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 SEPTEMBER 30, 1998

                                      OR

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

                  FOR THE TRANSITION PERIOD FROM           TO

                       COMMISSION FILE NUMBER 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 October 22, 1998, there were 9,541,063  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 SEPTEMBER 30, 1998

                            TABLE OF CONTENTS

                                                                           PAGE
                                                                           ----
Part I.         FINANCIAL INFORMATION

       Item 1.  Financial Statements
                Consolidated Balance Sheets as of September 30,
                  1998 (Unaudited) and December 31, 1997 ..................    3
                Consolidated Statements of Operations for the
                  Three Month and Nine Month Periods Ended September 30,
                           1998 and 1997 (Unaudited) ......................    4
                Consolidated Statements of Cash Flows for the
                  Nine Month Periods Ended September 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 .....................    9


PART II         OTHER INFORMATION

       Item 2.  Changes in Securities and Use of Proceeds .................   17

       Item 5.  Other Information .........................................   17

       Item 6.  Exhibits and Reports on Form 8-K ..........................   17


Signature Page ............................................................   18



                                        2


<PAGE>


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                     AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                              CONSOLIDATED BALANCE SHEETS

                                                  September 30,   December 31,
                                                      1998            1997
                                                  ------------    ------------
                                                  (Unaudited)
      ASSETS

CURRENT ASSETS
  Cash and cash equivalents ...................   $  2,520,357       4,807,441
  Accounts receivable, net ....................      5,559,788       6,961,953
  Due from affiliates .........................        515,314       2,127,771
  Federal and state income tax receivable .....         97,190         598,970
  Other current assets ........................      1,170,727         861,950
                                                  ------------    ------------
        Total current assets ..................      9,863,376      15,358,085
                                                  ------------    ------------
Property and equipment, net ...................      1,563,961       1,791,682
Other assets, net .............................      1,470,088       1,575,083
                                                  ------------    ------------
       Total assets ...........................   $ 12,897,425      18,724,850
                                                  ============      ==========

      LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES
  Accounts payable and other
     accrued expenses .........................   $  1,535,231       1,546,762
  Accrued network services costs ..............      3,757,901       4,319,198
  Sales and excise tax payable ................      1,081,565         736,012
  Due to affiliates ...........................      1,627,102       2,719,417
  Other current liabilities ...................        590,519         466,039
                                                  ------------    ------------
       Total current liabilities ..............      8,592,318       9,787,428
                                                  ------------    ------------
Deferred income taxes .........................        498,712         498,712
Common stock subject to put option ............        217,114         578,880
Other liabilities .............................          8,149          50,782
                                                  ------------    ------------
       Total liabilities ......................      9,316,293      10,915,802
                                                  ------------    ------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 1,000,000
  shares, $0.01 par value, including
  Series A convertible preferred stock,
  authorized 250,000 shares, $0.01 par
  value, cumulative as to 8% dividends,
  147,700 and 207,700 shares issued and
  outstanding September 30, 1998 and
  December 31, 1997 respectively 
  (Liquidation preference of $727,664
  and $910,800 at September 30, 1998 and
  December 31, 1997 respectively,
  including dividends accrued)  ...............          1,477           2,077
Common stock, authorized 20,000,000
  shares, $0.01 par value, 11,726,852
  and 11,437,056 shares issued at
  September 30, 1998 and December 31, 1997
  respectively, including 144,743 and
  385,920 shares subject to put options
  on September 30, 1998 and December 31,
  1997 respectively ...........................        115,821         110,511
Additional paid in capital ....................     17,902,105      17,138,739
Retained earnings (accumulated deficit) .......    (14,416,255)     (9,422,279)
Treasury stock, 2,201,601 and 1,999,997
  shares at September 30, 1998 and
  December 31, 1997 respectively ..............        (22,016)        (20,000)
                                                  ------------    ------------
       Total stockholders' equity .............      3,581,132       7,809,048
                                                  ------------    ------------
Commitments and contingencies .................           --              --
                                                  ------------    ------------

       Total liabilities and stockholder's equity $ 12,897,425      18,724,850
                                                  ============    ============


See accompanying Notes to Consolidated Financial Statements.       

                                       3
<PAGE>

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


                                      Three Months                     Nine Months
                                    Ended September 30,              Ended September 30,
                                ----------------------------     ----------------------------
                                    1998            1997             1998            1997
                                ------------    ------------     ------------    ------------

<S>                             <C>               <C>              <C>             <C>       
Revenues ....................   $ 10,589,137      12,403,290       34,328,842      39,244,448

Cost of revenues ............      7,252,847       8,911,113       24,896,860      27,304,366
                                ------------    ------------     ------------    ------------
Gross margin ................      3,336,290       3,492,177        9,431,982      11,940,082

Operating expenses
  Selling, general & admin ..      4,297,879       3,725,137       13,682,911      11,622,850
  Depreciation & amortization        261,449         150,837          805,687         515,037
                                ------------    ------------     ------------    ------------
     Total operating expenses      4,559,328       3,875,974       14,488,598      12,137,887
                                ------------    ------------     ------------    ------------
Operating loss ..............     (1,223,038)       (383,797)      (5,056,616)       (197,805)

Interest expense ............         (6,367)         (2,140)         (35,669)         (9,026)
Other income, net ...........         20,866          99,577           98,309         219,099
                                ------------    ------------     ------------    ------------
Income(loss) before income ..     (1,208,539)       (286,360)      (4,993,976)         12,268

Income tax expense (benefit)               0        (120,274)               0           5,152
                                ------------    ------------     ------------    ------------
Net income (loss) ...........   $ (1,208,539)       (166,086)      (4,993,976)          7,116
                                ============    ============     ============    ============
Net loss per share
   - basic and diluted ......   $      (0.13)          (0.02)*          (0.53)          (0.01)*
                                ============    ============     ============    ============
Weighted average number of
 common shares ..............      9,526,410       9,366,667*       9,518,132       9,366,522*
                                ============    ============     ============    ============
</TABLE>



     * The 1997 per share and share  amounts are presented on a pro forma basis.
(Note 7)






          See accompanying Notes to Consolidated Financial Statements.




                                        4

<PAGE>


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


                                                             Nine Months
                                                         Ended September 30,
                                                     --------------------------
                                                         1998           1997
                                                     -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss) ..............................   $(4,993,976)         7,116
  Adjustments to reconcile net income (loss)
    to net cash provided by (used in)
    operating activities:
        Depreciation and amortization ............       805,687        515,037
        Amortization of advanced commissions .....       220,928      1,130,762
        Provision for bad debts ..................     2,128,608      1,220,265
           Loss on disposition of assets .........         4,232              0
        Stock compensation earned ................       674,169              0
           Changes in assets and liabilities:
        Accounts receivable ......................      (678,393)     1,433,859
        Due from affiliates ......................      (114,144)      (104,061)
        Other current assets .....................       445,340       (351,479)
        Accounts payable and accrued liabilities .      (265,724)    (1,700,141)
        Due to affiliate .........................    (1,092,315)       213,167
                                                     -----------    -----------
        Net cash provided by (used in)
        operating activities .....................    (2,865,588)     2,364,525

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment .............      (282,114)      (158,412)
  Loans to affiliates ............................             0     (2,000,000)
  Loan to Remote Lojix/PCSI ......................      (500,000)             0
  Payments on loans to affiliates ................     1,726,601        145,567
  Cash received in acquisition ...................        25,917        211,172
  Other, net .....................................        (6,850)         2,748
                                                     -----------    -----------
        Net cash provided by (used in)
        investing activities .....................       963,554     (1,798,925)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on capital leases ...........       (43,926)             0
  Issuance of common stock for exercise of
      options ....................................        93,876              0
  Purchase of notes receivable ...................      (435,000)             0
                                                     -----------    -----------
             Net cash used in financing activities      (385,050)             0
                                                     -----------    -----------
    Net increase (decrease) in cash and cash
    equivalents ..................................    (2,287,084)       565,600

Cash and cash equivalents at beginning of period .     4,807,441      4,622,395
                                                     -----------    -----------
Cash and cash equivalents at end of period .......   $ 2,520,357      5,187,995
                                                     ===========    ===========



See accompanying Notes to Consolidated Financial Statements.



                                        5

<PAGE>


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

                         September 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 nine month periods
ended  September  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
September  30, 1997 earnings per share  calculations  to reflect the adoption of
SFAS 128.
                                     Three Months            Nine Months
                                  Ended September 30,     Ended September 30,
                                ----------------------  ----------------------
                                   1998        1997        1998        1997
                                ----------  ----------  ----------  ----------

Net Income (Loss)               (1,208,539)   (166,086) (4,993,976)      7,116
Less preferred dividends            11,816      20,000      35,448      60,000
                                ----------  ----------  ----------  ----------
   Income (Loss) applicable
    to common shareholders      (1,220,355)   (186,086) (5,029,424)    (52,884)
                                ==========  ==========  ==========  ========== 
Weighted average number of
  common shares                  9,526,410   9,366,667*  9,518,132   9,366,522*
                                ==========  ==========  ==========  ========== 
Net income (loss) per common
  share - basic and diluted          (0.13)      (0.02)*     (0.53)      (0.01)*
                                ==========  ==========  ==========  ========== 


* The 1997 amounts are presented on a pro forma basis. (see Note 7)

(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 grantees.

                                        6


<PAGE>

    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 Securities and Exchange  Commission with respect to stock options under
The New BestConnections, Inc. Amended and Restated 1997 Stock Option Plan.

    On May 28, 1998 the  Shareholder's  approved 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. On September 30, 1998 the Company registered
the 1,500,000 shares with the Securities and Exchange Commission.

    On August 10, 1998 the Company  relinquished its rights to repurchase common
stock shares issuable under option agreements  awarded to individuals in 1997 by
New BestConnections,  Inc., a subsidiary of the Company (the "SOES Options"). In
accordance  with  the  terms of such  option  agreements,  as a  result  of such
relinquishment,  the SOES  Options will  terminate  on December 9, 1998,  to the
extent  they have not been  exercised  by that  date.  Compensation  expense  of
$298,000 was recognized in 1998 and $499,000 in 1997 for the SOES Options. As of
September 30, 1998, none of these options had been exercised.  As of October 31,
1998,  5,000 options were  exercised by cash  purchases and 32,500  options were
exercised  through a cashless  exercise  offer  whereas  the  Company  agreed to
purchase up to one-half of the shares issuable at a price of $3.00 per share.

    Pursuant to the Company's 1998 Stock  Incentive  Plan, in September 1998 the
Company granted  incentive stock options to purchase the Company's common shares
as follows:

         10,000 shares  exercisable at a price of $2.75 per share,  vesting over
three years at a rate of 33 1/3% per year.

         20,000 shares  exercisable at a price of $2.75 per share,  vesting over
two years at a rate of 50% per year.

         50,000 shares  exercisable at a price of $2.75 per share,  vesting over
four years at a rate of 25% per year.

         2,000 shares  exercisable  at a price of $3.00 per share,  vesting over
four years at a rate of 25% per year.

         15,000 shares exercisable at a price of $2.375 per share,  vesting over
four years at a rate of 25% per year.

     On September  14, 1998 the Company  granted  nonstatutory  stock options to
purchase  50,000  shares at a exercise  price of the lesser of $6.00 or the fair
market value of the common stock on October 1, 1998,  vesting over four years at
a rate of 25% per year

     On September 25, 1998 the Company granted 20,000 shares of restricted stock
under the 1998 Stock  Incentive  Plan that vest based on the net  revenues  of a
segment of the Company as of December 31, 1999.

(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 month and nine month  periods  ended
September  30,  1998 and 1997 is equal to net income  (loss)  reported  for such
periods.


                                        7
<PAGE>



(5) Conversion of Preferred Stock
    -----------------------------
    On January 22, 1998,  and February 26, 1998, a total of 60,000 shares of the
Company's preferred stock was converted to 60,000 shares of the Company's common
stock.

(6) Acquisition
    -----------
    On  September  25, 1998 the  Company  acquired  all of the capital  stock of
Digital Media  International,  Inc. ("DMI"). The Company exchanged 30,000 shares
of its common  stock valued at $71,250 for all the  outstanding  common stock of
DMI. The  transaction was accounted for under the purchase method of accounting.
The following assets were acquired, liabilities assumed and common stock issued:

                  Current assets                                  $  50,105
                  Fixed assets                                       44,313
                  Goodwill                                          117,169
                  Accounts payable and accrued expenses            (166,254)
                  Common stock issued                               (71,250)
                                                                   --------
                  Cash acquired                                   $  25,917
                                                                   ========

Pro forma results of operations  are not materially  different  from  historical
results.

(7)  Pro Forma Results of Operations
     -------------------------------
     Pro  forma  results  of  operations  of  the  Company  as  if  the  reverse
acquisition of AvTel by Matrix, and the acquisitions of WestNet  Communications,
Inc.  and  BestConnections,  Inc.  had  occurred  as of January 1, 1997,  are as
follows:

                                    Three Months                 Nine Months
                             Ended September 30, 1997   Ended September 30, 1997
     Revenue                        $13,133,122                 41,444,847
     Net loss                          (512,285)                (9,858,423)
     Pro forma net loss
      per share - basic and dilute        (0.05)                    (1.05)

(8)  Note Receivable
     ---------------
     On  July  22,  1998  the  Company,  as part  of the  consideration  for the
acquisition  of a company,  loaned Remote  Lojix/PCSI,  Inc.  ("RLI")  $500,000,
evidenced by a  promissory  note.  The interest  rate is at 15% per annum with a
maturity date of November 1, 1998.  The note is secured by a Security  Agreement
granting  the Company  interest in all assets of RLI and a guaranty  executed by
the majority shareholder and President of RLI. The Company and RLI are currently
discussing an extension of the Note.

(9)  Related Party Transactions
      --------------------------
     On July 2, 1998 the  Company  purchased  notes  receivable  from one of the
Company's significant shareholders at a discount. The notes receivable evidenced
loans made by the significant shareholder in 1996 to Matrix employees to finance
their  purchases of Matrix  common stock  (which was  subsequently  converted to
shares of the  Company's  common  stock).  Each of the employees who delivered a
note receivable also entered into a Buyback Agreement dated October 6, 1996 (the
"Buyback Agreement"),  pursuant to which the Company is entitled to repurchase a
portion of such employee's  stock upon the termination of his or her employment.
The  original  notes,  plus  accrued  interest,  at the date of  purchase by the
Company evidenced a total amount of $573,000.  The Company purchased these notes
for $435,000.

     On July 6, 1998 the Company  repurchased  23,170 shares of its common stock
subject  to the  Buyback  Agreement  from a  terminated  employee.  The  Company
exercised  its right to  purchase  21,443 of such shares at a price of $1.51 per
share, and the former employee used the $32,379 in proceeds to reduce the amount
of his note. The Company  repurchased an additional 1,727 shares in satisfaction
of the remaining balance of $12,088 on the former employee's note.

     On July 11, 1998 the Company repurchased 178,434 shares of its common stock
subject  to the  Buyback  Agreement  from a  terminated  employee.  The  Company
exercised its right to purchase 171,547 of such shares at a price of $1.70 per

                                        8
<PAGE>

share,  and the former  employee  used the  $292,134  in  proceeds to reduce the
amount of his note.  The  Company  repurchased  an  additional  6,887  shares in
satisfaction of the remaining balance of $63,630 on the former employee's note.

(10) 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.

(11) Subsequent Events
     -----------------
    The Company  entered into a Loan and Security  Agreement with Coast Business
Credit, a division of Southern Pacific Bank ("Coast"),  a California corporation
on October 2, 1998. It provides for an asset based revolving  credit line with a
floating interest rate equal to prime plus 2%. The credit limit is the lesser of
$7,500,000 or a percentage of the amount of the Company's  eligible  receivables
and other items. As of the date of the agreement the percentage of the amount of
eligible  receivables  was 75%. The agreement  calls for a minimum  borrowing of
$1,500,000 with a two year term.

    On August 18,  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.  The  agreement  provides that 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  satisfaction  of certain of the  conditions  to  closing.  The
Company expects the transaction will be completed in the fourth quarter of 1998.

    Subsequent  to  September  30,  1998,  the Company  entered into a Letter of
Intent to sell the assets of The Friendly Net,  LLC, a wholly  subsidiary of the
Company.  The Company  expects the  transaction  will be completed in the fourth
quarter of 1998.



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 nine month
periods ended  September 30, 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.
   
                                        9
<PAGE>

     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 was a provider of long
distance  telephone  services  and  subsequently   provides  a  bundled  service
including internet.  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 Statements of Operations as a Percent of Revenue
                                   (Unaudited)

<TABLE>
<CAPTION>

                                            Three Months           Nine Months
                                         Ended September 30,    Ended September 30,
                                         -------------------    -------------------
                                           1998       1997        1998       1997
                                         --------   --------    --------   --------
<S>                                       <C>        <C>        <C>        <C>    
REVENUES ...........................      100.00%    100.00%    100.00%    100.00%

COST OF REVENUES ...................       68.49%     71.84%     72.52%     69.58%
                                         --------   --------    -------    -------
GROSS MARGIN .......................       31.51%     28.16%     27.48%     30.42%

Operating expenses
  Selling, general and administrative      40.59%     30.03%     39.86%     29.62%
  Depreciation and amortization ....        2.47%      1.22%      2.35%      1.31%
                                         --------   --------    -------    -------
     Total operating expenses ......       43.06%     31.25%     42.21%     30.93%
                                         -------    --------    -------    -------
OPERATING INCOME (LOSS) ............      (11.55%)    (3.09%)   (14.73%)    (0.50%)

Interest expense ...................       (0.06%)    (0.02%)    (0.10%)    (0.02%)
Other income, net ..................        0.20%      0.80%      0.29%      0.56%
                                         --------   --------    -------    -------
Income (loss) before income taxes ..      (11.41%)    (2.31%)   (14.55%)     0.03%
Income tax expense (benefit) .......        0.00%     (0.97%)     0.00%      0.01%
                                         --------   --------    -------    -------
NET INCOME (LOSS) ..................      (11.41%)    (1.34%)   (14.55%)     0.02%
                                         ========   ========    =======    =======
</TABLE>

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

Revenues

     Revenues for the three months ended  September 30, 1998 were $10.6 million,
a decline of 14.6% or $1.8 million from $12.4 million for the three months ended
September 30, 1997.

                                       10

<PAGE>

     The  focus  of  the  Company  is  to  be a  fully  integrated  provider  of
telecommunications   and  data   networking   services.   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 data  networking
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 September 30, 1998 compared to the three months ended September 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 primarily in the areas of telemarketing  and direct
mail which in the opinion of management was not cost effective.  Even though the
Company's  volume  discounts  are passed  through to the long distance end user,
higher customer attrition rates have continued. The effects of competitive lower
pricing  as well as the  decline  of the  customer  base is  expected  to lessen
dramatically as pricing within the industry slows and reaches its floor, and the
Company increases its focus on third party distributors. Management additionally
anticipates   that  the  revenue   decrease  will  stabilize  as  the  continued
integration  of and revenue  from the  corporate  data  networking  and internet
services of the Company  continues  to expand and grow beyond the long  distance
portion.

     Decreases  in revenues  were  anticipated  by the Company  beginning in the
first  quarter  of  1998.  At  that  time,  the new  management  team  chose  to
discontinue  and  reduce  certain  unprofitable  distribution  channels  of  its
subsidiary.  Revenue from these channels has decreased 41.4% or $6.3 million for
the nine  months  ended  September  30, 1998  compared to the nine months  ended
September 30, 1997.  Management continued in third quarter of 1998 to reduce the
Company's  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,   small  office-home  office  ("SOHO")
distributors  and agents,  and  internet  service  providers.  With  emphasis on
maintaining  and  increasing  certain  segments,  revenues  in these  areas have
increased  48.9% or $4.0  million for the nine months ended  September  30, 1998
compared to the nine months ended September 30, 1997.

     Data networking needs of the corporate customer have continued to drive and
change the telecom  industry.  The future focus of the Company continues 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
18.6% or $160,965 for the third quarter of 1998 compared to the first quarter of
1998.  This  percentage  is expected to  increase 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  $155,887 to $3.3 million for the three months ended
September  30, 1998 from $3.5 million for the three months ended  September  30,
1997.  As a percentage  of revenues,  gross margin  increased by 3.4  percentage
points to 31.51% for the three months ended  September  30, 1998 from 28.16% for
the three months  ended  September  30, 1997.  The increase in gross margin as a
percentage of revenues  primarily  resulted from decreases of network and leased
facilities that outweighed increases in the bad debt and fraud expenses,  all of
which are included in cost of sales.

     Network cost as a percentage of revenues decreased by 7.5 percentage points
to 60.0% for the three  months  ended  September  30,  1998 from 67.4% for three
months ended  September 30, 1997. The primary factor that effected this decrease
as a percentage was  significantly  lower rates,  which went into effect July of
1998,  negotiated with one of the Company's major underlying  carriers.  Network
cost as a percentage of revenue decreased by 7.3 percentage points to 60.0% for

                                       11
<PAGE>

the three months ended  September 30, 1998 from 67.3% for the three months ended
June 30, 1998.

     Bad debt expense as a percentage  of revenues  increased by 2.4  percentage
points to 6.2% for the three months ended  September  30, 1998  compared to 3.8%
for the three months ended  September  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 affected
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  geographic  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 or
electronic internet 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.  As of September  30, 1998,  48% of the  Company's  revenue was direct
billed compared to 20% as of September 30, 1997.

     Fraud  expense as a  percentage  of revenues  increased  by 1.7  percentage
points to 2.3% for the three months ended  September  30, 1998  compared to 0.6%
for the three  months  ended  September  30,  1997.  This  increase is primarily
associated  with  travel  card  fraud.  During  the third  quarter  the  Company
restricted the issuance of travel cards with international  calling ability.  In
addition, the Company's major international carrier provided the Company greater
flexibility to monitor and suspend travel card activity suspected as fraudulent.
The Company expects that this will help limit fraud expense in future quarters.

Selling, General, and Administrative Costs

     Selling,  general,  and  administrative  costs  increased  $572,742 to $4.3
million for the three months ended  September 30, 1998 from $3.7 million for the
three months ended  September 30, 1997.  As a percentage  of revenues,  selling,
general, and administrative costs increased by 10.55 percentage points to 40.59%
for the three months ended  September  30, 1998 from 30.03% for the three months
ended  September 30, 1997.  Decreased  revenues  contributed to 2.35  percentage
points increase as a percentage of revenues.  1.05% or $110,659 was expensed for
stock  compensation  expense  for the three  months  ended  September  30,  1998
compared  to  $0  for  the  three  months  ended  September  30,  1997.  Certain
non-employee  agents 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.  As of  September  30,
1998, the Company had three operating divisions,  two primary business locations
and remote  employees in several states  compared to one operating  division and
one location with no remote employees as of September 30, 1997. Additionally,  a
more comprehensive corporate structure was required for a public company.

Depreciation and Amortization

     Depreciation and amortization  increased $110,612 to $261,449 for the three
months ended September 30, 1998 from $150,837 for the three months September 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  decreased  $82,938
to $14,499 for the three  months ended  September  30, 1998 from $97,437 for the
three  months  ended  September  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 lower in 1998 compared
to 1997 primarily from a decrease in cash reserves. Included in other income for
1997 was $52,555 for the  reimbursement of expenses incurred in prior years from
an affiliated company.  Due to the Loan and Security Agreement entered into with
Coast Business Credit, the Company has a minimum commitment of $10,000 per month
in interest expense starting in October 1998.

                                       12


<PAGE>

Income Taxes

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


Nine Months Ended  September 30, 1998 compared with Nine Months Ended  September
30, 1997

Revenues

     Revenues for the nine months ended September 30, 1998 were $34.3 million, a
decline of 12.5% or $4.9  million  from $39.2  million for the nine months ended
September 30, 1997.

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

Gross Margin

     Gross  margin  decreased  $2.5  million to $9.4 million for the nine months
ended  September 30, 1998 from $11.9 million for the nine months ended September
30. 1997. As a percentage of revenues, gross margin decreased by 2.95 percentage
points to 27.48% for the nine months  ended  September  30, 1998 from 30.42% for
the nine months  ended  September  30,  1997.  The decrease in gross margin as a
percentage of revenues primarily resulted from an increase in bad debt expense.

     Network cost as a percentage of revenues changed by immaterial  amounts for
the nine  months  ended  September  30, 1998  compared to the nine months  ended
September 30, 1997.  Significantly  lower rates,  which went into effect July of
1998, negotiated with one of the Company's major underlying carriers allowed the
Company to attain the same  percentage  for the nine months ended  September 30,
1998 as it had for the nine months ended September 30, 1997.

     Bad debt expense as a percentage  of revenues  increased by 3.1  percentage
points to 6.2% for the nine months  ended  September  30, 1998 from 3.1% for the
nine months  ended  September  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
September 30, 1998 compared to the three months ended September 30, 1997.

Selling, General, and Administrative Costs

     Selling,  general,  and administrative  costs increased  approximately $2.1
million for the nine months ended September 30, 1998 compared to the nine months
ended  September 30, 1997. As a percentage of revenues,  selling,  general,  and
administrative costs increased by 10.24 percentage points to 39.86% for the nine
months ended  September 30, 1998 from 29.62% for the nine months ended September
30, 1997. 1.96% or $674,169 was expensed for stock compensation  expense for the
nine months ended  September  30, 1998  compared to $0 for the nine months ended
September  30,  1997.  Certain  non-employee  agents  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. $588,640
was incurred for  solicitation  of new marketing and sales channels for the nine
months ended  September  30, 1998  compared to $51,795 for the nine months ended
September 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.  See Results of  Operations  for the three
months ended  September 30, 1998 compared with the three months ended  September
30, 1997.  The merger  related costs are fully  described  above in the section,
Selling,  General, and Administrative  Costs. All of the reasons discussed above
are applicable for the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997.

Depreciation and Amortization

     Depreciation and amortization  increased  $290,650 to $805,687 for the nine
months  ended  September  30,  1998  from  $515,037  for the nine  months  ended


                                       13

<PAGE>

September  30,  1997.  $263,833  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  decreased $147,433
to $62,640 for the nine months ended  September  30, 1998 from  $210,073 for the
nine  months  ended  September  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  decreased  $53,601 to
$96,281 for the nine months ended  September 30, 1998 from $149,882 for the nine
months ended  September  30, 1997  primarily  from a decrease in cash  reserves.
Included in other expense for 1997 was $52,555 for the reimbursement of expenses
incurred in prior years from an affiliated company. Due to the Loan and Security
Agreement  entered into with Coast  Business  Credit,  the Company has a minimum
commitment of $10,000 per month in interest expense starting in October 1998.

Income Taxes

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

Liquidity and Capital Resources

     The primary source of operating cash flow for the Company has been revenues
derived  from  the  resale  of  domestic   and   international   long   distance
telecommunications   services.  Providing  data  networking  solutions  for  the
construction of corporate  Intranets and Wide Area Networks has become a growing
source of  revenues.  Minor  sources of revenues  include 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 users.

     Net cash used in operating  activities  is $2.9 million for the nine months
ended September 30, 1998, compared to net cash provided by operating  activities
of $2.4 million for the nine months ended  September  30, 1997.  Primarily,  the
change  resulted from the  Company's  net loss of $5.0 million  reported for the
nine months ended  September 30, 1998 compared to net income of $7,116  reported
for the nine months ended September 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, increased bad debt and fraud,
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 increase in bad debt expense for the nine months ended
September 30, 1998 associated  with decreased  collection  percentages  from the
LEC's has affected margins.

     Net  cash  provided  by  investing  activities  for the nine  months  ended
September  30,  1998  was  $963,554  compared  to net  cash  used  in  investing
activities of approximately $1.8 million for the nine months ended September 30,
1997. The Company loaned $2.0 million to an affiliated company,  Core Marketing,
LLC ("Core")  during the nine months ended  September 30, 1997.  $1,726,601  was
paid by Core on its loan during the nine months ended  September  30, 1998.  The
Company loaned  $500,000 to a company to be acquired,  RLI, (Note 8), during the
nine  months  ended  September  30,  1998.  Approximately  $282,114  was paid to
purchase equipment during the nine months ended September 30, 1998. The majority
of  equipment  purchases  were for computer and  computer  related  assets.  The
company  anticipates  significant  disbursements  for the Year  2000  compliance
requirements  that  will be  financed  through  equipment  leases  and the Coast
Business Credit loan agreement.

     Working  capital at  September  30, 1998 is $1.3  million  compared to $5.6
million at December  31,  1997,  a decrease of $4.3  million.  Cash  balances at
September  30, 1998 are $2.5  million  compared to $4.8  million at December 31,
1997, a decrease of approximately $2.3 million.  As discussed above, the Company
received $1.7 million on an outstanding loan.

                                       14


<PAGE>

     The Company entered into a Loan and Security  Agreement with Coast Business
Credit, a division of Southern Pacific Bank ("Coast"),  a California corporation
on October 2, 1998. The agreement  provides for an asset based revolving  credit
line with a floating  interest rate equal to prime plus 2%, subject to a minimum
interest rate of 8% per annum. The credit limit is the lesser of $7,500,000 or a
percentage of the amount of the Company's eligible  receivables and other items.
The agreement calls for a minimum borrowing of $1,500,000,  a $2,000,000 minimum
net worth requirement and a two year term, subject to extension.

     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 entered into the Coast agreement to help meet this need, as
well as operating and capital  expenditure needs, for the next twelve months. In
addition to debt  financing,  the  Company  may  utilize its capital  stock as a
source of financing.

Year 2000

    The Year 2000 problem is the  inability of a  meaningful  proportion  of the
world's computers,  software  applications and embedded  semiconductor  chips to
cope with the change of the year from 1999 to 2000.  This issue can be traced to
the infancy of computing,  when computer data and programs were designed to save
memory space by  truncating  the date field to just six digits (two for the day,
two for the month, and two for the year).  Therefore,  information  applications
automatically  assumed that the two-digit  year field  represented a year within
the 20th century.  As a result of this, systems could fail to operate or fail to
produce correct results at the start of the 21st century.

Assessment

    The Year 2000 problem affects computers, software, and other equipment used,
operated,   or  maintained  by  the  Company  for  itself  and  its   customers.
Accordingly, the Company is currently assessing the potential impact of, and the
costs of  remediating,  the Year 2000  problem for its  internal  systems and on
facilities systems and equipment.

    The  Company's  business is  substantially  dependent  upon the operation of
computer  systems  including  the  billing  system  that is utilized to rate and
format calls for billing. In addition,  the Company is relying on the systems of
third parties to originate and terminate  calls,  transmit calls to the Company,
and  process  bills to end users.  The Company has  launched  efforts  involving
leaders from the operational areas of the Company which could be affected by the
Year 2000 problem.  This effort was  initiated  pursuant to the direction of the
Board of Directors and has the  involvement of top management and its objectives
are top priority.

    The  Company  is in the  process  of  identifying  the  computers,  software
applications,  and related equipment used in connection with its operations that
must be  modified,  upgraded,  or  replaced  to minimize  the  possibility  of a
material  disruption of its  business.  The Company has commenced the process of
modifying,  upgrading, and replacing systems which have already been assessed as
adversely affected by the Year 2000 problem, and expects to have all other major
systems  assessed,  and if need  be,  modified,  before  the  occurrence  of any
material  disruption  of its  business.  The Company  expects to  complete  this
process by the middle of 1999.

    In addition to computers  and related  systems,  the operation of office and
facilities  equipment,  such  as  fax  machines,  copiers,  telephone  switches,
security  systems  and other  common  devices  may be  affected by the Year 2000
problem.  The Company is currently  assessing the potential effect of, and costs
of remediating,  the Year 2000 problem on its office and facilities  systems and
equipment.

     The Company has  initiated  communications  with third party  suppliers  of
products/services  used, operated, or maintained by the Company to identify and,
to the extent  possible,  to resolve  issues  involving  the Year 2000  problem.
However,

                                       15

<PAGE>

the  Company  has  limited or no control  over the  actions of these third party
suppliers.  Thus,  while the Company expects that it will be able to resolve any
significant  Year 2000  problems with these  systems,  there can be no assurance
that these  suppliers  will  resolve  any or all Year 2000  problems  with these
systems  before the  occurrence of a material  disruption to the business of the
Company or any of its  customers.  Any failure of these third  parties to timely
resolve Year 2000  problems  with their  systems  could have a material  adverse
effect  on  the  Company's  business,   financial  condition,   and  results  of
operations.

Impact of Year 2000 Problems

    Because the Company's  assessment  is not complete,  the Company has not yet
estimated   the  total  cost  to  the  Company  of   completing   any   required
modifications,  upgrades,  or replacements of either the operational systems, or
facilities  systems and  equipment.  The  Company  does  anticipate  significant
disbursements  for the year 2000 compliance  requirements  that will be financed
through equipment leases and the Coast Business Credit loan agreement.

    The Company  expects to identify  and  resolve all Year 2000  problems  that
could materially adversely affect its business operations.  However,  management
believes that it is not possible to determine  with complete  certainty that all
Year 2000 problems  affecting  the Company or its  customers and suppliers  have
been  identified or corrected.  The number of devices that could be affected and
the interactions  among these devices are simply too numerous.  In addition,  no
one can  accurately  predict how many Year 2000  problem-related  failures  will
occur or the  severity,  duration,  or financial  consequences  of these perhaps
inevitable  failures.  As a result,  management  expects  that the Company  will
likely suffer the following consequences:

         A number  of  operational  inconveniences  and  inefficiencies  for the
         Company  and its  customers  and  will  divert  management's  time  and
         attention and financial and human resources from its ordinary  business
         activities;

         A  lesser  number  of  serious   system   failures  that  will  require
         significant  efforts  by the  Company  or its  customers  to prevent or
         alleviate material business disruptions;

         Several routine business disputes and claims for pricing adjustments or
         penalties  due to  Year  2000  problems  by  customers,  which  will be
         resolved in the ordinary course of business; and

         A few serious  business  disputes  alleging that the Company  failed to
         comply  with the  terms  of its  contracts  or  industry  standards  of
         performance,  some of which  could  result in  litigation  or  contract
         termination.

Contingency Plans

    The Company will develop  contingency plans to be implemented if its efforts
to identify and correct Year 2000 problems affecting its operational systems and
facilities  systems and  equipment  are not  effective.  The Company  expects to
complete its contingency  plans by the middle of 1999.  Depending on the systems
affected, any contingency plans developed by the Company, if implemented,  could
have a material adverse effect on the Company's  financial condition and results
of operation.


Disclaimer

     The  discussion of the Company's  efforts,  and  management's  expectations
relating to Year 2000 compliance are forward-looking  statements.  The Company's
ability to  achieve  Year 2000  compliance  and the level of  incremental  costs
associated  therewith,  could be adversely  impacted by, among other things, the
availability and cost of programming and testing resources,  vendors' ability to
modify  proprietary  software,  and  unanticipated  problems  identified  in the
ongoing compliance review.

                                       16
<PAGE>


                         PART II. OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     On  September  25, 1998,  the Company  issued  30,000  shares of its common
stock,  which were not registered  under the Securities  Act, in connection with
the acquisition of Digital Media International, Inc., a Pennsylvania corporation
("DMI"),  by means of a stock-for-stock  exchange.  No underwriters were used in
the transaction and none of such shares were issued publicly. The Company relied
on the exemptions from  registration  provided by Sections 3(a) (11) and 4(2) of
the  Securities  Act and Rule 505 of  Regulation D promulgated  thereunder.  The
persons receiving shares were the three former DMI  shareholders.  These persons
were and are believed by the Company to possess the requisite level of financial
sophistication  and  experience  in order to qualify  for such  exemptions.  The
Company  made  available  to the  recipients  of such Common  Stock all material
information with respect to the Company and the share exchange. Each such person
signed an exchange agreement containing appropriate  investment  representations
and covenants.


ITEM 5.  OTHER INFORMATION

     On October  1, 1998,  M.  Scott  Hall  joined  the  Company as Senior  Vice
President, Consumer Markets.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a)  Exhibits

          10.1 Admendment To Carrier Transport Switched Services Agreement dated
               October   15,   1998,   between   Matrix   Telecom   and   Sprint
               Communications Company L.P.

          10.2 Loan  and  Security   Agreement  dated  October  2,  1998,  among
               registrant, Matrix Telecom and Coast Business Credit

          27.1 Financial Data Schedule - Nine Months Ended September 30, 1998

          27.2 Restated  Financial  Data Schedule - Nine Months Ended  September
               30, 1997

      (b) Reports on Form 8-K

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


                                       17


<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)


November 11, 1998




                                       18


<PAGE>



                                    Exhibit Index


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

10.1 Admendment To Carrier Transport  Switched Services  Agreement dated October
     15, 1998, between Matrix Telecom and Sprint Communications Company L.P.

10.2 Loan and Security Agreement dated October 2, 1998, among registrant, Matrix
     Telecom and Coast Business Credit

27.1 Financial Data Schedule - Nine Months Ended September 30, 1998

27.2 Restated Financial Data Schedule - Nine Months Ended September 30, 1997