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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

|X|      Quarterly  report  pursuant  to Section  13 or 15(d) of the  Securities
         Exchange Act of 1934

                for the quarterly period ended September 30, 2004

                                       Or

|_|      Transition  report  pursuant  to Section 13 or 15(d) of the  Securities
         Exchange Act of 1934

                        Commission file number: 000-32925

                              AVATAR SYSTEMS, INC.
             (Exact name of Registrant as specified in its charter)

             Texas                                        75-2796037
(State or other jurisdiction of             (IRS Employer Identification Number)
 incorporation or organization)

                5728 LBJ Freeway, Suite 270, Dallas, Texas 75240
              (Address of principal executive offices and zip code)


                                 (972) 720-1800
              (Registrant's telephone number, including area code)

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:


           Class              Number of shares outstanding at September 30, 2004


Common stock, $0.001 par value                     8,695,652

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<PAGE>


PART I. FINANCIAL INFORMATION..................................................1

   ITEM 1. FINANCIAL STATEMENTS................................................1
   ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS...........................................4
   ITEM 3. CONTROLS AND PROCEDURES.............................................7

PART II. OTHER INFORMATION.....................................................7

   ITEM 1. LEGAL PROCEEDINGS...................................................7
   ITEM 2. CHANGES IN SECURITIES...............................................7
   ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................7
   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................7
   ITEM 5. OTHER INFORMATION...................................................7
   ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................8
   SIGNATURES..................................................................8






















                                       i
<PAGE>
<TABLE>
<CAPTION>

                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
                              AVATAR SYSTEMS, INC.
                            CONDENSED BALANCE SHEETS

                                                                     September 30,    December 31,
                                                                          2004            2003
                                                                     -------------   -------------
                                                                      (Unaudited)          *
                                                                     -------------   -------------
<S>                                                                  <C>             <C>
                                     ASSETS

Current assets:
Cash and cash equivalents                                            $     495,653   $     492,737
Accounts receivable, net                                                   242,240         129,104
Prepaid expense                                                              7,690           7,340
Deferred income taxes                                                       11,180          12,340
                                                                     -------------   -------------
Total current assets                                                       756,763         641,521

Property and equipment - at cost, net                                      249,953         183,385
Purchased software, net                                                    114,207         181,215
Software development costs, net                                          2,122,410       1,876,094
                                                                     -------------   -------------

Total assets                                                         $   3,243,333   $   2,882,215
                                                                     =============   =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt and capital lease obligations   $      31,262   $       6,996
Accounts payable                                                            75,598          56,275
Accrued expense                                                             85,206          50,690
Deferred revenues                                                          302,952         265,328
                                                                     -------------   -------------
Total current liabilities                                                  495,018         379,289
Long-term debt and capital lease obligations                                66,099          26,120
Deferred income taxes                                                      304,277         235,203
                                                                     -------------   -------------
Total liabilities                                                          865,394         640,612
Stockholders' equity:
Common stock, $0.001 par value; 30,000,000 shares authorized
   8,695,652 shares, issued and outstanding                                  8,696           8,696
Common stock subscribed 142,500 shares                                         143            --
Additional paid-in capital                                               1,768,202       1,768,345
Retained earnings                                                          600,898         464,562
                                                                     -------------   -------------
Total stockholders' equity                                               2,377,939       2,241,603
                                                                     -------------   -------------
Total liabilities and stockholders' equity                           $   3,243,333   $   2,882,215
                                                                     =============   =============
</TABLE>

The accompanying notes are an integral part of these financial statements


*These amounts are derived from the audited financial statements.




                                       1
<PAGE>
<TABLE>
<CAPTION>

                              AVATAR SYSTEMS, INC.
                         CONDENSED STATEMENTS OF INCOME

                                   (Unaudited)
                                                       Three Months Ended       Nine Months Ended
                                                         September 30,             September 30,
                                                       2004         2003         2004         2003
                                                    ----------   ----------   ----------   ----------
<S>                                                 <C>          <C>          <C>          <C>
Revenues:
 Software                                           $  130,055   $  115,178   $  321,780   $  268,304
 Maintenance                                           251,926      216,815      732,994      733,073
 Professional services                                  48,707       52,193      111,506      128,995
 Hardware                                              128,670      434,403      174,291      540,837
                                                    ----------   ----------   ----------   ----------
    Net revenues                                       559,358      818,589    1,340,571    1,671,209
Cost of revenues:
 Software                                               26,768       18,471       64,656       66,311
 Maintenance                                            31,755       36,189      108,211      117,917
 Professional services                                  13,532       10,761       42,977       34,457
 Hardware                                              102,534      320,665      136,954      399,481
                                                    ----------   ----------   ----------   ----------
     Total cost of revenues                            174,589      386,086      352,798      618,166
                                                    ----------   ----------   ----------   ----------
      Gross margin                                     384,769      432,503      987,773    1,053,043
Operating expenses:
  Sales and marketing                                   42,840       77,289      137,283      270,671
  General and administrative                           120,788      139,423      313,643      384,953
  Amortization of intangibles                           92,782       88,809      278,345      266,427
  Depreciation                                          26,060       15,166       61,863       42,775
                                                    ----------   ----------   ----------   ----------
     Total operating expenses                          282,470      320,687      791,134      964,826
                                                    ----------   ----------   ----------   ----------
       Operating income                                102,299      111,816      196,639       88,217
   Investment income                                     9,814          298       13,273        1,751
   Interest expense                                      1,957        1,694        3,341        1,820
                                                    ----------   ----------   ----------   ----------
       Income from operations before income taxes      110,156      110,420      206,571       88,148
  Income tax expense                                    37,452       37,106       70,234       29,970
                                                    ----------   ----------   ----------   ----------

        Net income                                  $   72,704   $   73,314   $  136,337   $   58,178
                                                    ==========   ==========   ==========   ==========

Earnings per share:
Basic and Diluted                                   $     0.01   $     0.01   $     0.02   $      .01
                                                    ==========   ==========   ==========   ==========
Basic and diluted weighted average shares
          outstanding                                8,695,652    8,695,652    8,695,652    8,695,652
                                                    ==========   ==========   ==========   ==========
</TABLE>




                                       2
<PAGE>
<TABLE>
<CAPTION>

                              AVATAR SYSTEMS, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                                                            Nine Months Ended September 30,
                                                                            -------------------------------
                                                                                 2004              2003
                                                                            -------------     -------------
<S>                                                                         <C>               <C>
Cash flows from operating activities:
   Net income                                                               $     136,337     $      58,178
   Adjustments to reconcile net income to net cash provided by operating
     activities:
     Amortization of intangibles                                                  278,345           266,427
     Depreciation                                                                  61,863            42,775
     Deferred income taxes                                                         70,234            29,970
     Changes in operating assets and liabilities:
        Accounts receivable                                                      (113,136)         (206,725)
        Prepaid expense                                                              (350)            1,572
        Accounts payable and accrued expenses                                      53,839           150,030
        Deferred revenues                                                          37,624              --
                                                                            -------------     -------------
          Net cash provided by operating activities                               524,756           342,227
Cash flows from investing activities:
   Acquisition of property and equipment                                         (128,431)          (96,225)
   Capitalized software development costs                                        (457,654)         (292,218)
                                                                            -------------     -------------
          Net cash used in investing activities                                  (586,085)         (388,443)
Cash flows from financing activities:
   Payments on long-term debt and capital lease obligations                       (13,945)          (15,659)
   Proceeds from issuance of long-term debt and capital lease obligations          78,190            37,014
                                                                            -------------     -------------
   Net cash provided by financing activities                                       64,245            21,355
                                                                            -------------     -------------
Net increase (decrease) in cash and cash equivalents                                2,916           (24,861)
Cash and cash equivalents at beginning of period                                  492,737           395,256
                                                                            -------------     -------------
Cash and cash equivalents at end of period                                  $     495,653     $     370,395
                                                                            =============     =============

Supplemental disclosure of cash flow information:
   Cash paid for interest                                                   $       3,341     $       1,820
                                                                            =============     =============
</TABLE>



The accompanying notes are an integral part of these financial statements.




                                       3
<PAGE>

                              AVATAR SYSTEMS, INC.


                   NOTES TO THE CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)

1. Basis of Presentation

The condensed  financial  statements  have been prepared in accordance  with the
rules  and  regulations  of  the  Securities  and  Exchange  Commission  ("SEC")
applicable to interim financial  information.  Certain  information and footnote
disclosures  included  in  financial  statements  prepared  in  accordance  with
accounting  principles  generally  accepted in the United States of America have
been  omitted  in  these  interim  statements  pursuant  to such SEC  rules  and
regulations. The interim financial statements should be read in conjunction with
the audited  financial  statements  and related notes  included in the company's
2003 Annual  Report on Form 10-KSB filed with the SEC.  Interim  results are not
necessarily indicative of the results to be expected for the full year.


In the opinion of management,  the condensed  financial  statements  include all
adjustments   necessary  to  present  the  financial  position  and  results  of
operations  for  each  interim  period  shown  in  conformity   with  accounting
principles generally accepted in the United States of America.

2. Common Stock Subscribed

During April 2004, the Company entered into an agreement with the holders of its
5,700,000  outstanding warrants to purchase its common stock,  pursuant to which
the Company exchanged .025 shares of common stock for each outstanding  warrant.
The Company is obligated to issue an aggregate of 142,500 shares of common stock
to complete the exchange of the 5,700,000 outstanding warrants. These shares are
reflected as common stock subscribed in the accompanying condensed balance sheet
at September 30, 2004.

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

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

You should read the  following  discussion  in  conjunction  with our  financial
statements and related notes. Except for historical  information,  the following
discussion contains 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.  These   forward-looking   statements  involve  risks  and  uncertainties,
including,  among other things, statements about our gross margins and operating
costs and  expenses.  Our actual  results  may differ  significantly  from those
projected  in the  forward-looking  statements.  Factors that might cause future
results  to  differ  materially  from  those  discussed  in the  forward-looking
statements  include,  but are not limited to, those  discussed in  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
elsewhere in this  document as well as other  information  set forth in our 2003
Annual Report on Form 10-KSB filed with the SEC and other documents we file from
time to time with the SEC.

Results of Operations

Revenues

Our  net   revenues   include  four   components:   software   licensing   fees,
maintenance/recurring,  professional services and hardware. Our net revenues for
the third quarter ended September 30, 2004 decreased 31.7% to $559,358  compared
with net revenues of $818,589 for the same period in 2003.  Net revenues for the
nine months ended  September 30, 2004 decreased  19.8% to  $1,340,571,  compared
with $1,671,209 from the same period last year. The decrease in net revenues for
the  quarter  and  the  nine  months  ended  September  30,  2004  is  primarily
attributable  to lower hardware sales in the current  quarter when compared with
an exceptional quarter for September 30, 2003.


                                       4
<PAGE>

Software.  Software  sales  for the third  quarter  of 2004  increased  12.9% to
$130,055 compared with software sales of $115,178 for the third quarter of 2003.
Software sales for the nine months ended  September 30, 2004 increased  19.9% to
$321,780,  compared with $268,304 from the same period last year. Demand for our
software is  historically  highest  during the third quarter of the fiscal year.
Software  sales for the third quarter of 2004 were higher  compared to the third
quarter of 2003 due to the current  economic  activity in the energy  sector and
our increased marketing efforts during 2003.

Maintenance.  Maintenance  revenue  for the  third  quarter  increased  16.2% to
$251,926 compared with maintenance  revenue of $216,815 for the third quarter of
2003.  Maintenance  revenue for the nine  months  ended  September  30, 2004 was
stable at $732,994 when compared  with  maintenance  revenue of $733,073 for the
same period last year. Maintenance revenue for the quarter was higher because of
installations  we made during 2003 and the current  quarter.  We expect a slight
increase  in   maintenance   revenue   during  the  2004  year  because  of  new
installations during 2003 and expected sales for 2004.

Professional  services.  Professional  services revenue for the third quarter of
2004 decreased 6.7% to $48,707  compared with  professional  service  revenue of
$52,193 for the third quarter of 2003. Professional service revenue for the nine
months ended  September  30, 2004  decreased  13.6% to $111,506,  compared  with
$128,995 for the same period last year. We expect professional  services revenue
to increase because we have installed a higher number of new systems  generating
increased  demand  for  customization.  We have  also made  improvements  in our
billing system to better  identify  services we perform for our clients that are
not included in our normal maintenance fees.

Hardware.  Hardware  sales  for the third  quarter  of 2004  decreased  70.4% to
$128,670,  compared  with  hardware  sales of $434,403 for the third  quarter of
2003.  Hardware  sales for the nine months ended  September  30, 2004  decreased
67.8% to $174,291,  compared with  $540,837 from the same period last year.  The
decrease in hardware sales for the quarter is due to exceptionally  higher sales
during the third  quarter of 2003. A hardware  sale that we expected  during the
third quarter did not close until the  subsequent  quarter.  Hardware  sales are
generally  strongest during our third quarter.  We anticipate  stronger hardware
sales during the remainder of the year.

COST OF REVENUES


Our  cost of  revenues  includes  four  components:  cost of  software,  cost of
maintenance, cost of professional services, and cost of hardware sales. Our cost
of revenues for the third quarter of 2004 decreased  54.8% to $174,589  compared
with cost of  revenues  of  $386,086  for the  third  quarter  of 2003.  Cost of
revenues  for the nine  months  ended  September  30,  2004  decreased  42.9% to
$352,798  compared with $618,166 for the same period last year. Cost of revenues
as a percentage  of net  revenues  decreased to 31.2% for the three months ended
September 30, 2004 from 47.2% for the same period in 2003. Cost of revenues as a
percentage  of net  revenues  decreased  to  26.3%  for the  nine  months  ended
September 30, 2004,  compared with 37.0% for the same period in 2003. Lower cost
of revenues were primarily related to lower hardware sales.

Cost of  software.  Cost of  software  increased  44.9% to  $26,768 in the third
quarter of 2004 from  $18,471 in the third  quarter  of 2003.  Cost of  software
decreased 2.5% to $64,656 in the nine months ended September 30, 2004,  compared
with $66,311 in the same period last year.  Cost of software as a percentage  of
the related revenue increased to 20.6% for the third quarter of 2004 compared to
16.0% for the same  period in 2003.  Cost of  software  as a  percentage  of the
related  revenues  decreased  to 20.1% for the nine months ended  September  30,
2004,  compared  with 24.7% for the same period last year.  The increase in cost
and the percentage of cost of software was directly  related to higher  software
sales and increased sales commission costs.

Cost of maintenance. Cost of maintenance revenues decreased 12.3% to $31,755 for
the third  quarter of 2004 from $36,189 for the third  quarter of 2003.  Cost of
maintenance  revenues  decreased  8.2% to  $108,211  for the nine  months  ended
September 30, 2004,  compared with $117,917 for the same period last year.  Cost
of  maintenance  revenues as a percentage  of the related  revenue  decreased to
12.6% for the third  quarter  2004,  compared  to 16.7% for the same period last
year.  Cost of  maintenance  revenues as a  percentage  of the  related  revenue
decreased to 14.8% for the nine months ended  September 30, 2004,  compared with
16.1% for the same period last year.  The reduction in cost of  maintenance  was
due primarily to lower maintenance personnel costs.

Cost of professional services.  Cost of professional services increased 25.8% to
$13,532 for the three months ended September 30, 2004, compared with $10,761 for
the same period last year.  Cost of  professional  services  increased  24.7% to
$42,977 for the nine months ended  September  30, 2004 from $34,457 for the same


                                       5
<PAGE>

period last year. Cost of  professional  services as a percentage of the related
revenue increased to 27.8% in the third quarter 2004,  compared to 20.6% for the
same period last year.  Cost of  professional  services as a  percentage  of the
related revenue increased to 38.5% for the nine months ended September 30, 2004,
compared with 26.7% for the same period last year. The increases in cost and the
percentage  of  cost  of  professional  services  was due  primarily  to  higher
personnel costs.

Hardware. Cost of hardware sold decreased 68.0% to $102,534 for the three months
ended September 30, 2004,  compared with $320,665 for the same period last year.
Cost of hardware  sold  decreased  65.7% to $136,954  for the nine months  ended
September 30, 2004,  compared with $399,481 for the same period last year.  Cost
of hardware as a percentage  of the related  revenue  increased to 79.7% for the
three months ended  September 30, 2004,  compared with 73.8% for the same period
last year. Cost of hardware as a percentage of the related revenue  increased to
78.6% for the nine months ended September 30, 2004,  compared with 73.9% for the
same period last year. The decrease in hardware  costs is directly  attributable
to the decrease in hardware sales.

OPERATING EXPENSES

Sales and Marketing.  Our sales and marketing  expenses for the third quarter of
2004 decreased 44.6% to $42,840,  compared with $77,289 for the third quarter of
2003. Sales and marketing  expenses for the nine months ended September 30, 2004
decreased  49.3% to  $137,283,  compared  with  $270,671 in the same period last
year. Sales and marketing  expenses as a percentage of net revenues decreased to
7.7% for the third quarter of 2004,  compared with 9.4% for the same period last
year. Sales and marketing  expenses as a percentage of net revenues decreased to
10.2% for the nine months ended September 30, 2004,  compared with 16.2% for the
same period last year. The decreases in cost and related  percentages of revenue
were due to our completion of a marketing program in 2003.

General and  Administrative.  Our general and  administrative  expenses  for the
third quarter of 2004  decreased  13.4% to $120,788,  compared with $139,423 for
the third quarter of 2003. General and  administrative  expenses decreased 18.5%
to $313,643 for the nine months ended September 30, 2004, compared with $384,953
in  the  same  period  last  year.  General  and  administrative  expenses  as a
percentage  of net  revenues  increased  to 21.6% in the third  quarter of 2004,
compared  with 17.0% in the third  quarter of 2003.  General and  administrative
expenses as a percentage of net revenues increased slightly to 23.4% in the nine
months ended  September  30, 2004,  compared  with 23.0% in the same period last
year.  The  decreases  in the costs were  primarily  related to lower  personnel
costs,  while the  increases in the  percentages  of general and  administrative
expenses to net revenues was primarily related to lower net revenues.

Investment  Income.  Investment  income was $9,814 in the third  quarter of 2004
compared  to $298 in 2003.  Investment  income was  $13,273  for the nine months
ended September 30, 2004, compared with $1,751 in the same period last year.

Provision  for Income Taxes.  For the three and nine months ended  September 30,
2004 we recorded  income tax expense on income  from  operations  of $37,452 and
$70,234, respectively, based on our pretax income using an effective tax rate of
34%, which is our  anticipated  effective tax rate for the fiscal year 2004. The
actual  effective tax rate for the entire  fiscal year could vary  substantially
depending on actual results achieved.

Liquidity and Capital Resources

We have  historically  financed our liquidity needs through a variety of sources
including  proceeds from the sale of common stock,  borrowing from banks,  loans
from our stockholders, and cash flows from operations. At September 30, 2004, we
had $495,653 in cash and cash  equivalents.  Cash generated from  operations for
the nine months ended  September 30, 2004 was $524,756 and $342,227 for the same
period last year.  Cash used for investing  activities was $586,085 and $388,443
for the nine months ended September 30, 2004 and 2003,  respectively.  Cash used
for investing activities was used primarily in software development and property
and equipment. Net cash provided by financing activities was $64,245 and $21,355
for the nine months ended  September  30, 2004 and 2003,  respectively.  The net
cash provided from financing activities was primarily from the proceeds of notes
payable and capital lease obligations for equipment.


                                       6
<PAGE>

At September 30, 2004,  we had cash and cash  equivalents  of $495,653  compared
with cash and cash  equivalents  of $370,395 for the same period last year.  Our
cash and cash equivalents at December 31, 2003 was $492,737.  Based upon current
financial  resources,  we believe that we will have sufficient  reserves to meet
our anticipated  working  capital needs for our business as currently  conducted
for the next twelve months.  However, we anticipate that we will need additional
working capital to fund our business strategy including acquisitions.  There can
be no assurance that  additional  financing will be available,  or if available,
that such  financing  will be on  favorable  terms.  Any such  failure to secure
additional  financing,  if  needed,  could  impair our  ability  to achieve  our
business strategy.  There can be no assurance that we will have sufficient funds
or successfully achieve our plans to a level that will have a positive effect on
our results of  operations  or financial  condition.  Our ability to execute our
growth strategy is contingent upon sufficient  capital as well as other factors,
including our ability to further  increase  consumer  awareness of our products,
our ability to consummate  acquisitions  of  complimentary  businesses,  general
economic and  industry  conditions,  our ability to recruit,  train and retain a
qualified sales staff, and other factors,  many of which are beyond our control.
Even if our revenues and earnings  grow rapidly,  such growth may  significantly
strain  our  management,   operational,  and  technical  resources.  If  we  are
successful in obtaining greater market penetration with our products, we will be
required to deliver  increasing  volumes of our  products to our  customers on a
timely basis at a reasonable  cost to us. No assurance  can be given that we can
meet increased product demand or that we will be able to deliver our products on
a timely and cost-effective basis.

Item 3. Controls and Procedures

The  Chief  Executive   Officer/Chief  Financial  Officer  of  the  Company  has
established and is currently maintaining  disclosure controls and procedures for
the Company. The disclosure controls and procedures have been designed to ensure
that material  information  relating to the Company is made known to him as soon
as it is known by others  within the  Company.  There  have been no  significant
changes in these controls within the reporting period.

As of the  end of the  quarter,  the  Chief  Executive  Officer/Chief  Financial
Officer  conducts an update and a review and evaluation of the  effectiveness of
the Company's  disclosure  controls and  procedures.  It is the Chief  Executive
Officer's/Chief  Financial  Officer's  opinion that the controls and  procedures
currently  being  utilized by the Company are  sufficiently  effective to ensure
that any material  information relating to the Company would become known to him
within a reasonable time.

                           PART II. OTHER INFORMATION
Item 1. Legal Proceedings

None.

Item 2. Changes in Securities

During April 2004, the Company entered into an agreement with the holders of its
5,700,000  outstanding warrants to purchase its common stock,  pursuant to which
the Company exchanged .025 shares of common stock for each outstanding  warrant.
The Company is obligated to issue an aggregate of 142,500 shares of common stock
to complete the exchange of the 5,700,000 outstanding warrants.

Item 3. Defaults Upon Senior Securities

None.

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

None

Item 5. Other Information

None



                                       7
<PAGE>

Item 6. Exhibits And Reports On Form 8-K

       (a) Exhibits
               31.1 Section 302 Certification pursuant to Sarbanes-Oxley Act.
               32.1 Section 906 Certification pursuant to Sarbanes-Oxley Act

       (b) Reports on Form 8-K
               The Company filed Form 8-K on September 2, 2004. Item 2.02 -
               Results of Operations and Financial Condition and Item 8.01-
               Other Events were reported.
















                                       8
<PAGE>

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.

                                                       AVATAR SYSTEMS, INC.

Dated: November 12, 2004                            By: /s/ROBERT C. SHREVE, JR.
                                                       -------------------------
                                                       Robert C. Shreve, Jr.
                                                       Chief Executive Officer
                                                       Chief Financial Officer



























                                       9