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 March 31, 2005

                                       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 March 31, 2005


 Common stock, $0.001 par value                           8,838,152






<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.............................................6

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 ...........................................................7
   Signatures..................................................................8
   ----------




<PAGE>
<TABLE>
<CAPTION>


                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                              Avatar Systems, Inc.
                                 BALANCE SHEETS
                                                                                   March 31,   December 31,
                                                                                   -----------------------
                                                                                      2005         2004
                                                                                   ----------   ----------
                                                                                   (unaudited)       *
<S>                                                                                <C>          <C>
                                     ASSETS
CURRENT ASSETS
Cash and cash equivalents                                                          $   92,541   $  291,146
Marketable securities                                                                 462,197      326,763
Accounts receivable, net of allowance of $14,368                                       68,369      145,770
Prepaid expenses                                                                        5,602       15,303
Deferred income taxes                                                                  15,003       11,101
                                                                                   ----------   ----------
Total current assets                                                                  643,712      790,083
PROPERTY AND EQUIPMENT, net of accumulated depreciation
    of $528,841 and $496,920, respectively                                            305,905      263,247
PURCHASED SOFTWARE, net of accumulated amortization
of $792,127 and $769,791, respectively                                                 69,535       91,871
SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization
of $1,080,482 and $982,953, respectively                                            2,214,056    2,165,090
                                                                                   ----------   ----------
Total assets                                                                       $3,233,208   $3,310,291
                                                                                   ==========   ==========

                          LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable                                                                   $   31,175   $   72,028
Accrued expenses                                                                       80,314       93,618
Current maturities of long-term debt                                                    7,280        7,280
Current maturities of capital lease obligations                                        24,938       24,938
Deferred revenue                                                                      306,564      270,728
                                                                                   ----------   ----------
Total current liabilities                                                             450,271      468,592
DEFERRED INCOME TAXES                                                                 323,818      338,802
LONG-TERM DEBT
    Long-term debt                                                                     17,019       18,839
    Long-term capital lease obligations                                                33,649       38,947
                                                                                   ----------   ----------
Total long-term debt                                                                   50,668       57,786
                                                                                   ----------   ----------
Total liabilities                                                                     824,757      865,180
COMMITMENTS  AND CONTINGENCIES                                                           --           --
STOCKHOLDERS' EQUITY
    Preferred stock, $0.001 par value, 10,000,000 shares authorized; none issued         --           --
Common stock, $0.001 par value; 30,000,000 shares authorized;
 8,838,152 shares issued and outstanding                                                8,838        8,838
Paid-in capital                                                                     1,768,203    1,768,203
Retained earnings                                                                     627,033      656,119
Accumulated other comprehensive income                                                  4,377       11,951
                                                                                   ----------   ----------
Total stockholders' equity                                                          2,408,451    2,445,111
                                                                                   ----------   ----------
Total liabilities and stockholders' equity                                         $3,233,208   $3,310,291
                                                                                   ==========   ==========
</TABLE>

See accompanying notes to financial statements. * These amounts are derived from
the audited financial statements.

<PAGE>
<TABLE>
<CAPTION>

                              Avatar Systems, Inc.
                            STATEMENTS OF OPERATIONS
                                   (unaudited)
                                                                Three months ended March 31,
                                                                 --------------------------
                                                                     2005           2004
                                                                 -----------    -----------
<S>                                                              <C>            <C>
Revenue:
Software                                                         $    40,215    $    20,206
Maintenance                                                          260,396        225,980
Professional services                                                 46,270         31,867
Hardware                                                               8,030         36,961
                                                                 -----------    -----------
Total revenues                                                       354,911        315,014

Cost of Sales:
Software                                                              17,754         11,978
Maintenance                                                           34,254         43,628
Professional services                                                 15,336         15,577
Hardware                                                               1,045         29,078
                                                                 -----------    -----------
                                                                      68,389        100,261
                                                                 -----------    -----------
Gross profit                                                         286,522        214,753

Operating Expenses:
Sales and Marketing                                                   48,751         54,849
General and administrative                                           129,964        116,628
Amortization                                                         119,866         92,782
Depreciation                                                          31,921         15,942
                                                                 -----------    -----------
                                                                     330,502        280,201
                                                                 -----------    -----------
Operating loss                                                       (43,980)       (65,448)

Other income (expense):
Investment income                                                      3,527          1,020
Loss on investments                                                   (1,689)          --
Interest expense                                                      (1,926)          (613)
                                                                 -----------    -----------
                                                                         (88)           407

Loss before income taxes                                             (44,068)       (65,041)

Deferred income tax benefit                                          (14,983)       (22,114)
                                                                 -----------    -----------

NET LOSS                                                         $   (29,085)   $   (42,927)
                                                                 ===========    ===========

Net loss  per share - basic and diluted                                 --             --
                                                                 ===========    ===========

Weighted average common shares outstanding - basic and diluted     8,838,152      8,695,652
                                                                 ===========    ===========
</TABLE>

*Less than $0.01 per share
See accompanying notes to financial statements.

Comprehensive  loss for the  three  months  ended  March  31,  2005 and 2004 was
$(36,659) and  $(42,927),  respectively.  This includes the changes in available
for sales securites and net loss.

<PAGE>



                              Avatar Systems, Inc.
                            STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                                    Three months ended March 31,
                                                       ----------------------
                                                         2005         2004
                                                       ---------    ---------

Cash flows from operating activities
Net loss                                               $ (29,085)   $ (42,927)
Adjustments to reconcile net loss to net cash
provided by operating activities:
    Amortization                                         119,866       92,782
Depreciation                                              31,921       15,942
Loss on investments                                        1,689         --
Deferred income taxes                                    (14,983)     (22,114)
Changes in operating assets and liabilities:
Accounts receivable                                       77,401       67,657
Prepaid expenses                                           9,701         --
Accounts payable                                         (40,853)      11,123
Accrued expenses                                         (13,304)      (2,154)
Deferred revenue                                          35,836       69,387
                                                       ---------    ---------
Net cash provided by operating activities                178,189      189,696

Cash flows from investing activities
Software development costs capitalized                  (146,497)    (153,803)
Purchase of property and equipment                       (74,578)     (60,535)
Purchases of marketable securities                      (251,420)        --
    Sales of marketable securities                       102,819         --
                                                       ---------    ---------
Net cash used in investing activities                   (369,676)    (214,338)

Cash flows from financing activities
Principal payments on capital lease obligations           (5,298)        (150)
Proceeds from long-term debt                                --         30,737
Principal payments on long-term debt                      (1,820)      (1,749)
                                                       ---------    ---------
Net cash provided by (used in) financing activities       (7,118)      28,838

Net increase (decrease) in cash and cash equivalents    (198,605)       4,196

Cash and cash equivalents at beginning of quarter        291,146      492,737
                                                       ---------    ---------

Cash and cash equivalents at end of quarter            $  92,541    $ 496,933
                                                       =========    =========

Supplemental disclosure of cash paid for:
Interest                                               $   1,926    $     613
                                                       =========    =========

Supplemental disclosure of noncash investing activities:
 Change in unrealized gain on marketable securities     $ (11,477)   $    --
                                                        =========    =========

See accompanying notes to financial statements.

<PAGE>

                              AVATAR SYSTEMS, INC.
                          NOTES TO 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
2004 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.

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 2004
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,
professional services and hardware. Our net revenues for the first quarter ended
March 31,  2005  increased  12.7% to  $354,911  compared  with net  revenues  of
$315,014 for the same period in 2004.


Software.  Software  sales  for the first  quarter  of 2005  increased  99.0% to
$40,215  compared with software  sales of $20,206 for the first quarter of 2004.
Software  sales for the first quarter of 2004 were higher  compared to the first
quarter of 2004 because of the current petroleum industry environment.


Maintenance.  Maintenance  revenue for the first quarter of 2005 increased 15.7%
to $260,396 compared with maintenance  revenue of $225,980 for the first quarter
of 2004. We expect a slight increase in maintenance revenue during the 2005 year
over  2004  because  of new  software  installations  during  2004 and  expected
software sales for 2005.


Professional  services.  Professional  services revenue for the first quarter of
2005 increased 45.2% to $46,270  compared with  professional  service revenue of
$31,867 for the first quarter of 2004.  Professional  service revenues increased
due to training for our new customers.

<PAGE>



Hardware.  Hardware  sales  for the first  quarter  of 2005  decreased  78.3% to
$8,030,  compared with hardware  sales of $36,961 for the first quarter of 2004.
Hardware sales are seasonally low during the first quarter of our year; however,
hardware  sales  during the first  quarter  of 2004 were  higher  than  normally
expected.


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 first quarter of 2005  decreased  31.8% to $68,389  compared
with cost of  revenues  of  $100,261  for the  first  quarter  of 2004.  Cost of
revenues as a percentage of net revenues decreased to 19.3% for the three months
ended March 31, 2005 from 31.8% for the same period in 2004. The decrease in the
cost of revenues is primarily  related to lower  hardware sales offset by higher
commission  costs on software  sales.  The decrease in the percentage of cost of
net revenues is related  primarily to lower hardware sales and the related costs
which generally have a lower profit margin than the other components.


Cost of  software.  Cost of  software  increased  48.2% to  $17,754 in the first
quarter of 2005 from $11,978 in the first quarter of 2004. Cost of software as a
percentage  of the related  revenue  decreased to 44.1% for the first quarter of
2005  compared to 59.3% for the same period in 2004.  The  decrease in cost as a
percentage of revenue is directly  related to higher software sales. The cost of
software sold increased due to commissions on the higher software sales volume.


Cost of maintenance. Cost of maintenance revenues decreased 21.5% to $34,254 for
the first  quarter  of 2005 from  $43,628  for the first  quarter  of 2004.  The
decrease in costs was primarily  due to lower  hardware  rental  costs.  Cost of
maintenance  revenues as a percentage of the related revenue  decreased to 13.2%
during the first quarter 2005 compared to 19.3% for the same period in 2004. The
decrease in the percentage of cost of maintenance  revenues was due primarily to
lower hardware rental costs.


Cost of professional  services.  Cost of professional services decreased 1.5% to
$15,336 for the quarter ended March 31, 2005, compared with $15,577 for the same
period last year. Cost of  professional  services as a percentage of the related
revenue decreased to 33.1% in the first quarter 2005,  compared to 48.9% for the
same period last year due to higher demand for professional  services related to
new software installations.


Hardware.  Cost of hardware sold decreased 96.4% to $1,045 for the quarter ended
March 31, 2005,  compared  with  $29,078 for the same period last year.  Cost of
hardware as a  percentage  of the  related  revenue  decreased  to 13.0% for the
quarter ended March 31, 2005, compared with 78.7% for the same period last year.
Hardware sales during the first quarter of 2005 were not significant.


OPERATING EXPENSES


Sales and Marketing.  Our sales and marketing  expenses for the first quarter of
2005 decreased 11.1% to $48,752,  compared with $54,849 for the first quarter of
2004. Sales and marketing  expenses as a percentage of net revenues decreased to
13.7% for the first  quarter of 2005,  compared  with 17.4% for the same  period
last year. The decreases in cost and related percentages of revenue were related
to higher costs for a marketing program during 2004.


General and  Administrative.  Our general and  administrative  expenses  for the
first  quarter of 2005  increased  11.4% to $129,965,  compared with general and
administrative  expenses of $116,628 for the first quarter of 2004.  General and
administrative expenses as a percentage of net revenues remained stable at 36.6%
in the first quarter of 2005,  compared with 37.0% in the first quarter of 2004.
The increase in general and  administrative  expense is due to higher accounting
and auditing fees.


Investment  Income.  Investment  income was $3,527 in the first  quarter of 2005
compared to $1,020 in 2004.  The increase in investment  income is due to higher
invested balances.


Provision  for Income  Taxes.  For the three  months  ended March 31,  2005,  we
recorded a tax benefit on a loss from operations of $14,983, based on our pretax
loss using an effective tax rate of 34%, which is our anticipated  effective tax
rate for the fiscal  year 2005.  The  actual  effective  tax rate for the entire
fiscal year could vary substantially depending on actual results achieved.

<PAGE>



LIQUIDITY AND CAPITAL RESOURCES


Our cash and cash  equivalents and marketable  securities at March 31, 2005 were
$554,738 compared with $496,933 at March 31, 2004. Cash and cash equivalents and
marketable  securities  at December 31, 2004 were  $617,909.  Cash flows for the
first fiscal  quarter are impacted  positively by cash we collect from recurring
maintenance  agreements entered into during the first quarter.  The revenue from
the  maintenance  agreements  is  recognized  over the  term of the  maintenance
contract.  The cash flows from the  maintenance  agreements  were  offset by our
seasonally low software and hardware sales and quarterly operating loss.


Cash flows from Operating  Activities.  Our cash flows from operating activities
represent the most significant  source of funding for our operations.  Operating
activities  provided cash flows of $178,189 and $189,696 for the quarters  ended
March 31, 2005 and 2004, respectively.


The major use of our operating cash is to fund obligations that flow through our
accounts payable and accrued liabilities, such as funding of payroll and related
benefits,  rent, facilities costs, insurance,  professional fees and other costs
incurred in our normal operations.


We expect cash provided by operating  activities to remain  relatively stable in
future  periods due  primarily  to the  stability of our  recurring  maintenance
revenues, but will be impacted by fluctuations in software and hardware sales.


Cash Flows from Investing Activities.  Net cash used in investing activities for
the quarter ended March 31, 2005 of $369,676  consisted of capitalized  software
development costs of $146,497,  computer equipment purchases of $74,578, and net
marketable securities purchased of $148,601.


Net cash used in investing  activities  for the quarter  ended March 31, 2004 of
$214,338  included  $153,803  in  capitalized  software  development  costs  and
$60,535, primarily in computer equipment additions.


Cash Flows from Financing Activities.  Net cash used in financing activities for
the quarter ended March 31, 2005 of $7,118 was for principal payments on capital
lease obligations and notes payable.


Net cash provided by financing  activities  for the quarter ended March 31, 2004
of $28,838  reflected the issuance of a note to purchase an automobile offset by
reductions in payments on that note of $1,749.


Working  Capital.  At March 31, 2005, we had $193,442 in working  capital,  down
from  $321,491  at  December  31,  2004.  The  decrease  in  working  capital is
attributable  to an  increase in our  deferred  revenue  account of  $35,836,  a
decrease in our accounts  receivable of $77,401 and the net loss for the quarter
of $29,085.  We currently have no  significant  capital  commitments  other than
commitments under our capital lease  obligations,  note payments,  and operating
leases.


Based upon our past  performance and current  expectations,  we believe that our
cash  and cash  equivalents,  marketable  securities  and  cash  generated  from
operations  will be sufficient  to satisfy our working  capital  needs,  capital
expenditures,  investment requirements and financing activities for at least the
next twelve months.

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.


<PAGE>



As of the date of this  report,  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  /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

None

Item 3. Defaults Upon Senior Securities

None.

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

None

Item 5. Other Information

None

Item 6. Exhibits

31.1 Section 302 Certification pursuant to Sarbanes Oxley Act.
32.1 Section 906 Certification pursuant to Sarbanes-Oxley Act


<PAGE>



Signatures

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: May 13, 2005                          By: /s/ROBERT C. SHREVE, JR.
                                             ----------------------------
                                                   Robert C. Shreve, Jr.
                                                   Chief Executive Officer
                                                   Chief Financial Officer