SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   ---------
                                   FORM 10-Q
                                   ---------


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998

                                      OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM           TO

                       COMMISSION FILE NUMBER 0-27580

                                   ---------

                         AVTEL COMMUNICATIONS, INC.
              (EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)

                                   ---------


              DELAWARE                                 87-0378021
   (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)                 IDENTIFICATION NO.)


                                501 BATH STREET
                         SANTA BARBARA, CALIFORNIA 93101
                                (805) 884-6300
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


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 [_]

As of May 8, 1998, there were 9,524,747 shares of the Registrant's Common Stock,
par value $0.01 per share, issued and outstanding, excluding treasury stock.


                                       1



<PAGE>





                         AVTEL COMMUNICATIONS, INC.

                        QUARTER ENDED MARCH 31, 1998

                            TABLE OF CONTENTS

                                                                           PAGE
                                                                           ----
Part I.         FINANCIAL INFORMATION

       Item 1.  Financial Statements
                Consolidated Balance Sheets as of March 31,
                  1998 (Unaudited) and December 31, 1997....................  3
                Consolidated Statements of Operations for the
                  Three Months Ended March 31, 1998 and 1997 (Unaudited)....  4
                Consolidated Statements of Cash Flows for the
                  Three Months Ended March 31, 1998 and 1997 (Unaudited)....  5
                Notes to Consolidated Financial Statements
                  (Unaudited)...............................................  6

       Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations.......................  7


PART II.        OTHER INFORMATION


       Item 6.  Exhibits and Reports of Form 8-K............................ 13

Signature Page.............................................................. 14


                                       2



<PAGE>




PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                     AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                              CONSOLIDATED BALANCE SHEETS

                                                March 31,        December 31,
                                                  1998                1997
                                             -----------------------------------
                                              (Unaudited)
                  Assets
CURRENT ASSETS
  Cash and cash equivalents                   $ 3,994,945            4,807,441
  Accounts receivable, net                      7,423,082            6,961,953
  Due from affiliates                           1,903,805            2,127,771
  Federal and state income tax receivable         605,846              598,970
  Other current assets                            627,198              861,950
                                              -----------           ----------
          Total current assets                 14,554,876           15,358,085
                                              -----------           ----------
Property and equipment, net                     1,698,861            1,791,682
Other assets, net                               1,477,467            1,575,083
                                              -----------           ----------
          Total assets                        $17,731,204           18,724,850
                                              ===========           ==========

      Liabilities and Stockholders' Equity

CURRENT LIABILITIES
  Accounts payable and other
     accrued expenses                         $ 1,740,513           1,546,762
  Accrued network services costs                4,229,479           4,319,198
  Sales and excise tax payable                    788,450             736,012
  Due to affiliates                             2,896,034           2,719,417
  Other current liabilities                       559,385             466,039
                                              -----------          ----------
          Total current liabilities            10,213,861           9,787,428
                                              -----------          ----------
Deferred income taxes                             498,712             498,712
Common stock subject to put option                578,880             578,880
Other liabilities                                  38,640              50,782
                                              -----------          ----------
          Total liabilities                   $11,330,093          10,915,802
                                              -----------          ----------
STOCKHOLDERS' EQUITY
  Series A convertible preferred stock,
    cumulative as to 8% dividends.
    Authorized 1,000,000 shares,
    $0.01 par value, 147,700 shares
    issued and outstanding. (Liquidation
    preference of $665,635 including
    dividends in arrears).                         1,477               2,077
  Common stock, authorized 20,000,000
    shares,  $0.01 par value,  11,524,744
    and 11,437,056 shares issued March 31,
    1998 and December 31, 1997 respectively,
    including 385,920 shares subject to
    put options.                                 111,388             110,511
  Additional paid in capital                  17,403,015          17,138,739
  Retained earnings (accumulated deficit)    (11,094,769)         (9,422,279)
  Treasury stock, 1,999,997 shares               (20,000)            (20,000)
                                            ------------         -----------
          Total stockholders' equity           6,401,111           7,809,048

  Commitments and contingencies                        -                   -
                                            ------------         -----------
          Total liabilities and
           stockholders' equity              $17,731,204          18,724,850
                                            ============         ===========


See accompanying Notes to Consolidated Financial Statements.

                                    3


<PAGE>




                  AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                 (Unaudited)


                                                   Three Months
                                                  Ended March 31,
                                               ------------------
                                                1998          1997
                                               --------     -------

REVENUES                                    $12,444,839    13,970,761

COST OF REVENUES                              9,287,995     9,477,191
                                              ---------     ---------
GROSS MARGIN                                  3,156,844     4,493,570

Operating expenses
  Selling, general and administrative         4,582,446     3,716,752
  Depreciation and amortization                 278,868       184,851
                                              ---------     ---------
     Total operating expenses                 4,861,314     3,901,603
                                              ---------     ---------
OPERATING INCOME (LOSS)                      (1,704,470)      591,967

Interest expense                                (11,975)       (5,056)
Other income, net                                43,955        54,227
                                             -----------    ----------
Income (loss) before income taxes            (1,672,490)      641,138

Income tax expense (benefit)                          0       269,279
                                             -----------    ----------
NET INCOME (LOSS)                           $(1,672,490)      371,859
                                            ===========       =======

Net income (loss) per share -
   basic and diluted                        $     (0.18)         0.04*
                                            ===========          ==== 

Weighted average number of common shares      9,477,489     8,647,498*
                                            ============    ========= 



*   The 1997 amounts are presented on a pro forma basis.






See accompanying Notes to Consolidated Financial Statements.




                                    4


<PAGE>



                      AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     (Unaudited)


                                                          Three Months
                                                          Ended March 31,
                                                    -------------------------
                                                       1998             1997
                                                    --------         --------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                              $(1,672,490)        371,859
  Adjustments to reconcile net income (loss)
    to net cash provided by (used in)
    operating activities:
        Depreciation and amortization                278,868         184,853
        Amortization of advanced commissions         173,919         425,945
        Provision for bad debts                      749,725         356,747
        Stock compensation earned                    234,098               0
  Changes in assets and liabilities:
        Accounts receivable                       (1,210,854)        794,478
        Due from affiliates                          223,966      (1,210,315)
        Other current assets                        (321,100)      1,657,810
        Accounts payable and accrued liabilities     214,681          50,279
        Due to affiliate                             176,617        (246,086)
                                                  -----------      ----------
        Net cash provided by (used in)
        operating activities                      (1,152,570)      2,385,570

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                 (88,431)       (51,336)
  Loans to affiliates                                      0     (2,000,000)
  Payments on loans to affiliates                    410,192         12,874
  Proceeds from sale of property and equipment             0          2,749
                                                  -----------    -----------
        Net cash provided by (used in)
        investing activities                         321,761     (2,035,713)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on capital leases               (12,142)             0
  Issuance of common stock for exercise
      of options                                      30,455              0
                                                  -----------    -----------
    Net cash provided by financing activities         18,313              0
                                                  -----------    -----------
    Net increase (decrease) in cash and cash
    equivalents                                     (812,496)       349,857

Cash and cash equivalents at beginning of quarter  4,807,441      4,622,395
                                                  -----------    -----------
Cash and cash equivalents at end of quarter      $ 3,994,945      4,972,252
                                                 ===========      =========



See accompanying Notes to Consolidated Financial Statements.



                                    5


<PAGE>



                 AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               (Unaudited)

                          March 31, 1998 and 1997


(1) Basis of Presentation
    ---------------------

    The unaudited  consolidated  financial  statements of AvTel  Communications,
Inc. and Subsidiaries  (the "Company") for the quarters ended March 31, 1998 and
1997,  have been  prepared in  accordance  with  generally  accepted  accounting
principles for interim financial reporting. Accordingly, they do not include all
of the  information  and  footnotes  required by generally  accepted  accounting
principles for complete  financial  statements and should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's Form 10-K for the year ended  December 31, 1997.  All  significant
intercompany balances and transactions have been eliminated in consolidation. In
the opinion of management,  all adjustments (consisting only of normal recurring
adjustments)  considered  necessary  for a  fair  presentation  of  the  interim
financial  information  have been  included.  The results of operations  for any
interim period are not necessarily indicative of the results of operations for a
full year.

(2) Earnings Per Common Share
    -------------------------
    The Company  adopted the  provisions  of Statement  of Financial  Accounting
Standards No. 128,  "Earnings per Share" ("SFAS 128"),  in the fourth quarter of
1997 which  required  companies to present basic  earnings per share and diluted
earnings  per share.  Basic  earnings  per share is computed by dividing  income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were  exercised or  converted  into common  stock.  The Company has restated its
March 31, 1997  earnings per share  calculation  to reflect the adoption of SFAS
128.

(3) Stock Compensation
    ------------------
    On January 1, 1998 the Company  granted  options to  purchase  75,000 of the
Company's  common  shares at an exercise  price of $1.50 per share.  On March 1,
1998 the Company  granted  options to purchase  100,000 of the Company's  common
shares at an exercise price of $1.50 per share. These options become exercisable
based  on  qualified  billings  of  long  distance  customers  generated  by the
optionees from the respective dates of grant through December 31, 2000.

     On February 24, 1998 the Company's Board of Directors approved the grant of
a total of  120,000  shares of  restricted  common  stock to two  board  members
pursuant to the  Company's  1997 Stock  Incentive  Plan.  The  restricted  stock
provisions  will lapse  over four years or fully  lapse in the event of death or
permanent disability of the grantee.

     On  February  26,  1998 the  Company  granted  incentive  stock  options to
purchase 11,250 of the Company's common shares at an exercise price of $6.00 per
share.  The options were granted  pursuant to the Company's 1997 Stock Incentive
Plan and vest at the rate of 50% per year over two years.

(4) Comprehensive Income (Loss)
    ---------------------------
    In  June  1997,   Statement  of  Financial  Accounting  Standards  No.  130,
"Reporting  Comprehensive  Income,"  ("SFAS No.  130") was issued.  SFAS No. 130
establishes standards for reporting and displaying  comprehensive income and its
components  in an annual  financial  statement  that is displayed  with the same
prominence as other annual financial  statements.  Reclassification of financial
statements for earlier periods,  provided for comparative purposes, is required.
The  statement  also  requires the  accumulated  balance of other  comprehensive
income to be displayed  separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial  position.  SFAS No.
130  is  effective  for  fiscal  years   beginning   after  December  15,  1997.
Comprehensive  income  (loss) for the three months ended March 31, 1998 and 1997
is equal to net income (loss) reported for such periods.

(5) Conversion of Preferred Stock
    -----------------------------

    On January 22, 1998,  and  February  26,  1998, a total of 60,000  shares of
preferred stock was converted to 60,000 shares of common stock.



<PAGE>



(6) Pro Forma Results of Operations
    -------------------------------

    Pro forma results of operations of the Company as if the reverse acquisition
of AvTel by Matrix had occurred as of January 1, 1997, are as follows:

       Revenue                           $14,698,811
       Net loss                           (8,954,539)
       Pro forma net loss
       per share - basic and diluted           (1.03)

(7) Contingencies
    -------------
    The  Company  is a party to legal  proceedings  incidental  to its  business
which, in the opinion of management, are not expected to have a material adverse
effect on the Company's consolidated financial position or operating results.
                                      6


<PAGE>





ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THIS  QUARTERLY  REPORT ON FORM 10-Q CONTAINS  FORWARD-LOOKING  STATEMENTS  THAT
INVOLVE RISKS AND UNCERTAINTIES.  THE STATEMENTS CONTAINED IN THIS DOCUMENT THAT
ARE NOT PURELY HISTORICAL ARE  FORWARD-LOOKING  STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE  SECURITIES  ACT OF 1933 AND  SECTION  21E OF THE  SECURITIES
EXCHANGE ACT OF 1934,  INCLUDING  WITHOUT  LIMITATION  STATEMENTS  REGARDING THE
COMPANY'S EXPECTATIONS,  BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.
ALL  FORWARD-LOOKING  STATEMENTS  INCLUDED IN THIS QUARTERLY REPORT ARE BASED ON
INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES
NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING  STATEMENTS.  ACTUAL EVENTS AND
OUTCOMES COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF MANY FACTORS,  INCLUDING  THOSE  DESCRIBED  HEREIN AND
THOSE SET FORTH IN THE RISK FACTORS  DESCRIBED IN ITEM 1 OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FILED WITH THE SECURITIES  AND EXCHANGE  COMMISSION ON APRIL
14, 1998.

The following  discussion  and analysis  should be read in  connection  with the
unaudited  consolidated  financial  statements  for the quarters ended March 31,
1998 and 1997 of the  Registrant  and related notes  included  elsewhere in this
report  and  the  consolidated   financial  statements  and  related  management
discussion and analysis included in the Registrant's  Annual Report on Form 10-K
for the year ended December 31, 1997.

Overview

           AvTel  Communications,  Inc.  (the  "Company,"  the  "Registrant"  or
"AvTel")  was  formerly a Utah  corporation.  On December  1, 1997,  the Company
merged with and into its wholly-owned  Delaware  subsidiary,  thus effecting the
Company's  reincorporation  in  Delaware  (the  "Reincorporation  Merger").  The
conversion of the Company's stock in the  Reincorporation  Merger resulted in an
effective  one-for-four  reverse stock split, which was effective on December 1,
1997 (the "Reverse  Stock  Split").  All share and option numbers and prices set
forth herein have been adjusted to reflect the Reverse Stock Split.

     On  December  1,  1997,  the  Company  acquired  Matrix  Telecom,  Inc.,  a
privately-held  Texas  corporation  ("Matrix  Telecom")  by means of a share for
share  exchange  (the "Share  Exchange").  Matrix  Telecom is a provider of long
distance telephone services.  The  Reincorporation  Merger and the Reverse Stock
Split were conditions to the closing of the Share Exchange.

     The Share  Exchange was  effected  pursuant to a Stock  Exchange  Agreement
dated April 29, 1997, and  subsequently  amended,  pursuant to which the persons
and entities who owned the issued and outstanding common stock of Matrix Telecom
("Matrix Telecom Stockholders") transferred to AvTel all of their Matrix Telecom
stock and, in exchange,  AvTel issued to the Matrix Telecom  Stockholders shares
of AvTel's Common Stock. Following the Share Exchange, the former Matrix Telecom
Stockholders owned  approximately 81% of the issued and outstanding Common Stock
of the Company.

           For accounting purposes,  the Share Exchange was treated as a reverse
acquisition  of AvTel by  Matrix  Telecom.  AvTel  was the  legal  acquirer  and
accordingly,  the Share  Exchange  was  effected by the issuance of AvTel Common
Stock in  exchange  for all of the  common  stock  then  outstanding  of  Matrix
Telecom.  In  addition,  holders of Matrix  Telecom  outstanding  stock  options
received  non-qualified  stock  options of AvTel.  The  following  discussion of
results  of  operations  reflects  the  operations  of Matrix  Telecom  prior to
December  1, 1997 and  reflects  the  combined  operations  of AvTel and  Matrix
Telecom subsequent to December 1, 1997.  Accordingly,  references to the Company
refer to  operations  of  Matrix  Telecom  prior to the Share  Exchange  and the
combined  operations  of  AvTel  and  Matrix  Telecom  subsequent  to the  Share
Exchange.  The reverse  acquisition of AvTel by Matrix Telecom was accounted for
using the purchase method of accounting.


                                    7


<PAGE>




Results of Operations

          Consolidated Statement of Operations as a Percent of Revenue
                             (Unaudited)

                                                     Three Months
                                                    Ended March 31,
                                               ------------------------
                                                 1998            1997
                                               --------       ---------

REVENUES                                        100.00%         100.00%

COST OF REVENUES                                 74.63%          67.84%

GROSS MARGIN                                     25.37%          32.16%

Operating expenses
  Selling, general and administrative            36.82%          26.60%
  Depreciation and amortization                   2.24%           1.32%
                                              ---------        --------
     Total operating expenses                    39.06%          27.93%

                                              ---------        --------
OPERATING INCOME (LOSS)                         (13.70%)          4.24%

Interest expense                                 (0.10%)         (0.04%)
Other income, net                                 0.35%           0.39%
                                              ---------        --------
Income (loss) before income taxes               (13.44%)          4.59%

Income tax expense (benefit)                      0.00%           1.93%
                                              ---------        --------

NET INCOME (LOSS)                               (13.44%)          2.66%
                                              =========        ======== 

Quarter Ended March 31, 1998 compared with Quarter Ended March 31, 1997


Revenue

     Revenue for the quarter ended March 31, 1998 was $12.4 million a decline of
10.7% or $1.5 million from $13.9  million for the quarter  ended March 31, 1997.
However,  revenue  increased 2.47% or $300,000 from $12.1 million for the fourth
quarter ending  December 31, 1997.  Management  believes that this increase over
the prior  calendar  quarter  is  significant  and a result of  certain  changes
implemented in the Company's wholly-owned subsidiary,  Matrix Telecom, after the
completion of the Share Exchange on December 1, 1997.

     Significant  contributing factors to the decrease in consolidated  revenues
for the quarter  ended March 31,  1998  compared to the quarter  ended March 31,
1997  included  competitive  pricing  practices  and  management's  decision  to
discontinue   or  reduce   certain   distribution   channels  of  the  Company's
wholly-owned   subsidiary,   Matrix  Telecom.   These  factors  were  driven  by
competitive demands in the  telecommunications  industry.  The primary source of
revenues of the Company in the first  quarter of 1998 have  continued to be long
distance  products sold through  Matrix Telecom which are purchased from a major
underlying  carrier  and  resold to the end user.  Prior to the Share  Exchange,
Matrix Telecom was unable to  effectively  reduce its retail pricing in order to
meet  a  reduction  in  retail  pricing  by the  major  carriers,  resulting  in
increasing rates of attrition.  The combined effect of these factors resulted in
a decline in the  Company's  revenue  base.  The Company has recently  completed
lower rate negotiations with the Company's major underlying carrier, the effects
of which should begin to be realized in the latter part of the second quarter of
1998.  Future  plans of the Company  include the  implementation  of a switching
facility  which  management  believes  will  significantly  reduce  current cost
structures.

     New business  areas of the Company  posted  revenue  increases in the first
quarter of 1998  compared  to the first  quarter of 1997 of  approximately  $1.2
million.  Two international  distributors for the Company  experienced growth of
over 120%. Furthermore,


                                      8


<PAGE>



the Company  reported a net increase of 5,200  customers for the quarter  ending
March 31, 1998. Additionally, the Company experienced revenue growth of $872,000
in its Business Network Services division and Internet services  subsidiaries in
the first quarter of 1998. The Company's future focus includes  continued growth
in corporate sales by incorporating voice and data networking solutions into the
construction  of  corporate   Intranets  and  Wide  Area  Networks.   Management
anticipates  this  strategy to increase  revenue in  traditional  long  distance
telephone  services and data  networking  services and to continue to reduce the
Company's  dependency  on  residential  customers.  Additionally,  the Company's
wholly-owned   subsidiary,   Matrix  Telecom,  will  continue  to  pursue  niche
international opportunities and home-based businesses.

     Explanations of significant changes in certain distribution channels of the
Company's wholly-owned subsidiary,  Matrix Telecom, prior to the Share Exchange,
follow.

     A major marketing channel of the Company's wholly-owned subsidiary,  Matrix
Telecom, in the first quarter of 1997 was a distributor of the casual calling or
dial-around long distance products. Sales from this channel in the first quarter
of 1998 have  decreased  $1.4 million  compared to sales in the first quarter of
1997.  To maintain  this  particular  customer  base,  the Company,  at its sole
expense must  continue  marketing  through  direct mail and other costly  means.
Additionally,  fraud and bad debt cost  associated  with this  customer base are
significantly  higher since the Company is dependent  upon billing  arrangements
through the Local Exchange Carrier ("LEC").  The LEC collection  percentages are
typically  lower than those of the  Company.  Management  chose to decrease  its
dependence on the casual  customer,  and  marketing of new casual  customers was
significantly curtailed late in 1997 and in 1998.

     A second major marketing channel of the Company's wholly-owned  subsidiary,
Matrix  Telecom  in the first  quarter of 1997 was  telemarketing.  Sales from a
telemarketing   distributor   in  the  first  quarter  of  1998  have  decreased
approximately  $1.1 million  compared to sales in the first quarter of 1997. The
distributor  of this  product  faces  significant  competition  for the  typical
residential  long  distance  customer.   Sales  per  hour  as  measured  by  the
telemarketing  distributor continued to decline as the major first tier carriers
aggressively  reduced  their pricing and solicited the customer with cash awards
for changing  carriers.  Attrition of the  customer  solicited by  telemarketing
continued  increasing,  as the customers were enticed to the major carriers with
substantial  advertising  budgets.  Management  chose to discontinue  the use of
telemarketing  as a  primary  marketing  channel  to  increase  its  residential
customer  base,   while   increasing  the  use  of  niche  focused   independent
distributors.  Revenues from this customer base are  anticipated  to continue to
decline.

     Billings from a distributor  approximating $600,000 in the first quarter of
1997 were discontinued in May 1997 due to losses incurred from the distributor's
required  products.   Additional  billings  from  another  distributor  declined
$509,000  in the first  quarter of 1998 from  $795,000  in the first  quarter of
1997.  Matrix  Telecom,   prior  to  the  Share  Exchange,  had  terminated  the
relationship  with  the  distributor  due  to  discontinued  operations  of  its
wholly-owned subsidiary for which the distributor was selling.

Gross Margin

     Gross margin  decreased  $1.3 million to $3.1 million for the quarter ended
March 31,  1998 from $4.4  million for the quarter  ended March 31,  1997.  As a
percentage  of revenues,  gross margin  decreased  6.8% to 25.3% for the quarter
ended  March 31,  1998 from 32.1% for the  quarter  ended  March 31,  1997.  Two
factors primarily contributed to the decease.

     Network cost as a percentage  of revenue  increased  3.1%, to 68.2% for the
quarter  ended March 31, 1998 from 65.1% for the quarter  ended March 31,  1997.
The increase resulted primarily from the decrease in revenues. As retail pricing
was  lowered  in  response  to  competitive   industry  forces,   the  Company's
contractual  cost  related  to the  underlying  provider  of its  long  distance
services  did not  change;  therefore,  as retail  prices  decreased,  cost as a
percentage of revenue increased. Similarly, the attrition of a maturing customer
base  subscribing  to  higher-margin  products  along with the  addition  of new
customers at lower, more competitive products, impacted gross margins as network
cost as a percentage of revenue  continued to rise. The Company expects that the
trend described above will change.  New contractual rates were negotiated during
the first  quarter of 1998 with its  primary  underlying  carrier,  and the full
effect of decreased carrier rates will not begin to be realized until the latter
part of the second quarter of 1998.

     Bad debt  expense  increased  $413,000 to $800,000 in the first  quarter of
1998 from $387,000 in the first quarter of 1997. As a percentage of revenue, bad
debts increased 3.7% to 6.4% in the first quarter of 1998 from 2.7% in the first
quarter of 1997. The increased bad debt expense

                                    9


<PAGE>




primarily  resulted from decreased  collection  percentages from LECs in certain
geographical  regions.  The majority of the Company's revenues are billed by the
LEC, and collection  policies and aggressiveness in collection  procedures among
the LECs vary. The Company therefore,  experiences lower collection  percentages
depending upon the LEC. The Company experienced the majority of its sales growth
in a  geographical  location  in  which  the  LEC  collection  percentages  were
significantly  lower  than  other  areas of the  country.  The  majority  of new
products  being  sold by the  Company  have  been  designed  as a direct  billed
product.  The Company's  internal  collection  percentages are greater than 97%;
therefore,  as the number of customers  being billed by the LEC  decreases,  the
Company expects bad debt expense as a percentage of revenue to decrease.

Selling, General, and Administrative Costs

     Selling,  general,  and administrative costs increased 22.3% or $830,000 to
$4.5  million  for the quarter  ended  March 31, 1998 from $3.7  million for the
quarter  ended March 31,  1997.  Descriptions  of the more  significant  changes
follow.

     Salaries and wages increased $890,000 to $1.9 million for the quarter ended
March 31,  1998 from $1.1  million for the quarter  ended  March 31,  1997.  The
majority of the increase  resulted from the addition of personnel as a result of
the Share Exchange and the Company's increased deployment of sales and marketing
personnel.  For the first  quarter of 1998,  $428,000 of salary and wage expense
was  associated  with the  increase  in the number of  employees.  Approximately
$146,000  of  increased  salary and wage  expense  in the first  quarter of 1998
compared to the first  quarter of 1997 is  attributed to the increase in certain
sales and marketing  personnel in the Company's "Win Back and  Retention"  (WAR)
initiative.  Approximately  $83,000 in increased salary and wage expense for the
first quarter of 1998 over the first quarter of 1997 resulted from contract fees
associated with  programming for increased  information  systems.  Approximately
$64,000 in sales  incentives were paid in the first quarter of 1998,  which were
previously  supported  by  the  sales  distributor.  Approximately  $169,000  of
increased  salary and wage expense for the quarter ended March 31, 1998 compared
to the quarter ended March 31, 1997 resulted from normal  employee  compensation
and benefit  increases and certain operating  personnel  increases not mentioned
above.

     Advertising and promotion expense increased  approximately $179,000 for the
quarter ended March 31, 1998 over the quarter ended March 31, 1997.

     Billing  and  collection  fees  decreased  approximately  $149,000  for the
quarter  ended March 31, 1998  compared  to the  quarter  ended March 31,  1997.
Billing and  collection  fees normally move in the same direction as revenue and
remain constant as a percentage of revenues;  however,  the cost as a percentage
of revenue  decreased  0.63% primarily from the following.  First,  new products
have been designed to be direct billed by the Company, a method of billing which
is lower in cost than billing through the LEC. Second,  a significant  number of
customers  billing through  smaller LECs by a third party having  contracts with
those LECs were moved to direct bill status by the Company.  The  combination of
the two  factors  effected a  reduction  in  billing  and  collection  fees as a
percentage of revenue.

     Commission  expense  decreased  by $32,000 for the quarter  ended March 31,
1998 compared to the quarter ended March 31, 1997.  Commissions normally move in
the same  direction as revenue and remain  constant as a percentage of revenues;
however,  the cost as a percentage of revenue  increased 0.72%.  Primarily,  the
increased  percentage  resulted from stock compensation  expense incurred in the
first  quarter of 1998 but not in the first  quarter of 1997.  The  expense  was
classified  in  commission  expense  since  the  stock  will be  issued to sales
distributors  in a manner that is determined by billings  generated by the sales
distributor for the Company.

     Professional  services  decreased  $74,000 for the quarter  ended March 31,
1998 compared to the quarter ended March 31, 1997 primarily  from  decreasing on
site EDS personnel to maintain the rating and billing  software  utilized by the
Company to direct bill its customers.

     Regulatory  compliance fees decreased  $114,000 for the quarter ended March
31, 1998  compared to the quarter  ended March 31, 1997.  Certain  mandated fees
passed through to the end user are passed through at a cost high enough to cover
costs of  administration.  The  revenues  from those fees netted  against  their
direct cost are now classified in net revenues.

     Other selling,  general and administrative expense increased  approximately
$130,000 in the first  quarter of 1998  compared  to the first  quarter of 1997,
primarily as a result of changes resulting from the Share Exchange. The increase
in cost resulted from maintaining corporate and branch locations.
                                    10


<PAGE>





Depreciation and Amortization

     Depreciation and amortization increased $94,000 to $278,000 for the quarter
ended March 31, 1998 from  $184,000 for the quarter  ended March 31,  1997.  The
increase  primarily  resulted from the  acquisition of assets as a result of the
Share  Exchange and the related  increases in fixed and  non-current  assets and
their related depreciation and amortization expense.

Interest Expense and Other Income, Net

     Interest  expense  and  other  income  net of  other  expenses  changed  by
immaterial  amounts for the quarter ended March 31, 1998 compared to the quarter
ended March 31, 1997.  Interest expense  continued to be insignificant in amount
since  the  Company  has had  sufficient  cash to meet  operations  and  capital
expenditures.  Interest  income was slightly higher in the first quarter of 1997
compared  to the  first  quarter  of  1998  primarily  from a  decrease  in cash
reserves.

Income Taxes

     Income tax expense has not been  recorded  for the quarter  ended March 31,
1998  compared to the  quarter  ended March 31, 1997 since there has been a loss
from operations for the quarter ended March 31, 1998.

Liquidity and Capital Resources

     The primary  sources of  operating  cash flow for the Company are  revenues
derived  from  the  resale  of  domestic  and  international  telecommunications
services.  Minor  sources of revenues  are  received  for the  provision of back
office support and earnings from investment income. The primary uses of cash are
payments  to  underlying   network  vendors  for   provisioning   long  distance
facilities, commission payments to sales distributors, and payments to the major
LECs for billing and collecting directly from the long distance end user.

     Net cash  provided by operating  activities  was $2.3 million for the three
months ended March 31, 1997  compared to a net use of cash provided by operating
activities  amounting to $1.1 million for the three months ended March 31, 1998.
Primarily,  the change  resulted  from the  Company's  net loss of $1.6  million
reported for the quarter ended March 31, 1998 compared to net income of $371,000
reported for the quarter ended March 31, 1997.

     For  reasons  more fully  described  above  under the  heading  "Results of
Operations,"  the Company's net loss  resulted  from  declining  revenues of the
Company's wholly-owned subsidiary,  Matrix Telecom, decreasing gross margins and
increased  expenditures  in sales and  marketing.  Declining  revenues have been
caused in part by industry  competition,  changes in certain marketing  channels
and  management's  decision to  discontinue  relationships  with  certain  sales
distributors,  which  have  in the  past  contributed  a  significant  share  of
revenues. Similarly, the continuing market decreases in retail pricing without a
corresponding  decrease in the Company's  underlying cost structure  resulted in
decreasing margins.

     Working  capital at  December  31, 1997 was $5.5  million  compared to $4.3
million at March 31, 1998, a decrease of $1.2 million or 21.8%. Cash balances at
December 31, 1997 were $4.8 million  compared to $3.9 million at March 31, 1998,
a decrease of approximately  $813,000 or 16.9%,  resulting from the use of prior
cash balances for operations.

     The Company's net accounts receivable increased approximately $500,000 from
$6.9  million  at  December  31,  1997 to $7.4  million at March 31,  1998.  The
increase  primarily  resulted  from a pass through of certain  mandated  federal
regulatory fees to the end user.

     Net cash provided by investing  activities  for the quarter ended March 31,
1998  was  $321,000  compared  to net  cash  used  in  investing  activities  of
approximately  $2.0 million for the quarter  ended March 31, 1997.  In the first
quarter of 1997, the Company loaned $2.0 million to an affiliated company,  Core
Marketing,  LLC.  Approximately  $410,000 was paid prior to the end of the first
quarter  of 1998.  Approximately  $88,000  was  used to  purchase  property  and
equipment prior to the end of the first quarter of 1998.

     The  Company in the past has been able to finance its  operations  from net
cash provided by operating  activities without the need to borrow on a long-term
basis.  Since December 31, 1997, the Company has continued to be able to finance
its  operations  and capital  expenditures,  which have  consisted  primarily of
property and equipment, from cash


                                    11


<PAGE>





and cash equivalents at the beginning of the year. The Company  anticipates that
future operations and growth strategies (including possible acquisitions) of the
Company  will  require  funding  from other  sources.  The Company  continues to
evaluate its financing alternatives.  In addition to debt financing, the Company
may utilize its capital stock as a source of financing.





















                                     12




<PAGE>




                         PART II. OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


         (a)  Exhibits

              11 Statement re  Computation  of Per Share Earnings 27.1 Financial
              Data  Schedule  -  Quarter  ended  March 31,  1998  27.2  Restated
              Financial Data Schedule - Quarter ended March 31, 1997

         (b) Reports on Form 8-K

     The Registrant  filed an Amendment to Current Report on Form 8-K/A filed on
February 9, 1998 (refiled on March 13, 1998),  amending a Current Report on Form
8-K filed on December 9, 1997. Amending Item 7 to file financial  statements and
pro forma financial  information  with respect to the  share-for-share  exchange
with Matrix Telecom, Inc.

           The registrant  filed no other reports on Form 8-K during the quarter
ended March 31, 1998.

















                                     13




<PAGE>



                                   SIGNATURE


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


                           AVTEL COMMUNICATIONS, INC.,
                             a Delaware corporation



                             By: /s/  JAMES P. PISANI
                                 ------------------------------------
                                 JAMES P. PISANI
                                 PRESIDENT, CHIEF OPERATING OFFICER,
                                 CHIEF FINANCIAL OFFICER AND
                                 SECRETARY (Duly Authorized Officer and
                                 Principal Financial Officer)


May 14, 1998















                                    14


<PAGE>







                                  Exhibit Index


Exhibit
Number       Exhibit Description
-------      -------------------

11           Statement re Computation of Per Share Earnings
27.1         Financial Data Schedule - Quarter ended March 31, 1998
27.2         Restated Financial Data Schedule - Quarter ended March 31, 1997