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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 March 31, 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 March 31, 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.............................................6

PART II. OTHER INFORMATION.....................................................6

   ITEM 1. LEGAL PROCEEDINGS...................................................6
   ITEM 2. CHANGES IN SECURITIES...............................................6
   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

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

Current assets:
Cash and cash equivalents                                       $    496,933   $    492,737
Accounts receivable, net                                              61,447        129,104
Prepaid Expense                                                        7,340          7,340
Deferred income taxes                                                 11,180         12,340
                                                                ------------   ------------
Total current assets                                                 576,900        641,521

Property and Equipment - at cost, net                                227,977        183,385
Purchased Software, net                                              158,879        181,215
Software Development Costs, net                                    1,959,452      1,876,094
                                                                ------------   ------------

Total assets                                                    $  2,923,208   $  2,882,215
                                                                ============   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt                            $     16,403   $      6,996
Accounts payable                                                      67,398         56,275
Accrued expense                                                       48,536         50,690
Deferred revenues                                                    334,715        265,328
                                                                ------------   ------------
Total current liabilities                                            467,052        379,289
Long-term debt                                                        45,551         26,120
Deferred income taxes                                                211,929        235,203
                                                                ------------   ------------
Total liabilities                                                    724,532        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
Additional paid-in capital                                         1,768,345      1,768,345
Retained earnings                                                    421,635        464,562
                                                                ------------   ------------
Total stockholders' equity                                         2,198,676      2,241,603
                                                                ------------   ------------
Total liabilities and stockholders' equity                      $  2,923,208   $  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>

                              AVATAR SYSTEMS, INC.
                         CONDENSED STATEMENTS OF INCOME
                                   (unaudited)
                                                   Three Months Ended March 31,
                                                   ----------------------------
                                                       2004            2003
                                                   ------------    ------------

Revenues:
 Software                                          $     20,206    $     73,558
 Maintenance                                            225,980         285,764
 Professional services                                   31,867          33,353
 Hardware                                                36,961          28,225
                                                   ------------    ------------
    Total net revenues                                  315,014         420,900
Cost of revenues:
 Software                                                11,978          16,279
 Maintenance                                             43,628          39,846
 Professional services                                   15,577          12,186
 Hardware                                                29,078          25,285
                                                   ------------    ------------
     Total cost of revenues                             100,261          93,596
                                                   ------------    ------------
       Gross margin                                     214,753         327,304
Operating expenses:
  Sales and marketing                                    54,849          88,180
  General and administrative                            116,628         135,195
  Amortization of intangibles                            92,782          88,809
  Depreciation                                           15,942          12,134
                                                   ------------    ------------
      Total operating expenses                          280,201         324,318
                                                   ------------    ------------
        Operating income (loss)                         (65,448)          2,986
   Interest income                                        1,020             788
   Interest expense                                        (613)           --
                                                   ------------    ------------
        Income (loss) before taxes                      (65,041)          3,774
   Deferred income tax expense (benefit)                (22,114)          1,284
                                                   ------------    ------------

         Net income (loss)                         $    (42,927)   $      2,490
                                                   ============    ============

Income (loss)per share - Basic and diluted:
Net income (loss)                                  $          *    $          *
                                                   ============    ============
Shares used in per share calculations                 8,695,652       8,695,652
                                                   ============    ============

* Less than $0.01 per share.


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




                                       2
<PAGE>
<TABLE>
<CAPTION>

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

                                                            Three Months Ended March 31,
                                                            ----------------------------
                                                                2004            2003
                                                            ------------    ------------
<S>                                                         <C>             <C>
Cash flows from operating activities:
   Net income (loss)                                        $    (42,927)   $      2,490
   Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
     Amortization of intangibles                                  92,782          88,809
     Depreciation                                                 15,942          12,134
     Deferred income taxes                                       (22,114)          1,284
     Changes in operating assets and liabilities:
        Accounts receivable                                       67,657          54,818
        Prepaid expense                                             --               786
        Accounts payable and accrued expenses                      8,969         (24,002)
        Deferred revenue                                          69,387            --
                                                            ------------    ------------
          Net cash provided by operating activities              189,696         136,319
Cash flows from investing activities:
   Acquisition of fixed assets                                   (60,535)        (20,872)
   Capitalized software development costs                       (153,803)        (96,000)
                                                            ------------    ------------
          Net cash used in investing activities                 (214,338)       (116,872)
Cash flows from financing activities:
   Payments on note payable and capital lease obligation          (1,899)         (6,215)
   Proceeds from issuance of notes payable                        30,737            --
                                                            ------------    ------------
   Net cash provided by (used in) financing activities            28,838          (6,215)
                                                            ------------    ------------
Net increase in cash and cash equivalents                          4,196          13,232
Cash and cash equivalents at beginning of period                 492,737         395,256
                                                            ------------    ------------
Cash and cash equivalents at end of period                  $    496,933    $    408,488
                                                            ============    ============

Supplemental disclosure of cash flow information:
   Cash paid for interest                                   $        613    $       --
                                                            ============    ============
</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 first quarter ended March 31, 2004 decreased 25.2% to $315,014 compared with
net revenues of $420,900 for the same period in 2003.

Software.  Software  sales  for the first  quarter  of 2004  decreased  72.5% to
$20,206  compared with software  sales of $73,558 for the first quarter of 2003.
Demand for our software is lowest in the first  quarter.  Software sales for the
first  quarter of 2004 were lower  compared to the first quarter of 2003 because
we released  enhancement  modules to our Petroware2000  product during the first
quarter of 2003.

Maintenance.  Maintenance  revenue for the first quarter of 2004 decreased 20.9%
to $225,980 compared with maintenance  revenue of $285,764 for the first quarter
of 2003. The decrease in maintenance revenue reported for the quarter is because
we began  adjusting our deferred  revenue  accounts on a quarterly  basis rather
than annually.  We have a higher number of maintenance  contract renewals in the
first  quarter of the year  because  the  release of our  Petroware2000  product
occurred  during  the first  quarter  of 2001.  We expect a slight  increase  in
maintenance  revenue during the 2004 year over 2003 because of new installations
during 2003 and expected sales for 2004.

Professional  services.  Professional  services revenue for the first quarter of
2004 decreased 4.5% to $31,867  compared with  professional  service  revenue of
$33,353 for the first quarter of 2003.



                                       4
<PAGE>

Hardware. Hardware sales for the first quarter of 2004 increased 31.0% or $8,736
to $36,961,  compared  with  hardware  sales of $28,225 for the first quarter of
2003.

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 2004  increased  7.1% to $100,261  compared
with cost of revenues of $93,596 for the first quarter of 2003. Cost of revenues
as a percentage  of net  revenues  increased to 31.8% for the three months ended
March 31,  2004 from  22.2% for the same  period in 2003.  The  increase  in the
percentage  of cost or revenues  is  primarily  related to the  decrease in 2004
revenue reported. Our costs remained stable.

Cost of  software.  Cost of  software  decreased  26.4% to  $11,978 in the first
quarter of 2004 from $16,279 in the first quarter of 2003. Cost of software as a
percentage  of the related  revenue  increased to 59.3% for the first quarter of
2004  compared to 22.1% for the same period in 2003.  The  increase in cost as a
percentage of revenue is directly related to the decrease in software sales.

Cost of maintenance.  Cost of maintenance revenues increased 9.5% to $43,628 for
the first  quarter  of 2004 from  $39,846  for the first  quarter  of 2003.  The
increase in costs was primarily  due to higher  hardware  rental costs.  Cost of
maintenance  revenues as a percentage of the related revenue  increased to 19.3%
during the first quarter 2004 compared to 13.9% for the same period in 2003. The
increase in the percentage of cost of maintenance  revenues was due primarily to
the lower  maintenance  revenues reported because of the change in the frequency
of the adjustment to deferred revenue.

Cost of professional services.  Cost of professional services increased 27.8% to
$15,577 for the quarter ended March 31, 2004, compared with $12,186 for the same
period last year. Cost of  professional  services as a percentage of the related
revenue increased to 48.9% in the first quarter 2004,  compared to 36.5% for the
same period last year.

Hardware. Cost of hardware sold increased 15.0% to $29,078 for the quarter ended
March 31, 2004,  compared  with  $25,285 for the same period last year.  Cost of
hardware as a  percentage  of the  related  revenue  decreased  to 78.7% for the
quarter ended March 31, 2004, compared with 89.6% for the same period last year.
The decrease in percentage of cost of hardware was due to incentives provided by
our vendors.

OPERATING EXPENSES

Sales and Marketing.  Our sales and marketing  expenses for the first quarter of
2004 decreased 37.8% to $54,849,  compared with $88,180 for the first quarter of
2003. Sales and marketing  expenses as a percentage of net revenues decreased to
17.4% for the first  quarter of 2004,  compared  with 21.0% for the same  period
last year. The decreases in cost and related  percentages of revenue were due to
the implementation of a new marketing program completed in 2003.

General and  Administrative.  Our general and  administrative  expenses  for the
first  quarter of 2004  decreased  13.7% to $116,628,  compared with general and
administrative  expenses of $135,195 for the first quarter of 2003.  General and
administrative  expenses as a percentage  of net revenues  increased to 37.0% in
the first quarter of 2004, compared with 32.1% in the first quarter of 2003. The
increase in the percentage of general and  administrative as a percentage of net
revenues is due primarily to lower  reported  revenues.  The decrease in general
and  administrative  expense for the current  quarter was due to  reductions  in
personnel and the related costs allocated to general and administrative expense.

Interest  Income.  Interest  income  was  $1,020  in the first  quarter  of 2004
compared to $788 in 2003.

Provision  for Income  Taxes.  For the three  March 31,  2004 we  recorded a tax
benefit on a loss from operations of $22,114,  based on our pretax loss 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.


                                       5
<PAGE>

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 March 31, 2004, we had
$496,933 in cash and cash  equivalents.  Cash generated from  operations for the
three  months ended March 31, 2004 was $189,696 and $136,319 for the same period
last year. Cash used for investing  activities was $214,338 and $116,872 for the
three months  ended March 31, 2004 and 2003,  respectively,  primarily  for cash
invested in software  development and property and equipment.  Net cash provided
by financing  activities  was $28,838 for the three months ended March 31, 2004,
primarily  from the  proceeds  of notes  payable  for  equipment.  Cash  used by
financing activities for the three months ended March 31, 2003 of $6,215 was for
principal reduction of long term debt.

At March 31, 2004, we had cash and cash  equivalents  of $496,933 as compared to
cash and cash  equivalents  of $408,488 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 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.


                                       6
<PAGE>

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
       (b) Reports on Form 8-K

               The  Company  filed  Form 8-K on April 30,  2004.  Item 5 - Other
               Events  and  Item  12  -  Results  of  Operations  and  Financial
               Condition were reported.



























                                       7
<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 12, 2004                                 By: /s/ROBERT C. SHREVE, JR.
                                                       -------------------------
                                                       Robert C. Shreve, Jr.
                                                       Chief Executive Officer
                                                       Chief Financial Officer


































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