Advanced Voice Recognition Systems, Inc - Quarter Report: 2011 March (Form 10-Q)

7659 E. Wood Drive

Scottsdale, Arizona  85260

(Address of principal executive offices)

(480) 704-4183

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yeso      No x [Files not required.]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o       Accelerated filer o      

Non-accelerated filer o       Smaller reporting company x      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No x

As of May 6, 2011, 192,642,865 shares of Advanced Voice Recognition Systems, Inc. common stock, $.001 par value, were outstanding.

Advanced Voice Recognition Systems, Inc.

Table of Contents

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Part I. Financial Information

Advanced Voice Recognition Systems, Inc.

Condensed Balance Sheets

Development Stage Company

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

1

Advanced Voice Recognition Systems, Inc.

(A Development Stage Company)

Condensed Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these financial statements

2

Advanced Voice Recognition Systems, Inc.

Condensed Statement of Stockholders’ Deficit

Development Stage Company

(Unaudited)

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

3

Advanced Voice Recognition Systems, Inc.

Condensed Statements of Cash Flows

Development Stage Company

(Unaudited)

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

4

Advanced Voice Recognition Systems, Inc.

(A Development Stage Company)

Notes to Unaudited Condensed Financial Statements

Note 1.     Nature of Operations

The operations of Advanced Voice Recognition Systems, Inc. (“AVRS” or the “Company”) www.avrsys.com commenced in 1994 with a predecessor entity called NCC, Inc. NCC, Inc. was incorporated on March 15, 1994 in the State of Ohio. NCC, Inc. operated as a software and hardware development company that marketed voice recognition and transcription products for commercial applications.

In May 2000, WG Investments, LLC acquired the assets of NCC, Inc. and subsequently changed its name to NCC, LLC. NCC, LLC (also a predecessor to AVRS) continued the operations of NCC, Inc. until approximately December 31, 2001, when shifts in the industry’s markets caused NCC, LLC to suspend its operations.

AVRS was incorporated in the State of Colorado on July 7, 2005. In September 2005, the members of NCC, LLC transferred all of their membership interests in NCC, LLC to AVRS in exchange for 93,333,333 shares (post-recapitalization) of AVRS common stock. In December 2005, the Board of Directors approved a 1.5-to-1 stock split issuing 46,666,667 common shares (post-recapitalization), which increased the number of common shares outstanding to 140,000,000 shares (post-capitalization). Following the incorporation of AVRS, the Company initiated a new business plan and intends to continue its operations in the voice recognition and transcription industry.

AVRS specializes in creating interface and application solutions for speech recognition technologies. AVRS has successfully obtained patent protection of its proprietary technology (refer to Note 3, Intangible Assets). The Company plans to focus its technologies for the medical profession because of the profession’s present extensive use of dictation and its need for multiple applications of speech recognition technology in the generation of reports, documents and medical bills. Additionally the Company plans to focus on server based dictation and transcription, visual voicemail and the voicemail to text market.

The Company is a development stage enterprise in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises” now referred to as ACS 915 “Development Stage Entities”. The Company has been in the development stage since inception.

Stock Exchange Agreement

On April 28, 2008, the Company entered into a Stock Exchange Agreement with Samoyed Energy Corp., a Nevada corporation (“Samoyed”), which resulted in a reverse acquisition.

The Agreement provided for the reorganization of AVRS with Samoyed. In connection with the Agreement, Samoyed acquired all of the issued and outstanding common shares of AVRS in exchange for 140,000,000 shares of Samoyed’s common stock. At the closing of the Agreement, the former shareholders of AVRS owned approximately 85% of the outstanding common stock of Samoyed, resulting in a change in control.

For accounting purposes, this acquisition has been treated as a reverse acquisition and recapitalization of AVRS, with Samoyed the legal surviving entity. Since Samoyed had, prior to the recapitalization, minimal assets and limited operations, the recapitalization has been accounted for as the sale of 24,700,008 shares of AVRS common stock for the net liabilities of Samoyed. Therefore, the historical financial information prior to the date of the recapitalization is the financial information of AVRS. Costs of the transaction have been charged to the period in which they are incurred.

On May 19, 2008, pursuant to the Stock Exchange Agreement, the Company’s shareholders exchanged with, and transferred to Samoyed, all of the issued and outstanding shares of their capital stock. In exchange, Samoyed exchanged with, and issued to, the Company’s shareholders 85% (140,000,000 shares) of Samoyed’s common stock. In connection with the closing of the Stock Exchange Agreement:

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Stock Purchase Agreements

The Company entered into a Stock Purchase Agreement dated March 10, 2010 with two persons each of whom agreed to purchase 5,000,000 restricted shares of the common stock of AVRS for $250,000, payable in five installments on or before June 15, 2010.  As of March 31, 2011, the shareholders made payments totaling $400,000 purchasing 8,000,000 shares of common stock.

The Company entered into Stock Purchase Agreements dated May 4, 2010 with two shareholders each of whom agreed to purchase 5,000,000 restricted shares of the common stock of AVRS for $400,000, payable in seven installments on or before November 15, 2010.  As of March 31, 2010 the shareholders made payments totaling $20,000 which purchased 250,000 shares of common stock combined. On March 1, 2011 the Company and one purchaser of the stock purchase agreement dated May 4, 2010 signed a mutual termination agreement.  The balance of $390,000 representing 4,875,000 shares of Common Stock was cancelled.

During the twelve months ended December 31, 2010, the Company entered into Stock Purchase Agreements for the private sale to eight persons or entities of an aggregate of 12,742,857 shares of the common stock for aggregate proceeds of $1,000,000.  One of the purchasers was the Company’s Chairman of the Board who purchased 600,000 shares for $50,000.  All of the proceeds were paid during the 12 months ended December 31, 2010.

The Company entered into a Stock Purchase Agreement dated December 22, 2010 with one person who agreed to purchase 2,500,000 restricted shares of the common stock of AVRS for $200,000, payable in three installments on or before March 4, 2011.  The amount was unpaid at March 31, 2011.

The Company entered into a Stock Purchase Agreement dated March 9, 2011 with one person who agreed to purchase 4,375,000 restricted shares of the common stock of AVRS for $350,000.  Payment was made in full on March 10, 2011.

Agreement and Plan of Merger

On March 25, 2009, the Company entered into an Agreement and Plan of Merger (“Agreement and Plan of Merger”) with its wholly-owned subsidiary, NCC, LLC, a Colorado limited liability company, whereby NCC, LLC merged with and into the Company pursuant to Section 92A.180 of the Nevada Business Corporations Act. Upon consummation of the Agreement and Plan of Merger: (i) NCC, LLC ceased to exist; (ii) the Company’s membership interests in NCC, LLC automatically were canceled or retired and ceased to exist, without any consideration delivered in exchange thereof; (iii) the title to all estate, property rights privileges, powers and franchise assets and/or other

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rights owned by NCC, LLC became vested in the Company without reversion or impairment; and (iv) all liabilities of any kind of NCC, LLC became vested in the Company.

Stock Based Compensation

On March 18, 2009, the Company issued 350,000 restricted shares of the Company’s common stock, par value $.001 per share to Equiti-Trend Advisors LLC as deferred compensation in exchange for public relations services for a period of six months.  Shares were valued at $.25 per share on the date as of March 18, 2009 for a total stock compensation of $87,500.  On December 8, 2009, the Company issued 350,000 restricted shares of the Company’s common stock, par value $.001 per share to OTC Navigation as deferred compensation in exchange for public relations services for a period of three months.  Shares were valued at $.18 per share on the date of issue, December 8, 2009.  Deferred compensation of $63,000 has been recorded.  The $63,000 of compensation deferred at 12/31/09 was expensed in 2010.  Services began January 6, 2010 and were completed April 5, 2010.

Note 2.     Significant Accounting Policies

Unaudited Financial Information

The accompanying financial information as of March 31, 2011 and for the three months ended March 31, 2011 and 2010, and the period from March 15, 1994 (inception) through March 31, 2011, is unaudited.  In the opinion of management, all normal and recurring adjustments which are necessary to provide a fair presentation of the Company’s financial position at March 31, 2011 and its operating results for the three months ended March 31, 2011 and 2010 and the period from March 15, 1994 (inception) through March 31, 2011, have been made.  Certain information and footnote data necessary for a fair presentation of financial position and results of operations in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is therefore suggested that these financial statements be read in conjunction with the summary of significant accounting policies and notes to financial statements included in the Company’s annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2010.  The results of operations for the three months ended March 31, 2011 is not necessarily an indication of operating results to be expected for the year.

Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company is a development stage enterprise with losses since inception and a net capital deficit. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

The financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitability. During the years ended December 31, 2010 and 2009, the Company’s president loaned or advanced the Company funds for working capital on an “as needed” basis. There is no assurance that these loans or advances will continue in the future.   During the twelve months ended December 31, 2010, the Company received an aggregate of $ 1,420,000 from the sale of shares in private offerings of its common stock.  During the quarter ended March 31, 2011 the Company received $350,000 from the sale of shares in private offerings of its common stock.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments with original maturities of three months or less when acquired to be cash equivalents. The Company had cash at March 31, 2011 of $260,733, and $128,560 cash at December 31, 2010.  No amounts resulted from cash equivalents.

Fixed Assets

Fixed assets are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, ranging from three to five years. Expenditures for additions and improvements are capitalized, while repairs and maintenance costs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is recorded in the year of disposal.

Fixed assets consist of the following:

Depreciation expense totaled $496 and $341 for the three months ended March 31, 2011 and 2010 respectively.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes.  The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow.  Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740.  The Company did not record a cumulative effect adjustment related to the adoption of ASC 740.

Patents, Deferred Costs and Amortization

Patents consist of costs incurred to acquire issued patents. Amortization commences once a patent is granted. Costs incurred to acquire patents that have not been issued are reported as deferred costs. If a patent application is denied or expires, the costs incurred are charged to operations in the year the application is denied or expires. The Company amortizes its patents over an estimated useful life of twenty years. The carrying value of the first patent is $63,247 with $48,488 amortized and a balance at March 31, 2011 of $14,759. The carrying balance of the second patent is $58,277 with $8,211 amortized and a balance at March 31, 2011 of $ $50,066.  The weighted average arrives at a period of 13.75 years based on a period of 16.1 years for patent #1 and 12.4 years for patent #2, weighted for the total amount capitalized on each patent.  Amortization expense totaled $2,227 for each of the three months ended, March 31, 2011 and 2010, respectively. Estimated aggregate amortization expense for each of the next five years is as follows:

Impairment and Disposal of Long-Lived Assets

The Company evaluates the carrying value of its long-lived assets under the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” now referred to as ASC 360-10 Property, Plant, and Equipment – “Impairment or Disposal of Long Lived Assets” subsections” . ASC 306-10 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying value or fair value, less costs to sell.  Impairment recorded for each of the three months ended March 31, 2011 and 2010 was $-0-.  See Note 3.

Loss per Common Share

The Company reports net loss per share using a dual presentation of basic and diluted loss per share. Basic net loss per share excludes the impact of common stock equivalents. Diluted net loss per share utilizes the average market price per share when applying the treasury stock

method in determining common stock equivalents. At March 31, 2011 and 2010, there were no variances between the basic and diluted loss

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per share as there were no potentially dilutive securities outstanding.

Note 3.     Intangible and Fixed Assets

Intangible Assets

On November 13, 1995 the Company filed a patent application with the U.S. Patent and Trademark Office, which was granted on September 28, 1999 as patent #5,960,447, “Word Tagging and Editing system for Speech Recognition”. In accordance with 35 USC 154, the term for the above referenced patent shall be for a period beginning on the date on which the patent issues and ending 20 years from the date on which the application for the patent was filed in the United States. The above referenced U.S. Patent will expire on November 13, 2015.

The Company monitors the anticipated outcome of legal actions, and if it determines that the success of the defense of a patent is probable, and so long as the Company believes that the future economic benefit of the patent will be increased, the Company capitalizes external legal costs incurred in the defense of the patent. Upon successful defense of litigation, the amounts previously capitalized are amortized over the remaining life of the patent.

On July 7, 2009, Patent No.: US 7,558,730 titled “Speech Recognition and Transcription Among Users Having Heterogeneous Protocols” was issued by the United States Patent and Trademark Office.  In accordance with 35 USC 154, the patent shall be for a term beginning on July 7, 2009 and ending 20 years from the application date of November 27, 2001.  The patent will expire on November 27, 2021.  The deferred fees were capitalized during the quarter ended September 30, 2009 and the Company began amortization.

On March 9, 2010 the United States Patent and Trademark Office declared interference between the Company as Senior Party and Allvoice Developments, US LLC as Junior Party.  Interference is a proceeding conducted by the USPTO in instances where two or more parties claim patent rights to the same technology. The U.S. patent system awards patents to the first party to invent a particular technology.  In an interference, the primary purpose of the USPTO is to determine which party invented the technology first, and to award the patent to that party.  The Patent Office presumes that the parties made their inventions in the order of the filing dates accorded to their patent applications – the party with the earliest filing date is referred to as the “senior party,” while those with later filing dates are “junior parties.”  If the parties survive the preliminary patentability phase, then the burden of proof to establish priority resides with the junior party.  The Company understands that Allvoice, as the junior party, will bear the burden of proof in establishing priority, and thus will have to show that its inventors invented the technology covered by the interfering subject matter ahead of the Company’s inventors in order to retain its patent.  On March 12, 2010 the Company retained legal counsel for representation in the interference proceedings.  The Company was a party to the patent interference proceedings during 2010.  AVRS has the potential to obtain a new patent as a result of this interference.  However, by year-end, the interference had not been completed and AVRS had no way to assess its chances of obtaining the new patent, or what the possible value of the new patent might be.  As a result, in the 4^th quarter of 2010, AVRS impaired 100% of the deferred costs associated with the interference, resulting in a $1,068,860 impairment loss.  On January 13, 2011 oral arguments took place before a three judge panel on all issues raised in the interference. No ruling has been received.

On July 5, 2009, a continuation Application was filed with the USPTO.  On January 13, 2011 the USPTO issued a Notice of Allowance for the continuation application filed on July 5, 2009.  The patent is expected to issue in 2011 and all deferred costs associated with that application will be capitalized and amortization will commence in the period. As of March 31, 2011 $3,321 of costs associated with that application were reported as deferred costs.  Amortization commences once the patent is issued.  

Note 4.     Related Party Transactions

Contributed Services

During the years from 2000 through 2010 the Company’s officers and employees contributed management services and administrative services. The fair value of those services was recorded in the accompanying financial statements based on the prevailing rates for such services, with a corresponding credit to Additional paid-in capital. Contributed services recorded in the accompanying financial statements consisted of the following:

Indebtedness to Related Parties

During the years from 2000 through 2010, certain officers advanced the Company working capital to maintain the Company’s operations. As of March 31, 2011 and December 31, 2010, the Company owed the officers $65,800 and $123,113, respectively. The majority of the balance is owed to the Company’s president and totaled $60,000 and $117,313, respectively, at March 31, 2011 and December 31, 2010.

Of the amount owed to the Company’s president, $225,544 was converted into a promissory note in May 2008. As of March 7, 2011 the Company repaid the note in full.  Interest expense related to the note totaled $130 was accrued at March 31, 2011. 

During 2009, the Company’s president advanced the Company working capital of $80,000 which was converted into a second promissory note in October 2009. The note carries a 4 percent annual interest rate and matures on April 9, 2010. On April 9, 2010 the Company issued an allonge to the promissory note that extended the maturity date to April 15, 2011.   At March 31, 2011 the principle balance on this note was $60,000.   Interest expense related to the note of $754 was accrued at March 31, 2011.

Note 5.     Income Taxes

A reconciliation of the U.S. statutory federal income tax rate to the effective rate is as follows:

The Company is considered a start-up company for income tax purposes. As of March 31, 2011, the Company had not commenced its trade operations, so all costs were capitalized under Section 195. Accordingly, the Company had no net operating loss carry forwards at March 31, 2011.

Note 6 .    Concentration of Risk

Beginning December 31, 2010, through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions.  On March 31, 2011, the Company had cash balances at one FDIC insured financial institution of $260,733 in non-interest bearing accounts, which amount does not exceed the related federal deposit insurance.

Note 7.     Prepaid Expenses

On March 12, 2010, the Company paid a $65,000 retainer to a law firm in connection with the patentability phase of the interference proceedings that is to be applied to the final billing.

On April 6, 2010 the Company paid a second $65,000 retainer to a law firm for representation in anticipation of discovery request in connection with a lawsuit between Allvoice Developments, US, LLC and Microsoft Corporation. The retainer is to be applied to the final billing.  Microsoft has filed invalidity contentions relying in part on the Company’s first patent.

Note 8

Stockholder Deficit

On December 8, 2009, the Company issued 350,000 restricted shares of the Company’s common stock, par value $.001 per share to OTC Navigation as deferred compensation in exchange for public relations services for a period of three months.  Shares were valued at $.18 per share on the date of issue, December 8, 2009.  Services were completed April 6, 2010.  Deferred compensation of $63,000 was expensed during the first quarter of 2010.

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Note 9.     Subsequent Events

The Company entered into a Stock Purchase Agreement dated December 22, 2010 with one person who agreed to purchase 2,500,000 restricted shares of the common stock of AVRS for $200,000, payable in three installments on or before March 4, 2011.  On April 19, 2011 the purchaser paid $150,000 for 1,875,000 restricted shares of the Company’s common stock.  The Company agreed to an extension to July 31, 2011 on the $50,000 balance due.

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

The statements contained in this Quarterly Report that are not historical are “forward-looking statements”, which can be identified by use of terms such as “may”, “could”, “should”, “expect”, “plan”, “project”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “pursue”, “target” or “continue”, the negative of such terms or other comparable terminology, although some forward-looking statements may be expressed differently.

The forward-looking statements contained in this 10-Q are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this 10-Q are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to various factors listed in this Quarterly Report. All forward-looking statements speak only as of the date of this 10-Q. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Overview

We are a software development company headquartered in Scottsdale, Arizona, with an office in Mitchell, South Dakota. We specialize in creating interface and application solutions for speech recognition technologies. Our speech recognition software and related firmware was first introduced in 1994 at an industry trade show.  We currently have limited capital resources.  We are not currently engaged in marketing any products.  Our principal assets are our patents.  Our business strategy will be to attempt to interest other companies in entering into license agreements or other strategic relationships and to support and defend our patents through infringement and interference proceedings, as appropriate.

Results of Operations

We completed a stock exchange on May 19, 2008 and changed our business model. We have not generated any revenue since inception and do not have any cash generating product or licensing sales. We are a development stage enterprise that has incurred losses since inception.

At March 31, 2011, we had current assets of $260,733, and current liabilities of $551,950, as compared to $141,393 current assets and $399,147 in current liabilities at March 31, 2010. Our increase in current assets is attributable to our equity funding agreements. Our increase in current liabilities primarily is due to an increase in Accounts Payable during 2010 relating to the interference proceedings.

We had a net loss of $150,238 for the three months ended March 31, 2011, as compared to a net loss of $171,514 for the three months ended March 31, 2010. The decrease in net loss is attributable to decreased professional fees incurred in the three months ended March 31, 2011 in connection with the interference proceedings in the USPTO.

Liquidity and Capital Resources

For the three months ended March 31, 2011, we used $168,604 of cash in operating activities and $3,910 of cash in investing activities, and we received $350,000 of cash from the sale of our common stock. As a result, for the three months ended March 31, 2011, we recognized a $132,173 net increase in cash on hand. For the three months ended March 31, 2010, we used $83,232 of cash in operating activities and $19,645 cash in investing activities, and received $176,310 of cash provided by financing activities, resulting in a $73,433 increase in cash on hand for the year.

Historically, our president has loaned or advanced to us funds for working capital on an “as needed” basis. There is no assurance that these loans or advances will continue in the future. Because of our history of losses, net capital deficit and lack of assurance of additional financing, the audit report on our financial statements contains a “going concern” opinion regarding doubt about our ability to continue as a going concern.

In an attempt to address our financing needs, we have made sales of our common stock in private transactions.

The Company entered into a Stock Purchase Agreement dated March 10, 2010 with two persons each of whom agreed to purchase 5,000,000 restricted shares of the common stock of AVRS for $250,000, payable in five installments on or before June 15, 2010.  As of March 31, 2011, the shareholders made payments totaling $400,000 purchasing 8,000,000 shares of common stock.

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The Company entered into Stock Purchase Agreements dated May 4, 2010 with two shareholders each of whom agreed to purchase 5,000,000 restricted shares of the common stock of AVRS for $400,000 payable in seven installments on or before November 15, 2010.  As of March 31, 2011 the shareholders made payments totaling $20,000 which purchases 250,000 shares of common stock combined. On March 1, 2011 the Company and one purchaser of the stock purchase agreement dated May 4, 2010 signed a mutual termination agreement.  The balance of $390,000 representing 4,875,000 shares of Common Stock was cancelled.

The Company entered into a Stock Purchase Agreement dated December 22, 2010 with one person who agreed to purchase 2,500,000 restricted shares of the common stock of AVRS for $200,000, payable in three installments on or before March 4, 2011.  The amount was unpaid at March 31, 2011.

The Company entered into a Stock Purchase Agreement dated March 9, 2011 with one person who agreed to purchase 4,375,000 restricted shares of the common stock of AVRS for $350,000.  Payment was made in full on March 10, 2011.

If we continue to pursue interference proceedings, or initiate or defend infringement actions, we would expect to incur substantial costs and legal fees that ultimately may not be recoverable.

We will require additional debt or equity financing or a combination of both in order to carry out our business plan. We incurred substantial legal fees and costs in connection with the interference proceeding with Allvoice, and we will likely continue to incur expenses in defending our patents and pursuing license agreements.  We plan to raise additional funds through future sales of our securities, until such time as our revenues are sufficient to meet our cost structure, and ultimately achieve profitable operations. There is no assurance we will be successful in raising additional capital or achieving profitable operations. Our board of directors may attempt to use non-cash consideration to satisfy obligations that may consist of restricted shares of our common stock. These actions would result in dilution of the ownership interests of existing shareholders and may further dilute our common stock book value.

To obtain sufficient funds to meet our future needs for capital, we will from time to time, evaluate opportunities to raise financing through sales of our securities. However, future equity or debt financing may not be available to us at all, or if available, may not be on terms acceptable to us. We do not intend to pay dividends to shareholders in the foreseeable future.

U.S. Patent #5,960,447 includes 42 claims that we believe cover an extremely broad base of features applicable to existing Automatic Speech Recognition products and markets. We intend to use our patent protection to our advantage by licensing or otherwise. If our licensing and other efforts prove successful, our liquidity may increase.

U.S. Patent #7,558,730 expands an extremely broad base of features in speech recognition and transcription across heterogeneous protocols.  Costs totaling $58,277 have been capitalized, and amortization began in the third quarter 2009.

In order for our operations to continue, we will need to generate revenues from our intended operations sufficient to meet our anticipated cost structure. We may encounter difficulties in establishing these operations due to our inability to successfully prosecute any patent enforcement actions or our inability to effectively execute our business plan.

If we do not raise additional capital, or we are unable to obtain additional financing, or begin to generate revenues from our intended operations, we may have to scale back or postpone the development and marketing of our products or the enforcement of our patent rights until such financing is available.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 4.   Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer, who also is our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) and pursuant to Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2011. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms, and that such information is accumulated and is communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and

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procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our chief executive officer, who also is our chief financial officer, concluded that our disclosure controls and procedures are designed at a reasonable assurance level and were fully effective as of March 31, 2011 in providing reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated  to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal controls over financial reporting that occurred during the period covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 1.  LEGAL PROCEEDINGS

As discussed in Note 3 to the Financial Statements in Part I of this 10-Q Report, the Company is involved in a material interference proceeding conducted by the USPTO.  Oral argument before a three judge panel on all issues raised occurred on January 13, 2011.

ITEM 6. EXHIBITS.

INDEX

(1)     Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 1, 2008.

(2)     Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 10, 2008.

(3)     Incorporated by reference from the Company’s Registration Statement on Form SB-2 filed on October 31, 2005.

(4)     Incorporated by reference from the Company’s Current Report on Form 8-K filed on December 18, 2007.

(5)     Incorporated by reference from the Company’s Current Report on Form 8-K filed on February 4, 2008.

(6)     Incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed on February 14, 2008.

(7)     Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 31, 2008.

(8)     Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 21, 2008.

(9)     Incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.

(10)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on October 1, 2008.

(11)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on January 20, 2009.

(12)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 23, 2009

(13)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 1, 2009

(14)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on July 14, 2009

(15)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 30, 2009

(16)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on October 15, 2009

(17)    Incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed on November 13, 2009

(18)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on November 23, 2009

(19)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on December 13, 2009

(20)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on January 15, 2010

(21)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 16, 2010 

(22)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on April 6, 2010 

(23)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on April 12, 2010 

(24)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on April 12, 2010 

(25)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 10, 2010 

(26)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on July 30, 2010 

(27)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on September 2, 2010 

(28)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on September 9, 2010 

(29)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on September 10, 2010 

(30)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on September 27, 2010 

(31)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on October 25, 2010 

(32)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on October 26, 2010 

(33)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on November 1, 2010 

(34)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on November 9, 2010 

(35)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on December 28, 2010 

(36)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 7, 2011 

(37)    Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 15, 2011 

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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.

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