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 JUNE 30, 1998

                                       OR

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

                  FOR THE TRANSITION PERIOD FROM           TO

                         COMMISSION FILE NUMBER 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
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (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 July 24, 1998,  there were  9,657,427  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 JUNE 30, 1998

                                TABLE OF CONTENTS

                                                                          PAGE
                                                                          ----
Part I      FINANCIAL INFORMATION

          Item 1.  Financial Statements
                   Consolidated Balance Sheets as of June 30,
                     1998 (Unaudited) and December 31, 1997 .............   3
                   Consolidated Statements of Operations for the
                     Three Month and Six Month Periods Ended June 30,
                              1998 and 1997 (Unaudited) .................   4
                   Consolidated Statements of Cash Flows for the
                     Six Month Periods Ended June 30, 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 4.  Submission of Matters to a Vote of Security Holders ..  14

          Item 6.  Exhibits and Reports on Form 8-K .....................  14

   Signature Page .......................................................  15



                                        2

<PAGE>


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                   AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                        June 30,    December 31,
                                                          1998           1997
                                                      -----------   ----------- 
                                                      (Unaudited)
                  Assets
CURRENT ASSETS
  Cash and cash equivalents .......................  $  2,461,709     4,807,441
  Accounts receivable, net ........................     6,909,636     6,961,953
  Due from affiliates .............................     1,827,560     2,127,771
  Federal and state income tax receivable .........       110,339       598,970
  Other current assets ............................       550,229       861,950
                                                     ------------   -----------
         Total current assets .....................    11,859,473    15,358,085
                                                     ------------   -----------
Property and equipment, net .......................     1,650,537     1,791,682
Other assets, net .................................     1,398,317     1,575,083
                                                     ------------   -----------
          Total assets ............................  $ 14,908,327    18,724,850
                                                     ============    ==========
                                                 
      Liabilities and Stockholders' Equity
CURRENT LIABILITIES
  Accounts payable and other
     accrued expenses .............................  $  1,382,996     1,546,762
  Accrued network services costs ..................     3,676,171     4,319,198
  Sales and excise tax payable ....................       902,857       736,012
  Due to affiliates ...............................     2,683,381     2,719,417
  Other current liabilities .......................       547,612       466,039
                                                     ------------   -----------
          Total current liabilities ...............     9,193,017     9,787,428
                                                     ------------   -----------
Deferred income taxes .............................       498,712       498,712
Common stock subject to put option ................       541,627       578,880
Other liabilities .................................        18,818        50,782
                                                     ------------   -----------
          Total liabilities .......................    10,252,174    10,915,802
                                                     ------------   -----------
STOCKHOLDERS' EQUITY
  Preferred stock, authorized 750,000 shares, $0.01
    par value .....................................          --            --
  Series A convertible preferred stock, authorized
    250,000 shares, $0.01 par value, cumulative as
    to 8% dividends, 147,700 and 207,70 shares
    issued and  outstanding  June 30, 1998 and
    December 31, 1997 respectively. (Liquidation
    preference of $704,032 and $910,800 June 30,
    1998 and December 31, 1997 respectively,
    including dividends in arrears) ...............         1,477         2,077
  Common stock, authorized 20,000,000 shares, $0.01
    par value, 11,645,075 and 11,437,056 shares
    issued June 30, 1998 and December 31, 1997
    respectively, including 337,733 and 385,920
    shares subject to put options on June 30, 1998
    and December 31, 1997 respectively ............       113,074       110,511
  Additional paid in capital ......................    17,769,318    17,138,739
  Retained earnings (accumulated deficit) .........   (13,207,716)   (9,422,279)
  Treasury stock, 1,999,997 shares ................       (20,000)      (20,000)
                                                     ------------   -----------
          Total stockholders' equity ..............     4,656,153     7,809,048
                                                     ------------   -----------

Commitments and contingencies .....................          --            --

          Total liabilities and
           stockholders' equity ...................  $ 14,908,327    18,724,850
                                                     ============    ==========
                                                  
See accompanying Notes to Consolidated Financial Statements

                                        3
<PAGE>
<TABLE>

                   AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<CAPTION>


                                        Three Months                   Six Months
                                       Ended June 30,                Ended June 30,
                                --------------------------    ------------------------
                                     1998          1997           1998           1997
                                ------------   -----------    -----------   -----------
<S>                             <C>            <C>            <C>           <C>       

REVENUES .....................  $ 11,294,866    12,870,397     23,739,705    26,841,158

COST OF REVENUES .............     8,356,018     8,916,062     17,644,013    18,393,253

GROSS MARGIN .................     2,938,848     3,954,335      6,095,692     8,447,905

Operating expenses
  Selling, general & admin ...     4,802,586     4,180,961      9,385,032     7,897,713
  Depreciation & amortization        265,370       179,349        544,238       364,200
                                ------------   -----------    -----------   -----------
     Total operating expenses      5,067,956     4,360,310      9,929,270     8,261,913
                                ------------   -----------    -----------   -----------
OPERATING INCOME (LOSS) ......    (2,129,108)     (405,975)    (3,833,578)      185,992


Interest expense .............       (17,327)       (1,830)       (29,302)       (6,886)
Other income, net ............        33,488        65,295         77,443       119,522
                                ------------   -----------    -----------   -----------
Income(loss) before income tax    (2,112,947)     (342,510)    (3,785,437)      298,628

Income tax expense (benefit) .             0      (143,853)             0       125,426
                                ------------   -----------    -----------   -----------
NET INCOME (LOSS) ............  $ (2,112,947)     (198,657)    (3,785,437)      173,202
                                ============   ===========    ===========   ===========

Net income (loss) per share
   - basic and diluted .......  $      (0.22)        (0.02)*        (0.40)         0.02*
                                ============   ===========    ===========   ===========

Weighted average number of
 common shares ...............     9,549,958     9,366,447*     9,513,924     9,366,420*
                                ============   ===========    ===========   ===========



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






See accompanying Notes to Consolidated Financial Statements.
</TABLE>




                                        4

<PAGE>

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


                                                           Six Months
                                                          Ended June 30,
                                                    ------------------------
                                                        1998         1997
                                                    -----------   ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss) ............................  $(3,785,437)     173,202
    Adjustments to reconcile net income (loss)
      to net cash provided by (used in)
      operating activities:
          Depreciation and amortization ..........      544,238      364,200
          Amortization of advanced commissions ...      220,928      832,094
          Provision for bad debts ................    1,468,143      747,988
          Stock compensation earned ..............      563,509            0
    Changes in assets and liabilities:
          Accounts receivable ....................   (1,415,826)   1,291,072
          Due from affiliates ....................     (137,213)     248,114
          Other current assets ...................      579,424     (176,504)
          Accounts payable and accrued liabilities     (561,458)  (1,419,808)
          Due to affiliate .......................      (36,036)    (389,894)
                                                    -----------   ----------
          Net cash provided by (used in)
          operating activities ...................   (2,559,728)   1,670,464

  CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment ...........     (226,327)    (127,536)
    Loans to affiliates ..........................            0   (2,000,000)
    Payments on loans to affiliates ..............      437,424       75,697
    Proceeds from sale of property and equipment .            0        2,748
                                                    -----------   ----------
          Net cash provided by (used in)
          investing activities ...................      211,097   (2,049,091)

  CASH FLOWS FROM FINANCING ACTIVITIES:
    Principal payments on capital leases .........      (28,881)           0
    Issuance of common stock for exercise
        of options ...............................       31,780            0
                                                    -----------   ----------
      Net cash provided by financing activities ..        2,899            0
                                                    -----------   ----------
      Net increase (decrease) in cash and cash
      equivalents ................................   (2,345,732)    (378,627)

  Cash and cash equivalents at beginning of period    4,807,441    4,622,395
                                                    -----------   ----------
  Cash and cash equivalents at end of period .....  $ 2,461,709    4,243,768
                                                    ===========   ==========



See accompanying Notes to Consolidated Financial Statements.



                                        5

<PAGE>

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

                             June 30, 1998 and 1997


(1) Basis of Presentation
    ---------------------
    The unaudited  consolidated  financial  statements of AvTel  Communications,
Inc. and Subsidiaries  (the "Company") for the three month and six month periods
ended June 30, 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 June
30, 1997 earnings per share calculations 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.

     On May 22, 1998 the Company registered 1,292,000 shares of its common stock
with the  Security  and Exchange  Commission  with the respect to stock  options
under The New BestConnections, Inc. Amended and Restated 1997 Stock Option Plan.

     On May 28, 1998 the Company  adopted  the 1998 Stock  Incentive  Plan which
provides  for the  issuance  of up to  1,500,000  shares of AvTel  common  stock
pursuant to stock options and issuances of restricted  stock, as well as for the
grant of stock appreciation rights.

(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

                                        6

<PAGE>


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 month and six month periods ended June 30, 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.

(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:

                                         Three Months             Six Months
                                      Ended June 30, 1997   Ended June 30, 1997
          Revenue                         $ 13,612,914            28,311,725
          Net loss                            (391,599)           (9,346,138)
          Pro forma net loss
           per share - basic and diluted         (0.05)                (1.11)

(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.

(8) Subsequent Events
    -----------------
    On June 29, 1998, the Company executed a Letter of Intent to acquire Digital
Media, Inc.("DMI"). The acquisition will be a stock exchange accounted for under
the purchase method.  Approximately  25,000 shares of AvTel common stock will be
issued for all the then  outstanding  stock of DMI.  The parties  are  currently
negotiating  the  definitive  acquisition  agreement.  The  Company  expects the
transaction will be completed in the third quarter.

    In August 1998, the Company entered into an amended stock purchase agreement
with the  shareholders  of Remote  Lojix/PCSI,  Inc.  ("RLI") to acquire 100% of
RLI's stock.  The transaction will be accounted for under the purchase method of
accounting.  AvTel  common  stock  will be issued  for all the then  outstanding
shares of RLI, and certain earnout shares will be issued  contingent upon future
earnings  of  RLI.  The  parties  are  currently   negotiating   the  definitive
acquisition agreement.  The Company expects the transaction will be completed in
the third quarter.


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 three month and six month
periods  ended  June 30,  1998  and 1997 of the  Registrant  and  related  notes
inclu1ded 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.

                                        7

<PAGE>


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.


Results of Operations

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

                                        Three Months             Six Months
                                       Ended June 30,          Ended June 30,
                                     -------------------    -------------------
                                       1998       1997         1998       1997
                                     --------   --------    --------   --------
REVENUES                              100.00%    100.00%     100.00%    100.00%

COST OF REVENUES                       73.98%     69.28%      74.32%     68.53%

GROSS MARGIN                           26.02%     30.72%      25.68%     31.47%

Operating expenses
  Selling, general and administrative  42.52%     32.49%      39.53%     29.42%
  Depreciation and amortization         2.35%      1.39%       2.29%      1.36%
                                     --------   --------    --------   --------
     Total operating expenses           44.87%    33.88%      41.83%     30.78%
                                     --------   --------    --------   --------
OPERATING INCOME (LOSS)               (18.85%)    (3.15%)    (16.15%)     0.69%

Interest expense                       (0.15%)    (0.01%)     (0.12%)    (0.03%)
Other income, net                       0.30%      0.51%       0.33%      0.45%
                                     --------   --------    --------   --------
Income (loss) before income taxes     (18.71%)    (2.66%)    (15.95%)     1.11%
Income tax expense (benefit)            0.00%     (1.12%)      0.00%      0.47%
                                     --------   --------    --------   --------
NET INCOME (LOSS)                     (18.71%)    (1.54%)    (15.95%)     0.65%
                                     ========   ========    ========   ======== 
    

                                        8
<PAGE>

Three Months Ended June 30,1998 compared with Three Months Ended June 30, 1997

Revenues

     Revenues  for the three months  ended June 30, 1998 were $11.3  million,  a
decline of 12.2% or $1.6 million  from $12.9  million for the three months ended
June 30, 1997.

     The  focus  of  the  Company  is  to  be a  fully  integrated  provider  of
information technologies. The merger of AvTel Communications and Matrix Telecom,
effective  December  1, 1997,  provided  the  Company  with  substantial  growth
opportunities.  By  acquiring  Matrix,  the  Company  integrated  a large  voice
customer  base  supported  by  a  sophisticated   back  office  and  information
technology  group into AvTel's  highly  skilled  services  group which  provided
broadband  network services of voice,  data and video to the mid-size  corporate
customers.

     The primary source of revenues of the Company  during the period  continued
to be voice  distribution  channels of the  Company's  wholly owned  subsidiary,
Matrix  Telecom.  Factors  similar in nature to those affecting all resellers of
long  distance,  have  continued  to effect a decline in revenues  for the three
months ended June 30, 1998 compared to the three months ended June 30, 1997. Due
to pricing  pressures within the industry and the competitive  reductions by the
first tier carriers, the Company similarly continued to reduce retail pricing of
long distance products to meet consumer expectations.

     Decreases in revenues were additionally  affected by a continued  attrition
of a maturing  customer base. The Company purchases excess network capacity from
national  underlying  carriers.  Even though the Company's  volume discounts are
passed through to the long distance end user,  higher  customer  attrition rates
have continued. As a reseller, the Company has been unable to effectively reduce
its retail  pricing to meet the  current  pricing  levels of the major  carriers
having their own network  facilities.  Lower rates have been negotiated with the
Company's  vendors;  however,  the effects of those reductions have been minimal
with the continued decline of retail prices within the industry.  The effects of
lower  pricing  as  well  as  the  decline  of the  customer  base  will  lessen
dramatically  as pricing  within the industry  slows and reaches its floor,  and
either  the  Company  negotiates  lower  costs  or  implements  its own  network
facility.  Management  additionally  anticipates  that the revenue decrease will
stabilize as the continued  integration  of and revenue from the corporate  data
services of the Company  continues  to expand and grow beyond the long  distance
portion.

     Decreases in revenues were  anticipated  in the first quarter of 1998.  The
new  management  team  chose to  discontinue  and  reduce  certain  unprofitable
distribution channels of its subsidiary.  Management's focus continued in second
quarter of 1998 to reduce its dependence on low margin,  high churn segments and
to increase its resources in the business  markets with higher  average  billing
and retention rates, niche ethnic consumer markets, and small office-home office
("SOHO")  distributors  and agents.  With emphasis on maintaining and increasing
certain segments, revenues in these areas have increased 55% in 1998 compared to
1997.

     Data needs of the corporate customer have continued to drive and change the
telecom  industry.  The future  focus of the  Company  continued  to move toward
incorporating  voice and data  networking  solutions  into the  construction  of
corporate Intranets and Wide Area Networks which will decrease its dependence on
traditional  long distance  services of the  residential  consumer.  The primary
focus of the Company has been to move quickly and efficiently towards becoming a
viable  resource to the  corporate  world having few options in this new wave of
technology.  Excluding consumer voice traffic,  the Company's revenues generated
by the data needs of its customers as a percentage of total  revenues  increased
5% for the second  quarter of 1998 compared to the first  quarter of 1998.  This
percentage is expected to increase  significantly  as the Company  completes its
continued integration of its corporate broadband network and its growth counters
the decline of the long distance business.


Gross Margin

     Gross  margin  decreased  $1.1 million to $2.9 million for the three months
ended June 30, 1998 from $4.0  million for the three months ended June 30, 1997.
As a percentage of revenues, gross margin decreased 4.7% to 26.02% for the three
months ended June 30, 1998 from 30.72% for the three months ended June 30, 1997.
The decrease in gross margin as a percentage of revenues primarily resulted from
increases in the cost of network and the bad debt expense, both of which are

                                        9
<PAGE>

included in cost of sales.

     Network cost as a percentage  of revenues  increased  1.5% to 67.3% for the
three  months  ended June 30,  1998 from 65.8% for three  months  ended June 30,
1997. Two primary factors  effected this increase as a percentage.  As described
more fully above in the Revenue section,  retail pricing was lowered in response
to competitive  industry  forces.  Even though the Company's lower rate elements
were negotiated with its vendors,  cost did not decrease by a greater percentage
than  the  reductions  in  the  retail  pricing.  Therefore,  as  retail  prices
decreased, cost as a percentage of revenue continued to increase. Similarly, the
continued  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.  This trend will tend to stabilize  and reverse to the extent
that the Company's  other  business lines of data and voice products with higher
margins  continue to  increase  as a  percentage  of overall  revenue  channels.
Additionally, significantly lower rates, which will go into effect July of 1998,
were negotiated with the Company's major  underlying  carrier.  Network cost has
been estimated to decrease approximately 4% as a percentage of revenues based on
current traffic mix.

     Bad debt expense as a percentage of revenues increased 3.2% to 6.7% for the
three  months  ended June 30, 1998  compared to 3.5% for the three  months ended
June 30, 1997. The increased bad debt expense primarily  resulted from decreased
collection  percentages  from the Local  Exchange  Carriers  ("LECs") in certain
geographical  regions.  The majority of the Company's revenues are billed by the
LECs and the  Company's  bad debt expense was  effected by the lower  collection
percentages of the LECs.  Collection  policies and  aggressiveness in collection
procedures  among the LECs vary.  A  significant  amount of new sales growth was
experienced in a particular  geographical  location in which the LECs collection
percentages  were  considerably  lower,  and the Company's bad debt expense as a
percentage of revenues increased. The majority of new products being sold by the
Company  have  been  designed  as direct  billed  products,  and the  collection
percentages   experienced  by  the  Company's  internal   collection  staff  are
significantly  higher  than  those of the  LECs.  Therefore,  as the  number  of
customers  being billed by the LEC  decreases,  and the Company  implements  its
policy of moving  away from the LEC  billing  services,  bad debt  expense  as a
percentage of revenue is anticipated to decrease.

Selling, General, and Administrative Costs

     Selling,  general,  and  administrative  costs  increased  $621,625 to $4.8
million for the three months ended June 30, 1998 from $4.2 million for the three
months ended June 30, 1997. As a percentage of revenues,  selling,  general, and
administrative  costs increased 10.03% to 42.52% for the three months ended June
30,  1998 from  32.49%  for the three  months  ended  June 30,  1997.  Decreased
revenues  contributed  to  the  majority  of the  increase  as a  percentage  of
revenues. However, it is noted that $329,411 was expensed for stock compensation
expense for the three  months  ended June 30, 1998  compared to $0 for the three
months ended June 30, 1997.  Certain  non-employees  of the Company were granted
options for  participation  in the  generation  of new business for the Company.
Accordingly,  stock compensation was expensed under the requirements of SFAS No.
123. The remaining  increase in cost was attributable to selling,  general,  and
administrative  costs associated with the merger of AvTel and Matrix,  effective
December 1, 1997. The Company has two locations and remote  employees in several
states.

Depreciation and Amortization

     Depreciation  and  amortization  increased  $86,021 to  $265,370  for three
months ended June 30, 1998 from $179,349 for the three months June 30, 1997. The
increase primarily resulted from amortization of intangibles associated with the
merger of AvTel and Matrix.  Similarly,  the  acquisition and  consolidation  of
assets related to the merger resulted in some increases in depreciation expense.

Interest Expense and Other Income, Net

     Interest  expense  and  other  income  net of  other  expenses  changed  by
immaterial  amounts for the three  months  ended June 30,  1998  compared to the
three months ended June 30, 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.


                                       10
<PAGE>

Income Taxes

     Income tax expense has not been  recorded  for the three  months ended June
30, 1998 compared to the three months ended June 30, 1997 since there has been a
loss from operations for the three months ended June 30, 1998.


Six Months Ended June 30, 1998 compared with Six Months Ended June 30, 1997


Revenues

     Revenues  for the six months  ended June 30,  1998 were  $23.7  million,  a
decline of 11.6% or $3.1  million  from $26.8  million for the six months  ended
June 30, 1997.

     See Results of Operations for the three months ended June 30, 1998 compared
with the three  months  ended June 30,  1997.  The  decline in revenues is fully
described above in the section, Revenues. All of the reasons discussed above are
applicable  for the six months  ended June 30,  1998  compared to the six months
ended June 30, 1997.

Gross Margin

     Gross  margin  decreased  $2.3  million to $6.1  million for the six months
ended June 30, 1998 from $8.4 million for the six months ended June 30. 1997. As
a percentage  of revenues,  gross margin  decreased  5.79% to 25.68% for the six
months  ended June 30, 1998 from 31.47% for the six months  ended June 30, 1997.
The decrease in gross margin as a percentage of revenues primarily resulted from
increases  in the cost of network  and the bad debt  expense,  both of which are
included in cost of sales.

     Network cost as a percentage  of revenues  increased  2.4% to 67.8% for the
six  months  ended June 30,  1998 from  65.4% for the six months  ended June 30,
1997.  Reasons for the increase in network  cost as a percentage  of revenue are
comparable and fully explained above in the Gross Margin section. See Results of
Operations for the three months ended June 30, 1998 compared to the three months
ended June 30 1997. Continued pricing declines at a faster rate than vendor cost
reductions  and  increased  attrition of  customers  from  industry  competition
further  eroded gross margins for the six months ended June 30, 1998 compared to
the six months ended June 30, 1997. As explained above,  this trend will tend to
stabilize and reverse to the extent that the Company's  other  business lines of
data and voice products with higher margins continue to increase as a percentage
of overall revenue channels. Additionally, significantly lower rates, which will
go into effect July of 1998, were negotiated with the Company's major underlying
carrier.  Network  cost has been  estimated  to decrease  approximately  4% as a
percentage of revenues based on current traffic mix.

     Bad debt expense as a percentage of revenues increased 3.4% to 6.5% for the
six months ended June 30, 1998 from 3.1% for the six months ended June 30, 1997.
Reasons for the  increase  in bad debt  expense as a  percentage  of revenue are
comparable and fully explained above in the Gross Margin section. See Results of
Operations for the three months ended June 30, 1998 compared to the three months
ended June 30, 1997.

Selling, General, and Administrative Costs

     Selling,  general,  and administrative  costs increased  approximately $1.5
million for the six months ended June 30, 1998  compared to the six months ended
June 30, 1997. As a percentage of revenues, selling, general, and administrative
costs  increased  10.11% to 39.53% for the six months  ended June 30,  1998 from
29.42% for the six months ended June 30, 1997. Decreased revenues contributed to
the majority of the increase as a percentage of revenues.  However,  it is noted
that  $563,509 was expensed  for stock  compensation  expense for the six months
ended  June 30,  1998  compared  to $0 for the six months  ended June 30,  1997.
Certain  non-employees of the Company were granted options for  participation in
the generation of new business for the Company. Accordingly,  stock compensation
was expensed under the  requirements of SFAS No. 123.  $503,504 was incurred for
solicitation  of new marketing and sales  channels for the six months ended June
30,  1998  compared  to $30,715  for the six months  ended  June 30,  1997.  The
remaining   increase  in  cost  was  attributable  to  selling,   general,   and
administrative  costs associated with the merger of AvTel and Matrix,  effective
December 1, 1997. The Company has two locations and remote  employees in several
states.
                                       11

<PAGE>

Depreciation and Amortization

     Depreciation  and amortization  increased  $180,038 to $544,238 for the six
months ended June 30, 1998 from $364,200 for the six months ended June 30, 1997.
$176,766 of the increase was due to amortization of intangibles  associated with
the merger of AvTel and Matrix.

Interest Expense and Other Income, Net

     Interest  expense  and  other  income  net of  other  expenses  changed  by
immaterial  amounts for the six months  ended June 30, 1998  compared to the six
months ended June 30, 1997.  Interest  expense  continued to be insignificant in
amount since the Company has had sufficient  cash to meet it  operational  needs
and capital expenditures. Interest income was slightly lower in 1998 compared to
1997 primarily from a decrease in cash reserves.

Income Taxes

     Income tax expense has not been  recorded for the six months ended June 30,
1998  compared to the six months ended June 30, 1997 since there has been a loss
from operations for the six months ended June 30, 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   long   distance
telecommunications  services.  A growing  source of revenues has been the design
and installation of data networking  solutions for the construction of corporate
Intranets and Wide Area Networks. 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 services
directly from end user.

     Net cash used in  operating  activities  is $2.6 million for the six months
ended June 30, 1998, compared to a net cash provided by operating  activities of
$1.7  million  for the six months  ended June 30,  1997.  Primarily,  the change
resulted from the Company's net loss of $3.8 million reported for the six months
ended June 30,  1998  compared to net income of  $173,202  reported  for the six
months ended June 30, 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 unprofitable
sales  distributors,  which have in the past contributed a significant  share of
revenues.  Similarly,  the  continuing  market  decreases in retail  pricing and
attrition of a maturing  customer base without a  corresponding  decrease in the
underlying cost structure sufficient to counter the negative effects on revenues
caused decreasing margins.

     Working  capital at June 30, 1998 is $2.7 million  compared to $5.6 million
at December 31, 1997, a decrease of $2.9 million. Cash balances at June 30, 1998
are $2.5  million  compared to $4.8  million at December 31, 1997, a decrease of
approximately $2.3 million. Even though the Company has experienced an operating
loss  for  this  period,  it has  had  sufficient  cash  reserves  to  meet  all
obligations on a current basis.

     Net cash provided by investing activities for the six months ended June 30,
1998  was  $211,097  compared  to net  cash  used  in  investing  activities  of
approximately  $2.0 million for the six months ended June 30, 1997.  The Company
loaned $2.0  million to an  affiliated  company,  Core  Marketing,  LLC ("Core")
during the six months ended June 30, 1997. $437,424 was paid by Core on its loan
during  the six months  ended June 30,  1998.  Subsequent  to June 30,  1998 the
Company   received   $1,276,411  from  Core,   leaving  a  balance  of  $85,054.
Approximately  $226,327 was paid to purchase  property and equipment  during the
six months ended June 30, 1998.  The  majority of equipment  purchases  were for
computer and computer related assets.

                                       12


<PAGE>



     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 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.




                                       13



<PAGE>


                         PART II. OTHER INFORMATION

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     (a)  The  Registrant  held its annual  meeting of  stockholders  on May 28,
          1998.

     (b)  The following  individuals were elected as all of the directors of the
          Registrant:  Anthony E. Papa, James P. Pisani, John E. Allen,  Jeffrey
          J. Jensen and Gregory T. Mutz.

     (c)  The following matters were presented to the stockholders for approval:

          1.   Election of directors.

          The voting for the election of directors was as follows:

               Director           For        Against      Abstain       Total
          -----------------    ---------    ---------    ---------    ---------
          Anthony E. Papa      6,267,545            0    1,478,348    7,745,893
          James P. Pisani      6,267,545            0    1,478,348    7,745,893
          John E. Allen        7,119,283            0      626,610    7,745,893
          Jeffery J. Jensen    7,119,283            0      626,610    7,745,893
          Gregory T. Mutz      7,119,283            0      626,610    7,745,893

          There were no broker non-votes.

          2.   Ratification of Auditors.

          The  stockholders of Registrant  ratified the appointment of KPMG Peat
          Marwick LLP as the company's independent auditors for 1998. The voting
          was as follows:

             For         Against        Abstain         Total
         ----------     ---------      ---------      ---------
          7,743,815         1,150            928      7,745,893

          There were no broker non-votes.

          3.   Adoption of 1998 Stock Incentive Plan.

          The stockholders of Registrant approved the adoption of the 1998 Stock
          Incentive  Plan which  provides  for the  issuance of up to  1,500,000
          shares of the Registrant's  common stock pursuant to stock options and
          issuances  of  restricted  stock,  as well as for the  grant  of stock
          appreciation rights. The voting was as follows:

                                                         Broker
             For          Against        Abstain       Non-Votes        Total
          ---------      ---------      ---------      ---------      ---------
          7,213,828        187,993          6,664        337,408       7,745,893



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits

          11 Statement re Computation of Per Share Earnings
          27.1 Financial Data Schedule - Six Months Ended June 30, 1998
          27.2 Restated Financial Data Schedule - Six Months Ended June 30, 1997

      (b) Reports on Form 8-K

          The  registrant  filed no reports on Form 8-K during the quarter ended
          June 30, 1998.


                                       14

<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)


August 11, 1998















                                       15
<PAGE>


                                  Exhibit Index


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

11           Statement re Computation of Per Share Earnings
27.1         Financial Data Schedule - Six Months Ended June 30, 1998
27.2         Restated Financial Data Schedule - Six Months Ended June 30, 1997