The way I read your employer's answer: The 1099 was for your Federal return, and the W-2 was for State of CA only.
Just enter the 1099 on Fed or you may be taxed twice on the same income. Also, you can dedust your expenses from 1099 income, but not for wages.
If you must use the W-2, or if the problen exists on the state return as well, enter $1 for box one to get around this possible program glitch. It's not going to effect your taxes.
