================================================================================


                       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 June 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 June 30, 2004


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


================================================================================




<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....................................7
   SIGNATURES..................................................................8





















                                      -i-
<PAGE>
<TABLE>
<CAPTION>

                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                              AVATAR SYSTEMS, INC.
                                 BALANCE SHEETS

                                                                  June 30,     December 31,
                                                                    2004           2003
                                                                ------------   ------------
                                                                 (unaudited)         *
                                                                ------------   ------------
<S>                                                             <C>            <C>
                                     ASSETS

Current assets:
Cash and cash equivalents                                       $    466,740   $    492,737
Accounts receivable, net                                             167,487        129,104
Prepaid Expense                                                        7,690          7,340
Deferred income taxes                                                 11,180         12,340
                                                                ------------   ------------
Total current assets                                                 653,097        641,521

Property and Equipment - at cost, net                                223,234        183,385
Purchased Software, net                                              136,543        181,215
Software Development Costs, net                                    2,038,793      1,876,094
                                                                ------------   ------------

Total assets                                                    $  3,051,667   $  2,882,215
                                                                ============   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt                            $     16,403   $      6,996
Accounts payable                                                      48,275         56,275
Accrued expense                                                       76,181         50,690
Deferred revenues                                                    297,863        265,328
                                                                ------------   ------------
Total current liabilities                                            438,722        379,289
Long-term debt                                                        40,886         26,120
Deferred income taxes                                                266,825        235,203
                                                                ------------   ------------
Total liabilities                                                    746,433        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                                                    528,193        464,562
Total stockholders' equity                                         2,305,234      2,241,603
                                                                ------------   ------------
Total liabilities and stockholders' equity                      $  3,051,667   $  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


                                                       Three Months Ended June 30,     Six Months Ended June 30,
                                                          2004            2003           2004            2003
                                                      ------------    ------------   ------------    ------------
<S>                                                   <C>            <C>             <C>            <C>
Revenues:
 Software                                             $    171,519   $     79,568    $    191,725   $    153,126
 Maintenance                                               255,092        230,493         481,070        516,258
 Professional services                                      30,933         43,449          62,799         76,802
 Hardware                                                    8,659         78,209          45,620        106,434
                                                      ------------    ------------   ------------    ------------
    Net revenues                                           466,203        431,719         781,214        852,620
Cost of revenues:
 Software                                                   25,910         31,562          37,888         47,841
 Maintenance                                                32,828         41,882          76,456         81,728
 Professional services                                      13,868         11,510          29,445         23,696
 Hardware                                                    5,342         53,531          34,421         78,815
                                                      ------------    ------------   ------------    ------------
     Total cost of revenues                                 77,948        138,485         178,210        232,080
                                                      ------------    ------------   ------------    ------------
       Gross margin                                        388,255        293,234         603,004        620,540
Operating expenses:
  Sales and marketing                                       39,593        105,204          94,443        193,382
  General and administrative                                76,232        110,334         192,856        245,530
  Amortization of intangibles                               92,782         88,809         185,564        177,618
  Depreciation                                              19,861         15,474          35,803         27,609
                                                      ------------    ------------   ------------    ------------
      Total operating expenses                             228,468        319,821         508,666        644,139
                                                      ------------    ------------   ------------    ------------
        Operating income (loss)                            159,787        (26,587)         94,338        (23,599)
   Interest income                                           2,439            665           3,459          1,453
   Interest expense                                            771            126           1,384            126
                                                      ------------    ------------   ------------    ------------
        Income (loss) from operations before income
           taxes                                           161,455        (26,048)         96,413        (22,272)
   Deferred income tax expense (benefit)                    54,895         (8,420)         32,782         (7,136)
                                                      ------------    ------------   ------------    ------------

         Net income (loss)                            $    106,560    $    (17,628)  $     63,631    $    (15,136)
                                                      ============    ============   ============    ============

Net Income (loss) per share:
Basic and Diluted:
Net income (loss)                                     $       0.01    $          *   $       0.01    $          *
                                                      ============    ============   ============    ============
Basic and diluted weighted average shares
    outstanding                                          8,695,652      8,695,652       8,695,652      8,695,652
                                                      ============    ============   ============    ============
</TABLE>

*Less than $(0.01)




                                       2
<PAGE>
<TABLE>
<CAPTION>

                              AVATAR SYSTEMS, INC.
                            STATEMENTS OF CASH FLOWS
                                   (unaudited)

                                                            Six Months Ended June 30,
                                                            --------------------------
                                                                2004           2003
                                                            -----------    -----------
<S>                                                         <C>            <C>
Cash flows from operating activities:
   Net income (loss)                                        $    63,631    $   (15,136)
   Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
     Amortization of intangibles                                185,564        177,618
     Depreciation                                                35,803         27,609
     Deferred income taxes                                       32,782         (7,136)
     Changes in operating assets and liabilities:
        Accounts receivable                                     (38,383)        97,361
        Prepaid expense                                            (350)         1,572
        Accounts payable and accrued expenses                    17,491        (12,911)
        Deferred revenue                                         32,535           --
                                                            -----------    -----------
          Net cash provided by operating activities             329,073        268,977
Cash flows from investing activities:
   Acquisition of fixed assets                                  (75,653)       (46,154)
   Capitalized software development costs                      (303,591)      (192,000)
                                                            -----------    -----------
          Net cash used in investing activities                (379,244)      (238,154)
Cash flows from financing activities:
   Payments on note payable and capital lease obligation         (6,563)       (11,040)
   Proceeds from issuance of notes payable                       30,737           --
                                                            -----------    -----------
   Net cash provided by (used in) financing activities           24,174        (11,040)
                                                            -----------    -----------
Net increase (decrease) in cash and cash equivalents            (25,997)        19,783
Cash and cash equivalents at beginning of period                492,737        395,256
                                                            -----------    -----------
Cash and cash equivalents at end of period                  $   466,740    $   415,039
                                                            ===========    ===========

Supplemental disclosure of cash flow information:
   Cash paid for interest                                   $     1,384    $       126
                                                            ===========    ===========
</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

We prepared the condensed financial  statements 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.  We
recommend that these interim  financial  statements be read in conjunction  with
the audited  financial  statements and related notes included in our 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 our opinion,  the  condensed  financial  statements  include all  adjustments
necessary to present the financial  position and results of operations  for each
interim period shown.

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 second quarter ended June 30, 2004 increased 8.0% to $466,203  compared with
net revenues of $431,719  for the same period in 2003.  Net revenues for the six
months ended June 30, 2004  decreased  8.4% to $781,214,  compared with $852,620
from the same  period  last year.  The  increase  in net  revenues is due to the
current  economic  activity  in the energy  sector and our  increased  marketing
efforts  during 2003. The decrease in net revenues for the six months ended June
30, 2004 is primarily attributable to lower hardware sales in the second quarter
when compared with an exceptional quarter ended June 20, 2003.


Software.  Software  sales for the second  quarter of 2004  increased  115.6% to
$171,519 compared with software sales of $79,568 for the second quarter of 2003.
Software  sales  for the six  months  ended  June 30,  2004  increased  25.2% to
$191,725,  compared with $153,126 from the same period last year. Demand for our
software is historically  lowest in the second  quarter.  Software sales for the
second  quarter  of 2004 were  higher  compared  to the  second  quarter of 2003
because  due to the  current  economic  activity  in the  energy  sector and our
increased marketing efforts during 2003.


Maintenance.  Maintenance  revenue  for the second  quarter  increased  10.7% to
$255,092 compared with maintenance revenue of $230,493 for the second quarter of
2003.  Maintenance revenue for the six months ended June 30, 2004 decreased 6.8%
to $481,070  compared with  maintenance  revenue of $516,258 for the same period
last  year.   Maintenance   revenue  for  the  quarter  was  higher  because  of
installations  we made  during  2003 and the current  quarter.  The  decrease in
maintenance  revenue  reported for the for the six months ended June 30, 2004 is
because we began  adjusting our deferred  revenue  accounts on a quarterly basis
rather than annually.  We expect a slight increase in maintenance revenue during
the 2004 year because of new  installations  during 2003 and expected  sales for
2004.


                                       4
<PAGE>

Professional  services.  Professional services revenue for the second quarter of
2004 decreased 28.8% to $30,933  compared with  professional  service revenue of
$43,449 for the second quarter of 2003. Professional service revenue for the six
months ended June 30, 2004 decreased 18.2% to $62,799, compared with $76,802 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  second  quarter of 2004  decreased  88.9% to
$8,659,  compared with hardware sales of $78,209 for the second quarter of 2003.
Hardware  sales  for the six  months  ended  June 30,  2004  decreased  57.1% to
$45,620,  compared with $106,434 from the same period last year. The decrease in
hardware sales for the quarter is due to  exceptionally  higher sales during the
second quarter of 2003.  Hardware  sales are strongest  during our third quarter
and 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 second quarter of 2004 decreased  43.7% to $77,948  compared
with cost of  revenues  of  $138,485  for the second  quarter  of 2003.  Cost of
revenues  for the six months  ended June 30,  2003  decreased  23.2% to $178,210
compared  with  $232,080  for the same period  last year.  Cost of revenues as a
percentage  of net  revenues  decreased to 16.7% for the three months ended June
30,  2004  from  32.1%  for the same  period  in 2003.  .Cost of  revenues  as a
percentage of net revenues  decreased to 22.8% for the six months ended June 30,
2003,  compared  with 27.2% for the same period in 2003.  Lower cost of revenues
were primarily related to lower hardware sales.


Cost of  software.  Cost of  software  decreased  17.9% to $25,910 in the second
quarter of 2004 from  $31,562 in the second  quarter of 2003.  Cost of  software
decreased 20.8% to $37,888 in the six months ended June 30, 2004,  compared with
$47,841 in the same period last year.  Cost of software as a  percentage  of the
related  revenue  decreased to 15.1% for the second  quarter of 2004 compared to
39.7% for the same  period in 2003.  Cost of  software  as a  percentage  of the
related  revenues  decreased  to 19.8% for the six months  ended June 30,  2004,
compared  with 31.2% for the for the same period last year.  The decrease in the
percentage of cost of software was directly related to higher software sales.


Cost of maintenance. Cost of maintenance revenues decreased 21.6% to $32,828 for
the second quarter of 2004 from $41,882 for the second quarter of 2003.  Cost of
maintenance revenues decreased 6.5% to $76,456 for the six months ended June 30,
2004,  compared with $81,728 for the same period last year.  Cost of maintenance
revenues as a  percentage  of the  related  revenue  decreased  to 12.9% for the
second  quarter 2004,  compared to 18.2% for the same period last year.  Cost of
maintenance  revenues as a percentage of the related revenue  remained stable at
15.9% for the six months ended June 30, 2004,  compared  with 15.8% for the same
period last year.  The  reduction  in cost of revenues  was due  primarily  to a
reduction in maintenance personnel costs.


Cost of professional services.  Cost of professional services increased 20.5% to
$13,868 for the three months ended June 30, 2004,  compared with $11,510 for the
same period last year. Cost of professional  services increased 24.3% to $29,445
for the six months  ended June 30,  2004 from  $23,696  for the same period last
year.  Cost of  professional  services as a  percentage  of the related  revenue
increased to 44.8% in the second  quarter  2004,  compared to 26.5% for the same
period last year. Cost of  professional  services as a percentage of the related
revenue increased to 46.9% for the six months ended June 30, 2004, compared with
30.9% for the same  period last year.  The  increase  in  percentage  of cost of
professional services was due to lower revenues.


Hardware.  Cost of hardware sold decreased  90.0% to $5,342 for the three months
ended June 30, 2004,  compared with $53,531 for the same period last year.  Cost
of hardware  sold  decreased  56.3% to $34,421 for the six months ended June 30,


                                       5
<PAGE>

2004, compared with $78,815 for the same period last year. Cost of hardware as a
percentage of the related revenue  decreased to 61.7% for the three months ended
June 30,  2004,  compared  with 68.4% for the same  period  last  year.  Cost of
hardware as a percentage of the related revenue remained stable at 75.5% for the
six months  ended June 30,  2004,  compared  with 74.1% for the same period last
year.


OPERATING EXPENSES


Sales and Marketing.  Our sales and marketing expenses for the second quarter of
2004 decreased  62.4% to $39,593,  compared with $105,204 for the second quarter
of 2003.  Sales and  marketing  expenses  for the six months ended June 30, 2004
decreased 51.2% to $94,443, compared with $193,382 in the same period last year.
Sales and marketing  expenses as a percentage of net revenues  decreased to 8.5%
for the second  quarter of 2004,  compared  with 24.4% for the same  period last
year. Sales and marketing  expenses as a percentage of net revenues decreased to
12.1% for the six months ended June 30, 2004,  compared  with 22.7% for the same
period last year.The  decreases in cost and related  percentages of revenue were
due to our completion of a marketing program.


General and  Administrative.  Our general and  administrative  expenses  for the
second  quarter of 2004 decreased  30.9% to $76,262,  compared with $110,334 for
the second quarter of 2003. General and administrative  expenses decreased 21.5%
to $192,856 for the six months ended June 30, 2004,  compared  with  $245,530 in
the same period last year. General and  administrative  expenses as a percentage
of net revenues decreased to 16.4% in the second quarter of 2004,  compared with
25.6% in the second quarter of 2003.  General and  administrative  expenses as a
percentage  of net revenues  decreased to 24.7% in the six months ended June 30,
2004,  compared  with 28.8% in the same period last year.  The  decreases in the
costs and percentages of general and administrative expenses to net revenues was
primarily related to lower personnel costs.


Investment  Income.  Investment  income was $2,439 in the second quarter of 2004
compared to $665 in 2003.  Investment income was $3,459 for the six months ended
June 30, 2004, compared with $1,453 in the same period last year.


Provision for Income Taxes.  For the three and six months ended June 30, 2004 we
recorded a  deferred  tax  expense  on income  from  operations  of $54,895  and
$32,782, 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 June 30, 2004, we had
$466,740 in cash and cash  equivalents.  Cash generated from  operations for the
six months  ended June 30, 2004 was  $329,073  and  $268,977 for the same period
last year. Cash used for investing  activities was $379,244 and $238,154 for the
six months ended June 30, 2004 and 2003,  respectively.  Cash used for investing
activities  was  invested  primarily  in software  development  and property and
equipment.  Net cash  provided by financing  activities  was $24,174 for the six
months ended June 30,  2004,  primarily  from the proceeds of notes  payable for
equipment.  Cash used by financing  activities for the six months ended June 30,
2003 of $11,040 was for principal reduction of long term debt.


At June 30, 2004,  we had cash and cash  equivalents  of $466,740 as compared to
cash and cash  equivalents  of $415,039 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.


                                       6
<PAGE>

Even if our revenues and earnings  grow rapidly,  such growth may  significantly
strain our management and our  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.


During the period immediately after 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

Item 6. Exhibits And Reports On Form 8-K

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


                                       7
<PAGE>


       (b) Reports on Form 8-K
                  The Company  filed Form 8-K on April 21, 2004.  Item 5 - Other
                  Events  and Item 12 -  Results  of  Operations  and  Financial
                  Condition were reported.

                  The Company  filed Form 8-K on May 7, 2004.  Item 12 - Results
                  of Operations and Financial Condition were reported.



                                   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: August 11, 2004                              By: /s/ROBERT C. SHREVE, JR.
                                                       -------------------------
                                                         Robert C. Shreve, Jr.
                                                        Chief Executive Officer
                                                        Chief Financial Officer