulatory framework
for intrastate telephone service.

For the provision of interstate access services,  the Company operates under
the terms of the FCC's price cap incentive plan.  The "price cap" mechanism
serves to limit the rates a carrier may charge, rather than just regulating the
rate of return which may be achieved.  Under this approach, the maximum prices
that the LEC may charge are increased or decreased each year by a price index
based upon inflation less a predetermined productivity target.  LECs have
limited pricing flexibility provided they do not exceed the allowed price cap.

Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 11 of the Company's consolidated financial statements
included in Item 8.

The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.

The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace.  The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its telephone networks.  However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.

INITIATIVES

In 1996, the Company and its parent, GTE, continued to position themselves to
respond aggressively to competitive developments and benefit from new
opportunities.

GTE North Incorporated (the Company):

Restructuring and Cost Control

During 1996, the Company substantially completed the implementation of its
three-year $374.6 million re-engineering program.  Total costs of the program
included $251.6 million related to improvements in customer service processes,
$90.7 million related to improvements in administrative processes and $32.3
million related to the consolidation of facilities and operations and other
related costs.  These costs were primarily associated with the closure and
relocation of various service centers, software enhancements and separation
benefits related to employee reductions.





                                       3
<PAGE>   6

GTE Corporation (GTE):

Video Services

The Telecommunications Act eliminates the telephone company programming ban and
allows GTE the flexibility to choose whether it will enter the wireline video
distribution business through an open video platform arrangement or via a
standard cable television operation (Title VI).  The legislation also allows
GTE to deploy video networks which are fully integrated with its telephone
operations.

GTE, through a separate subsidiary, made its initial entry into the video
market under Title VI.  The most technologically-advanced hybrid fiber/coaxial
network available is being deployed.  At the end of 1996, GTE had been granted
six franchises, three in California and three in Florida.  Construction of the
networks in those markets is underway and approximately 7,000 video subscribers
were acquired in 1996, bringing GTE's total video subscribers to approximately
15,000.

Internet Access

GTE, through a separate subsidiary, was the first local-exchange carrier to
introduce nationwide Internet services to residential and business customers in
1996.  By year-end 1996, GTE's Internet access service, marketed as GTE
Internet Solutions, was offered in over 350 cities covering 49 states,
including Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin.  An
agreement with UUNET Technologies provides the Internet backbone and local
dialing capabilities.  Over 70,000 customers were subscribing to GTE Internet
Solutions at December 31, 1996.

GTE Long Distance

One of the most significant impacts of the Telecommunications Act's passage was
the removal of certain restrictions previously included in GTE's Consent
Decree.  Prior to February 8, 1996, GTE was restricted from jointly marketing
the products and services of the Company with those of GTE's interexchange
subsidiaries.  With this joint marketing restriction lifted, GTE can now offer
its customers many services on one monthly bill, with one point of contact.
This opportunity facilitated GTE's entry into the long distance business, as
discussed above.  By December 31, 1996, GTE, through a separate subsidiary, was
offering the service, marketed under the name GTE Easy Savings Plan (sm), in
all 50 states and was serving over 825,000 customers.

ENVIRONMENTAL MATTERS

GTE maintains monitoring and compliance programs related to environmental
matters.  Currently, the Company has been named as a potentially responsible
party at a number of "Superfund Sites".  GTE has reviewed each site in which it
has an involvement to establish an expected remediation cost.  Based on this
review, management believes the Company is not subject to administrative or
judicial proceedings which would result in a material adverse effect on the
Company's results of operations or financial position.  The Company has
established adequate reserves for estimated remediation and cleanup costs.

The Company's annual expenditures for site cleanups and environmental
compliance have not been and are not expected to be material.  Costs incurred
include the Company's share of cleanup expenses for Superfund Sites, outlays
required to keep existing operations in compliance with environmental
regulations and an underground storage tank replacement program.





                                       4
<PAGE>   7
Item 2.  Properties

The Company's property consists principally of land, structures and equipment
required to provide various telecommunications services.  All of these
properties, located in the states of Illinois, Indiana, Michigan, Ohio,
Pennsylvania and Wisconsin, are generally in good operating condition and
adequate to satisfy the needs of the business.  Substantially all of the
Company's property is subject to the liens of its respective mortgages securing
funded debt.  From January 1, 1992 to December 31, 1996, the Company made
capital expenditures of $3 billion for new plant and facilities required to
meet telecommunication service needs and to modernize plant and facilities.
These additions were equal to 33% of gross plant of $9.2 billion at December
31, 1996.

In the fourth quarter of 1995, the Company discontinued the use of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS 71).

In general, FAS 71 required the Company to depreciate its telephone plant and
equipment over lives approved by regulators which, in many cases, extended
beyond the assets' economic lives.  FAS 71 also required the deferral of
certain costs based upon approvals received from regulators to recover such
costs in the future.  As a result of these requirements, the recorded net book
value of certain assets and liabilities, primarily telephone plant and
equipment, were in many cases higher than that which would otherwise have been
recorded based on their economic lives.  See Note 2 of the Company's
consolidated financial statements included in Item 8.

Item 3.  Legal Proceedings

There are no pending legal proceedings which would have a material impact on
the Company's consolidated financial statements.

Item 4.  Submission of Matters to a Vote of Security Holders

None.





                                       5
<PAGE>   8
PART II


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

Market information is omitted since the Company's common stock is wholly-owned
by GTE Corporation (GTE).


SHAREHOLDER SERVICES

The First National Bank of Boston, Transfer Agent and Registrar for GTE and the
Company's common stock and preferred stock, should be contacted with any
questions relating to shareholder accounts.  This includes the following:

o        Account information
o        Dividends
o        Market prices
o        Transfer instructions
o        Statements and reports
o        Change of address

Shareholders may call toll-free at 1-800-225-5160 anytime, seven days a week.
Customer Service Representatives are available Monday through Friday between
the hours of 8 a.m. and 5 p.m. Eastern Time.  Outside the United States call 1-
617-575-2990.

Or write to:
         Bank of Boston
         c/o Boston EquiServe, L.P.
         P.O. Box 9121
         Boston, MA 02205-9121

For overnight delivery services, use the following address:
         Bank of Boston
         c/o Boston EquiServe, L.P.
         Blue Hills Office Park
         150 Royall Street
         Canton, MA 02021

The Bank of Boston address where shareholders, banks and brokers may deliver
certificates is One Exchange Place, 55 Broadway in New York City.

PARENT COMPANY ANNUAL REPORT

To obtain a copy of the 1996 annual report of our parent company or the annual
Form 10-K filed with the Securities and Exchange Commission, call
1-800-225-5160.

INFORMATION VIA THE INTERNET

Internet World Wide Web users can access information on GTE through the
         following universal resource: http://www.gte.com

PRODUCTS AND SERVICES HOTLINE

Shareholders may call 1-800-828-7280 to receive information concerning GTE
products and services.





                                       6
<PAGE>   9
Item 6.  Selected Financial Data

GTE North Incorporated and Subsidiary

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                              ----------------------------------------------------------------
Selected Income Statement Items (a)               1996        1995            1994       1993(b)       1992
- -----------------------------------           ----------------------------------------------------------------
                                                                  (Thousands of Dollars)
<S>                                         <C>           <C>            <C>           <C>          <C>
Revenues and sales                          $2,988,803   $  2,861,163     $2,794,465   $2,637,564   $2,591,750
Operating costs and expenses                 2,002,253      1,981,530      1,924,409    2,383,648    1,920,300
                                            ------------------------------------------------------------------            
Operating income                               986,550        879,633        870,056      253,916      671,450
Interest - net                                 113,875        114,646        109,487      113,775      115,144
Income taxes                                   321,175        271,743        284,293       34,925      186,764
                                            ------------------------------------------------------------------            
Income before extraordinary charges            551,500        493,244        476,276      105,216      369,542
Extraordinary charges                               --     (1,253,960)(c)         --      (14,270)          --
                                            ------------------------------------------------------------------            
Net income (loss)                           $  551,500   $   (760,716)    $  476,276   $   90,946   $  369,542
                                            ==================================================================            
                                                        
Dividends declared on common stock          $  548,502   $    336,000     $  277,729   $  165,052   $  364,162
Dividends declared on preferred stock            2,559          2,592          2,643        2,680        2,731
</TABLE>

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                              ----------------------------------------------------------------
Selected Balance Sheet Items                    1996        1995            1994       1993(b)       1992
- ----------------------------                  ----------------------------------------------------------------
                                                                  (Thousands of Dollars)
<S>                                         <C>           <C>            <C>           <C>          <C>
Property, plant and equipment, net (c)        $2,939,321   $2,841,574     $4,780,079   $4,680,338   $4,635,444
Total assets                                   4,609,928    4,289,081      6,120,013    5,813,016    5,679,570
Long-term debt and preferred stock,
  subject to mandatory redemption              1,549,587    1,348,437      1,384,397    1,486,589    1,387,072
Shareholders' equity                           1,265,880    1,265,441      2,364,657    2,168,750    2,245,719
</TABLE>

- --------------------------------------------------------------------------------

(a) Per share data is omitted since the Company's common stock is 100% owned by
    GTE Corporation.
(b) Operating income in 1993 included a $374.6 million pre-tax charge for
    restructuring costs which reduced net income by $230.8 million.
(c) See Note 2 of the consolidated financial statements included in Item 8.





                                      7
<PAGE>   10
Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations (Dollars in Millions)

BUSINESS OPERATIONS

GTE North Incorporated (the Company), a wholly-owned subsidiary of GTE
Corporation (GTE), provides local-exchange, network access and toll services to
customers in Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin.  At
December 31, 1996, the Company served 4,678,491 access lines in its service
territories.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                              Years Ended December 31,
                                         ----------------------------------
                                           1996         1995         1994
                                         -------       ------      --------
   <S>                                     <C>          <C>              <C>
   Net income (loss)                    $551.5       $(760.7)         $476.3
</TABLE>                             

The net loss for 1995 includes one-time extraordinary charges (net of tax) of
$1,241.5 for the discontinuance of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71)
and $12.5 for the early retirement of debt in the fourth quarter of 1995.

Excluding the extraordinary charges discussed above, net income increased 12%
or $58.3 in 1996 and 4% or $17 in 1995.  The 1996 increase represents higher
revenues and sales, reflecting customer growth with a 3.7% increase in access
lines and an 11% increase in minutes of use, and lower depreciation expense,
partially offset by higher operating costs.  The 1995 increase is primarily
attributable to higher revenues and sales reflecting customer growth, partially
offset by higher depreciation expense and higher operating costs.

 REVENUES AND SALES

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,      
                                                               -------------------------------------- 
                                                                 1996           1995           1994   
                                                               --------       --------       -------- 
   <S>                                                         <C>            <C>            <C>
   Local services                                              $1,148.3       $1,081.1       $1,040.2
   Network access services                                      1,081.4        1,060.7        1,032.8
   Toll services                                                  352.4          366.6          395.6
   Other services and sales                                       406.7          352.8          325.9
                                                               --------       --------       -------- 
      Total revenues and sales                                 $2,988.8       $2,861.2       $2,794.5
</TABLE>

Total revenues and sales increased 4% or $127.6 in 1996 and 2% or $66.7 in
1995.

Local service revenues are based on fees charged to customers for providing
local telephone exchange service within designated franchise areas.  Local
service revenues increased 6% or $67.2 in 1996 and 4% or $40.9 in 1995.  The
number of access lines increased 3.7% in 1996, generating $30.9 of additional
revenues which reflects both customer growth and second line promotions.  A
revenue-neutral rate restructuring in Michigan, effective fourth quarter 1995,
resulted in an increase in local service revenues of $13, which is offset by
corresponding decreases in both network access and toll services revenues.
Also contributing to the 1996 increase are growth of $10.7 in sales of
CentraNet (R), growth of $9.7 in sales of enhanced custom calling features,
such as SmartCall (R), and growth of $4.8 in sales of





                                       8
<PAGE>   11
integrated digital services, which enable rapid transmission of voice, data,
image and text, such as Internet access.  An adjustment to correct the billing
of certain state excise taxes in the second quarter of 1996 of $7.2 partially
offsets the 1996 increases.  The 1995 increase is attributable to customer
growth as reflected by a 3.5% increase in access lines, which generated
additional revenues of $28.4, and $5.2 growth in E911 revenues.  In addition,
the increase represents a $13.5 growth in sales of custom calling features
(e.g. SmartCall (R), CLASS services, etc.) and Integrated Services Digital
Network (ISDN), a service that permits rapid transmission of voice, data, image
and text over one line.  These increases are partially offset by a $3.4 decline
in revenues associated with rate reductions.

Network access service revenues are based on fees charged to interexchange
carriers that use the Company's local-exchange network in providing long
distance services.  In addition, business and residential customers pay access
fees to connect to the local network to obtain long distance service.  Cellular
service providers and other local- exchange carriers also pay access charges
for cellular and intraLATA (Local Access Transport Area) toll calls hauled or
terminated by the Company.  Revenues derived from network access services
increased 2% or $20.7 in 1996 and 3% or $27.9 in 1995.  The 1996 increase is
primarily due to an 11% increase in minutes of use, which generated $59.2 of
additional revenues.  In addition, special access revenues increased $9.7
reflecting growth in dedicated lines.  A reduction of $44.2 in interstate
access revenues reflecting the net effect of the rate changes associated with
the Federal Communications Commission's (FCC) 1995 and 1996 price caps and the
rate restructure in Michigan, as discussed above, partially offset the
increases to revenues in 1996.  The 1995 increase is primarily due to a 10%
increase in minutes of use, which generated $38.3 of additional revenues, an $8
increase in end user access charge revenues associated with growth in access
lines and a growth in cellular and directory assistance revenues of $4.6.
These increases are partially offset by a decrease in network access service
revenues as the result of interstate price reductions of $24.5.

Toll service revenues are based on fees charged for service beyond a customer's
local calling area but within the LATA.  Toll service revenues decreased 4% or
$14.2 in 1996 and 7% or $29 in 1995.  The 1996 decrease reflects the impact of
optional discount calling plans, which effectively lowered intrastate long
distance rates.  Additionally, this reduction results from intraLATA toll
competition, partially offset by an increase in toll volumes primarily due to
the Illinois conversion to an Originating Responsibility Plan (ORP).
Furthermore, the effect of the rate restructure in Michigan, as discussed above
in local service revenues, and $5.9 of unfavorable intrastate settlement
activity contributed to the 1996 decline in toll service revenues.  The 1995
decrease is driven by a decline in toll usage resulting from 10XXX intraLATA
toll competition, price reductions and lower toll revenues for extended area
service which is offset in local service revenues.

Other services and sales revenues increased 15% or $53.9 in 1996 and 8% or
$26.9 in 1995.  The 1996 and 1995 increases are primarily due to $57.1 and
$36.3, respectively, of additional Telephone Sales and Services (TSS) revenues
generated from the sale of products and services previously marketed through
GTE Telecom Marketing Incorporated (TMC).  The Company purchased certain assets
from TMC, an affiliated sales and services company, in the third quarter of
1995.  The 1996 increase is also related to higher directory advertising
revenues of $6.1 due to timing of publications and growth of $3.4 in sales of
radio paging and voice messaging services.  These 1996 increases are partially
offset by a decrease of $12.5 in billing and collection revenues.  The 1995
increase is also attributable to growth of $9 in E911 equipment, radio paging
and voice messaging revenues.  These 1995 increases are partially offset by a
decrease in billing and collection revenues of $21.





                                       9
<PAGE>   12
OPERATING COSTS AND EXPENSES

<TABLE>
<CAPTION>
                                                         Years Ended December 31,      
                                                   -------------------------------------- 
                                                     1996           1995           1994   
                                                   --------       --------       -------- 
   <S>                                             <C>            <C>            <C>
   Cost of services and sales                      $1,061.0       $1,003.3       $1,027.1
   Selling, general and administrative                447.1          412.8          363.4
   Depreciation and amortization                      494.2          565.4          533.9
                                             
      Total operating costs and expenses           $2,002.3       $1,981.5       $1,924.4
</TABLE>

Total operating costs and expenses increased 1% or $20.8 in 1996 and 3% or
$57.1 in 1995.

The 1996 increase represents higher cost of services and sales expense and
higher selling, general and administrative costs associated with revenue
generation efforts, reduced partially by lower depreciation costs.  The 1996
increase generally reflects higher material costs of $23.8 related to business
equipment sales, greater labor costs of $17.1, including contractor costs, and
increased telecommunication costs of $15.  In addition, the 1996 increase is
related to higher application software costs of $14.7, higher data processing
costs of $11.9, and higher operating taxes of $5.8.  Also contributing to the
1996 increase are the change in actuarial adjustments to the Company's benefit
plans of $7.8 and a reserve of $5.7 for inside wire maintenance settlements, as
discussed below.  These increases are partially offset by a net $71.2 decrease
in depreciation due to revised estimates of future net salvage value and
remaining useful lives, partially offset by growth in depreciable plant
investment.  The impact of $28.1 in pension settlement gains recorded in 1996
was offset by settlement gains of $13.2 recorded in 1995 which resulted from
lump-sum payments from the Company's pension plans.

The increase in operating costs and expenses for 1995 includes the effect of
settlement gains associated with lump-sum payments from the Company's pension
plan of $13.2 recorded in 1995 offset by $62.6 recorded in 1994.  Also
contributing to the 1995 increase is higher depreciation expense of $31.5 due
to revised estimates of future net salvage value and remaining useful lives and
by growth in depreciable plant investment.  These 1995 increases are partially
offset by lower contractor costs of $11.5 and net decreases in carrier billing
settlements of $11.


  OTHER EXPENSE

<TABLE>
<CAPTION>
                                                         Years Ended December 31,      
                                                   -------------------------------------- 
                                                     1996           1995           1994   
                                                   --------       --------       -------- 
   <S>                                             <C>            <C>            <C>
   Interest - net                                  $113.9         $114.6         $109.5
   Income taxes                                     321.2          271.7          284.3
</TABLE>

Interest - net remained relatively unchanged in 1996 and increased 5% or $5.1
in 1995.  The 1995 increase is primarily due to higher average commercial paper
levels and higher average short-term interest rates.

Income taxes increased 18% or $49.5 in 1996 and decreased 4% or $12.6 in 1995.
The 1996 increase corresponds to the increase in pre-tax income and adjustments
to prior years' tax liabilities.  The 1995 decrease includes adjustments to
prior years' tax liabilities.


                                       10
<PAGE>   13
CAPITAL  RESOURCES AND LIQUIDITY

Management believes that the Company has adequate internal and external
resources available to meet ongoing operating requirements for construction of
new plant, modernization of facilities and payment of dividends.  The Company
generally funds its construction program from operations although external
financing is available.  Short-term borrowings can be obtained through
commercial paper borrowings or borrowings from GTE.  On July 1, 1996, the
Company began participating with other affiliates in a $1,500 syndicated line
of credit to back up commercial paper borrowings.  Through this shared
arrangement, the Company can issue up to $700 of commercial paper.  The Company
has an existing shelf registration statement for an additional $150 of
debentures.

The Company's primary source of funds during 1996 was cash flow from operations
of $1,094.7 compared to $819.3 in 1995.  The increase in cash flow from
operations is primarily the result of lower working capital requirements and
improved results from operations.  Cash from operations was also utilized to
fund the Company's re-engineering plan.

The Company's capital expenditures during 1996 were $609 compared to $608.4
during the same period in 1995.  The 1996 expenditures reflect the Company's
continued access line growth and modernization of current facilities to support
new products and expanded service capabilities.  The Company's anticipated
construction costs for 1997 are expected to increase slightly from the 1996
level, reflecting the continued expansion of existing networks and upgrades
associated with the support of expanded services.

On August 30, 1995, the Company purchased certain assets from TMC, an
affiliated telephone sales and services company, for $5.2.  The Company used
cash from operations to fund the purchase.

Net cash used in financing was $504.4 in 1996 compared to $204.7 in 1995.  This
included dividend payments of $524.7 in 1996 compared to $294.9 in 1995.  The
Company issued $200 of 7.625% debentures in May 1996 and $250 of 6.90%
debentures in November 1996 to refinance the debt called and redeemed in the
fourth quarter of 1995.   Financing activities also included a decrease in
short-term debt of $398.4 for 1996 compared to an increase of $392.9 for the
same period in 1995 reflecting the repayment of commercial paper primarily from
the proceeds of the debt issuances.

At December 31, 1995, the Company had entered into forward contracts to sell
$200 of U.S. Treasury Bonds to hedge against changes in market interest rates
related to the debt the Company called and subsequently refinanced in May 1996,
discussed above.  A gain of approximately $19 occurred upon settlement of the
forward contracts and is being amortized over the life of the associated
refinanced debt as an offset to interest expense.

REGULATORY AND COMPETITIVE TRENDS

The Company is subject to regulation by the regulatory bodies of the states of
Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin as to its
intrastate business operations and by the FCC as to its interstate operations.

Significant regulatory and legislative developments occurred during 1996,
including the passage of the Telecommunications Act of 1996 (the
Telecommunications Act).  The Telecommunications Act is intended to promote
competition in all sectors of the telecommunications marketplace, while
preserving and advancing universal telephone service.

As a result of the Telecommunications Act, the Company may be faced with
increased competition from numerous sources, including competitive access
providers (CAPs), alternative local-exchange carriers (ALECs), interexchange
carriers (IXCs), wireless carriers, cable providers, media and computer
companies.  These companies collectively have the ability to offer a broad
array of voice, video and data services to business and residential customers.





                                       11
<PAGE>   14
Following passage of the Telecommunications Act, the FCC has undertaken to
issue rules governing three areas: interconnection, universal service and
access charge reform.  In August 1996, the FCC adopted its rules governing
interconnection.  These rules generally require LECs to make their services
available to competitors at a wholesale discount and to make their network
elements available to competitors at below-cost prices.  GTE petitioned for
judicial review of these rules on the grounds that they were inconsistent with
the Telecommunications Act.  In October 1996, the U.S. Court of Appeals for the
Eighth Circuit granted GTE's request for a stay of the pricing provisions of
the FCC's rules pending the Court's resolution of the merits of GTE's petition.
Oral arguments on the merits were held in January 1997, and the Court's ruling
is expected in the spring of 1997.

In November 1996, the Federal-State Joint Board released its recommended
universal service plan, and in December 1996, the FCC issued its access reform
proposals.  Both proposals incorporate a pricing methodology similar to the one
that GTE is appealing in the interconnection case.  A final order in the
universal service proceeding must be adopted by early May 1997, and a decision
on the access reform proceeding is expected shortly thereafter.

A key provision of the Telecommunications Act eliminated the legal restraints
of the GTE Consent Decree which kept the Company from providing interLATA long
distance services.  This action will simplify GTE's ability to market local,
intraLATA and interLATA service to its customers as a bundled service.  In
February 1996, GTE executed an agreement whereby WorldCom, Inc. will provide,
on a non-exclusive basis, a full array of telecommunications services in
support of GTE's entry into the interLATA long distance market.  In March 1996,
GTE, through a separate subsidiary, began offering long distance service to its
customers in selected markets.  GTE now offers the service, marketed under the
name GTE Easy Savings Plan (sm), in all 50 states.

The Telecommunications Act forbids states from imposing any barriers to entry
into local and toll competition.  To date, local competition has been
authorized in all 28 states where GTE currently offers local telephone service,
including Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin.  In
addition, nineteen states, including Illinois, Indiana, Michigan, Ohio,
Pennsylvania and Wisconsin, have authorized plans that would allow customers to
pre-subscribe to a specific carrier to handle their intraLATA toll calls.
Pre-subscribed customers will simply dial "1" before the telephone number in
order to complete intraLATA calls.  GTE has proposals pending in all nine of
the states which have not ordered implementation.

Federal and state regulatory activity continued to change the traditional
cost-based, rate-of-return regulatory framework for intrastate and interstate
telephone service.  Regulatory authorities have adopted various forms of
alternative regulation, which provide economic incentives to telephone service
providers to improve productivity and provide the foundation for implementing
pricing flexibility necessary to address competitive entry into the Company's
markets. The state regulatory commissions in Michigan and Wisconsin have
adopted price regulation for intrastate telephone service.  Regulatory
commissions in the states of Illinois, Indiana, Ohio and Pennsylvania continue
to remain under the traditional cost-based, rate-of-return regulatory framework
for intrastate telephone service.

For the provision of interstate access services, the Company operates under the
terms of the FCC's price cap incentive plan.  The "price cap" mechanism serves
to limit the rates a carrier may charge, rather than just regulating the rate
of return which may be achieved.  Under this approach, the maximum prices that
LECs may charge are increased or decreased each year by a price index based
upon inflation less a predetermined productivity target. LECs have limited
pricing flexibility provided they do not exceed the allowed price cap.

Further information regarding the Company's activities with the various
regulatory agencies and revenue arrangements with other telephone companies is
discussed in Note 11 of the Company's consolidated financial statements
included in Item 8.

The Company continues to support greater competition in telecommunications,
provided that, overall, the actions to eliminate existing legal and regulatory
barriers benefit consumers by allowing an opportunity for all service providers
to participate equally in a competitive marketplace under comparable
conditions.





                                       12
<PAGE>   15
The Company intends to continue to respond aggressively to regulatory and legal
developments that allow for increased competition and opportunities in the
marketplace.  The Company expects its financial results to benefit from reduced
costs and the introduction of new products and services that will result in
increased usage of its telephone networks.  However, it is likely that such
improvements will be offset, in part, by continued strategic pricing reductions
and the effects of increased competition.

OTHER MATTERS

Eleven separate class action lawsuits were brought against GTE and twelve of
its subsidiaries (GTE Defendants), including the Company, relating to the
provision of inside wire maintenance services.  On August 6, 1996, the GTE
Defendants and class counsel executed and filed a settlement agreement in one
of the lawsuits.  The Court preliminarily approved the agreement and
conditionally certified a national class of plaintiffs for settlement purposes.
A fairness hearing on the settlement was held on December 18, 1996.  On January
21, 1997, the Court approved the settlement as written and issued a permanent
injunction to prohibit future lawsuits covering any claims from 1987 to the
date of settlement.  Pursuant to the settlement, a proof of claim form was
inserted into the March 1997 customer bills for the national class to request
their benefits under the settlement.  Management believes that the Company has
adequately provided for this settlement in its financial statements for the
year ended December 31, 1996.

INITIATIVES

In 1996, the Company and its parent, GTE, continued to position themselves to
respond aggressively to competitive developments and benefit from new
opportunities.  Further information regarding these initiatives is discussed in
Item 1.

INFLATION

The Company's management generally does not believe inflation has a significant
impact on the Company's earnings.  However, increases in costs or expenses not
otherwise offset by increases in revenues could have an adverse effect on
earnings.





                                       13
<PAGE>   16
Item 8.  Financial Statements and Supplementary Data

GTE North Incorporated and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Years Ended December 31                                             1996             1995             1994
- -----------------------                                           ----------       ----------       ---------- 
                                                                              (Thousands of Dollars)
<S>                                                               <C>              <C>              <C>
REVENUES AND SALES (a)
  Local services                                                 $ 1,148,302      $ 1,081,085      $ 1,040,206
  Network access services                                          1,081,374        1,060,670        1,032,752
  Toll services                                                      352,431          366,649          395,636
  Other services and sales                                           406,696          352,759          325,871
                                                                 -----------      -----------      -----------
   Total revenues and sales                                        2,988,803        2,861,163        2,794,465
                                                                 -----------      -----------      -----------

OPERATING COSTS AND EXPENSES (b)
  Cost of services and sales                                       1,060,968        1,003,323        1,027,139
  Selling, general and administrative                                447,127          412,802          363,363
  Depreciation and amortization                                      494,158          565,405          533,907
                                                                 -----------      -----------      -----------
   Total operating costs and expenses                              2,002,253        1,981,530        1,924,409
                                                                 -----------      -----------      -----------
OPERATING INCOME                                                     986,550          879,633          870,056

OTHER EXPENSE
  Interest  - net                                                    113,875          114,646          109,487
                                                                 -----------      -----------      -----------
INCOME BEFORE INCOME TAXES                                           872,675          764,987          760,569
  Income taxes                                                       321,175          271,743          284,293
                                                                 -----------      -----------      -----------
INCOME BEFORE EXTRAORDINARY CHARGES                                  551,500          493,244          476,276
  Extraordinary charges                                                   --       (1,253,960)              --
                                                                 -----------      -----------      -----------
NET INCOME (LOSS)                                                $   551,500      $  (760,716)     $   476,276
                                                                 ===========      ===========      ===========
</TABLE>

(a) Includes billings to affiliates of $96,491, $91,192 and $92,406 for the
    years 1996-1994, respectively.
(b) Includes billings from affiliates of $201,630, $203,520, and $155,446 for
    the years 1996-1994, respectively.


See Notes to Consolidated Financial Statements.





                                      14
<PAGE>   17
GTE North Incorporated and Subsidiary
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31                                                                            1996             1995
- -----------                                                                        -----------      -----------                 
                                                                                       (Thousands of Dollars)
<S>                                                                                <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                        $   12,975       $   31,655
  Receivables, less allowances of $31,248 and $24,059                                 805,965          662,350
  Inventories and supplies                                                             40,996           48,257
  Deferred income tax benefits                                                         59,438           76,993
  Other                                                                                24,623           33,961
                                                                                   ----------       ----------
   Total current assets                                                               943,997          853,216
                                                                                   ----------       ----------

Property, plant and equipment, net                                                  2,939,321        2,841,574
Employee benefit plans                                                                686,134          560,087
Other assets                                                                           40,476           34,204
                                                                                   ----------       ----------
Total assets                                                                       $4,609,928       $4,289,081
                                                                                   ==========       ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Short-term obligations, including current maturities                             $  257,766       $  435,443
  Accounts payable                                                                    159,098          108,210
  Affiliate payables and accruals                                                      67,989           39,062
  Advanced billings and customer deposits                                              62,743           58,680
  Taxes payable                                                                       159,589          126,179
  Accrued interest                                                                     24,031           21,149
  Accrued payroll costs                                                               219,406          150,728
  Dividends payable                                                                   124,555           98,229
  Accrued restructuring costs                                                              --           93,501

  Other                                                                               135,272           76,011
                                                                                   ----------       ----------
   Total current liabilities                                                        1,210,449        1,207,192
                                                                                   ----------       ----------

  Long-term debt                                                                    1,532,650        1,330,811
  Deferred income taxes                                                               206,386          177,199
  Employee benefit plans                                                              352,200          268,430
  Other liabilities                                                                    25,426           22,382
                                                                                   ----------       ----------
   Total liabilities                                                                3,327,111        3,006,014
                                                                                   ----------       ----------
Preferred stock, subject to mandatory redemption                                       16,937           17,626
                                                                                   ----------       ----------
Shareholders' equity:
  Preferred stock                                                                      29,033           29,033
  Common stock (978,351 shares issued)                                                978,351          978,351
  Additional paid-in capital                                                           43,110           43,110
  Retained earnings                                                                   215,386          214,947
                                                                                   ----------       ----------
   Total shareholders' equity                                                       1,265,880        1,265,441
                                                                                   ----------       ----------
Total liabilities and shareholders' equity                                         $4,609,928       $4,289,081
                                                                                   ==========       ==========
</TABLE>

See Notes to Consolidated Financial Statements.





                                      15
<PAGE>   18
GTE North Incorporated and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended December 31                                              1996             1995             1994
- -----------------------                                           ----------       ----------      ----------- 
                                                                            (Thousands of Dollars)
<S>                                                                 <C>              <C>              <C>
OPERATIONS
  Income before extraordinary charges                             $  551,500       $  493,244       $  476,276
  Adjustments to reconcile income before extraordinary
   charges to net cash from operations:
   Depreciation and amortization                                     494,158          565,405          533,907
   Deferred income taxes                                              46,742           42,038           30,888
   Provision for uncollectible accounts                               39,836           35,409           38,292
   Change in current assets and current liabilities:
     Receivables - net                                              (135,210)         (57,605)        (102,965)
     Other current assets                                             16,599             (630)          14,302
     Accrued taxes and interest                                       36,292          (17,438)          14,093
     Other current liabilities                                       132,659         (180,091)         (99,139)
   Other - net                                                       (87,841)         (61,042)         (41,843)
                                                                  ----------       ----------       ----------
   Net cash from operations                                        1,094,735          819,290          863,811
                                                                  ----------       ----------       ----------
INVESTING
  Capital expenditures                                              (608,984)        (608,395)        (634,738)
  Acquisition of assets                                                   --           (5,200)              --
  Other - net                                                             --              334             (443)
                                                                  ----------       ----------       ----------
   Net cash used in investing                                       (608,984)        (613,261)        (635,181)
                                                                  ----------       ----------       ----------

FINANCING
  Long-term debt issued                                              446,100               --          445,942
  Long-term debt and preferred stock retired                         (46,844)        (290,329)         (16,170)
  Dividends                                                         (524,735)        (294,870)        (235,257)
  Increase (decrease) in short-term obligations,
     excluding current maturities                                   (398,390)         392,887         (398,494)
  Other - net                                                         19,438          (12,435)              --
                                                                  ----------       ----------       ----------
   Net cash used in financing                                       (504,431)        (204,747)        (203,979)
                                                                  ----------       ----------       ----------

Increase (decrease) in cash and cash equivalents                     (18,680)           1,282           24,651

Cash and cash equivalents:
  Beginning of year                                                   31,655           30,373            5,722
                                                                  ----------       ----------       ----------
  End of year                                                     $   12,975       $   31,655       $   30,373
                                                                  ==========       ==========       ==========

Cash paid during the year for:
  Interest                                                        $  117,724       $  122,917       $  100,037
  Income taxes                                                       249,322          229,354          258,789
</TABLE>


See Notes to Consolidated Financial Statements.





                                      16
<PAGE>   19
GTE North Incorporated and Subsidiary
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                         Additional
                                               Preferred      Common      Paid-in      Retained
                                                 Stock        Stock       Capital      Earnings       Total
                                             ------------  -----------  -----------  ------------  ----------
                                                                  (Thousands of Dollars)
<S>                                              <C>          <C>           <C>        <C>          <C>
Shareholders' equity, December 31, 1993         $ 29,033     $ 978,351     $ 43,018   $ 1,118,351   $2,168,753
Net income                                                                                476,276      476,276
Dividends declared                                                                       (280,372)    (280,372)
                                                --------     ---------     --------   -----------   ----------
Shareholders' equity, December 31, 1994           29,033       978,351       43,018     1,314,255    2,364,657

Net loss                                                                                 (760,716)    (760,716)
Dividends declared                                                                       (338,592)    (338,592)
Redemption of preferred stock below stated par                                   92                         92
                                                --------     ---------     --------   -----------   ----------
Shareholders' equity, December 31, 1995           29,033       978,351       43,110       214,947    1,265,441

Net income                                                                                551,500      551,500
Dividends declared                                                                       (551,061)    (551,061)
                                                --------     ---------     --------   -----------   ----------
Shareholders' equity, December 31, 1996         $ 29,033     $ 978,351     $ 43,110   $   215,386   $1,265,880
                                                ========     =========     ========   ===========   ==========
</TABLE>


See Notes to Consolidated Financial Statements.



                                      17
<PAGE>   20
GTE North Incorporated and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

GTE North Incorporated (the Company) provides a wide variety of communications
services ranging from local telephone service for the home and office to highly
complex voice and data services for various industries.  At  December 31,1996,
the Company served 4,678,491 access lines in the states of Illinois, Indiana,
Michigan, Ohio, Pennsylvania and Wisconsin.  The Company is a wholly-owned
subsidiary of GTE Corporation (GTE).

BASIS OF PRESENTATION

The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles which require that management make
estimates and assumptions that affect reported amounts.  Actual results could
differ from those estimates.

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, GTW Telephone Systems Incorporated.  All
significant intercompany transactions have been eliminated.

The Company discontinued applying the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71), in the fourth quarter of 1995 (see Note 2).

Reclassifications of prior-year data have been made, where appropriate, to
conform to the 1996 presentation.

TRANSACTIONS WITH AFFILIATES

GTE Supply (100% owned by GTE) provides construction and maintenance equipment,
supplies and electronic repair services to the Company.  These purchases and
services amounted to $219.3 million, $179.8 million and $167.4 million for the
years 1996-1994, respectively.  Such purchases and services are recorded in the
accounts of the Company, at cost, which includes a normal return realized by
GTE Supply.

The Company is billed for certain printing and other costs associated with
telephone directories, data processing services and equipment rentals, and
receives management, consulting, research and development and pension
management services from other affiliated companies.  These charges amounted to
$201.6 million, $203.5 million and $155.4 million for the years 1996-1994,
respectively.  The amounts charged for these affiliated transactions are based
on a proportional cost allocation method.

The Company's consolidated financial statements include allocated expenses
based on the sharing of certain executive, administrative, financial,
accounting, marketing, personnel, engineering, and other support services being
performed at consolidated work centers among the domestic GTE Telephone
Operating Companies.  The amounts charged for these affiliated transactions are
based on a proportional cost allocation method as filed with the Federal
Communications Commission (FCC).

The Company has an agreement with GTE Directories Corporation (Directories)
(100% owned by GTE), whereby the Company provides its subscriber lists, billing
and collection and other services to Directories.  Revenues from these
activities amounted to $96.5 million, $91.2 million and $92.4 million for the
years 1996-1994, respectively.





                                       18
<PAGE>   21
TELEPHONE PLANT

In 1996, the Company began providing for depreciation on a straight-line basis
over the estimated economic lives of its assets (see Note 2).  The Company had
previously provided for depreciation on a straight-line basis over asset lives
approved by regulators.   Maintenance and repairs of property are charged to
income as incurred.  Additions to, replacements and renewals of property are
charged to telephone plant accounts.  Property retirements are charged in total
to the accumulated depreciation account.  No adjustment to depreciation is made
at the time properties are retired or otherwise disposed of, except in the case
of significant sales or extraordinary retirements of property where profit or
loss is recognized.

REVENUE RECOGNITION

Revenues are recognized when earned.  This is generally based on usage of the
Company's local-exchange networks or facilities.  For other products and
services, revenues are generally recognized when services are rendered or
products are delivered to customers.

INVENTORIES AND SUPPLIES

Inventories and supplies are stated at the lower of cost, determined
principally by the average cost method, or net realizable value.

EMPLOYEE BENEFIT PLANS

Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on accumulated benefit obligations are
accrued currently.  Prior service costs and credits resulting from changes in
plan benefits are amortized over the average remaining service period of the
employees expected to receive benefits.  Material curtailment/settlement gains
and losses associated with employee separations are recognized in the period in
which they occur.

STOCK OPTION PLANS

In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).  As permitted by FAS 123, the Company continues to apply the recognition
and measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25).  The difference between
the recognition and measurement provisions of FAS 123 and APB 25 is not
significant to the Company's results of operations.

INCOME TAXES

The Company's results are included in GTE's consolidated federal income tax
return.  The Company participates in a tax- sharing agreement with GTE and
remits tax payments to GTE based on its tax liability on a separate company
basis.

Deferred tax assets and liabilities are established for temporary differences
between the way certain income and expense items are reported for financial
reporting and tax purposes and subsequently adjusted to reflect changes in tax
rates expected to be in effect when the temporary differences reverse.  A
valuation allowance is established for any deferred tax asset for which
realization is not likely.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.





                                       19
<PAGE>   22
2.  EXTRAORDINARY CHARGES

In response to legislation (see Note 11) and the increasingly competitive
environment, the Company discontinued the use of FAS 71 in the fourth quarter
of 1995.

As a result of the decision to discontinue FAS 71, the Company recorded a
non-cash, after-tax extraordinary charge of $1,241.5 million (net of tax
benefits of $758 million) in the fourth quarter of 1995.  The charge primarily
represents a reduction in the net book value of telephone plant and equipment
through an increase in accumulated depreciation.  In addition to the one-time
charge, beginning in 1996, the Company shortened the depreciable lives of its
telephone plant and equipment as follows:

<TABLE>
<CAPTION>
                                                  Depreciable Lives
                                            ----------------------------
                                            Average
        Asset Category                       Before                After
        --------------                      -------               ------
        <S>                                  <C>                    <C>
        Copper                               20-30                  15
        Switching                            17-19                  10
        Circuit                              11-13                   8
        Fiber                                25-30                  20
</TABLE>

In addition, during 1995, the Company redeemed prior to stated maturity, $190.6
million of long-term debt.  These redemptions resulted in an after-tax
extraordinary charge of $12.5 million (net of tax benefits of $7.7 million).

3.  RESTRUCTURING COSTS

During 1993, the Company recorded one-time restructuring costs of $374.6
million, which reduced net income by $230.8 million, primarily for incremental
costs related to implementation of the Company's re-engineering plan to improve
customer-responsiveness and product quality, reduce the time necessary to
introduce new products and services and further reduce costs.  The
restructuring costs included $251.6 million to re-engineer customer service
processes and $90.7 million to re-engineer administrative processes.  The
restructuring costs also included $32.3 million to consolidate  facilities and
operations and other related costs.  These expenditures were primarily
associated with the closure and relocation of various service centers, software
enhancements and separation benefits associated with employee reductions.  The
re-engineering plan was substantially completed in 1996, consistent with the
original cost estimates.





                                       20
<PAGE>   23


4.  PREFERRED STOCK

Cumulative preferred stock, not subject to mandatory redemption, exclusive of
amounts held in treasury, as of December 31, 1996 and 1995 is as follows:


<TABLE>
<CAPTION>
                                                      Shares 
                                                    ---------
            <S>                                       <C>    
            Authorized                                       
                        No par value                  388,396
                      $100 par value                   33,524
                                                      -------
                 Total                                421,920
                                                      =======
</TABLE>                        

<TABLE>
<CAPTION>
                                                      Shares               Amount                 
                                                    ----------       ----------------------
         Outstanding                                                 (Thousands of Dollars)       
           <S>                                       <C>                   <C>         
           $2.00     No par value                      45,484             $  2,215                
           $2.10     No par value                      66,390                3,542                
           $2.20     No par value                      34,379                1,719                
           $2.25     No par value                      90,765                4,538                
           $4.50   $100 par value                       7,297                  730                
           $5.00   $100 par value                      24,639                2,464                
           $7.60     No par value                     140,000               13,825                
                                                      -------             --------
              Total                                   408,954             $ 29,033                
                                                      =======             ========
</TABLE>

Cumulative preferred stock, subject to mandatory redemption, is as follows:

<TABLE>
<CAPTION>
                                                      Shares 
                                                    ---------
<S>                                                  <C>    
Authorized
            No par value                              462,934
           $50 par value                              166,721
                                                      -------
     Total                                            629,655
                                                      =======
</TABLE>

<TABLE>
<CAPTION>
                                                                              December 31
                                                ---------------------------------------------------------------------
                                                           1996                                     1995
                                                ---------------------------------------------------------------------
                                                 Shares              Amount               Shares              Amount    
                                                -------             -------              -------             --------    
Outstanding                                                  (Thousands of Dollars)                   (Thousands of Dollars)      
  <S>                                           <C>               <C>                    <C>                <C>        
  $1.15     No par value                        121,600           $   3,040              128,000            $   3,200    
  $1.25     No par value                         18,584                 465               18,614                  465    
  $2.30     No par value                         25,200               1,260               25,200                1,260    
  $2.375    No par value                         28,429               1,422               30,897                1,545    
  $2.40    $50 par value                         27,490               1,375               29,490                1,474    
  $2.50     No par value                         39,800               1,990               39,800                1,990    
  $2.50     No par value                         44,631               2,208               47,587                2,355
  $2.50C    No par value                         23,237               1,162               23,237                1,162    
  4.60%    $50 par value                         57,300               2,865               60,500                3,025    
  5.16%    $50 par value                         23,000               1,150               23,000                1,150    
                                                -------           ---------              -------            ---------           
     Total                                      409,271           $  16,937              426,325            $  17,626    
                                                =======           =========              =======            =========           
</TABLE>                                                    
                                                            




                                      21
<PAGE>   24

The outstanding preferred stock is redeemable at a premium, at any time, in
whole or in part, on thirty days notice.  Cumulative preferred stock, not
subject to mandatory redemption, held as treasury shares by the Company were 46
shares at December 31, 1996, 1995 and 1994.

The Company is also required, for Series subject to mandatory redemption, to
purchase and retire shares each year through the operation of a purchase fund.
Shares can be acquired or tendered on a best efforts basis at not more than $50
per share, except for the $1.15 and $1.25 Series, at not more than $25 per
share.  The maximum number of shares that can be purchased and retired each
year are: $1.15 Series - 6,400 shares; $1.25 Series - 1,200 shares; $2.30
Series - 1,200 shares; $2.375 Series - 2,468 shares; $2.40 Series - 2,000
shares; $2.50 Series (IL) - 2,000 shares; $2.50 (IN) - 2,958 shares; $2.50C
Series - 1,200 shares; 4.60% Series - 3,200 shares and the 5.16% Series - 1,000
shares.  The aggregate maximum total of these shares per year is 23,626 shares.

The Company met this requirement through treasury stock and the purchase of
17,054; 23,626 and 22,387 shares in 1996- 1994 respectively.  The aggregate
retirement of preferred stock subject to a purchase fund is $985,000 in each of
the years 1997-2001.

At December 31, 1996 and December 31, 1994, the Company held no cumulative
preferred stock, subject to mandatory redemption as treasury shares.  At
December 31, 1995, the Company held 1,200 shares of treasury stock to cover
future redemption requirements.  No shares were reserved for officers or
employees or for options, warrants, conversions or other rights.  The preferred
shareholders have no voting rights.

5.  COMMON STOCK

The authorized common stock of the Company consists of 2,200,000 shares with a
par value of $1,000 per share.  All outstanding shares of common stock are held
by GTE.

There were no shares of common stock held by or for the account of the Company
and no shares were reserved for officers and employees, or for options,
warrants, conversions or other rights.

At December 31, 1996, $35.8 million of retained earnings were restricted as to
the payment of cash dividends on common stock under the most restrictive terms
of the Company's indentures.





                                       22
<PAGE>   25
6.  DEBT

Long-term debt as of December 31, was as follows:

<TABLE>
<CAPTION>
                                                                                1996                1995
                                                                                 (Thousands of Dollars)
<S>                                                                             <C>                 <C>
First mortgage bonds:
   Maturing 1997 through 2031, weighted average rates of 7.92%
     and 7.76%, respectively                                                  $    642,566        $    688,418

Debentures:
   6.00   %  Series A, due 2004                                                    250,000             250,000

   5.50   %  Series B, due 1999                                                    200,000             200,000

   7.625 %   Series C, due 2026                                                    200,000                  --
   6.90   %  Series D, due 2008                                                    250,000                  --


Other:
  GTE Finance Corporation promissory notes-maturing 1998 through 2016,
     weighted average rate of 9.02%                                                 45,000              45,000
  Commercial paper expected to be refinanced on a long-term basis                       --             200,000
  Capitalized leases                                                                   143                 446
                                                                              ------------        ------------
  Total principal amount                                                         1,587,709           1,383,864
Premium (discount) - net                                                            10,807              (7,900)
                                                                              ------------        ------------
  Total                                                                          1,598,516           1,375,964

Less: current maturities                                                          (65,866)             (45,153)
                                                                              ------------        ------------
  Total long-term debt                                                        $  1,532,650        $  1,330,811
                                                                              ============        ============
</TABLE>


The Company issued $200 million of 7.625% Series C debentures, due 2026, in May
1996 and $250 million of 6.90% Series D debentures, due 2008, in November 1996.
Net proceeds were applied toward the repayment of short-term borrowings
incurred in connection with the redemption of long-term debt in December 1995
prior to stated maturity (see Note 2).  Net proceeds were also used to finance
the Company's construction program and for general corporate purposes.

Long-term debt as of December 31, 1995 includes $200 million of commercial
paper which the Company refinanced in May 1996, as discussed above and in Note
7.

None of the securities shown above were held in sinking or other special funds
of the Company, pledged by the Company or held by affiliates, except for the
promissory notes held by GTE Finance Corporation.  Debt discounts and premiums
on the Company's outstanding long-term debt are amortized over the lives of the
respective issues.  Substantially all of the Company's telephone plant is
subject to the liens of the indentures under which the bonds listed above were
issued.

Estimated payments of long-term debt during the next five years are: $65.9
million in 1997; $33.1 million in 1998; $213.9 million in 1999; $1 million in
2000 and $71.9 million in 2001.





                                       23
<PAGE>   26


Total short-term obligations as of December 31, were as follows:

<TABLE>
<CAPTION>
                                                                                  1996                1995
                                                                              ------------        ------------
                                                                                   (Thousands of Dollars)
<S>                                                                               <C>                 <C>
Commercial paper - average rates 5.4% and 5.7%                                $    191,900        $    390,290
Current maturities of long-term debt                                                65,866              45,153
                                                                              ------------        ------------
  Total                                                                       $    257,766        $    435,443
                                                                              ============        ============
</TABLE>

On July 1, 1996, the Company began participating with other affiliates in a
$1.5 billion syndicated line of credit to back up commercial paper borrowings.
Through this shared arrangement, the Company can issue up to $700 million of
commercial paper.

7.   FINANCIAL INSTRUMENTS

At December 31, 1995, the Company had entered into forward contracts to sell
$200 million of U.S. Treasury Bonds to hedge against changes in market interest
rates related to the debt the Company called and subsequently refinanced in May
1996.  A gain of approximately $19 million occurred upon settlement of the
forward contracts and is being amortized over the life of the associated
refinanced debt as an offset to interest expense.

The fair values of financial instruments, other than long-term debt, closely
approximate their carrying value.  As of December 31, 1996, the estimated fair
value of long-term debt based on either reference to quoted market prices or an
option pricing model, was lower than the carrying value by approximately $8
million.  The estimated fair value of long-term debt as of December 31, 1995
exceeded the carrying value by approximately $44 million.





                                       24
<PAGE>   27
8.   INCOME TAXES

The income tax provision is as follows:

<TABLE>
<CAPTION>
                                                                      1996             1995             1994
                                                                   ------------     ------------    -------------
                                                                            (Thousands of Dollars)
<S>                                                                 <C>              <C>              <C>
Current:
  Federal                                                           $244,128         $205,299         $221,180
  State                                                               30,305           24,406           32,225
                                                                    --------         --------         --------  
                                                                     274,433          229,705          253,405
                                                                    --------         --------         --------  
Deferred:
  Federal                                                             49,139           45,433           42,589
  State                                                                6,931            9,903            4,772
                                                                    --------         --------         --------  
                                                                      56,070           55,336           47,361
                                                                    --------         --------         --------  

Amortization of deferred investment tax credits                       (9,328)         (13,298)         (16,473)
                                                                    --------         --------         --------  
   Total                                                            $321,175         $271,743         $284,293
                                                                    ========         ========         ========
</TABLE>


A reconciliation between taxes computed by applying the statutory federal
income tax rate to pre-tax income and income taxes provided in the consolidated
statements of income is as follows:

<TABLE>
<CAPTION>
                                                                      1996             1995             1994
                                                                   ------------     ------------    -------------
                                                                            (Thousands of Dollars)
<S>                                                                 <C>              <C>              <C>
Amounts computed at statutory rates                                 $304,541         $266,838         $266,199
  State and local income taxes, net of federal income tax             24,203           22,301           24,047
   benefits
  Amortization of deferred investment tax credits, net of
   federal income tax benefits                                        (6,063)         (13,298)         (16,473)
  Depreciation of telephone plant construction costs
   previously deducted for tax purposes - net                             --            5,325            6,315
  Rate differentials applied to reversing temporary                       --           (6,743)          (7,337)
   differences
  Other differences - net                                             (1,506)          (2,680)          11,542
                                                                    --------         --------         --------  
Total provision                                                     $321,175         $271,743         $284,293
                                                                    ========         ========         ========
</TABLE>

The tax effects of temporary differences that give rise to the current deferred
income tax benefits and deferred income tax liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
                                                                                       1996             1995
                                                                                     --------         --------  
                                                                                       (Thousands of Dollars)
<S>                                                                                  <C>              <C>
Depreciation and amortization                                                       $  79,174        $  43,989
Employee benefit obligations                                                         (190,078)        (116,521)
Prepaid pension cost                                                                  255,829          206,020
Investment tax credits                                                                 10,382           16,445
Other - net                                                                            (8,359)         (49,727)
                                                                                    ---------        ---------
   Total                                                                            $ 146,948        $ 100,206
                                                                                    =========        =========  
</TABLE>



                                       25
<PAGE>   28
9.  EMPLOYEE BENEFIT PLANS

RETIREMENT PLANS

The Company sponsors noncontributory defined benefit pension plans covering
substantially all employees.  The benefits to be paid under these plans are
generally based on years of credited service and average final earnings.  The
Company's funding policy, subject to the minimum funding requirements of U.S.
employee benefit and tax laws, is to contribute such amounts as are determined
on an actuarial basis to provide the plans with assets sufficient to meet the
benefit obligations of the plans.  The assets of the plans consist primarily of
corporate equities, government securities and corporate debt securities.

The components of the net pension credit for 1996-1994 were as follows:

<TABLE>
<CAPTION>
                                                                      1996             1995             1994
                                                                   ------------     ------------    -------------
                                                                            (Thousands of Dollars)
<S>                                                                 <C>              <C>              <C>
Benefits earned during the year                                   $   44,618        $  38,142       $   46,407
Interest cost on projected benefit obligations                       113,639          108,922          101,768
Return on plan assets:
  Actual                                                            (432,535)        (509,740)           2,633
  Deferred                                                           200,931          305,521         (201,449)
Other - net                                                          (33,369)         (40,728)         (43,237)
                                                                  ----------        ---------       ----------  
  Net pension credit                                              $ (106,716)       $ (97,883)      $  (93,878)
                                                                  ==========        =========       ==========  
</TABLE>

The expected long-term rate of return on plan assets was 9.0% for 1996 and 8.5%
for 1995 and 1994.

The funded status of the plans and the net prepaid pension cost at December 31,
were as follows:

<TABLE>
<CAPTION>
                                                                                     1996             1995
                                                                                   --------         --------  
                                                                                     (Thousands of Dollars)
<S>                                                                                  <C>              <C>
Vested benefit obligations                                                         $1,225,528       $1,034,151
                                                                                   ==========       ==========

Accumulated benefit obligations                                                    $1,345,246       $1,187,042
                                                                                   ==========       ==========

Plan assets at fair value                                                          $3,185,513       $2,798,177
Less: projected benefit obligations                                                 1,672,419        1,514,849
                                                                                   ----------       ----------
Excess of assets over projected obligations                                         1,513,094        1,283,328
Unrecognized net transition asset                                                    (113,869)        (139,780)
Unrecognized net gain                                                                (713,091)        (583,461)
                                                                                   ----------       ----------
  Net prepaid pension cost                                                         $  686,134       $  560,087
                                                                                   ==========       ==========
</TABLE>


Assumptions used to develop the projected benefit obligations at December 31,
were as follows:

<TABLE>
<CAPTION>
                                                 1996             1995
                                               --------         --------  
<S>                                              <C>              <C>
Discount rate                                    7.50%            7.50%
Rate of compensation increase                    5.25%            5.25%
</TABLE>                                   
                                           




                                       26
<PAGE>   29
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Substantially all of the Company's employees are covered under postretirement
health care and life insurance benefit plans.  The health care benefits paid
under the plans are generally based on comprehensive hospital, medical and
surgical benefit provisions.  The Company funds amounts for postretirement
benefits as deemed appropriate from time to time.

The postretirement benefit cost for 1996-1994 included the following
components:

<TABLE>
<CAPTION>
                                                                      1996           1995           1994
                                                                   ------------   ------------    ----------
                                                                            (Thousands of Dollars)
<S>                                                                 <C>              <C>              <C>
Benefits earned during the year                                    $   7,469      $   8,254       $  9,499
Interest on accumulated postretirement benefit obligations            42,740         45,049         41,828
Actual (return) loss on plan assets                                     (574)        (2,509)           749
Amortization of transition obligation                                 17,144         19,879         21,791
Other - net                                                             (678)         1,404         (3,616)
                                                                   ---------      ---------       --------
  Postretirement benefit cost                                      $  66,101      $  72,077       $ 70,251
                                                                   =========      =========       ========
</TABLE>

The following table sets forth the plans' funded status and the accrued
postretirement benefit obligations as of December 31:
<TABLE>
<CAPTION>
                                                                                     1996             1995
                                                                                   --------         --------  
                                                                                     (Thousands of Dollars)
<S>                                                                                  <C>              <C>
Accumulated postretirement benefit obligations attributable to:
  Retirees                                                                         $  414,580      $   426,776
  Fully eligible active plan participants                                              15,290           12,952
  Other active plan participants                                                      173,329          204,065
                                                                                   ----------      -----------
Total accumulated postretirement benefit obligations                                  603,199          643,793
Less: fair value of plan assets                                                        21,900           19,993
                                                                                   ----------      -----------
Excess of accumulated obligations over plan assets                                    581,299          623,800
Unrecognized transition obligation                                                   (258,146)        (315,606)
Unrecognized net gain (loss)                                                            8,455          (74,442)
                                                                                   ----------      -----------
  Accrued postretirement benefit obligations                                       $  331,608      $   233,752
                                                                                   ==========      ===========
</TABLE>


The assumed discount rates used to measure the accumulated postretirement
benefit obligations were 7.5% at December 31, 1996 and December 31, 1995.  The
assumed health care cost trend rate was 8.75% in 1996 and averaged 9.75% in
1995 and is assumed to decrease gradually to an ultimate rate of 6.0% in the
year 2004.  A one percentage point increase in the assumed health care cost
trend rates for each future year would have increased 1996 costs by $5.5
million and the accumulated postretirement benefit obligations as of December
31, 1996, by $59.2 million.

SAVINGS PLANS

The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code.  The plans cover substantially all full-time employees.
Under the plans, the Company provides matching contributions in GTE common
stock based on qualified employee contributions.  Matching contributions
charged to income were $17.9 million, $18.3 million and $14.4 million in
1996-1994, respectively.





                                       27
<PAGE>   30
10. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is summarized as follows at December 31:

<TABLE>
<CAPTION>
                                                                                   1996               1995
                                                                               -------------       ------------
                                                                                      (Thousands of Dollars)
<S>                                                                              <C>                <C>
Land                                                                           $      28,506       $     29,867
Buildings                                                                            547,408            559,583
Plant and equipment                                                                7,822,174          7,556,178
Other                                                                                784,235            756,674
                                                                               -------------       ------------
  Total                                                                            9,182,323          8,902,302
  Accumulated depreciation (see Note 2)                                           (6,243,002)        (6,060,728)
                                                                               -------------       ------------
  Total property, plant and equipment - net                                    $   2,939,321       $  2,841,574
                                                                               =============       ============
</TABLE>


Depreciation expense in 1996-1994 was equivalent to a composite average
percentage of 5.7%, 6.7% and 6.4%, respectively.





                                      28
<PAGE>   31

11.  REGULATORY AND COMPETITIVE MATTERS

The Company's intrastate business is regulated by the state regulatory
commissions in Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin.
Interstate operations are subject to regulation by the FCC.

INTRASTATE SERVICES

The Company provides local-exchange services to customers within its designated
franchise area.  The Company also provides toll services within designated
geographic areas called Local Access and Transport Areas (LATAs) under
agreements with connecting local-exchange carriers (LECs) in conformity with
individual state regulatory orders.  Provisioning of intrastate toll services
by the Company is accomplished by either bill-and-keep arrangements or by
participation with other LECs in settlement arrangements.  A portion of
intrastate toll compensation is earned through access rates which are billed to
other LECs for completing toll calls.

Illinois

All Primary Toll Carrier (PTC) agreements in Illinois were terminated by July
1996 pursuant to the order issued by the Illinois Commerce Commission (ICC) on
December 20, 1995.  Under the PTC plan, each PTC was responsible for filing
toll rates and developing and administering compensation with other LECs.  Each
of the other LECs were compensated through access charges relating to their
involvement in carrying, handling, and billing the calls.  With PTC
termination, each LEC is responsible for providing intraMarket Service Area
(MSA) toll to its end users.

On October 3, 1995, the ICC also issued an order requiring Line Side
Interconnection (unbundling) to be effective November 1, 1995.  LECs are
required to unbundle local access lines into loops, ports and loop subelements
and offer them as separate services within 180 days of a bona fide request.
Line side interconnection is a term which describes the ability of a competitor
or customer to interconnect its facilities with the portion of the LEC network
which extends from the central office to the customer's premises.

As of November 1, 1996, the Company converted all capable offices in Illinois
to 1+ IntraMSA toll pre-subscription pursuant to the ICC's order issued October
3, 1995.

On December 3, 1996, the ICC issued its decision in the Company's arbitration
with AT&T Corp. (AT&T) to determine interconnection, resale, and unbundling
terms and conditions.  Interim discount rates for the Company's resold services
were set equal to Ameritech's average rate of 20.07%.  Where the Company does
not have services similar to Ameritech's, a default discount of 17.5% is to be
used.  The Company's cost studies are to be used in the interim until permanent
discounts are established in a separate generic cost proceeding.  The Company
has filed a lawsuit in the U.S. District Court challenging portions of the
ICC's arbitration determinations.

Indiana

On September 7, 1995, AT&T, LCI International, Inc., Sprint Corporation
(Sprint) and WorldCom Inc. filed a petition requesting the Indiana Utility
Regulatory Commission (IURC) to require LECs to allow 1+ and 0+ intraLATA
pre-subscription in the state of Indiana.  On November 26, 1996, the IURC
ordered all LECs to allow 1+ pre-subscription.  The Company was ordered to
implement the change by May 26, 1997.  Implementation costs shall be amortized
over three years and recovered through an Equal Access Recovery Charge.

On December 12, 1996, the IURC issued its order in the arbitration proceeding
between the Company and AT&T Communications of Indiana, Inc.  The IURC ordered
interim proxy rates for interconnection and unbundled network elements using
rates established in the AT&T-Ameritech Indiana Interconnection Agreement plus
20%.  The wholesale





                                       29
<PAGE>   32
discount was set at 17%.  A separate cost investigation has been established to
review the Company's costs for establishing permanent interconnection rates.
The proceeding is expected to be resolved by late 1997.  Resale issues will
continue to be addressed in Cause No. 39983, the Commission's investigation
into local telephone exchange competition.

On July 1, 1996, the IURC issued an interim order in its investigation relating
to local telephone exchange competition (Cause No. 39983) which addressed the
resale of bundled local services.  The order required that existing LECs file
wholesale tariffs for all its retail local-exchange services, with certain
exceptions, reflecting the applicable discounts for avoided costs.  Requests
for reconsideration or clarification were received by several parties.  The
Company filed a Petition for Rehearing, Reconsideration and Clarification
stating that, among other items, the filing of wholesale tariffs was in
conflict with the negotiation process permitted by the Telecommunications Act
of 1996 (the Telecommunications Act).  The IURC issued its Order on
Reconsideration and Resale Issues on December 18, 1996 addressing services
available for discount and the applicable wholesale discount.  The Commission
ruled that, on an interim basis and subject to true-up, the 17% discount
ordered in the GTE-AT&T arbitration agreement would apply on a statewide basis.

Michigan

On June 9, 1995, the Company filed an application with the Michigan Public
Service Commission (MPSC) to increase basic local service rates by
approximately $18.1 million annually to offset planned reductions in intraLATA
toll rates and the implementation of new optional toll calling plans.  On
October 25, 1995, the MPSC issued an order approving a settlement agreement,
signed by all parties, to increase basic local service rates by $12.9 million
annually, effective November 24, 1995.  In addition, the Company implemented
reduced intraLATA toll rates, including the impacts of new optional calling
plans, totaling $12.9 million annually.

LECs have been under price cap regulation in the state of Michigan since
January 1, 1992, concurrent with the passage of Public Act 179.  On November
30, 1995, Public Act 216, a second generation regulatory reform law, became law
in Michigan replacing Public Act 179.  While price caps are maintained, Public
Act 216 allows for the rebalancing of local service rates based on the existing
variations in cost and the expansion of local competition by requiring tariffs
for unbundled service and local interconnection.

In Michigan, pursuant to Public Act 216, the Company eliminated an interLATA
carrier common line (CCL) surcharge retroactive to December 1, 1995, resulting
in an access revenue reduction of $5.2 million.  On January 15, 1996, an end
user charge was implemented to generate local revenue of $5.2 million in order
to compensate the Company for CCL surcharge revenues lost.

The Company provided intraLATA 1+ dialing parity in all capable switches in
Michigan by June 30, 1996 as mandated by the MPSC in order to comply with
Public Act 216.

On December 12, 1996, the MPSC issued its decision in the Company's arbitration
with AT&T to determine interconnection, resale, and unbundling terms and
conditions.  The interim discount rate for the Company's resold services was
set at 25%.  The Company has filed a lawsuit in the U.S. District Court
challenging portions of the MPSC's arbitration determinations.

On January 15, 1997, the MPSC issued its decision in the Company's arbitration
with Sprint on many of the same issues that were submitted by AT&T.  These
decisions reaffirmed the rate issued in the previous arbitration proceedings.
The Company has filed a lawsuit in the U.S. District Court challenging portions
of the MPSC's arbitration determinations.

Effective March 19, 1997, the Company increased the intrastate end user charge
by $18.4 million annually, and effective April 1, 1997, the Company reduced
intraLATA toll rates by $6 million annually.





                                       30
<PAGE>   33
Ohio

On March 1, 1995, the Company filed a package of proposed access, toll and
local rate reductions with the Public Utilities Commission of Ohio (PUCO) in
the amount of $22 million on an annual basis.  The Company's proposal also
included a commitment to eliminate multi-party services by 1998 and to install
digital switches in all exchanges by 1999.  On April 13, 1995, the PUCO
approved the Company's proposal in its entirety.

On June 29, 1995, the Governor of Ohio signed the State of Ohio Biennium
Budget.  This budget contains a provision which reduced the telecommunications
utility property tax assessment rate from 88 percent to 25 percent on all new
investments beginning with 1994 vintage with a resulting 1995 favorable pre-tax
impact of $3.7 million.

On December 21, 1995, the PUCO issued an order approving the Company's request
to continue an $11.1 million  annual depreciation amortization for two years,
beginning January 1, 1996.  The amortization was scheduled to expire on
December 31, 1995.

On October 9, 1996, the Company filed to reduce its intrastate terminating
Carrier Common Line Charge (CCLC) by $10 million, effective November 15, 1996.
On November 19, 1996, the Company filed to reduce the intrastate CCLC an
additional $6 million, effective January 1, 1997.

On December 24, 1996, the PUCO issued its decision in the Company's arbitration
with AT&T to determine interconnection, resale, and unbundling terms and
conditions.  The interim discount rate for the Company's resold services was
set at 12.16%.  The Company has filed a lawsuit in the U.S. District Court
challenging portions of the PUCO's arbitration determinations.

On January 30, 1997, the PUCO issued its decision in the Company's arbitration
with Sprint on many of the same issues that were submitted by AT&T.  These
decisions reaffirmed the rate issued in the previous arbitration proceedings.
The Company has filed a lawsuit in the U.S. District Court challenging portions
of the PUCO's arbitration determinations.

Pennsylvania

On December 6, 1996, the Pennsylvania Public Utility Commission (PPUC) issued
its decision in the Company's arbitration with AT&T to determine
interconnection, resale, and unbundling terms and conditions.  The interim
discount rate for the Company's resold services was set at 22.8%.  The Company
has filed a lawsuit in the U.S. District Court challenging portions of the
PPUC's arbitration determinations.

On December 19, 1996, the PPUC issued its decision in the Company's arbitration
with Sprint on many of the same issues that were submitted by AT&T.  These
decisions reaffirmed the rate issued in the previous arbitration proceedings.
The Company has filed a lawsuit in the U.S. District Court challenging portions
of the PPUC's arbitration determinations.

Wisconsin

On July 5, 1994, regulatory reform legislation was signed into law in
Wisconsin.  Effective September 1, 1994, this legislation allows LEC's to
choose to be regulated under price cap regulation or remain under traditional
rate of return regulation.  Regardless of the LEC's choice, the legislation
opens the LEC's local-exchange franchises to competition and requires
interconnection with competitors and provision of basic local services on an
unbundled basis.  If a LEC chooses to operate under the price cap plan, it is
required to file a network modernization plan.  On November 2, 1994, the
Company formally notified the Public Service Commission of Wisconsin (PSCW)
that it would elect price cap regulation as of January 1, 1995.  On that same
date, the Company also filed intrastate access charge reductions of $4 million,
effective January 1, 1995.  This reduction was a legislative requirement of
those companies electing price cap regulation.





                                       31
<PAGE>   34
On May 23, 1995, the PSCW approved the infrastructure plan filed by the
Company.  The plan was filed in compliance with the 1994 legislation allowing
LECs to elect price regulation.  The Company stated that it would make capital
investments within the range of $235-$290 million over a six year period
(1995-2000).  The actual amount spent will depend on the demand for new
services such as Frame Relay, Integrated Services Digital Network (ISDN) and
Video Broadband services.  The plan also stated that the Company would provide
schools and public libraries with credits towards the purchase of GTE-provided
enhanced services.

On March 15, 1996, the Company filed the results of its first year under price
regulation (1995).  The PSCW authorized a price increase of 0.63% in basic
Message Telecommunication Service (MTS) rates based on the established price
cap formula and the Company's results of service quality and infrastructure
investment levels.  No price increase was implemented due to competitive market
conditions.  The Company will file its results for 1996 by April 1997.

In September 1996, the Company converted all capable offices in Wisconsin to 1+
pre-subscription pursuant to the PSCW's Order issued July 29, 1996.

On December 12, 1996, the PSCW issued its decision in the Company's arbitration
with AT&T to determine interconnection, resale and unbundling terms and
conditions.  The discount rate for resale was set at 18.45%.  Interim rates
based on the Company's cost studies will be used for interconnection and
unbundled network elements until new cost studies are completed which is
expected later in 1997.  The Company has filed a lawsuit in the U.S. District
Court challenging portions of the PSCW's arbitration determinations.

INTERSTATE SERVICES

For the provision of interstate services, the Company operates under the terms
of the FCC's price cap incentive plan.  The "price cap" mechanism serves to
limit the rates a carrier may charge, rather than just regulating the rate of
return which may be achieved.  Under this approach, the maximum price that the
LEC may charge is increased or decreased each year by a price index based upon
inflation less a predetermined productivity target.  LECs have limited pricing
flexibility provided they do not exceed the allowed price cap.

In March 1995, the FCC adopted interim rules to be utilized by LECs, including
the Company, for their 1995 Annual Price Cap Filing.  The interim rules allowed
LECs to select from three productivity/sharing options for each tariff entity.
Each of the three options reflected an increase to the 3.3% productivity factor
used since 1991.  The Company selected the following productivity factors and
sharing thresholds for use in the 1996-1997 and 1995-1996 tariff years:

<TABLE>
<CAPTION>
                 Tariff                         Productivity               Sharing Parameters
                 Entity                            Factor                50%               100%
   ------------------------------             ----------------      ---------------    ---------------
   <S>                                              <C>            <C>                     <C>
   1996-1997 Tariff Year
   ---------------------

   Illinois, Indiana, Michigan,
   Ohio, Pennsylvania, Wisconsin                    5.3%           None                    None
                              

   1995-1996 Tariff Year
   ---------------------

   Michigan                                         4.0%           12.25-13.25% ROR        Over 13.25% ROR

   Illinois, Indiana, Ohio,
   Pennsylvania, Wisconsin                          5.3%           None                    None
</TABLE>

Under the interim rules, the Company filed tariffs to reduce rates by $34.1
million annually, effective August 1, 1995.  On September 20, 1995, the FCC
released its proposed rulemaking proceeding on price caps which proposes
specific





                                       32
<PAGE>   35
changes to reflect and encourage emerging competition in local and access
services markets and to establish the path towards decreased regulation of
LECs' services.  On September 27, 1995, the FCC solicited comments on a number
of specific issues regarding methods for establishing the price caps, such as
productivity measurements, sharing, the common line formula and exogenous
costs.

The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC's interim price cap rules.  In doing so, the Company
changed its productivity factor from 4.0% to 5.3% for its Michigan tariff
entity.  On June 24, 1996, the FCC ordered all LECs subject to price cap
regulation, including the Company, to update their GDP-PI inflation factors
through the fourth quarter of 1995.  Overall, the final 1996 interstate access
filing resulted in an annual price reduction of $5.2 million, effective July 1,
1996.

On February 8, 1996, the Telecommunications Act became law.  This comprehensive
telecommunications reform legislation addresses a wide range of competitive and
regulatory issues that will affect the future development of local and long
distance services, cable television and information services.  The new law
removes regulatory and court-ordered barriers to competition between segments
of the industry, enabling local-exchange, long distance, wireless and cable
companies to compete in offering voice, video and information services.

The Telecommunications Act requires the FCC and state commissions to open
local-exchange markets and to set new guidelines for interconnection, loosens
restrictions barring local telephone companies from entering the cable
television market, and preserves universal service while equalizing the
responsibility for contribution among all carriers.

On August 8, 1996, the FCC published its First Report and Order (the Order)
containing rules implementing Section 251 of the Telecommunications Act dealing
with interconnection, unbundling of network elements and wholesale prices and
other terms for competitive entry into local-exchange service.  On August 9,
1996, the FCC released its Second Report and Order implementing the provision
of number portability and dialing parity in accord with the Telecommunications
Act.

On September 16, 1996, GTE filed an appeal and motion for stay of the Order
with the United States Court of Appeals for the District of Columbia.  This
appeal argued that the FCC had no jurisdiction to impose national pricing rules
for what is essentially local service.  This appeal was subsequently
transferred to the Court of Appeals for the Eighth Circuit together with
appeals by other LECs and state regulatory commissions.  On October 15, 1996,
the Eighth Circuit granted a partial stay.  The stay delays implementation of
the Order's pricing provisions and associated rules, as well as the rules
requiring GTE and other LECs to permit requesting carriers to select terms and
conditions from various agreements between them and other carriers for purposes
of interconnection.  On November 12, 1996, the Supreme Court denied
applications to vacate the stay filed by the FCC and various companies seeking
to enter the local-exchange business.  Additionally, the Court held oral
arguments on the merits on January 17, 1997.   The Court's ruling is expected
in the spring of 1997.

While GTE cannot predict the outcome of the Court's final decision, GTE intends
to continue to vigorously present its position in Court.

In November 1996, the Federal-State Joint Board released its recommended
universal service plan, and in December 1996, the FCC issued its access reform
proposals.  Both proposals incorporate a pricing methodology similar to the one
that GTE is appealing in the interconnection case.  A final order in the
universal service proceeding must be adopted by early May 1997, and a decision
on the access reform proceeding is expected shortly thereafter.

SIGNIFICANT CUSTOMER

Revenues received from AT&T include amounts for access and billing and
collection during the years 1996-1994 under various arrangements and amounted
to $375.3 million, $407.5 million and $402.8 million, respectively.





                                       33
<PAGE>   36
12.  COMMITMENTS AND CONTINGENCIES

The Company has noncancelable leases covering certain land, buildings, office
space and equipment that contain varying renewal options.  The majority of
lease commitments relate to the lease for the centralized GTE Telephone
Operations general facilities entered into in 1991.  The lease agreement
requires rental payments over 30 years (beginning in 1992) sufficient to pay
scheduled principal and interest payments for $210 million of Telephone
Facility Lease Bonds issued by the lessor.  The lease expense is shared by all
GTE Telephone Operating Companies.

Rental expense was $25.4 million, $27.6 million and $27.2 million in 1996-1994,
respectively.  Minimum rental commitments for noncancelable leases through 2001
do not exceed $32.9 million annually and aggregate $621.8 million thereafter.

The Company is subject to a number of proceedings arising out of the conduct of
its business, including those relating to regulatory actions, commercial
transactions and/or environmental, safety and health matters.  Management
believes that the ultimate resolution of these matters will not have a material
adverse effect on the results of operations or the financial position of the
Company.

Recent judicial and regulatory developments, as well as the pace of
technological change, have continued to influence industry trends, including
accelerating and expanding the level of competition.  As a result, the
Company's operations face increasing competition in virtually all aspects of
its business.  The Company continues to support greater competition in
telecommunications, provided that, overall, the actions to eliminate existing
legal and regulatory barriers benefit consumers by allowing an opportunity for
all service providers to participate in a competitive marketplace under
comparable conditions.





                                       34
<PAGE>   37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
GTE North Incorporated:

We have audited the accompanying consolidated balance sheets of GTE North
Incorporated (a Wisconsin corporation and wholly-owned subsidiary of GTE
Corporation) and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996.  These financial
statements and the schedule and exhibit referred to below are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these financial statements and the schedule and exhibit based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE North Incorporated and
subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

As discussed in Note 2 of the consolidated financial statements, in 1995, the
Company discontinued applying the provisions of Statement of Financial
Accounting Standards No.71, "Accounting for the Effects of Certain Types of
Regulation".

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole.  The supporting schedule and exhibit listed under
Item 14 are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements.  The supporting schedule and exhibit have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.


                                                             ARTHUR ANDERSEN LLP


Dallas, Texas
January 28, 1997





                                       35
<PAGE>   38
MANAGEMENT REPORT

To Our Shareholders:

The management of the Company is responsible for the integrity and objectivity
of the financial and operating information contained in this Annual Report on
Form 10-K, including the consolidated financial statements covered by the
Report of Independent Public Accountants.  These statements were prepared in
conformity with generally accepted accounting principles and include amounts
that are based on the best estimates and judgments of management.

The Company has a system of internal accounting controls which provides
management with reasonable assurance that transactions are recorded and
executed in accordance with its authorizations, that assets are properly
safeguarded and accounted for, and that financial records are maintained so as
to permit preparation of financial statements in accordance with generally
accepted accounting principles.  This system includes written policies and
procedures, an organizational structure that segregates duties, and a
comprehensive program of periodic audits by the internal auditors.  The Company
has also instituted policies and guidelines which require employees to maintain
the highest level of ethical standards.




JOHN C. APPEL
President




GERALD K. DINSMORE
Senior Vice President - Finance and Planning





                                       36
<PAGE>   39
Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

None.





                                      37
<PAGE>   40
PART III

Item 10.   Directors and Executive Officers of the Registrant

a.   Identification of Directors

The names, ages and positions of the directors of the Company as of March 1,
1997 are listed below along with their business experience during the past five
years.

<TABLE>
<CAPTION>
          Name             Age      Director Since                       Business Experience
- -----------------------   ------   ----------------  ----------------------------------------------------------             
<S>                         <C>          <C>          <C>
John C. Appel               48           1996         Executive Vice President - Network Operations, GTE
                                                      Telephone Operations, 1996; Executive Vice President -
                                                      Network Operations, all GTE domestic telephone
                                                      subsidiaries of which he is not President, 1996;
                                                      Director, all GTE domestic telephone subsidiaries,
                                                      1996; President - GTE South Incorporated and GTE North
                                                      Incorporated, 1995; Senior Vice President - Regulatory
                                                      Operations, GTE Telephone Operations, 1994; President -
                                                      GTE Southwest Incorporated, 1994; State President -
                                                      Texas / New Mexico, 1993; Vice President and General
                                                      Manager - California, GTE Telephone Operations West
                                                      Area, 1992.

Richard M. Cahill           58           1993         Vice President - General Counsel, GTE Telephone
                                                      Operations, 1988; Director, all GTE domestic telephone
                                                      subsidiaries, 1993 and/or 1994; Director, GTE Vantage
                                                      Incorporated, 1991; Vice President - General Counsel,
                                                      all GTE domestic telephone subsidiaries, 1995.

Gerald K. Dinsmore          47           1993         Senior Vice President - Finance and Planning, GTE
                                                      Telephone Operations, 1994; Senior Vice President -
                                                      Finance and Planning, all GTE domestic telephone
                                                      subsidiaries, 1994; Vice President - Finance, GTE
                                                      Telephone Operations, 1993; President of all South Area
                                                      Companies, GTE Telephone Operations, 1992; Director,
                                                      GTE Florida Incorporated and GTE South Incorporated,
                                                      1992; Director, all other GTE domestic telephone
                                                      subsidiaries, 1993 and/or 1994.

Michael B. Esstman          50           1993         Executive Vice President - Customer Segments, GTE
                                                      Telephone Operations, 1994; Executive Vice President -
                                                      Operations, GTE Telephone Operations, 1993; Director,
                                                      all Central Area Companies, 1991; Director, all other
                                                      GTE domestic telephone subsidiaries, 1993 and/or 1994.

Thomas W. White             50           1993         President, GTE Telephone Operations, 1995; Executive
                                                      Vice President - Network Operations, GTE Telephone
                                                      Operations, 1994; Executive Vice President - GTE
                                                      Telephone Operations, 1993; Director, all GTE domestic
                                                      telephone subsidiaries, 1993 and/or 1994; Director,
                                                      Quebec-Telephone.
</TABLE>

Directors are elected annually.  There are no family relationships between any
of the directors or executive officers of the Company, except that Mr. Jacobson
and Ms. Jacobson are married to one another.





                                       38
<PAGE>   41
b.       Identification of Executive Officers

The Company's policies are established not only by the Company's executive
officers, but also by the executive officers of GTE Telephone Operations.
Accordingly, the list below contains the names, ages and positions of the
executive officers of both the Company and GTE Telephone Operations (Telops) as
of March 1, 1997.

<TABLE>
<CAPTION>
                                           Year Assumed
                                         Present Position
                                    --------------------------
                                                       the
          Name               Age       Telops        Company                         Position
- -----------------------   ------    -----------   ------------  -----------------------------------------------             
<S>                          <C>        <C>           <C>        <C>
Thomas W. White              50         1995           --        President of GTE Telephone Operations
John C. Appel                48         1996          1995       President of the Company and Executive Vice
                                                                 President - Network Operations of GTE Telephone
                                                                 Operations
James G. Badders             44         1994           --        Vice President-Consumer Customer Contact of GTE
                                                                 Telephone Operations
Mary Beth Bardin             42         1994          1995       Vice President - Public Affairs of GTE
                                                                 Telephone Operations and the Company
C. F. Bercher                53         1994          1995       President - Consumer Markets of GTE
                                                                 Telephone Operations
                                         --           1995       Vice President - Consumer Markets of the
                                                                 Company
Richard M. Cahill            58         1988          1995       Vice President - General Counsel of GTE
                                                                 Telephone Operations and the Company
Terri L. Compton             40         1996           --        Vice President-Business Development of GTE
                                                                 Telephone Operations
C. Michael Crawford          50         1996           --        Vice President-Information Technology of GTE
                                                                 Telephone Operations
Gerald K. Dinsmore           47         1994          1993       Senior Vice President - Finance and Planning of
                                                                 GTE Telephone Operations and the Company
William M. Edwards, III      48          --           1993       Vice President-Controller of the Company
Michael B. Esstman           50         1994           --        Executive Vice President - Customer Segments of
                                                                 GTE Telephone Operations
Oscar C. Gomez               50         1997           --        Vice-President-Diversity Marketing and
                                                                 Management of GTE Telephone Operations
William A. Griswold          44          --           1994       Vice President - Northeast Region of the
                                                                 Company
Gregory D. Jacobson          45          --           1994       Treasurer of the Company
Pamela S. Jacobson           39         1996           --        Vice President-Strategic Planning of GTE
                                                                 Telephone Operations
Brad M. Krall                55         1993          1995       Vice President - Centralized Operations of GTE
                                                                 Telephone Operations and the Company
Michael J. McDonough         47         1996           --        Senior Vice President-Market Integration of GTE
                                                                 Telephone Operations
Paul E. Miner                52         1995           --        Vice President-Program Management Office of GTE
                                                                 Telephone Operations
Christopher D. Owens         41         1996          1996       Vice President-Regulatory and Governmental
                                                                 Affairs for GTE Telephone Operations and the
                                                                 Company
Barry W. Paulson             45         1996          1996       Vice President-Network Operations Planning and
                                                                 Support of GTE Telephone Operations and the
                                                                 Company
Richard L. Schaulin          54         1989          1995       Vice President - Human Resources of GTE
                                                                 Telephone Operations and the Company
Leland W. Schmidt            63         1987           --        Vice President-Industry Affairs of GTE
                                                                 Telephone Operations
Charles J. Somes             50          --           1994       Secretary of the Company
Larry J. Sparrow             53         1994          1995       President - Carrier Markets of GTE Telephone
                                                                 Operations
                                         --           1995       Vice President - Carrier Markets of the Company
Lewis O. Wilks (1)           43         1996           --        President-Business Markets of GTE Telephone
                                                                 Operations
                                         --           1996       Vice President - Business Markets of the
                                                                 Company
William A. Zielke            50          --           1994       Vice President - North Region of the Company
</TABLE>

(1)      Lewis O. Wilks was appointed President-Business Markets of GTE
         Telephone Operations and Vice President- Business Markets of the
         Company replacing Michael J. McDonough, who was appointed Senior Vice
         President-Market Integration of GTE Telephone Operations.

Each of these executive officers has been an employee of the Company or an
affiliated company for the last five years.  Except for duly elected officers
and directors, no other employees had a significant role in decision making.
All officers are appointed for a term of one year.





                                       39
<PAGE>   42

Item 11.         Executive Compensation

Executive Compensation Tables

The following tables provide information about executive compensation.

SUMMARY COMPENSATION TABLE

The following table sets forth information about the compensation of the 1996
Principal Executive Officers of the Company and each of the other four most
highly compensated executive officers (the named executive officers) of GTE
Telephone Operations in 1996.  The information in this table under the caption
"Annual Compensation" sets forth all compensation paid to the named executive
officers by GTE Telephone Operations. The caption "Long-Term Compensation" in
this table sets forth all long-term compensation paid to the named executive
officers under employee benefit plans administered by GTE Corporation or GTE
Service Corporation.  Footnote 1 to this table sets forth the actual 1996
annual compensation for each of the named executive officers that was allocated
to the Company.


<TABLE>
<CAPTION>
                                                                                 Long-Term Compensation
                                                                     ---------------------------------------------------
                                        Annual Compensation (1)              Awards                 Payouts
                                     ------------------------------  ----------------------- ---------------------------
                                                                     Restricted  Securities
                                                       Other Annual    Stock     Underlying    LTIP       All Other
   Name and Principal                Salary    Bonus   Compensation    Awards     Options/   Payouts     Compensation
   Position in Group          Year   ($) (2)  ($) (3)      ($)        ($) (4)     SARs (#)     ($)         ($) (5)
- ------------------------------------------------------------------------------------------------------------------------
   <S>                        <C>    <C>      <C>           <C>        <C>          <C>       <C>            <C>
   John C. Appel              1996   295,977  380,700       --         51,229       124,400   439,200        10,572
    President                 1995   239,600  258,100       --           --          63,500   162,800        10,194
                              1994   193,023  182,400       --           --          24,800    34,700         6,230

   Thomas W. White            1996   463,115  533,700       --         81,511       183,400   770,000        10,613
    President -               1995   418,884  443,800       --           --          98,800   331,800        10,613
     GTE Telephone            1994   353,508  368,200       --           --          53,700   164,100         7,075
     Operations

   Michael B. Esstman         1996   369,958  359,600       --         61,702       124,400   627,400        10,613
    Executive Vice President  1995   350,731  349,400       --           --          63,500   305,900         7,238
    -                                                                                                              
    Customer Segments         1994   327,546  358,200       --           --          53,700   158,300         4,998
     GTE Telephone
     Operations

   Larry J. Sparrow           1996   294,812  260,800       --         41,561        81,400   404,100        10,613
    President-                1995   261,866  255,600       --           --          36,400   211,300        10,613
    Carrier Markets           1994   260,662  233,800       --           --          30,900   117,200         7,075
     GTE Telephone
     Operations

   Gerald K. Dinsmore         1996   288,619  263,700       --         41,751        81,400   404,100        10,613
    Senior Vice President -   1995   265,125  255,600       --           --          36,400   211,300        10,613
    Finance and Planning      1994   248,438  233,800       --           --          30,900    97,800         7,075
     GTE Telephone
     Operations
</TABLE>

(1)      Annual Compensation represents the total annual cash compensation of
         salaries, bonuses and other compensation.  The Company's allocated
         share for Messrs. Appel, White, Esstman, Sparrow and Dinsmore, for 
         whom total annual amounts are shown above, is $152,611; $214,984; 
         $159,861; $121,746 and $121,024, respectively.

(2)      The data in the table includes fees of $15,692 and $16,607 received by
         Mr. White for serving as director of BC TEL during 1996 and 1995.  
         BC TEL, a Canadian company, is an indirectly-owned subsidiary of GTE
         Corporation.





                                      40
<PAGE>   43
(3)      The data in this column represents the annual bonus received by each
         of the named executive officers under the GTE Corporation Executive
         Incentive Plan (the EIP) in 1996.  In connection with GTE's Equity
         Participation Program (EPP), a portion of this amount has been
         deferred into restricted stock units payable at maturity (generally, a
         minimum of three years) in GTE Common Stock (Restricted Stock Units).
         The number of Restricted Stock Units received was calculated by
         dividing the amount of the annual bonus deferred by the average
         closing price of GTE Common Stock on the NYSE composite tape for the
         20 consecutive trading days following the release to the public of
         GTE's financial results for the fiscal year in which the bonus was
         earned (the Average Closing Price).  Additional Restricted Stock Units
         are received on each dividend payment date based upon the amount of
         the dividend paid and the closing price of GTE Common Stock on the
         composite tape of NYSE issues on the dividend declaration date.

(4)      The data in this column represents the dollar value of the matching
         Restricted Stock Units based upon the Average Closing Price.  Matching
         Restricted Stock Units are received on the basis of one additional
         Restricted Stock Unit for every four Restricted Stock Units deferred
         through annual bonus deferrals described in footnote 3 above.  The
         matching Restricted Stock Units were designed as an inducement to
         encourage full participation in the EPP and to compensate the
         executives for their agreement not to realize the economic value
         associated with the Restricted Stock Units representing deferred
         annual bonus for a minimum of three years.  Additional Restricted
         Stock Units are received on each dividend payment date based upon the
         amount of the dividend paid and the closing price of GTE Common Stock
         on the composite tape of NYSE issues on the dividend declaration date.
         Messrs. Appel, White, Esstman, Sparrow and Dinsmore each hold a total
         of 5,406; 8,598; 6,509; 4,385 and 4,404 Restricted Stock Units,
         respectively, which had a dollar value of $245,298; $390,134;
         $295,346; $198,970 and $199,832, respectively, based solely upon the
         closing price of GTE Common Stock on December 31, 1996.

(5)      The column "All Other Compensation" includes, for 1996, contributions
         by GTE and its related companies to the GTE Savings Plan of $6,750 for
         each of Messrs. Appel, White, Esstman, Sparrow and Dinsmore and
         contributions by GTE and its related companies to the GTE Executive
         Salary Deferral Plan of $3,822 for Mr. Appel, and $3,863 for each of
         Messrs. White, Esstman, Sparrow and Dinsmore.





                                       41
<PAGE>   44
OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table shows all grants of options and tandem stock appreciation
rights (SARs) to the named executive officers of the Company in 1996, whether
or not specifically allocated to the Company.  The options and SARs were
granted under the Long-Term Incentive Plan (LTIP).  Pursuant to Securities and
Exchange Commission rules, the table also shows the value of the options
granted at the end of the option terms (ten years) if the stock price were to
appreciate annually by 5% and 10%, respectively. There is no assurance that the
stock price will appreciate at the rates shown in the table.  The table also
indicates that if the stock price does not appreciate, there will be no
increase in the potential realizable value of the options granted.
<TABLE>
<CAPTION>
                                                                                    Potential Realizable Value at
                                                                                    Assumed Annual Rate of Stock
                                                                                       Price Appreciation For
                                          Individual Grants                                  Option Term
                      ------------------------------------------------------------ --------------------------------
                                               Percent of                                                        
                         Number of           Total Options/                                                      
                         Securities           SARs Granted    Exercise                                           
                         Underlying                to          Or Base                                           
                       Options / SARs         Employees in      Price    Expiration                              
        Name              Granted             Fiscal Year      ($/SH)       Date       0%        5%         10% 
- -------------------   -----------------  ------------------ ----------- ----------- ------- -----------  ----------
<S>                        <C>                    <C>            <C>      <C>          <C>   <C>                      
John C. Appel              62,200 (1)             .47%           43.75    2/20/06      --    $1,710,787  $4,335,129    
                           62,200 (2)             .47%           43.06    6/05/06      --     1,683,903   4,267,005   
                                                                                                                      
Thomas W. White            91,700 (1)             .69%           43.75    2/20/06      --     2,522,173   6,391,179   
                           91,700 (2)             .69%           43.06    6/05/06      --     2,482,539   6,290,746   
                                                                                                                      
Michael B. Esstman         62,200 (1)             .47%           43.75    2/20/06      --     1,710,787   4,335,129   
                           62,200 (2)             .47%           43.06    6/05/06      --     1,683,903   4,267,005   
                                                                                                                      
Larry J. Sparrow           40,700 (1)             .31%           43.75    2/20/06      --     1,119,438   2,836,652   
                           40,700 (2)             .31%           43.06    6/05/06      --     1,101,847   2,792,076   
                                                                                                                      
Gerald K. Dinsmore         40,700 (1)             .31%           43.75    2/20/06      --     1,119,438   2,836,652   
                           40,700 (2)             .31%           43.06    6/05/06      --     1,101,847   2,792,076   
</TABLE>

(1)      Each option was granted in tandem with a SAR, which will expire upon
         exercise of the option. Under the LTIP, each option granted may be
         exercised with respect to one-third of the aggregate number of shares
         subject to the grant each year, commencing one year after the date of
         grant.

(2)      Messrs. Appel, White, Esstman, Sparrow and Dinsmore also received a
         special "performance-based" stock option grant during 1996.  The
         options were granted in tandem with SARs at a price equal to the fair
         market value on the date of grant. They are intended both to motivate
         the executives to remain with GTE during a period of unprecedented
         opportunities and challenges, and to give them an opportunity to
         accelerate the enhancement of their equity position in GTE, but only if
         specific and aggressive shareholder returns are met.  Unlike the
         three-year graduated vesting schedule that applies to the other options
         reflected in the table, each performance-based option grant will vest
         in three stages according to the following schedule: (i) each option
         may be exercised with respect to one-third of the aggregate number of
         shares represented by the grant if the closing price of GTE Common
         Stock on the NYSE is $60 or more per share for 20 consecutive days (or,
         if earlier, on the fifth anniversary of the grant date); (ii) each
         option may be exercised with respect to an additional one-third of the
         aggregate number of shares represented by the grant if the closing
         price of GTE Common Stock on the NYSE is $70 or more per share for 20
         consecutive days (or, if earlier, on the sixth anniversary of the grant
         date); and (iii) each option may be exercised with respect to the final
         one-third of the aggregate number of shares represented by the grant if
         the closing price of GTE Common Stock on the NYSE is $80 or more per
         share for 20 consecutive days (or, if earlier, on the seventh
         anniversary of the grant date).





                                       42
<PAGE>   45
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

The following table provides information as to options and SARs exercised by
each of the named executive officers of the Company during 1996.  The table
sets forth the value of options and SARs held by such officers at year-end
measured in terms of the closing price of GTE Corporation (GTE) Common Stock on
December 31, 1996.


<TABLE>
<CAPTION>                                                   Number of Securities           Value of Unexercised       
                                                            Underlying Unexercised        In-the-Money Options/SARs   
                         Shares                             Options/SARs at FY-End              at FY-End ($)         
                        Acquired              Value       ----------------------------   ---------------------------
Name                  On Exercise (#)      Realized ($)   Exercisable    Unexercisable   Exercisable   Unexercisable 
- -------------------   -----------------    -------------  -------------  --------------  ------------  -------------
<S>                         <C>              <C>             <C>            <C>          <C>             <C>      
John C. Appel               25,467           316,222           6,400        175,001         62,400         841,706
Thomas W. White             43,800           697,575         120,132        267,168      1,474,402       1,377,266
Michael B. Esstman              --                --          95,766        184,634      1,180,292       1,019,121
Larry J. Sparrow            48,466           601,963          37,567        115,967        469,003         606,460
Gerald K. Dinsmore          40,100           462,995              --        115,967             --         606,460
</TABLE>

LONG-TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR

The LTIP provides for awards, currently in the form of stock options with
tandem SARs, other stock-based awards and dollar denominated awards, to
participating employees. The stock options and tandem SARs awarded under the
LTIP to the named executive officers are shown in the table on page 42.

<TABLE>
<CAPTION>
                                                                                                        
                                                                          Estimated Future Payouts      
                                              Performance          Under Non-Stock Price Based Plans (1)
                              Number of     Or Other Period    ---------------------------------------------
                            Shares, Units   Until Maturation   Threshold (2)     Target (3)
Name                       Or Other Rights     Or Payout       (# of Units)     (# of Units)     Maximum (4)
- ----------------------   -----------------  ----------------   -------------   --------------   ------------
<S>                                 <C>             <C>              <C>             <C>     
John C. Appel                        7,400          3 Years          2,148            8,262    
Thomas W. White                     10,900          3 Years          3,164           12,169    
Michael B. Esstman                   7,400          3 Years          2,148            8,262    
Larry J. Sparrow                     4,900          3 Years          1,422            5,471    
Gerald K. Dinsmore                   4,900          3 Years          1,422            5,471    
</TABLE>

(1)      An individual's award may not exceed the applicable individual award
         limit, which is expressed as a percentage of the LTIP Award Pool (the
         Award Limit).  The Award Limit depends on the individual's base salary
         at the end of the cycle, and may not exceed 3.5% of the LTIP Award
         Pool.  The amounts described in footnotes 2 through 4 below are
         subject to and cannot exceed the Award Limit.  An individual is
         initially granted a specified number of GTE Common Stock equivalent
         units (Equivalent Units) at the beginning of an award cycle.  During
         the award cycle, additional Equivalent Units are added based upon the
         price of GTE Common Stock and the amount of the per share dividend
         paid on each dividend payment date.  It is not possible to predict
         future dividends and, accordingly, estimated Equivalent Unit accruals
         in this table are calculated for illustrative purposes only and are
         based upon the dividend rate and price of GTE Common Stock at the
         close of business on December 31, 1996.  The Target future payout or
         award is the dollar amount derived by multiplying the Equivalent Unit
         balance credited to the participant at the end of the award cycle by
         the price of GTE Common Stock.  The Target award measures performance
         attainment as described in footnote 3.





                                       43
<PAGE>   46
(2)      The Threshold represents attainment of minimum acceptable levels of
         performance (the Threshold Levels) with respect to the five Long-Term
         Performance Bonus measures (the Measures) adopted for the 1996-1998
         Performance Bonus award cycle -- revenue growth; earnings per share
         (EPS) growth; earnings before Interest, taxes, depreciation and
         amortization (EBITDA) growth; average return on investment (ROI); and
         relative total shareholder return (TSR).  If the Threshold Level is
         attained with respect to each of the Measures, the award will be equal
         to approximately 25% of the combined Target award (the TSR Threshold
         is set at 50%, while the Threshold for the other four Measures is set
         at 20%).  Because performance is measured separately for each Measure,
         it is possible to receive an award if the Threshold Level is achieved
         with respect to at least one but not all of the Measures.  If the
         actual results for all Measures are below the Threshold Levels, no
         award will be paid.

(3)      The Target represents attainment of levels of three-year revenue
         growth, EPS growth, EBITDA growth, ROI and TSR established at the
         beginning of a cycle (the Target Levels).  If GTE's actual results for
         each of the Measures are equivalent to the Target Levels, this would
         represent outstanding performance, and the award will be equal to 100%
         of the combined Target award.  GTE's performance is measured
         separately for each Measure.  Accordingly, if the actual result for
         any Measure is at the applicable Target Level, the portion of the
         award determined by that Measure will be at 100% of the Target award
         for that Measure.  Similarly, the portion of the award determined by
         any Measure performing at less than the applicable Target Level, but
         above the Threshold, will be less than the Target award for that
         Measure.

(4)      This column has intentionally been left blank because it is not
         possible to determine the maximum number of Equivalent Units until the
         award cycle has been completed.  Subject to the Award Limit discussed
         in footnote 1 above, the maximum amount of the award is limited by the
         extent to which GTE's actual results for the five Measures exceed the
         Target Levels.  If GTE's actual results during the cycle for the five
         Measures exceed the respective Target Levels, additional awards may be
         paid, based on a linear interpolation.  For example, for revenue
         growth, the schedule is as follows:

<TABLE>
<CAPTION>
     Performance Increment Above
     Revenue Performance Target              Added Percentage to Combined Awards
     --------------------------              -----------------------------------
<S>                                          <C>
Each 0.1% improvement in cumulative
        revenue growth                                       +2%
</TABLE>

         Thus, if the revenue growth Measure exceeds its Target Level by .5%
         while the remaining four Measures are precisely at their respective
         Target Levels, then the performance bonus will equal 110% of the
         combined Target award.





                                       44
<PAGE>   47
Executive Agreements

GTE has entered into agreements (the Agreements) with Messrs. Appel, White,
Esstman and Dinsmore regarding benefits to be paid in the event of a change in
control of GTE (a Change in Control).

A Change in Control is deemed to have occurred if (a) any person or group of
persons acquires, other than from GTE or as described below, 20% (or under
certain circumstances, a lower percentage, not less than 10%) of GTE's voting
power, (b) three or more directors are elected in any twelve-month period
without the approval of a majority of the members of GTE's Incumbent Board (as
defined in the Agreements) then serving as members of the Board, (c) the
members of the Incumbent Board no longer constitute a majority of the Board of
Directors or (d) GTE's shareholders approve (i) a merger, consolidation or
reorganization involving GTE, (ii) a complete liquidation or dissolution of GTE
or (iii) an agreement for the sale or other disposition of all or substantially
all of the assets of the Corporation to any person other than a subsidiary of
GTE.  An individual whose initial assumption of office occurred pursuant to an
agreement to avoid or settle a proxy or other election contest is not
considered a member of the Incumbent Board.  In addition, a director who is
elected pursuant to such a settlement agreement will not be deemed a director
who is elected or nominated by the Incumbent Board for purposes of determining
whether a Change in Control has occurred.  Notwithstanding the foregoing, a
Change in Control will not occur in the following situations: (1) certain
merger transactions in which there is at least 50% GTE shareholder continuity
in the surviving corporation, at least a majority of the members of the board
of directors of the surviving corporation consist of members of the Board and
no person owns more than 20% (or under certain circumstances, a lower
percentage, not less than 10%) of the voting power of the surviving corporation
following the transaction, and (2) transactions in which GTE's securities are
acquired directly from GTE.

The Agreements provide for benefits to be paid in the event these individuals
separate from service and have a "good reason" for leaving or are terminated
without "cause" within two years after a Change in Control of GTE.

Good reason for leaving includes but is not limited to the following events:
demotion, relocation or a reduction in total compensation or benefits, or the
new entity's failure to expressly assume obligations under the Agreements.
Termination for cause includes certain unlawful acts on the part of the
executive or a material violation of his or her responsibilities to the
Corporation resulting in material injury to the Corporation.

An executive who experiences a qualifying separation from service will be
entitled to receive up to two times the sum of (i) base salary and (ii) the
average of his percentage awards under the EIP for the previous three years.
The executive will also continue to receive medical and life insurance coverage
for up to two years and will be provided with financial and outplacement
counseling.

In addition, the Agreements with Messrs. Appel, White, Esstman and Dinsmore
provide that in the event of a separation from service, they will receive
service credit in the following amounts: two times years of service otherwise
credited if the executive has five or fewer years of credited service; 10 years
if credited service is more than five and not more than 10 years; and, if the
executive's credited service exceeds 10 years, the actual number of credited
years of service.  These additional years of service will apply towards
vesting, retirement eligibility, benefit accrual and all other purposes under
the Supplemental Executive Retirement Plan (SERP) and the GTE Corporation
Executive Retired Life Insurance Plan (ERLIP).  In addition, each executive
covered under an Agreement will be considered to have not less than 76 points
and 15 years of accredited service for the purpose of determining his or her
eligibility for early retirement benefits.  The Agreements provide that there
will be no duplication of benefits.

Each of the Agreements remain in effect until July 1, 1999 unless terminated
earlier pursuant to its terms. The Agreements will be automatically renewed on
each successive July 1 unless, not later than December 31 of the preceding
year, one of the parties notifies the other that he does not wish to extend his
respective Agreement.  If a Change in Control occurs, the Agreements will
remain in effect until the obligations of GTE (or its successor) under the
Agreements have been satisfied.





                                       45
<PAGE>   48
Retirement Programs

         Pension Plans

The estimated annual benefits payable, calculated on a single life annuity
basis, under GTE's defined benefit pension plans at normal retirement at age
65, based upon final average earnings (integrated with social security as
described below) and years of service, is illustrated in the following table:

                               PENSION PLAN TABLE

<TABLE>
<CAPTION>                                                                      
                                                        Years of Service
    Final Average           ---------------------------------------------------------------------------
      Earnings                15               20               25               30               35
- -----------------           ---------------------------------------------------------------------------
   <S>                      <C>              <C>              <C>              <C>            <C>
    $150,000              $  31,388        $  41,850        $  52,313        $  62,775       $   73,238
     200,000                 42,263           56,350           70,438           84,525           98,613
     300,000                 64,013           85,350          106,688          128,025          149,363
     400,000                 85,763          114,350          142,938          171,525          200,113
     500,000                107,513          143,350          179,188          215,025          250,863
     600,000                129,263          172,350          215,438          258,525          301,613
     700,000                151,013          201,350          251,688          302,025          352,363
     800,000                172,763          230,350          287,938          345,525          403,113
     900,000                194,513          259,350          324,188          389,025          453,863
   1,000,000                216,263          288,350          360,438          432,525          504,613
   1,200,000                259,763          346,350          432,938          519,525          606,113
   1,500,000                325,013          433,350          541,688          650,025          758,363
   2,000,000                433,763          578,350          722,938          867,525        1,012,113
</TABLE>

GTE Service Corporation, a wholly-owned subsidiary of GTE, maintains the GTE
Service Corporation Plan for Employees' Pensions (the Service Corporation
Plan), a noncontributory pension plan for the benefit of all GTE employees
based on years of service and earnings.  Pension benefits to be paid from the
Service Corporation Plan and contributions to the Service Corporation Plan are
related to basic salary exclusive of overtime, differentials, incentive
compensation (except as otherwise described) and other similar types of
payments. Under the Service Corporation Plan, pensions are computed on a
two-rate formula basis of 1.15% and 1.45% for each year of service, with the
1.15% service credit being applied to that portion of the average annual salary
for the five highest consecutive years that does not exceed the Social Security
Integration Level (the portion of salary subject to the Federal Social Security
Act), and the 1.45% service credit being applied to that portion of the average
annual salary for the five highest consecutive years that exceeds said level up
to the statutory limit on compensation.  As of December 31, 1996, the credited
years of service under the Service Corporate Plan for Messrs. Appel, White,
Esstman, Sparrow and Dinsmore are 25, 28, 28, 29 and 21, respectively.

Under Federal law, an employee's benefits under a qualified pension plan, such
as the Service Corporation Plan, are limited to certain maximum amounts.  GTE
maintains a SERP, which supplements the benefits of any participant in the
Service Corporation Plan in an amount by which any participant's benefits under
the Service Corporation Plan are limited by law.  In addition, the SERP
includes a provision permitting the payment of additional retirement benefits
determined in a similar manner as under the Service Corporation Plan on
remuneration accrued under management incentive plans as determined by the
Committee.  SERP benefits are payable in a lump sum or an annuity.





                                       46
<PAGE>   49
         Executive Retired Life Insurance Plan

The ERLIP provides Messrs. Appel, White, Esstman, Sparrow and Dinsmore a
postretirement life insurance benefit of three times final base salary.  Upon
retirement, ERLIP benefits may be paid as life insurance or, alternatively, an
equivalent amount equal to the present value of the life insurance amount
(based on actuarial factors and the interest rate then in effect), may be paid
as a lump sum payment, as an annuity or as installment payments.

Directors' Compensation

The current directors, all of whom are employees of GTE, are not paid any fees
or remuneration, as such, for service on the Board.





                                       47
<PAGE>   50
Item 12.    Security Ownership of Certain Beneficial Owners and Management

(a)   Security Ownership of Certain Beneficial Owners as of February 28, 1997:

<TABLE>
<CAPTION>                                                 
                                   Name and Address of               Shares of
      Title of Class                Beneficial Owner            Beneficial Ownership   Percent of Class
    -------------------        ---------------------------     ---------------------   ----------------
    <S>                        <C>                             <C>                           <C>
    Common Stock of GTE        GTE Corporation                 978,351                       100%
    North Incorporated         One Stamford Forum              shares of record
                               Stamford, Connecticut 06904
</TABLE>

(b)   Security Ownership of Management as of December 31, 1996:

<TABLE>
<CAPTION>

       Title of Class          Name of Director or Nominee (1) (2) (3)
    --------------------       ------------------------------------------------------
    <S>                        <C>                                          <C>
    Common Stock of GTE        John C. Appel                                   45,162
    Corporation                Richard M. Cahill                               78,150
                               Gerald K. Dinsmore                              37,724
                               Michael B. Esstman                             162,084
                               Thomas W. White                                203,785
                                                                            ---------
                                                                              526,905
                                                                            =========
                               Executive Officers (1) (2) (3)
                               ------------------------------------------------------
                               John C. Appel                                   45,162
                               Thomas W. White                                203,785
                               Michael B. Esstman                             162,084
                               Larry J. Sparrow                                86,892
                               Gerald K. Dinsmore                              37,724
                                                                            ---------
                                                                              535,647
                                                                            =========


                               All directors and executive
                               officers as a group (1) (2) (3)              1,442,682
                                                                            =========

</TABLE>

(1)      Includes shares acquired through participation in the GTE Savings
         Plan.

(2)      Included in the number of shares beneficially owned by Messrs. Appel,
         Cahill, Dinsmore, Esstman, White, Sparrow and all directors and
         executive officers as a group are 41,667; 72,100; 35,999; 155,566;
         189,765; 73,566 and 1,261,616 shares, respectively, which such persons
         have the right to acquire within 60 days pursuant to stock options.

(3)      No director, nominee for director or executive officer owns as much as
         one-tenth of one percent of the total outstanding shares of GTE Common
         Stock, and all directors and executive officers as a group own less
         than one-fifth of one percent of the total outstanding shares of GTE
         Common Stock.

(c)   There were no changes in control of the Company during 1996.

Item 13.   Certain Relationships and Related Transactions

The Company's executive officers or directors were not materially indebted to
the Company or involved in any material transaction in which they had a direct
or indirect material interest.  None of the Company's directors were involved
in any business relationships with the Company.





                                       48
<PAGE>   51

PART IV


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

(a)(1)      Financial Statements - See GTE North Incorporated's
            consolidated financial statements and report of independent
            accountants thereon in the Financial Statements section
            included elsewhere herein.

   (2)      Financial Statement Schedules - Schedules supporting the
            consolidated financial statements for the years ended December
            31, 1996-1994 (as required):

            II - Valuation and Qualifying Accounts

  Note:     Schedules other than that listed above are omitted as not
            applicable, not required, or the information is included in
            the consolidated financial statements or notes thereto.

  (3)       Exhibits - Included in this report or incorporated by reference.

            3.1*  Articles of Incorporation and amendments are referenced
                  in the 1986 and 1987 Form 10-K's, respectively

            3.2*  Amended Bylaws (Exhibit 3.2 of the 1995 Form 10-K, File
                  No. 0-1210)

            4.1*  Indenture dated as of January 1, 1994 between GTE North
                  Incorporated and The First National Bank of Chicago, as
                  Trustee (Exhibit 4.1 of the Company's Registration Statements
                  on Form  S-3, File Nos.  33-50449 and 33-51911)

            4.2*  First Supplemental Indenture dated as of May 1, 1996
                  between GTE North Incorporated and The First National Bank of
                  Chicago, as Trustee (Exhibit 4.3 of the Company's Report on
                  Form 8-K, dated May 7, 1996)

            10*   Material Contracts - Agreements Between GTE and Certain
                  Executive Officers (Exhibit 10 of the 1995 Form 10-K, File No.
                  0-1210)

            12    Statements re: Calculation of the Consolidated Ratio of
                  Earnings to Fixed Charges

            23    Consent of Independent Public Accountants

            27    Financial Data Schedule

(b) Reports on Form 8-K

 No reports on Form 8-K were filed during the fourth quarter of 1996.


*    Denotes exhibits incorporated herein by reference to previous filings with
     the Securities and Exchange Commissionas designated.





                                       49
<PAGE>   52



GTE North Incorporated and Subsidiary

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1996, 1995 and 1994

(Thousands of Dollars)


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
            Column A             Column B                 Column C                  Column D       Column E
- --------------------------------------------------------------------------------------------------------------
                                                         Additions
                                             ---------------------------------
                                                                                   Deductions
                                Balance at       Charged         Charged              from
                                Beginning       (Credited)     (Credited) to        Reserves      Balance at
           Description            of Year        to Income    Other Accounts        (Note 1)     Close of Year
- --------------------------------------------------------------------------------------------------------------
<S>                                                  <C>            <C>                <C>            <C>
Allowance for uncollectible accounts
   for the years ended:

   December 31, 1996                $ 24,059         $39,836          $47,446(2)        $80,093        $31,248
                                    ==========================================================================
   December 31, 1995                $ 23,241         $35,409          $52,959(2)        $87,550        $24,059
                                    ==========================================================================
   December 31, 1994                $ 25,173         $38,292          $16,974(2)        $57,198        $23,241
                                    ==========================================================================


Accrued restructuring costs for the
   years ended (Note 4):

   December 31, 1996                $ 93,501         $    --        $(46,796)(3)        $46,705            $--
                                    ==========================================================================
   December 31, 1995                $231,049         $    --            $  --          $137,548        $93,501
                                    ==========================================================================
   December 31, 1994                $374,558         $    --            $  --          $143,509       $231,049
                                    ==========================================================================
</TABLE>

NOTES:

(1)  Charges for which reserve was created.
(2)  Recoveries of previously written-off amounts.
(3)  Represents amounts necessary to satisfy commitments related to the
     re-engineering program that have been reclassified to Accounts Payable and
     Accrued Expenses.
(4)  See Note 3 to the consolidated financial statements included elsewhere
     herein.





                                      50
<PAGE>   53
                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                              GTE NORTH INCORPORATED 
                                        -----------------------------------
                                                   (Registrant)


Date March 25, 1997                  By           John C. Appel
     ------------------                 -----------------------------------
                                                  John C. Appel 
                                                    President   
                                                               
                                                                
                                                                
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


<TABLE>
<S>                                    <C>                                                       <C>
John C. Appel                          President and Director                                    March 25, 1997
- -----------------------------          (Principal Executive Officer)
John C. Appel                                                       

Gerald K. Dinsmore                     Senior Vice President - Finance and                       March 25, 1997
- -----------------------------          Planning and Director        
Gerald K. Dinsmore                     (Principal Financial Officer)
                                                                    
William M. Edwards, III                Vice President - Controller                               March 25, 1997
- -----------------------------          (Principal Accounting Officer)
William M. Edwards, III                                              

Richard M. Cahill                      Director                                                  March 25, 1997
- -----------------------------
Richard M. Cahill

Michael B. Esstman                     Director                                                  March 25, 1997
- -----------------------------
Michael B. Esstman

Thomas W. White                        Director                                                  March 25, 1997
- -----------------------------
Thomas W. White
</TABLE>





                                                            51
<PAGE>   54




                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
     Exhibit
     Number                       Description
 -------------            ------------------------------------------------------
        <S>               <C>
        12                Statements re: Calculation of the Consolidated Ratio
                          of Earnings to Fixed Charges

        23                Consent of Independent Public Accountants

        27                Financial Data Schedule
</TABLE>






<PAGE>   1
Exhibit 12

GTE North Incorporated and Subsidiary

STATEMENTS OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES

(Thousands of Dollars)


<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                                         ---------------------------------------------------------------------
                                           1996         1995        1994      1993(a)      1993        1992
                                         ---------------------------------------------------------------------
<S>                                      <C>           <C>         <C>         <C>        <C>         <C>
Net earnings available for fixed
charges:
  Income before extraordinary charges      $551,500    $493,244    $476,276    $340,316   $105,216    $369,542
  Add - Income tax expense                  321,175     271,743     284,293     181,325     34,925     186,764
       - Fixed charges                      129,084     128,105     121,978     136,262    136,262     137,369
                                         ----------    --------    --------    --------   --------    --------
Adjusted earnings                        $1,001,759    $893,092    $882,547    $657,903   $276,403    $693,675
                                         ==========    ========    ========    ========   ========    ========

Fixed charges:
  Interest expense                         $120,607    $118,921    $112,885    $123,557   $123,557    $124,197
  Portion of rent expense
     representing interest                    8,477       9,184       9,093      12,705     12,705      13,172
                                         ----------    --------    --------    --------   --------    --------
Adjusted fixed charges                     $129,084    $128,105    $121,978    $136,262   $136,262    $137,369
                                         ==========    ========    ========    ========   ========    ========

RATIO OF EARNINGS TO FIXED
  CHARGES                                      7.76        6.97        7.24        4.83       2.03        5.05
</TABLE>


(a)Results for 1993 exclude an after-tax restructuring charge of approximately
   $230.8 million for the implementation of a re-engineering plan and a one-time
   after-tax charge of approximately $4.3 million related to the enhanced early
   retirement and voluntary separation programs offered to eligible employees in
   1993.






<PAGE>   1
Exhibit 23


                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the incorporation of
our report, dated January 28, 1997, on the consolidated financial statements
and supporting schedule and exhibit of GTE North Incorporated and subsidiary
included in this Form 10-K, into the Registration Statement previously filed on
Form S-3 (File No. 333-02013).

                                                             ARTHUR ANDERSEN LLP


Dallas, Texas
March 25, 1997






<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                          12,975
<SECURITIES>                                         0
<RECEIVABLES>                                  837,213
<ALLOWANCES>                                    31,248
<INVENTORY>                                     40,996
<CURRENT-ASSETS>                               943,997
<PP&E>                                       9,182,323
<DEPRECIATION>                             (6,243,002)
<TOTAL-ASSETS>                               4,609,928
<CURRENT-LIABILITIES>                        1,210,449
<BONDS>                                      1,532,650
                           16,937
                                     29,033
<COMMON>                                       978,351
<OTHER-SE>                                     258,496
<TOTAL-LIABILITY-AND-EQUITY>                 4,609,928
<SALES>                                      2,988,803
<TOTAL-REVENUES>                             2,988,803
<CGS>                                        1,060,968
<TOTAL-COSTS>                                2,002,253
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                             113,875
<INCOME-PRETAX>                                872,675
<INCOME-TAX>                                   321,175
<INCOME-CONTINUING>                            551,500
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   551,500
<EPS-PRIMARY>                                        0
<EPS-DILUTED>                                        0
        

</TABLE>



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