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**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-KSB**

| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF   THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------|

**FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006**

**COMMISSION FILE NUMBER**: **000-32925**

| **AVATAR   SYSTEMS, INC.**                                 |
|------------------------------------------------------------|
| *(Name of Small Business Issuer Specified in Its Charter)* |

| **Texas**                                                          |   | **75-2796037**                         |
|--------------------------------------------------------------------|--------|----------------------------------------|
| *(State or other jurisdiction of incorporation or   organization)* |   | *(IRS Employer Identification Number)* |
|                                                               |   |                                   |
| **2801 Network Blvd., Suite 210,   Frisco, Texas**                 |   | **75034**                              |
| *(Address of principal executive offices)*                         |   | *(Zip Code)*                           |

| **(972)   720-1800**                                             |
|------------------------------------------------------------------|
| *(Registrant’s telephone   number, including area code)*    |
|                                                             |
| Securities registered   under Section 12(b) of the Exchange Act: |
| **None**                                                         |
|                                                             |
| Securities registered   under Section 12(g) of the Exchange Act: |
| **$.001   Par Value Common Stock**                               |

          Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  o

          Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 |   |
|--------|-----|---|--------|----|---|--------|

          Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.   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 |   |
|--------|-----|---|--------|----|---|--------|

          The Issuer’s revenue for its most recent fiscal year was $3,655,453.

          The aggregate market value of the shares held by non-affiliates was approximately $930,600 based upon the last trade price of $1.10 per share of Common Stock on the OTC Bulletin Board as of April 12, 2007.

          As of April 12, 2007, 9,038,152 shares of the Issuer’s $0.001 par value common stock were outstanding.

          The following documents are incorporated by reference: None

          Transitional Small Business Disclosure Format (Check one):

|   | Yes    | o      |   | No     | x      |   |
|--------|--------|--------|--------|--------|--------|--------|
|   |   |   |   |   |   |   |
|        |

**TABLE OF CONTENTS**

| **PART I**   | **2**                                                                                                                       |
|--------------|-----------------------------------------------------------------------------------------------------------------------------|
|         | Item 1. Description of Business                                                                                             | 2 |
|         | Item 2. Description of Properties                                                                                           | 10 |
|         | Item 3. Legal Proceedings                                                                                                   | 11 |
|         | Item 4. Submission of Matters to a   Vote of Security Holders                                                               | 11 |
| **PART II**  | **12**                                                                                                                      |
|         | Item 5. Market for Common Equity   and Related Shareholder Matters                                                          | 12 |
|         | Item 6. Management’s Discussion   and Analysis of Financial Condition or Plan of Operations                            | 13 |
|         | Item 7. Financial Statements                                                                                                | 29 |
|         | Item 8. Changes In and   Disagreements with Accountants on Accounting and Financial Disclosure                              | 66 |
|         | Item 8a. Controls and Procedures                                                                                            | 66 |
|         | Item 8b. Other Information                                                                                                  | 66 |
| **PART III** | **67**                                                                                                                      |
|         | Item 9. Directors, Executive   Officers, Promoters and Control Persons; Compliance with Section 16(A) of the   Exchange Act | 67 |
|         | Item 10. Executive Compensation                                                                                             | 68 |
|         | Item 11. Security Ownership of   Certain Beneficial Owners and Management and Related Stockholder Matters                   | 70 |
|         | Item 12. Certain Relationships and   Related Transactions                                                                   | 71 |
|         | Item 13. Exhibits                                                                                                           | 72 |
|         | Item 14. Principal Accountant Fees   and Services                                                                           | 73 |
|         | Signatures                                                                                                                  | 74 |

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**PART I**

**Item 1. Description of Business**

**     Business Development**

          Avatar Systems, Inc. (“Avatar”, the “Company”, or “we”) provides enterprise resource solution software to companies engaged in the petroleum exploration and production industry.  We offer integrated software solutions for automating and integrating data and work flows across the petroleum industry, as well as the information flows between the petroleum organization and external parties.  Our products are intended to increase operational efficiency, improve the accuracy of client information, and enable better decision-making.  Each solution focuses on specific mission-critical functions of the petroleum organization and is tailored to meet the needs of the particular client, as determined by size, properties under management and complexity of the petroleum industry.

          Avatar Systems, Inc. began business on September 1, 1996 as Avatar Systems, Ltd., a Texas limited partnership, in connection with the acquisition of Information Resources, Inc.

          On July 7, 2000, the limited partners assigned their respective partnership interests to Avatar International, Inc. for 6,399,000 shares of Avatar International’s common stock.  The partnership assigned all of its assets and liabilities to Avatar International and was dissolved.  On July 10, 2000, Avatar International changed its name to Avatar Systems, Inc.

          On November 14, 2000, HCI Acquisition 1998-2, Inc.(“HCI”) acquired all of the outstanding common stock of Avatar Systems, Inc. pursuant to a plan and agreement of merger.  The Avatar Systems common stock was acquired from its four shareholders in exchange for 8,000,000 shares of HCI’s common stock representing approximately 92% of the HCI’s common stock.  HCI, as the surviving entity, changed its name to Avatar Systems, Inc., its sole officer and director resigned and HCI’s shareholders elected five new directors, who were also serving as directors of Avatar Systems.

          HCI was incorporated in Texas on August 7, 1998 as a wholly-owned subsidiary of Hospitality Companies, Inc., which was engaged in the leasing, sale and servicing of refrigeration, air conditioning and restaurant equipment.

          On August 18, 2006, the Company acquired all the outstanding common stock of Questa Software Systems, Inc. (“Questa”) pursuant to a Stock Purchase Agreement.  Questa, located in Midland, Texas, was engaged in the development of accounting software for the petroleum production industry.  The purchase price was approximately $2.24 million, subject to certain post-closing adjustments based on Questa’s actual working capital as of the closing date.

          The acquisition of Questa provides for economies of scale to be achieved by eliminating redundant expense items including major development costs, solidifies our recurring maintenance revenue stream, and increases the professional capacity of our human resources.

          Operating results of Questa have been included in the Company’s financial statements since August 1, 2006, when the Company assumed the risk of loss for Questa’s operations, by recording the transaction from that date directly in the accounts of the Company.

          Avatar’s stock symbol is AVSY.OB.  Our common stock began trading on the Over-the-Counter Pink Sheets on April 2, 2001.  On November 5, 2001, our Registration Statement on Form 10-SB became effective and our stock was approved for trading December 19, 2001 on the NASD OTC Bulletin Board.

          On our investor relations web site, which is accessible through www.avatarsystems.net, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”): our annual reports on Form 10-KSB, our quarterly reports on Form 10-QSB, our current reports on Form 8-K and any amendments to those reports. All such filings on our investor relations web site are available free of charge.  Information contained or referenced on our website is not incorporated by reference in and does not form a part of this Annual Report on Form 10-KSB.  The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that is filed electronically with the SEC.

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          Our principal executive offices are located at 2801 Network Boulevard, Suite 210, Frisco, Texas 75034, and our telephone number is (972) 720-1800. 

**     Industry Background**

          The petroleum industry is a data-intensive and complex global industry.  The industry consists of three distinct sectors: upstream, midstream and downstream.

|   | • | Upstream activities include exploration, producing   and selling crude oil, natural gas and gas liquids.                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | Midstream activities typically include the   gathering, transportation, and storage of petroleum products.                                                              |
|   | • | Downstream activities include refining crude oil   into petroleum products, trading crude oil and petroleum products and   distributing and marketing refined products. |

          Within the upstream sector, the exploration and production divisions of oil and gas companies are chartered with finding, developing and managing the production of oil and gas reserves.  Petroleum companies need to continually add new reserves of oil and gas at a faster rate than existing reserves are depleted.  Optimizing a portfolio of oil and gas reserves is an ongoing process, whereby, petroleum companies explore, evaluate, develop, manage and divest petroleum interests.

          The discovery, evaluation, acquisition and processing of properties within the upstream petroleum industry are typically cumbersome, costly, and time-consuming and are characterized by:

|   | • | Data-Intensive, Paper-Based Processes.  Large amounts of geotechnical,   engineering, land-related, financial and accounting data must be compiled and   integrated from disparate, non-standardized, paper-based and digital sources   in order to evaluate and manage properties. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | Geographic Dispersion of Resources.  Many new exploration and development   projects are conducted in remote parts of the world, creating significant   costs and numerous insufficiencies in the management of an upstream business.                                               |
|   | • | Lack of Back Office Interconnectivity.  The ability of companies to exchange data   electronically and effect transactions in an efficient manner is currently   limited by the numerous incompatible back office land, production and   accounting systems.                        |

          The energy application market has grown, as major U.S. oil companies have divested many of their U.S.-based assets, in order to pursue opportunities abroad.  These divestitures have opened the door for small independent oil companies to acquire the assets of the major oil companies.  There is a growing demand for oil and gas accounting and financial software because of the growth of these small independent oil companies.

          The computer infrastructure within the petroleum industry has been allowed to age beyond what is traditionally considered the useful life span of many of its component elements.  The challenges facing the petroleum industry are how to take advantage of the anticipated increase in demand, confront the problem of aging IT infrastructure, and deal with the ongoing attrition of the work force.  These challenges will be met by changes in the business processes of oil and gas companies to work with fewer people, make efficient use of technology, and move away from capital-intensive computing systems. The oil industry will become a more streamlined and efficient industry based upon technology and services, an enterprise wide resource solution, supplied through application service providers (“ASP”).  These ASP’s will offer enhanced outsourcing capabilities including not onlyapplications, but through professional services including consulting, implementation, integration, software and industry training.

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**     Narrative Description of Business**

**     Products**

          Avatar provides the petroleum industry with solutions for accounting/financial management, production and land management, oil and gas marketing and electronic data exchange on both a licensed basis and as an (ASP).

          We provide technology products and services to support the ongoing management of an upstream petroleum business and to facilitate the processing of oil and gas transactions through the back office systems of buyers, sellers, and traders.  We offer a full line of accounting, resource management, and document management software for the petroleum industry through our Avatar400, Petroware2000, Integra Energy and ISYNERGY product lines.  Our products offer a variety of applications specific to the accounting, billing, financial analysis, document management and land, royalty and production management functions of a petroleum company.

**     Petroware2000**

          Petroware2000 runs on all major operating systems and hardware types, including Microsoft Windows, Hewlett Packard and IBM products.  Petroware2000 runs on virtually any platform and is available in single and multi-user licenses and on an ASP basis.  Petroware2000 utilizes the speed, power, flexibility, and infinite expandability of IBM’s DB2 database environment to insure reliability, extended product longevity and substantially faster processing speeds.  Our Petroware2000 product is designed for the small- to medium-sized petroleum company.

**     Integra Energy**

          The Integra Energy Management Software System provides accounting, land, production, field capture and drilling operations software for domestic oil & gas operators, investors, and drilling companies.  The 32-bit Microsoft Windows compliant product utilizes industry standard high performance relational database technology to bring companies flexible, fully integrated solutions that adapt and improve with advances in technology.  Comprehensive support for EDI, eCommerce and EFT are incorporated into the products via uploads, downloads and support for industry standard data exchange and interfaces for CDEX, JIBE, CODE, GRADE, IHS/PI/Dwights, Aries, GeoGraphix, Federal and State electronic filing.  Integra’s extended database technology supports multiple database platforms including but not limited to the following:  Microsoft SQL Server, Oracle and IBM DB2.Avatar400

          Avatar 400 provides a comprehensive accounting system, which delivers real time information from the database to users.  This product takes advantage of the scalability and security of the IBM AS400 line of servers and utilizes the advanced features of IBM technology allowing energy customers to obtain accurate and timely information.  Avatar400, which was designed primarily for use by major petroleum companies, provides an extensive array of data elements and multiple sorting capabilities.  It automatically generates a host of reports, including lease/well management reports, financial reports and accounting reports.  Avatar400 offers a complete selection of real-time accounting software modules which include general ledger, accounts payable, accounts receivable, revenue accounting, joint interest billing, partnership accounting, depletion (cost & statutory), fixed assets (GAAP& tax), budgeting and revenue accrual.  Additionally, our Avatar400 product provides functionality for production management, oil and gas marketing, field inventory and data exchange interfaces between accounting and engineering systems.

**     ASP Products**

          Our Petroware, Integra, and RAPID, or Remote Access Private Integrated Datalink ASP systems deliver enterprise resource solutions to petroleum companies on a worldwide basis.  Our ASP products were developed to reduce the high costs of oil and gas accounting software ownership.  Users remotely connect to our IBM AS400 or Citrix farm servers on a subscription basis, thereby, eliminating the need for expensive in-house hardware solutions, software purchases, and eventual upgrades.  Our ASP solutions provide access to high availability, secure, fast processing servers for a limited monthly expenditure and reduce, or eliminate, the need for expensive in-house information technology personnel.

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**     iSYNERGY**

          iSYNERGY is an enterprise class, integrated information management software.  It combines document and data capture, process automation, workflow, imaging, enterprise report management, and secured access in a single, browser-based application.  iSYNERGY provides the capability to dynamically organize and control the delivery of documents and data  to increase productivity and share information among employees, partners, and customers.  iSYNERGY integrates with CRM, ERP, accounting and other enterprise applications providing a scalable framework for functional expansion and for managing the entire enterprise document infrastructure.  iSYNERGY eliminates unnecessary manual processes and time consuming searches for paper documents and files which in turn reduces costs and increases productivity.

**     Support and Maintenance Services**

          Due to the mission-critical nature of our products, most clients purchase annual support and maintenance, which entitles them to technical support and product upgrades as they become available. We continually upgrade and enhance our products to respond to changing market needs, evolving regulatory requirements, and new technologies. 

**     Professional Services**

          Professional services consist of consulting, implementation, integration, custom report writing, and training.  Many of our clients purchase consulting services from us to support their implementations, assist in the conversion of their historical data and provide ongoing training and education.  We believe that consulting services facilitate a client’s early success with our products, strengthen the relationship with the client, and generate valuable feedback for our product development group.

**          Growth Strategy**

**     Leveraging Existing Customer Relationships**

          We have an installed base of more than 600 customers.  Existing customers expanding or upgrading their information solutions provide us with a market for additional software solutions and services. The majority of our revenues are generated from existing customers.

**     Developing and Enhancing New Technologies**

          Our product development efforts are focused on developing new solutions as well as enhancing and broadening our current software solutions. New solutions will continue to emphasize state-of-the-art technologies for Internet-enablement and information exchange.  During fiscal 2007, our product development efforts will include rollout of production /land modules for our Petroware2000 product, DASHBOARD, and further integration of imaging functionality in our Petroware2000, Integra, and AS400 products.

**     Pursuing Acquisitions and Strategic Alliances**

          We have successfully completed three acquisitions since 1996.  We will continue to evaluate potential acquisitions of other companies or technologies to further expand our solutions, services, or market penetration.  In addition, as we expand in our markets, we intend to enter into additional sales and marketing strategic alliances in such markets.  We believe that new technical skills, expanded software functionality, a broader client base and an expanded geographic presence may result from these activities.

**     Expanding ASP Hosting Business**

          We have offered our AS400 RAPID ASP services since 1999.  We began offering our Petroware2000 product as an ASP service in early 2004.  Our ASP offerings allow customers to free up resources to concentrate on their core competencies and strategic projects. The ASP business model provides us with a growing source of recurring revenue.  Our ASP hosting centers allows us to meet customer demands as well as offer off-site backup and disaster recovery capabilities to our customers.

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**     Sales and Marketing**

          Our marketing plan is geared to penetrate the energy market.  We use regional distributors, trade shows, advertising, conferences, direct mail, telemarketing, referral base, and a written incentive-based compensation plan for our sales representatives to grow our market share.  We maintain a database of over 15,000 domestic oil and gas companies registered with Dunn and Bradstreet.  Additionally, we have engaged research consultants to access public records as filed with state regulatory agencies by oil and gas companies.  Product demonstrations can be provided via the Internet, direct modem connection to customer site, in person at the customer site or at our office in Frisco.

          To discover opportunities to sell our products and Internet integration solutions, we call on our existing customer base, as well as leads we receive from customers, inquiries in response to tradeshows and advertisements.  We conduct a variety of marketing programs to educate our target market, create awareness, and attract visitors to our products.

          Our web site (www.avatarsystems.net) provides customer leads and promotes our products and services over the Internet.  Our web site is also used to provide current customers information on new products and services, training dates and Company sponsored seminars.

**     Competition**

          The market for enterprise information solutions is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. We face direct and indirect competition from a broad range of competitors, many of whom have greater financial, technical and marketing resources than we do.  We face competition from other traditional oil and gas service providers, as well as from Internet companies who have established websites and who are pursuing various e-commerce initiatives in bringing accounting solutions to the petroleum industry.  Many of our competitors are large well-financed companies who provide an array of accounting and financial management solutions to the petroleum industry.

**     Customers**

          The Company had no customers that accounted for more than 10% of revenue during the year ended December 31, 2006 or 2005.

**     Suppliers**

          Our primary supplier is IBM.  We purchase most of our equipment for internal use and resale purposes from IBM.  Additionally, we purchase from IBM the database product and other value-added enhancements used in our Avatar400 and Petroware2000 products.  We do not believe the loss of IBM, as a supplier will have a material adverse effect on our business since the products we purchase from IBM are readily available from a number of other vendors.

**     Licenses, Franchises, Concessions, Royalty Agreement, Patents, Trademarks or Labor Contracts**

          Our success depends significantly upon our proprietary technology.  We currently rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights.  We hold copyrights and trademarks to all of our products including, Avatar400, RAPID, Petroware2000, Integra, and Petroware Version 6.  We generally enter into confidentiality agreements with our employees and with our resellers and customers.  We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection.  Despite these efforts, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use our proprietary information.

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          We also rely on certain software that we license from third parties, including software that is integrated with internally developed software and used in our solutions to perform key functions. These third-party software licenses may not continue to be available to us on commercially reasonable terms and the related software may not continue to be appropriately supported, maintained or enhanced by the licensors. The loss of licenses to use, or the inability of licensors to support, maintain, and enhance, any of such software could result in increased costs, delays or reductions in software shipments until equivalent software could be developed or licensed and integrated.

**     Regulatory and Environmental Matters**

          Few laws or regulations are currently directly applicable to our access to or our conducting business on the Internet.  However, because of the Internet’s popularity and increasing use, new laws and regulations may be adopted.  Such laws and regulations may cover issues such as; user privacy, pricing, content, copyrights, distribution, and characteristics and quality of products and services.  Currently, we do not need any governmental approval for our products or services.

          In addition, the growth of the Internet and electronic commerce, coupled with publicity regarding Internet fraud, may lead to the enactment of more stringent consumer protection laws.  These laws may impose additional burdens on our business.  The enactment of any additional laws or regulations may impede the growth of the Internet, which could decrease our potential revenue from electronic commerce or otherwise adversely affect our business, financial condition, and operating results.

          Laws and regulations directly applicable to electronic commerce or Internet communications are becoming more prevalent. Various state jurisdictions are considering legislation directed to electronic commerce which if enacted could affect our business.  The applicability of many of these laws to the Internet is uncertain and could expose us to substantial liability.  Any new legislation or regulation regarding the Internet, or the application of existing laws and regulations to the Internet, could materially and adversely affect us.  If we were alleged to violate federal, state or foreign, civil or criminal law, even if we could successfully defend such claims, it could materially and adversely affect us.

**     Product Development**

          Our capitalized software development costs have been focused on the development of our Avatar400, Petroware2000 and Integra products.  We capitalize software development costs applicable to each product after technological feasibility has been established until the product is released to the market.  In 2006 and 2005, our product development expenditures were $754,852 and $628,644, respectively.

**     Employees**

          As of  December 31, 2006, we had 23 employees, of which 1 was engaged in professional services, 14 in product development and customer support, 4 in sales and marketing, 3 in finance and administration and 1 in information technology.  We believe our future success will depend, in part, on our continued ability to attract and retain highly qualified personnel in a competitive market for experienced and talented software engineers and sales and marketing personnel.  Our success depends, to a significant extent, upon the continued contributions of our senior management and other key personnel, many of whom would be difficult to replace.  None of our employees are represented by a labor union or are subject to a collective bargaining agreement.  We believe that our employee relations are strong.

**     Risk Factors and Other Trends and Uncertainties Affecting Future Operations**

          Investors should carefully consider the risks described below before making an investment decision. These risks are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Form 10-KSB report, including our financial statements and related notes. 

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**WE INTEND TO GROW OUR BUSINESS BY ACQUIRING OTHER COMPANIES OR TECHNOLOGIES.  IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY, ACQUIRE, AND INTEGRATE NEW COMPANIES OR TECHNOLOGIES, OUR BUSINESS WILL BE HARMED.**

          We have grown our business primarily through the acquisition of other companies and assets and plan to continue this growth strategy for the foreseeable future.  If we are unsuccessful in identifying, acquiring, and integrating other companies, we may not achieve our anticipated levels of growth.  A substantial portion of our current revenue is derived from businesses or technologies that we have acquired. Although we continually evaluate acquisition opportunities, we may be unable to identify suitable acquisition candidates or successfully negotiate or finance any future acquisitions. We may also be unable to effectively integrate any acquired companies.

          Acquiring other companies or technologies involves many risks and difficulties, including:

| • | diversion of management’s attention from our   existing business;                                                                                                                                                                                      |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | increased fixed costs, which could cause profits to   decrease;                                                                                                                                                                                             |
| • | assumption of unknown material liabilities of   acquired companies;                                                                                                                                                                                         |
| • | large write-offs and amortization expenses related   to goodwill and other intangible assets;                                                                                                                                                               |
| • | difficulty in integrating an acquired company’s   personnel and culture with our personnel and culture;                                                                                                                                                |
| • | difficulty in integrating an acquired company’s   accounting and information systems with our accounting and information   systems;                                                                                                                    |
| • | difficulty in maintaining standards, controls,   procedures and policies across the combined companies;                                                                                                                                                     |
| • | issuances of equity securities that may dilute your   interest in our company;                                                                                                                                                                              |
| • | incurring additional debt; and                                                                                                                                                                                                                              |
| • | disruption of our ongoing business and operations,   which could, among other things, impair our reputation and our relationships   with customers and employees and potentially cause the loss of our own key   employees or those of an acquired company. |

**FAILURE TO MANAGE OUR GROWTH COULD RESULT IN INEFFICIENT OPERATIONS.**

          Our acquisition strategy could strain our infrastructure, management, internal controls and financial systems. We may not be able to effectively manage our present growth or any future expansion, which could cause substantial increases in our operating costs without corresponding increases in our revenue.  To support our growth, we will need to continue to hire qualified employees in all areas of our business. This planned strategy could strain our ability to integrate and properly train our new employees. Inadequate integration and training of our employees may result in an inefficient workforce and may harm our operating results.

**WE MUST CONTINUE TO INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTS.**

          The market for our products is characterized by rapid technological change, changes in customer demands and evolving industry standards. New products based on new technologies or new industry standards can render existing products obsolete and unmarketable. As a result, our future success will continue to depend upon our ability to develop new products or product enhancements that address the future needs of our target markets and to respond to these changing standards and practices. We may not be successful in developing, introducing and marketing new products or product enhancements on a timely and cost effective basis, or at all, and our new products and product enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. Delays in the commencement of commercial shipments of new products or enhancements may result in client dissatisfaction and delay or loss ofproduct revenue.  If we are unable, for technological or other reasons, to develop and introduce new products or enhancements of existing products in a timely manner in response to changing market conditions or client requirements, or if new products or new versions of existing products do not achieve market acceptance, our business would be seriously harmed.  In addition, our ability to develop new products and product enhancements is dependent upon the products of other software vendors, including certain system software vendors, such as Microsoft Corporation, IBM and development tool vendors. If the products of such vendors have design defects or flaws, are unexpectedly delayed in their introduction, or are unavailable on acceptable terms, our business could be seriously harmed.  Our software products are complex and may contain undetected defects or errors when first introduced or as new versions are released.  Although we have not experienced adverse effects resulting from anysoftware errors, we cannot be sure that, despite testing by us and our clients, defects or errors will not be found in new products after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could seriously harm our business.

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**FAILURES OF HARDWARE SYSTEMS OR SOFTWARE COULD UNDERMINE CUSTOMER CONFIDENCE IN THE RELIABILITY OF OUR PRODUCTS AND SERVICES, WHICH COULD HARM OUR BUSINESS AND REPUTATION.**

          There are a number of circumstances that can lead to a customer having an unsatisfactory experience with our solutions.

          Some of our products and services require our customers to access our web site through the Internet.  To do so, they must be connected to the Internet and have sufficiently current hardware, operating system software, web browsers and other software. Because of the complex nature of software and hardware and the rapidly evolving nature of technology, a customer’s system may become incompatible with our products or services.  As a result, a customer may be unable to access our products or services or their access may be interrupted or delayed while using our products or services.

          A significant disruption in our Internet services or the Internet service of our customers could seriously undermine their confidence in our business.  During a disruption, participants may lose their online connection for an extended period and be unable to access our Internet marketplace.

          Many of our products and services depend on complex software that is both internally developed and licensed from third parties. Complex software often contains defects, particularly when first introduced or when new versions are released.  Although we test our software, we may not discover software defects that affect current or planned services or enhancements until after they are deployed.  These defects could cause service interruptions.

          Any of these events could lead to customer dissatisfaction with one or more of our solutions, damage our reputation, increase our service costs, cause us to lose revenue, delay market acceptance, result in legal proceedings against us or divert our development resources, any of which could cause our business to suffer.

**SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING BUSINESS.**

          A significant barrier to commerce and communications over public networks is the secure transmission of confidential information.  Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other web sites to protect proprietary information.  If any well-publicized compromises of security were to occur, it could have the effect of substantially reducing the use of the internet for commerce and communications.  Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations.  The internet is a public network, and data is sent over this network from many sources.  In the past, computer viruses, software programs that disable or impair computers, have been distributed and haverapidly spread over the internet.  Computer viruses could be introduced into our systems or those of our customers or other third parties, which could disrupt or make it inaccessible to customers.  We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches.  To the extent that our activities may involve the storage and transmission of proprietary information, security breaches could expose us to a risk of loss or litigation and possible liability.  Our security measures may be inadequate to prevent security breaches, and our business would be harmed if our security were breached. 

**IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY BE SUBJECT TO INCREASED COMPETITION THAT COULD SERIOUSLY HARM OUR BUSINESS.**

          Our success depends significantly upon our proprietary technology.  We currently rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights.  We generally enter into confidentiality agreements with our employees and with our resellers and customers.  We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Despite these efforts, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use our proprietary information.  In addition, we cannot be certain that others will not develop substantially equivalent or superseding proprietary technology, or that equivalent products will not be marketed in competition with ourproducts, thereby substantially reducing the value of our proprietary rights.  Litigation may be necessary to protect our proprietary technology.  This litigation may be time-consuming and expensive.  

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**WE MUST RETAIN KEY EMPLOYEES AND RECRUIT QUALIFIED TECHNICAL AND SALES PERSONNEL.**

          We believe that our success will depend on the continued employment of our senior management and other key personnel.  Additionally, our continued success depends, in part, on our ability to identify, attract, motivate, and retain qualified technical, sales and other personnel.  Because our future success is dependent on our ability to continue to enhance and introduce new products, we are particularly dependent on our ability to identify, attract, motivate and retain qualified engineers with the requisite education, backgrounds and industry experience.  The loss of the services of a significant number of our engineers or sales people could be disruptive to our development efforts or business relationships and could seriously harm our business.  We may also be required to create additional performance and retention incentives in order to retain our employees, including the granting ofadditional stock options to employees at current prices or issuing incentive cash bonuses.  Such incentives may either dilute our existing stockholder base or result in unforeseen operating expenses, which may cause our stock price to fall.

**OUR OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS AND THEIR AFFILIATES HAVE SUBSTANTIAL CONTROL OVER OUR BUSINESS.**

          Our executive officers, directors, and major stockholders beneficially own, in the aggregate, approximately 92% of our common stock.  These stockholders, if they vote together, will be able to significantly influence matters that our stockholders must approve, including electing directors and approving significant corporate transactions.  This concentration of ownership may also have the effect of delaying or preventing us from effecting a change in control, which could cause our stock price to decline.

**RECENTLY ENACTED AND PROPOSED CHANGES IN SECURITIES LAWS AND REGULATIONS WILL INCREASE OUR COSTS.**

          The Sarbanes-Oxley Act (“the Act”) of 2002, which became law in July 2002, requires changes in some of our corporate governance and securities disclosure and/or compliance practices. As part of the Act’s requirements, the Securities and Exchange Commission has been promulgating new rules on a variety of subjects, in addition to other rule proposals, and the NASDAQ Stock Market has enacted new corporate governance listing requirements.  We believe these developments will increase our accounting and legal compliance costs and could expose us to additional liability.  These developments may make retention and recruitment of qualified persons to serve on our board of directors or executive management more difficult.  We are presently evaluating and monitoring regulatory and legislative developments and cannot reliably estimate the timing or magnitude of additional cost we willincur as a result of the Act or other related legislation or regulation.

**AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR OUR COMMON STOCK**

          There is not an established active public market for our common stock.  No assurance can be given that an active market will exist for our common stock.

**Item 2. Description of Properties**

          The Company leases its 6,192 square foot facility at 2801 Network Boulevard, Suite 210, Frisco, Texas, 75034.  The lease for the corporate office was entered into on July 29, 2005 for a one hundred twenty-month lease term commencing on November 1, 2005 and expiring on October 31, 2015.

          As part of the acquisition of Questa, the Company assumed the lease of a 7,197 square foot facility at 10 Desta Drive, Suite 250 West, Midland, Texas 79705.  The original lease for the Midland facility was entered into on November 14, 2005 for a seventy-five month lease term commencing on January 1, 2006 and expiring on March 31, 2012.

-10-

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          The Company leases a 1,496 square foot facility at 6 Desta Drive, Suite 3350, Midland, Texas 79705.  The lease for the Midland facility was entered into on June 1, 2006 for a twelve-month lease term commencing on October 1, 2006 and expiring on September 30, 2007.

          The Company leases a 250 square foot facility at 1901 Rickety, Suite 216, Tyler, Texas.  The lease for the Tyler facility was entered into on June 23, 2006 for a twelve-month lease term commencing on July 1, 2006 and expiring on June 30, 2007.

**Item 3. Legal Proceedings**

          From time to time, we are involved in litigation incidental to the conduct of our business.  We are not party to any lawsuit or proceeding that, in our opinion, is likely to seriously harm our business.

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

          None.

-11-

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**PART II**

**Item 5. Market for Common Equity and Related Shareholder Matters**

          Our common stock began trading on the Over-the-Counter Pink Sheets on April 2, 2001.  On November 5, 2001, our Registration Statement on Form 10-SB became effective and our stock was approved for trading on December 19, 2001, on the NASD OTC Bulletin Board.  During 2006, there was only nominal trading in the shares of our common stock.  No assurance can be given that an active market will exist for our common stock in the future.  On April 12, 2007, the last date reported for our common stock, the closing bid price was $1.05 and the closing ask price was $1.15.  Our trading symbol is AVSY.OB.

**     Holders**

          As of April 12, 2007, the Company had approximately 450 shareholders of record, its common stock had a closing bid price of $1.05 per share, and a closing ask price of $1.15 per share.

**     Dividends**

          We have not declared any dividends on our common stock during the last two fiscal years and we do not expect to declare dividends in the near future since we intend to utilize our earnings, if any, to finance our future growth, including possible acquisitions.

**     Securities Authorized for Issuance under Equity Compensation Plans**

| **Plan category**                                            |   | **Number of   securities   to be issued upon   exercise of   outstanding options,   warrants and rights** |               | **Weighted-average   exercise price of   outstanding options,   warrants and rights** |   | **Number of   securities   remaining available for   future issuance under   equity compensation plans   (excluding securities   reflected in column (a))** |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|--------------------|---------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                              |   |                                                                                                           |                    |                                                                                  |        |                                                                                                                                                             |   |  |  |   |
| Equity compensation plans   approved by security holders     |   |                                                                                                      | —   |                                                                                  | $      | —                                                                                                                                            |   |   | —   |   |
| Equity compensation plans   not approved by security holders |   |                                                                                                      | 1,276,477          |                                                                                  | $      | 0.528                                                                                                                                                       |   |   | 1,223,523 |   |
|                                                         |   |                                                                                                           |                    |                                                                                  |        |                                                                                                                                                             |   |  |  |   |
| Total                                                        |   |                                                                                                      | 1,276,477          |                                                                                  | $      | 0.528                                                                                                                                                       |   |   | 1,223,523 |   |
|                                                         |   |                                                                                                           |                    |                                                                                  |        |                                                                                                                                                             |   |  |  |   |

          See Note 5 in the accompanying notes to the financial statements for a description of the 2000 Stock Compensation Plan and other Non-Qualified Stock Options.

-12-

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**Item 6. Management’s Discussion and Analysis of Financial Condition or Plan of Operations**

**     Forward Looking Statements**

          This report contains forward-looking statements, other than historical facts, which reflect the view of Company’s management with respect to future events.  Such forward-looking statements are based on assumptions made by and information currently available to the Company’s management.  Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.  Important factors that could cause actual results to differ materially from such expectations include, without limitation, the ability of the Company i) to generate levels of revenue and adequate cash flows from its operations to support and maintain its current cost structure and ii) to develop and deliver products that are competitive, accepted by its markets and are not rendered obsolete by changingtechnology.   The forward-looking statements contained herein reflect the current views of the Company’s management with respect to future events and are subject to these factors and other risks, uncertainties and assumptions relating to the operations, results of operations and financial position of the Company.  The Company assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those contemplated by such forward-looking statements.

**     1. Critical Accounting Policies and Estimates**

**          Use of Estimates and Certain Significant Estimates**

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Significant assumptions and estimates are required in the capitalization and amortization of software development costs.  It is at least reasonably possible these estimates could be revised in the near term and the revisions could be material.

**          Concentrations of Credit Risk**

          Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable.  Products are sold to customers located principally in the United States.  The Company continually evaluates the creditworthiness of its customers’ financial condition and generally does not require collateral.  The Company evaluates the collectability of its accounts receivable based on a combination of factors.  In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, the Company records a specific reserve for bad debts against amounts due.  The Company has not experienced significant losses on uncollectible accounts receivable.

**          Fair Value of Financial Instruments**

          In accordance with the reporting requirements of Statement of Financial Accounting Standards (“SFAS”) No. 107, *Disclosures About Fair Value of Financial Instruments,* the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this statement and includes this additional information in the notes to financial statements when the fair value is different than the carrying value of these financial instruments.  The estimated fair value of accounts receivable, accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these instruments.  The carrying value of short and long-term debt and capital lease obligations also approximates fair value since these instruments bear market rates of interest.  None of these instruments are held for trading purposes.

**          Marketable Securities**

          Marketable securities at December 31, 2006 and 2005 consisted of corporate equities.  SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*, requires certain investments be recorded at fair value or amortized cost.  The appropriate classification of the investments in marketable equity is determined at the time of purchase and re-evaluated at each balance sheet date.  As of December 31, 2006 and 2005, the Company’s marketable securities were classified as available-for-sale, which are carried at fair value, with unrealized gains and losses reported as other comprehensive income or loss within the stockholders’ equity section of the accompanying balance sheets.  The cost of marketable equity securities sold is determined on a specific identification basis.  The fair value of marketable equity securities is based on quoted marketprices.

-13-

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**          Software Development Costs**

          The Company capitalizes the costs of developing and testing new or significantly enhanced software products in accordance with the provisions of SFAS No. 86, *Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed*.  Under SFAS No. 86, all costs incurred to establish technological feasibility of a computer product are charged to operations as incurred.  After technological feasibility is established, costs of developing the computer software product are capitalized until the product is available for general release to customers.  The Company capitalized $754,852 and $628,644 of software development costs during the years ended December 31, 2006 and 2005, respectively.  Capitalized software development costs are amortized using the greater of the amount computed by the ratio of current year net revenue to estimated future net revenue of the product,or the amount computed by the straight-line method over a period that approximates the estimated economic life of the products, which historically has been seven years.  The amount, by which unamortized software costs exceed the net realizable value, if any, is recognized in the period the excess is determined.  No charge was recorded in 2006 or 2005 for unamortized software costs that exceeded the net realizable value.  Amortization of capitalized developed software charged to expense was $406,049 and $390,120 for the years ended December 31, 2006 and 2005, respectively.

**          Impairment of Long-Lived Assets**

          The Company reviews its long-lived assets and certain identifiable intangibles for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amounts of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the assets based on estimated future cash flows.  During the years ended December 31, 2006 and 2005, the Company recorded no impairment charges.

**          Revenue Recognition**

          The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*, as amended by SOP 98-9, *Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions*, Staff Accounting Bulletin (“SAB”) No. 104, *Revenue Recognition,*and Emerging Issues Task Force (“EITF”) No. 00-21, *Revenue Arrangement with Multiple Deliverables.*

          The Company recognizes revenue from the licensing of software when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable, and collection of the resulting receivable is reasonably assured. 

          Maintenance agreements are renewable on an annual basis, include rights to upgrades, when and if available, telephone support, updates, enhancements (when not separately priced and marketed), and bug fixes.  Maintenance fees are charged in the initial licensing year and for renewals of annual maintenance in subsequent years.  Revenue is recognized for maintenance ratably over the contract term. 

          Other recurring revenue services are offered on a subscription-basis.  Subscription-based revenues are recognized ratably over the term of the agreement. 

          Professional services including implementation, data conversion, integration, custom report writing and training are generally billed based on hourly rates together with reimbursement for travel and accommodation expenses.  Professional services offered are not essential to the functionality of the software sold.

          Hardware sales are recorded as revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) 104, *Revenue Recognition*.  Revenue is recognized when title and/or risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured.  Revenue is recognized under the gross method in accordance with Emerging Issues Task Force (“EITF”) 99-19, *Reporting Revenue Gross as a Principle vs. Net as an Agent*.  As such, revenue includes the value of the product sold.

-14-

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          **Stock-based Compensation**

          On January 1, 2006, the Company adopted SFAS No. 123(R), *Share-Based Payment*, and has elected to use the modified prospective method, which requires the application of the accounting standard to all share-based awards issued on or after January 1, 2006 and any outstanding share-based awards that were issued but not vested as of January 1, 2006.  Accordingly, the financial statements as of December 31, 2006 and 2005, and for the years then ended have not been restated to reflect the impact of SFAS No. 123(R).  For the twelve months ended December 31, 2006, the adoption of SFAS No. 123(R) resulted in incremental stock-based compensation expense of $7,341.

          Prior to the adoption of SFAS 123(R), the Company applied Accounting Principles Board (“APB”) No. 25 to account for its stock-based awards.

**          Inflation**

          We do not believe that inflation has materially affected our results of operations.

**     2. Acquisition**

          On August 18, 2006, the Company acquired all the outstanding common stock of Questa Software Systems, Inc. (“Questa”) pursuant to a Stock Purchase Agreement.  Questa, located in Midland, Texas, was engaged in the development of accounting software for the petroleum production industry.  The purchase price was approximately $2.24 million, subject to certain post-closing adjustments based on Questa’s actual working capital as of the closing date.  The $2.24 million purchase price consisted of:

|   | • | cash paid to the Sellers in the aggregate amount of   $1,790,634;                                                                                                                                                                                                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | convertible promissory notes issued to the Sellers   in the aggregate amount of $280,000;                                                                                                                                                                                                         |
|   | • | an aggregate of 200,000 shares of common stock of   the Company issued to the Sellers, valued at $0.505 per share in accordance   with EITF 99-12, “Determination of the Measurement Date for the Market Price   of Acquirer Securities Issued in a Purchase Business Combination”; and |
|   | • | transaction costs of $67,789.                                                                                                                                                                                                                                                                     |

          In connection with the execution of the Stock Purchase Agreement, the Company entered into a Stock Buyback Agreement with the sellers on August 18, 2006.  Pursuant to the Stock Buyback Agreement, the Company granted the sellers the right and option to sell to the Company all or any portion of the shares on the first business day five years from the closing date of the acquisition at a price of $1.00 per share.  As a result, these shares have been classified as temporary equity on the balance sheet.

          The acquisition was financed with a term loan from a financial institution in the amount of $476,500, the promissory note to two stockholders in the amount of $823,500, the convertible promissory notes issued to the seller’s in the amount of $280,000 and the issuance of 200,000 shares of common stock of the Company.

          The acquisition of Questa provides for economies of scale to be achieved by eliminating redundant expense items including major development costs, solidifies our recurring maintenance revenue stream, and increases the professional capacity of our human resources.

          Operating results of Questa have been included in the Company’s financial statements since August 1, 2006, when the Company assumed the risk of loss for Questa’s operations, by recording the transaction from that date directly in the accounts of the Company.

-15-

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          The following table summarizes the initial fair values of the assets acquired and liabilities assumed at the date of acquisition based on a preliminary valuation.  Subsequent adjustments may be recorded upon the completion of the valuation and the final determination of the purchase price allocation.

| Current assets         |   | $      | 138,116   |   |
|------------------------|--------|--------|-----------|--------|
| Computers and software |   |   | 27,370    |   |
| Furniture and fixtures |   |   | 14,379    |   |
| Purchased software     |   |   | 2,141,702 |   |
| Current liabilities    |   |   | (82,144   | )      |
|                   |   |        |           |   |
|                   |   | $      | 2,239,423 |   |
|                   |   |        |           |   |

          The following unaudited pro forma information presents the 2006 and 2005 results of operations of the Company as if the acquisition had occurred on January 1, 2005.  The unaudited pro forma results are not necessarily indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor are they necessarily indicative of future results.

|                                          |   | **Year ended   December 31,** |      |
|-----------------------------------------------|--------|-------------------------------|-----------|
|                                          |   |                               |      |
|                                          |   | **2006**                      |      | **2005** |   |
|                                          |   |                               |           |   |  |  |   |
|                                          |   | **(unaudited)**               |      | **(unaudited)** |   |
| Total revenue                                 |   | $                             | 4,721,785 |   | $ | 3,963,647 |   |
| Net income                                    |   | $                             | 618,452   |   | $ | 562,916 |   |
| Net income per share:                         |   |                          |      |   |   |   |   |
| Basic and diluted                             |   | $                             | 0.07      |   | $ | 0.06 |   |
| Weighted average common   shares outstanding: |   |                          |      |   |   |   |   |
| Basic                                         |   |                          | 9,038,152 |   |   | 9,038,152 |   |
| Diluted                                       |   |                          | 9,278,639 |   |   | 9,232,403 |   |

**     3. Long-term Debt**

**          Long-term Debt to Financial Institution**

          On August 16, 2006, the Company entered into a Bank Loan Agreement (Loan Agreement) with a financial institution to provide a promissory note term credit facility (Term Loan) for $476,500.

          The Term Loan is payable in 53 monthly principal payments of $7,942 beginning on March 5, 2007 and a final payment of the outstanding principal balance on August 5, 2011.  Interest on the outstanding principal balance of the note is payable monthly beginning September 5, 2006, with a final payment on the term maturity date.  The note bears interest at the greater of the prime rate plus three quarters of one percent (0.75%), or nine percent (9.0%).

          The Term Loan is collateralized by substantially all of the Company’s assets.  The Term Loan may be prepaid or terminated at the Company’s option at anytime without penalty.  The Loan Agreement contains certain financial covenants and customary default provisions (with grace periods where customary), including, among other things, failure to pay any principal or interest when due; any materially false or misleading representation, warranty, or financial statement; failure to comply with or to perform any provision of the agreement; and default on any debt in excess of $500,000.

-16-

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          In connection with the Loan Agreement, Robert C. Shreve, Jr., the Company’s Chairman, President, Chief Executive Officer and Chief Financial Officer, provided a guaranty in favor of the financial institution, pursuant to which Mr. Shreve guaranteed up to $676,500 of the Company’s obligations under the Term Loan and the Revolving Loan.  As consideration for providing this guaranty, the Company issued common stock options to purchase 451,000 shares of common stock of the Company to Mr. Shreve at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance.  The value of the options, using the Black-Scholes option pricing model was determined to be $171,018 and was recorded as debt issuance costs included in other assets in the accompanying balance sheets, and will be amortized as interest expense over the life of the loan.

          At December 31, 2006, the Company was not in compliance with certain financial covenants of the Loan Agreement.  The Company has received a waiver of the requirements at December 31, 2006 and for the quarter ending March 31, 2007.  The Company expects to be in compliance with the financial covenants as additional profits are realized in the future as a result of the acquisition.

**          Note Payable-Stockholders**

          On August 16, 2006, the Company entered into a loan agreement and promissory note with two stockholders to provide a promissory note for $823,500.  The stockholders own approximately 27.1% and 26.6%, respectively, of the outstanding common stock of the Company.

          The promissory note is payable in 53 monthly principal payments of $13,725 beginning on March 5, 2007 and a final payment of the outstanding principal balance on the August 5, 2011.  Interest on the outstanding principal balance of the note is payable monthly beginning September 5, 2006, with a final payment on the term maturity date.  The note bears interest at the greater of the prime rate plus three quarters of one percent (0.75%), or nine percent (9.0%).

          The promissory note is collateralized by substantially all of the Company’s assets and is subordinated to the Term Loan from the financial institution.  The stockholder note payable may be prepaid or terminated at the Company’s option at anytime without penalty.  The loan agreement contains certain financial covenants and customary default provisions (with grace periods where customary), including, among other things, failure to pay any principal or interest when due; any materially false or misleading representation, warranty, or financial statement; failure to comply with or to perform any provision of the agreement; and default on any debt in excess of $500,000.

          As consideration for providing the loan agreement and the promissory note, the Company issued common stock options to purchase 274,500 shares of common stock of the Company to the each of the stockholders at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance.  The value of the options, using the Black-Scholes option pricing model was determined to be $208,179 and was recorded as a discount to the related debt and will be amortized as interest expense over the life of the loan.  For the year ended December 31, 2006, $23,690 was recorded as interest expense in the Company’s income statement.

          At December 31, 2006, the Company was not in compliance with certain financial covenants of the loan agreement.  The Company has received a waiver of the requirements at December 31, 2006 and for the quarter ending March 31, 2007.  The Company expects to be in compliance with the financial covenants as additional profits are realized in the future as a result of the acquisition.

**          Convertible Notes Payable-Stockholders**

          On August 18, 2006, as partial consideration for the acquisition, the Company issued convertible promissory notes to the sellers of Questa (the “Seller Promissory Notes”) in the amounts of $120,000 and $160,000.  Accrued and unpaid interest on the Seller Promissory Notes is payable for a period of five years following the date of the note in twenty quarterly installments commencing on September 30, 2006 and continuing on the last day of each third calendar month.  Thereafter, principal and accrued interest on the notes is payable in twelve equal quarterly installments commencing on the fifth anniversary of the notes, and continuing thereafter on the last day of each third calendar month, with the final installment of the unpaid principal balance and all accrued and unpaid interest due eight years from the date of the notes.

-17-

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          The outstanding principal balances of the Seller Promissory Notes are convertible, at the option of the holders, in whole or in part and at any time or from time to time, into shares of common stock of the Company at a conversion price of $3.50 per share, as adjusted from time to time for stock splits, combinations, stock dividends and other similar events.

          The Seller Promissory Notes is unsecured and may be prepaid at the Company’s option at anytime without penalty, provided that, after the Company notifies the holders that the outstanding principal balance will be repaid and the date of such prepayment fifteen days in advance.  The holders have the option during the fifteen days to convert all or any portion of the outstanding principal balance of the Seller Promissory Notes in accordance with the conversion features of the notes.

**     4. Temporary Equity**

          On August 18, 2006, the Company issued 200,000 shares of its common stock to the sellers of Questa, in connection with the execution of a Stock Purchase Agreement to acquire Questa.  The Company entered into a Stock Buyback Agreement with the sellers on August 18, 2006.  Pursuant to the Stock Buyback Agreement, the Company granted the sellers the right and option to sell to the Company all or any portion of the shares on the first business day five years from the closing date of the acquisition at a price of $1.00 per share.  The shares were valued at $0.505 per share in accordance with EITF 99-12, and because of the potential obligation to repurchase the shares on August 18, 2011, the shares were recorded as temporary equity in accordance with EITF Topic No. 98, *Classification and Measurement of Redeemable Securities.*

**     5. Stock Options**

**     2000 Stock Compensation Plan**

          The 2000 Stock Compensation Plan authorizes the grant of up to 1,500,000 of the Company’s common stock in the form of incentive stock options (“ISOs”), and, the plan provides that: (i) the exercise price of an ISO must be no less than the fair value of the stock at the date of grant and (ii) the exercise price of an ISO held by an optionee who possesses more than 10% of the total combined voting power of all classes of stock must be no less than 110% of the fair market value of the stock at the time of grant.  The Compensation Committee of the Board of Directors has the authority to set expiration dates no later than ten years from the date of grant (or five years for an optionee who meets the 10% criteria), payment terms and other provisions for each grant.  Shares associated with unexercised options or reacquired shares of common stock become available for options orissuances.  The Compensation Committee of the Board of Directors may, at its sole discretion, accelerate or extend the date or dates on which all or any particular award or awards granted under the plan may vest or be exercised.  In the event of a merger, liquidation or sale of substantially all of the assets of the Company, the Board of Directors has the discretion to accelerate the vesting of the options granted under the plan.  At the discretion of the Compensation Committee, any option may include a “reload” feature.  Such feature allows an optionee exercising an option to receive, in addition to the number of shares of common stock due on the exercise, an additional option with an exercise price equal to the fair market value of the common stock on the date such additional option is granted.

          The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model (“BSOPM”) which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  The Company’s options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates.  The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables.

          The fair value of options that were granted under the 2000 Stock Compensation Plan during the year ended December 31, 2006 was $0.47 per share.  The fair values of options granted were estimated using the Black-Scholes pricing model with a weighted average risk-free interest rate of 4.75%.  The following assumptions were also used to determine the fair value of each option grant: dividend yields of 0%; weighted average expected volatility of 137.3 %, a weighted average expected term of 6.5 years, and an expected forfeiture rate of 67% based on the Company’s historical experience.  The volatility was determined based on the historic volatility of the Company’s stock for the length of the expected term of the options. 

-18-

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          At December 31, 2006, total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date was $37,830, which is expected to be recognized over a period of 3 years.  There were no 2000 Stock Compensation Plan options exercised during the year ended December 31, 2006.

          Information regarding the 2000 Stock Compensation Plan option transactions for the year ended December 31, 2006 is summarized below:

|                                       |   | **Options** |               | **Weighted   Average   Exercise Price** |   | **Weighted   Average   Remaining   Contractual   Term (years)** |   |
|--------------------------------------------|--------|-------------|--------------------|-----------------------------------------|--------|-----------------------------------------------------------------|--------|
|                                       |   |             |                    |                                    |        |                                                                 |   |  |  |   |
| Options outstanding at   beginning of year |   |        | 56,808             |                                    | $      | 1.250                                                           |   |   | —   |   |
| Options granted                            |   |        | 291,000            |                                    | $      | 0.505                                                           |   |   | —   |   |
| Options exercised                          |   |        | —   |                                    |   | —                                                |   |   | —   |   |
| Options forfeited                          |   |        | (71,331            | )                                       | $      | 0.686                                                           |   |   | —   |   |
|                                       |   |             |                    |                                    |        |                                                                 |   |  |  |   |
| Options outstanding at   December 31, 2006 |   |        | 276,477            |                                    | $      | 0.611                                                           |   |   | 8.80 |   |
|                                       |   |             |                    |                                    |        |                                                                 |   |  |  |   |
| Options exercisable at   December 31, 2006 |   |        | 39,477             |                                    | $      | 1.250                                                           |   |   | 3.78 |   |
|                                       |   |             |                    |                                    |        |                                                                 |   |  |  |   |

          Information regarding the 2000 Stock Compensation Plan options outstanding as of December 31, 2006 is summarized below:

|                 |   | **Options   Outstanding** |    | **Options   Exercisable**                                       |   |
|----------------------|--------|---------------------------|---------|-----------------------------------------------------------------|--------|
|                 |   |                           |    |                                                                 |   |
| **Exercise   Price** |   | **Options**               |    | **Weighted   Average   Remaining   Contractual   Life (years)** |   | **Weighted   Average   Exercise   Price** |   | **Aggregate   Intrinsic   Value** |   | **Options** |   | **Weighted   Average   Exercise   Price** |   | **Aggregate   Intrinsic   Value** |   |
|                      |   |                           |         |                                                            |        |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| 1.250                |   |                      | 39,477  |                                                            |   | 3.78 |   |   | 1.250 |   |   | —   |   |   | 39,477 |   |   | 1.250 |   |   | —   |   |
| 0.505                |   |                      | 237,000 |                                                            |   | 9.63 |   |   | 0.505 |   | $ | 67,545 |   |   | —   |   |   | 0.505 |   |   | —   |   |

**     Nonqualified Stock Options**

          As previously indicated under Note H, Robert C. Shreve, Jr., the Company’s Chairman, President, Chief Executive Officer and Chief Financial Officer, provided a guaranty in favor of a financial institution, pursuant up to $676,500 of the Company’s obligations under the Term Loan and the Revolving Loan for the Questa acquisition.  As consideration for providing this guaranty, the Company issued common stock options to purchase 451,000 shares of common stock of the Company to Mr. Shreve at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance.  

          The Company also issued, as consideration for providing a loan agreement and promissory note in connection with the Questa acquisition, common stock options to purchase 274,500 shares of common stock of the Company to two stockholders at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance.

          The Nonqualified Stock Option Agreement provides that the option price is $0.505, and the optioned shares are fully vested and fully exercisable.  The option period commences on August 16, 2006 and expires on August 16, 2013, unless earlier terminated by the grantee’s termination of service, death, disability, failure to pay the exercise price, or makes an assignment of the option without written consent of the Company.  In the event of a merger, liquidation or sale of substantially all of the assets of the Company, the option shall pertain to and apply to the securities or rights to which a holder of the number of shares of common stock subject to this option would have been entitled.  The option may be canceled by the Company, in its sole discretion, as of the effective date of any change of control, merger, consolidation or share exchange, or any issuance of bonds, debentures,preferred or preference stocks ranking prior to or otherwise affecting the common stock, or the rights thereof, or of any proposed sale of all or substantially all of the assets of the Company, or of any dissolution or liquidation of the Company, by either: (i) giving notice to grantee of its intention to cancel the optioned shares for which the issuance of shares of common stock involved payment by grantee for such shares and, permitting the purchase during the 30 day period next preceding such effective date of any or all of the shares of common stock subject to this option; or (ii) paying grantee an amount equal to a reasonable estimate of the difference between the net amount per share payable in such transaction or as a result of such transaction.

-19-

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          The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model (“BSOPM”) which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  The Company’s options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates.  The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables.

          The fair value of non-qualified stock options that were granted during the year ended December 31, 2006 was $0.38 per share.  The fair values of options granted were estimated using the Black-Scholes pricing model with a risk-free interest rate of 4.75%.  The following assumptions were also used to determine the fair value of each option grant: dividend yields of 0%; expected volatility of 117.7%, and an expected term of 3.5 years.  The volatility was determined based on the historic volatility of the Company’s stock for the length of the expected term of the options. 

          There were no non-qualified stock options exercised during the year ended December 31, 2006.

          Information regarding non-qualified stock option transactions for the year ended December 31, 2006 is summarized below:

|                                       |   | **Options** |               | **Weighted   Average   Exercise   Price** |   | **Weighted   Average   Remaining   Contractual   Term (years)** |   |
|--------------------------------------------|--------|-------------|--------------------|-------------------------------------------|--------|-----------------------------------------------------------------|--------|
|                                       |   |             |                    |                                      |        |                                                                 |   |  |  |   |
| Options outstanding at   beginning of year |   |        | —   |                                      | $      | —                                                |   |   | —   |   |
| Options granted-Robert C.   Shreve, Jr.    |   |        | 451,000            |                                      | $      | 0.505                                                           |   |   | —   |   |
| Options   granted-Stockholders             |   |        | 549,000            |                                      | $      | 0.505                                                           |   |   | —   |   |
| Options exercised                          |   |        | —   |                                      |   | —                                                |   |   | —   |   |
| Options forfeited                          |   |        | —   |                                      | $      | —                                                |   |   | —   |   |
|                                       |   |             |                    |                                      |        |                                                                 |   |  |  |   |
| Options outstanding at   December 31, 2006 |   |        | 1,000,000          |                                      | $      | 0.505                                                           |   |   | 6.63 |   |
|                                       |   |             |                    |                                      |        |                                                                 |   |  |  |   |
| Options exercisable at   December 31, 2006 |   |        | 1,000,000          |                                      | $      | 0.505                                                           |   |   | 6.63 |   |
|                                       |   |             |                    |                                      |        |                                                                 |   |  |  |   |

          At December 31, 2006, the Company had no non-qualified stock options outstanding in which the exercise price was lower than the market value of the Company’s common stock.  Therefore, the intrinsic value is zero on the non-qualified stock options.

-20-

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          Information regarding non-qualified stock options outstanding as of December 31, 2006 is summarized below:

|                 |   | **Options   Outstanding** |      | **Options   Exercisable**                                       |   |
|----------------------|--------|---------------------------|-----------|-----------------------------------------------------------------|--------|
|                 |   |                           |      |                                                                 |   |
| **Exercise   Price** |   | **Options**               |      | **Weighted   Average   Remaining   Contractual   Life (years)** |   | **Weighted   Average   Exercise   Price** |   | **Aggregate   Intrinsic   Value** |   | **Options** |   | **Weighted   Average   Exercise   Price** |   | **Aggregate   Intrinsic   Value** |   |
|                      |   |                           |           |                                                            |        |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| 0.505                |   |                      | 1,000,000 |                                                            |   | 6.63 |   |   | 0.505 |   | $ | 285,000 |   |   | 1,000,000 |   |   | 0.505 |   | $ | 285,000 |   |

**     6. Stock Based Compensation**

          Effective January 1, 2006, the Company adopted SFAS 123R for stock-based compensation plans.  Under SFAS 123R, all stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense in the statements of income over the requisite service period.

          The Company adopted SFAS 123R using a modified prospective application in compliance with the revised implementation date on January 1, 2006.  Under the modified prospective application, prior periods are not revised for comparative purposes.  The valuation provisions of SFAS 123R apply to new awards and to awards that were outstanding at the effective date and subsequently modified or cancelled.

          The fair value of each option grant is estimated on the date of grant using the BSOPM, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  The weighted-average fair value of options that were granted during the year ended December 31, 2006 was $0.40 per share.  The Company’s options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates.  The fair values of options granted were estimated using the Black-Scholes pricing model with a weighted average risk-free interest rate of 4.75%.  The following assumptions were also used to determine the fair value of each option grant: dividend yields of 0%; weighted average expected volatility of 122.1%, a weighted average expected term of 4.18 years, and anexpected forfeiture rate of 67% based on the Company’s historical experience.  The volatility was determined based on the historic volatility of the Company’s stock for the length of the expected term of the options. 

          Share-based compensation expense included in general and administrative expenses and share-based interest expense for options issued in connection with the stockholder debt and debt issuance costs recognized for the year ended December 31, 2006 were as follows:

|                                                    |   | **Year ended   December 31, 2006** |    |
|---------------------------------------------------------|--------|------------------------------------|---------|
|                                                    |   |                                    |         |   |
| Operating expenses:                                     |   |                               |    |   |
| General   and administrative (employee related options) |   | $                                  | 7,341   |   |
| Other income (expense):                                 |   |                               |    |   |
| Interest   expense                                      |   |                               | 43,152  |   |
|                                                    |   |                                    |         |   |
| Share-based   expense before taxes                      |   |                               | 50,493  |   |
| Related income tax benefits                             |   |                               | (17,168 | ) |
|                                                    |   |                                    |         |   |
| Share-based   expense, net of taxes                     |   | $                                  | 33,325  |   |
|                                                    |   |                                    |         |   |

          Robert C. Shreve, Jr., the Company’s Chairman, President, Chief Executive Officer and Chief Financial Officer, provided a guaranty in favor of a financial institution, pursuant to which Mr. Shreve guaranteed up to $676,500 of the Company’s obligations under the Term Loan and the Line-of-Credit.  As consideration for providing this guaranty, the Company issued common stock options to purchase 451,000 shares of common stock of the Company to Mr. Shreve at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance.  The value of the options, using the BSOPM model was determined to be $171,018 and was recorded as debt issuance costs included in other assets in the accompanying balance sheets, and will be amortized as interest expense over the life of the loan.  The Company recorded $19,462 as interest expense to reflect the amortization of thedebt issuance costs for the period ended December 31, 2006.

-21-

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          The Company entered into a loan agreement and promissory note with two stockholders to provide a promissory note for $823,500.  The stockholders own approximately 27.1% and 26.6%, respectively, of the outstanding common stock of the Company.  The Company recorded $23,690 as interest expense to reflect the amortization of the unamortized discount on the promissory note payable to the stockholders for the period ended December 31, 2006.

     **Pro Forma Information under SFAS 123R for Periods Prior to January 1, 2006**

          Prior to the adoption of SFAS 123R, the Company had elected to account for stock-based compensation arrangements through the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25, “*Accounting for Stock-Based Compensation*.”  Under the intrinsic value method, compensation expense is measured as the excess, if any, of the market value of the underlying common stock over the amount the employee is required to pay on the date both the number of shares and the price to be paid are known. No compensation expense had been recognized in the statements of income as option grants generally are made with exercise prices equal to the fair value of the underlying common stock on the award date, which is typically the date of compensation measurement.  Had compensation cost been determined based on the fair value at the date of grant, in accordance with theprovisions of SFAS No. 123, “*Accounting for Stock-Based Compensation*,” the Company’s net income and basic and diluted earnings per share for the year ended December 31, 2005 would not have been impacted because there were no unvested options outstanding and there would have been no unrecognized compensation costs during the period.

     **Results of Operations**

**          Revenue**

|                  |   | **Year ended   December 31,** |      | **Change** |   |
|-----------------------|--------|-------------------------------|-----------|------------|--------|
|                  |   |                               |      |            |   |
|                  |   | **2006**                      |      | **2005**   |   | **Amount** |   | **%** |   |
|                  |   |                               |           |       |        |  |   |  |  |   |  |  |   |
| Software              |   | $                             | 816,688   |       | $      | 565,948 |   | $ | 250,740 |   |   | 44.3 |   |
| Maintenance           |   |                          | 1,825,639 |       |   | 1,173,333 |   |   | 652,306 |   |   | 55.6 |   |
| Professional services |   |                          | 686,547   |       |   | 279,865 |   |   | 406,682 |   |   | 145.3 |   |
| Hardware              |   |                          | 326,579   |       |   | 259,258 |   |   | 67,321 |   |   | 26.0 |   |
|                  |   |                               |           |       |        |  |   |  |  |   |  |  |   |
| Total revenue         |   | $                             | 3,655,453 |       | $      | 2,278,404 |   | $ | 1,377,049 |   |   | 60.4 |   |
|                  |   |                               |           |       |        |  |   |  |  |   |  |  |   |

          Our revenue includes four components: software licensing fees, maintenance, professional services, and hardware.  Our revenues for the year ended December 31, 2006 increased 60.4% to $3,655,453 compared with revenues of $2,278,404 for the year ended December 31, 2005.  Our overall revenues were primarily affected by the acquisition of Questa, which added $853,901 to total revenue from August 1, 2006, the effective date of the acquisition to December 31, 2006.  We also experienced solid growth in our existing products and services with an increase in overall revenue of $523,148, or 23.0%.

**          Software**

|   | • | Software sales for the year ended December 31, 2006   increased 44.3% to $816,688, which included $280,151 from Questa from the   effective date of the acquisition.                                 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | Software sales for our existing products were down   slightly to $536,537.  Software sales   during 2006 continued to be strong as result of the strength of oil prices in   the energy sector. |

-22-

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**          Maintenance**

|   | • | Maintenance revenue for the year ended December 31,   2006 increased 55.6% to $1,825,639 compared with maintenance revenue of   $1,173,333 in 2005.                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | The increase in maintenance revenue related to the   Questa acquisition was $349,191 from August 1, 2006 to December 31, 2006.                                                            |
|   | • | Maintenance revenue for our existing products   increased $303,115, a 25.8% increase.    Maintenance revenues increased primarily because of our ASP solutions   and software sales. |

**          Professional services**

|   | • | Professional service revenue for the year ended   December 31, 2005 increased 145.3% to $686,547 compared to $279,865 in 2005.                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | The increase in professional services revenue   related to the Questa acquisition was $224,559.  Questa provides a higher percentage of implementation and data   conversion services than Avatar has previously provided.                                                                                                                                                                                                                                                   |
|   | • | Professional services related to the Questa   acquisition were higher than projected because of higher sales of Integra and   an increase in the professional services billing rate.                                                                                                                                                                                                                                                                                              |
|   | • | Professional services related to our existing   products also increased 65.1% to $461,988 during 2006 from $279,865 in   2005.  We provided more training and   system conversion services related to software sales, including a large   implementation of our AS400 software and document management solution.  We completed more installations of   ISYNERGY, a document management solution that requires professional   implementation and configuration services. |

**          Hardware**

|   | • | Hardware sales for the year ended December 31, 2006   increased 26.0% to $326,579 compared with hardware sales of $259,258 in 2005.                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | Questa was not a reseller of hardware products.  We expect our hardware sales to increase   in the future because of the acquisition, anticipated technology changes and   relationships that we have with hardware vendors. |

**          Cost of Revenue**

|                  |   | **Year ended   December 31,** |      | **Change** |   |
|-----------------------|--------|-------------------------------|-----------|------------|--------|
|                  |   |                               |      |            |   |
|                  |   | **2006**                      |      | **2005**   |   | **Amount** |   | **%** |   |
|                  |   |                               |           |       |        |  |   |  |  |   |  |  |   |
| Software              |   | $                             | 324,008   |       | $      | 229,458 |   | $ | 94,550 |   |   | 41.2 |   |
| Maintenance           |   |                          | 388,277   |       |   | 138,900 |   |   | 249,377 |   |   | 179.5 |   |
| Professional services |   |                          | 161,546   |       |   | 66,320 |   |   | 95,226 |   |   | 143.6 |   |
| Hardware              |   |                          | 266,655   |       |   | 204,771 |   |   | 61,884 |   |   | 30.2 |   |
|                  |   |                               |           |       |        |  |   |  |  |   |  |  |   |
| Total cost of revenue |   | $                             | 1,140,486 |       | $      | 639,449 |   | $ | 501,037 |   |   | 78.4 |   |
|                  |   |                               |           |       |        |  |   |  |  |   |  |  |   |

          Our cost of revenue includes four components: cost of software, cost of maintenance revenue, cost of professional services, and cost of hardware sales.  Our cost of revenue for the year ended December 31, 2006 increased 78.4% to $1,140,486 compared with $639,449 in 2005.  Cost of revenue as a percentage of total revenue increased to 31.2% for the year ended December 31, 2006 from 28.1% in 2005.  Our overall cost of revenue were primarily affected by the acquisition of Questa, which added $260,689 to total cost of revenue from August 1, 2006, the effective date of the acquisition, to December 31, 2006.

-23-

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**          Software**

|   | • | Cost of software sales for the year ended December   31, 2006 increased 41.2% to $324,008, which included $57,774 from Questa from   the effective date of the acquisition.                                                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | Cost of software sales for our existing products   increased to $266,234 from $229,458 or 16.0% primarily due to higher   commission costs.  We expect an   increase in our cost of software sales in the future because of increases in   the cost of our database components. |
|   | • | Cost of software as a percentage of the related   revenue decreased slightly to 39.7% for the year ended December 31, 2006 from   40.5% in 2005.                                                                                                                                     |

**          Maintenance**

|   | • | Cost of maintenance revenue for the year ended   December 31, 2006 increased 179.5% to $388,277 compared with $138,900 in   2005.                                                                                                                                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | The increase in cost of maintenance revenue related   to the Questa acquisition was $148,778 from August 1, 2006 to December 31,   2006.                                                                                                                                                          |
|   | • | Cost of maintenance revenue for our existing   products increased $100,599 or 72.4%.    Cost of maintenance revenue increased due to higher personnel costs,   data center utilities, and bandwidth costs.    These costs increased in relation to higher revenues from ASP   services. |
|   | • | Cost of maintenance as a percentage of the related   revenue increased to 21.3% for the year ended December 31, 2006 from 11.8% in   2005.                                                                                                                                                        |

**          Professional Services**

|   | • | Cost of professional services for the year ended   December 31, 2006 increased 143.6% to $161,546 compared with $66,320 in 2005.                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | The increase in cost of professional services   related to the Questa acquisition was $54,137 from August 1, 2006 to December   31, 2006.                                                                             |
|   | • | Cost of professional services for our existing   products increased $41,089, or 62.0%.    The increase in cost of professional services was directly related to   the increase in professional services revenue. |
|   | • | Cost of professional services as a percentage of the   related revenue remained stable at 23.5% for 2006 and 23.7% in 2005.                                                                                           |

**          Hardware**

|   | • | Cost of hardware sales for the year ended December   31, 2006 increased 30.2% to $266,655 compared with $204,771 in 2005.      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|   | • | Cost of hardware as a percentage of the related   revenue remained relatively stable at 81.7% for 2006 compared to 79.0% 2005. |

**          Operating Expenses**

|                       |   | **Year ended   December 31,** |      | **Change** |   |
|----------------------------|--------|-------------------------------|-----------|------------|--------|
|                       |   |                               |      |            |   |
|                       |   | **2006**                      |      | **2005**   |   | **Amount** |   | **%** |   |
|                       |   |                               |           |       |        |  |   |  |  |   |  |  |   |
| Sales and marketing        |   | $                             | 453,411   |       | $      | 277,161 |   | $ | 176,250 |   |   | 63.6 |   |
| General and administrative |   |                          | 765,484   |       |   | 481,458 |   |   | 284,026 |   |   | 59.0 |   |
| Amortization               |   |                          | 536,057   |       |   | 479,465 |   |   | 56,592 |   |   | 11.8 |   |
| Depreciation               |   |                          | 223,661   |       |   | 148,369 |   |   | 75,292 |   |   | 50.7 |   |
|                       |   |                               |           |       |        |  |   |  |  |   |  |  |   |
| Total operating expenses   |   | $                             | 1,978,613 |       | $      | 1,386,453 |   | $ | 592,160 |   |   | 42.7 |   |
|                       |   |                               |           |       |        |  |   |  |  |   |  |  |   |

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|   | **Sales and Marketing**        |
|--------|--------------------------------|
|   |                           |   |
|   | •                         | Our sales and marketing expenses for the year ended   December 31, 2006 increased 63.6% to $453,411 compared with $277,161 in 2005. |
|   | •                         | Sales and marketing expenses related to the Questa   acquisition from August 1, 2006 to December 31, 2006 were $45,094. |
|   | •                         | Sales and marketing expenses related to our existing   business increased to $408,317 from $277,161 in 2005.  The increase in sales and marketing   expenses was related primarily an increase in marketing efforts by the   addition of outside marketing services, printed materials, direct mail costs,   and a related increase in travel costs. |
|   | •                         | Sales and marketing expenses as a percentage of   total revenues remained stable at 12.4% for 2006 compared with 12.2% for   2005. |
|   |                           |   |
|   | **General and Administrative** |
|   |                           |   |
|   | •                         | Our general and administrative expenses for the year   ended December 31, 2006 increased 59.0% to $765,484 compared with $481,458 in   2005. |
|   | •                         | General and administrative expenses related to the   Questa acquisition from August 1, 2006 to December 31, 2006 were $86,125. |
|   | •                         | General and administrative expenses for our existing   business increased 41.1% to $679,359 from $481,458 in 2005.  General and administrative costs increased   primarily due to higher internal accounting costs incurred related to the   Questa acquisition, higher outside auditing costs, and an increase in   investor relations expenses. |
|   | •                         | General and administrative expenses as a percentage   of total revenues remained stable at 20.9% for the year ended December 31,   2006, compared with 21.1% in 2005. |
|   |                           |   |
|   | **Amortization**               |
|   |                           |   |
|   | •                         | Amortization expense increased 11.8% to $536,057 for   the year ended December 31, 2006 from $479,465 in 2005. |
|   | •                         | The increase in amortization expense related to the   acquisition of Questa was $127,482. |
|   | •                         | Amortization expense as a percentage of total   revenue decreased to 14.7% in 2006 compared with 21.0% in 2005.  The increase in amortization expense of   $127,482 from the Questa acquisition was offset by a net decrease in   amortization of existing amortizable assets due to the completed amortization   of a prior acquisition. |
|   |                           |   |
|   | **Depreciation**               |
|   |                           |   |
|   | •                         | Depreciation expense increased 50.7% to $223,661 for   the year ended December 31, 2006 from $148,369 in 2005. |
|   | •                         | Depreciation expense related to the acquisition of   Questa was $5,001. |
|   | •                         | Depreciation increased 47.4% on existing assets to   $218,660 from $148,369 in 2005.  The   increase is due to additions to our ASP facilities in 2006 and a full year of   depreciation on additions we made to our data center in late 2005. |
|   | •                         | Depreciation expense as a percentage of total   revenues remained stable at 6.1% in 2006 compared with 6.5% in 2005. |

-25-

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**          Other Income (Expense)**

|                                            |   | **Year ended   December 31,** |     | **Change** |   |
|-------------------------------------------------|--------|-------------------------------|----------|------------|--------|
|                                            |   |                               |     |            |   |
|                                            |   | **2006**                      |     | **2005**   |   | **Amount** |   | **%** |   |
|                                            |   |                               |          |       |        |  |   |  |  |   |  |  |   |
| Investment income                               |   | $                             | 22,768   |       | $      | 20,259 |   | $ | 2,509 |   |   | 12.4 |   |
| Gain (loss) on sales of   marketable securities |   |                          | 18,022   |       |   | (10,007 | ) |   | 28,029 |   |   | 280.1 |   |
| Interest expense                                |   |                          | (113,876 | )          |   | (8,165 | ) |   | (105,711 | ) |   | 1,294.7 |   |
|                                            |   |                               |          |       |        |  |   |  |  |   |  |  |   |
| Total other income   (expense)                  |   | $                             | (73,086  | )          | $      | 2,087 |   | $ | (75,173 | ) |   | (3,602.0 | ) |
|                                            |   |                               |          |       |        |  |   |  |  |   |  |  |   |

|   | **Investment Income**                                |
|--------|------------------------------------------------------|
|   |                                                 |   |
|   | •                                               | Investment income was $22,768 for the year ended   December 31, 2006 compared to $20,259 in 2005.  The increase in investment income was due to higher short-term   interest rates offset by lower invested balances after we completed the   Questa acquisition. |
|   |                                                 |   |
|   | **Gain (loss) on sales of marketable   securities**  |
|   |                                                 |   |
|   | •                                               | We realized a gain on   investments of $18,022 during the year ended December 31, 2006.  The gain was realized when we liquidated investments   that we had earmarked for acquisitions.    We sold the investments to complete the Questa acquisition. |
|   | •                                               | For the year ended   December 31, 2005, we realized a loss of $10,007 on investments in mutual   bond funds that were sold due to their longer terms of maturity so that our   investment positions would benefit from rising short-term rates. |
|   |                                                 |   |
|   | **Interest Expense**                                 |
|   |                                                 |   |
|   | December 31, 2006 interest   expense was as follows: |

|                                   |   | **Stated   Interest on   Notes** |   | **Discount   Amortization** |   | **Financing   Cost   Amortization** |   | **Total   Interest   Expense** |               |
|----------------------------------------|--------|----------------------------------|--------|-----------------------------|--------|-------------------------------------|--------|--------------------------------|--------------------|
|                                   |   |                                  |        |                        |        |                                     |   |                                |                    |   |  |  |   |
| Line of credit                         |   | $                                | 5,077  |                        | $      | —                    |   | $                              | —   |   | $ | 5,077 |   |
| Capital lease obligations              |   |                             | 9,949  |                        |   | —                    |   |                           | —   |   |   | 9,949 |   |
| Long-term promissory notes             |   |                             | 18,661 |                        |   | —                    |   |                           | 19,462             |   |   | 38,123 |   |
| Notes payable-stockholders             |   |                             | 28,411 |                        |   | 23,690                              |   |                           | —   |   |   | 52,101 |   |
| Convertible Notes payable-stockholders |   |                             | 4,200  |                        |   | —                    |   |                           | —   |   |   | 4,200 |   |
| Other                                  |   |                             | 4,426  |                        |   | —                    |   |                           | —   |   |   | 4,426 |   |
|                                   |   |                                  |        |                        |        |                                     |   |                                |                    |   |  |  |   |
| Total interest expense                 |   | $                                | 70,724 |                        | $      | 23,690                              |   | $                              | 19,462             |   | $ | 113,876 |   |
|                                   |   |                                  |        |                        |        |                                     |   |                                |                    |   |  |  |   |

-26-

----

          December 31, 2005 interest expense was as follows:

|                       |   | **Stated   Interest on   Notes** |   | **Discount   Amortization** |   | **Financing   Cost   Amortization** |   | **Total   Interest   Expense** |               |
|----------------------------|--------|----------------------------------|--------|-----------------------------|--------|-------------------------------------|--------|--------------------------------|--------------------|
|                       |   |                                  |        |                        |        |                                     |   |                                |                    |   |  |  |   |
| Capital lease obligations  |   | $                                | 6,292  |                        |   | —                    |   |                           | —   |   | $ | 6,292 |   |
| Long-term promissory notes |   |                             | 1,715  |                        |   | —                    |   |                           | —   |   |   | 1,715 |   |
| Other                      |   |                             | 158    |                        |   | —                    |   |                           | —   |   |   | 158 |   |
|                       |   |                                  |        |                        |        |                                     |   |                                |                    |   |  |  |   |
| Total interest expense     |   | $                                | 8,165  |                        | $      | —                    |   | $                              | —   |   | $ | 8,165 |   |
|                       |   |                                  |        |                        |        |                                     |   |                                |                    |   |  |  |   |

**          Provision for Income Taxes**

|   | • | For the year ended December 31, 2006, we recorded a   deferred tax expense of $157,511 based on our pretax income of $463,268 using   an effective tax rate of 34%, which is our anticipated effective tax rate for   the fiscal year 2006.  The actual   effective tax rate for the entire fiscal year could vary substantially   depending on actual results achieved. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**     Liquidity and Capital Resources**

          Our cash and cash equivalents and marketable securities at December 31, 2006 were $717,162 compared with $697,576 at December 31, 2005.  Cash flows for the year ended December 31, 2006 were impacted positively by cash we collected from recurring maintenance agreements, software, and hardware sales.  These cash flows were offset by cash paid to effect the Questa acquisition, additions to software development costs and purchases of computer equipment.

**          Cash flows from Operating Activities**

          Our cash flows from operating activities represent the most significant source of funding for our operations.  Operating activities provided cash flows of $1,324,891 and $1,047,692 for the year ended December 31, 2006 and 2005, respectively.

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

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

**          Cash Flows from Investing Activities**

          Net cash used in investing activities for the year ended December 31, 2006 of $2,652,837 consisted of capitalized software development costs of $754,852, purchases of property and equipment of $153,693 and $1,810,548 for the acquisition of Questa, less net marketable securities sold of $66,256.

          Net cash used in investing activities for year ended December 31, 2005 of $1,049,789 included $628,644 in capitalized software development costs, purchases of computer equipment of $292,083, and net marketable securities purchased of $129,062.

-27-

----

**          Cash Flows from Financing Activities**

          Net cash provided from financing activities for the year ended December 31, 2006 was $1,392,937.  Cash was provided by a line-of-credit for $145,067, issuance of long-term debt of $476,500 to a financial institution, and issuance of notes payable to stockholders of $823,500.  Cash was applied to a short-term debt, capital lease obligations and long-term debt totaling $52,130.

          Net cash used in financing activities for the year ended December 31, 2005 of $31,993 was for principal payments on capital lease obligations and notes payable.

**          Working Capital**

          At December 31, 2006, we had a working capital deficit of $16,877 down from a positive working capital position of $255,446 at December 31, 2005.  The decrease in working capital is attributable primarily to cash used in investing activities of $1,810,548 for the acquisition of Questa offset by increases in accounts payable of $77,452 and accrued expenses of $44,362.  We currently have no significant capital commitments other than commitments under our capital lease obligations, notes payable and operating leases.

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

     **Recent Accounting Pronouncements**

          In September 2006, the SEC issued Staff Accounting Bulletin 108 (“SAB 108”), *Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements*.  SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.  The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in the quantification of a misstatement that, when all relevant quantitative and qualitative factors are considered, is material.  The Company adopted SAB 108 in the fourth quarter of 2006 and there was no impact on the Company’s results of operations or financial position.

          In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*.  SFAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is currently evaluating the impact of SFAS No. 157 on its results of operations and financial position.

          In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN No. 48”), *Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109*, which clarifies the accounting for uncertainty in tax positions.  FIN No. 48 requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.  The provisions of FIN No. 48 are effective in fiscal years beginning after December 15, 2006.  The Company is currently evaluating the impact of FIN 48 on its results of operations and financial position.

-28-

----

**Item 7. Financial Statements**

Avatar Systems, Inc. Index to Financial Statements

| Report of Independent Registered   Public Accounting Firm | F-1                                                                                                 |
|-----------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                      |                                                                                                |   |
| Financial Statements                                      |                                                                                                |
|                                                      | Balance Sheets as of December 31,   2006 and 2005                                                   | F-2 |
|                                                      | Statements of Income and Comprehensive Income for the years   ended December 31, 2006 and 2005      | F-3 |
|                                                      | Statements of Changes in   Stockholders’ Equity for the years ended December 31, 2006 and 2005 | F-4 |
|                                                      | Statements of Cash Flows for the   years ended December 31, 2006 and 2005                           | F-5 |
|                                                      | Notes to Financial Statements                                                                       | F-6 to F-35 |

-29-

----

Financial Statements and Report of Independent Registered Public Accounting Firm

Avatar Systems, Inc.

December 31, 2006 and 2005

-30-

----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders Avatar Systems, Inc.

We have audited the accompanying balance sheets of Avatar Systems, Inc., as of December 31, 2006 and 2005 and the related statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Avatar Systems, Inc. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note A to the financial statements, Avatar Systems, Inc. adopted Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment*, effective January 1, 2006.

/s/ Whitley Penn LLP

Dallas, Texas April 17, 2007

F-1

----

Avatar Systems, Inc.**BALANCE SHEETS**

|                                                                                                           |   | **December   31,** |               |
|----------------------------------------------------------------------------------------------------------------|--------|--------------------|--------------------|
|                                                                                                           |   |                    |               |
|                                                                                                           |   | 2006               |               | 2005 |   |
|                                                                                                           |   |                    |                    |   |  |  |   |
| **ASSETS**                                                                                                     |   |               |               |   |   |   |   |
| **CURRENT   ASSETS**                                                                                           |   |               |               |   |   |   |   |
| Cash   and cash equivalents                                                                                    |   | $                  | 322,047            |   | $ | 257,056 |   |
| Marketable   securities                                                                                        |   |               | 395,115            |   |   | 440,520 |   |
| Accounts   receivable                                                                                          |   |               | 351,570            |   |   | 81,179 |   |
| Prepaid   expenses and other current assets                                                                    |   |               | 31,499             |   |   | 34,783 |   |
| Deferred   income taxes                                                                                        |   |               | 16,853             |   |   | 20,347 |   |
|                                                                                                           |   |                    |                    |   |  |  |   |
| **Total current assets**                                                                                       |   |               | 1,117,084          |   |   | 833,885 |   |
| **PROPERTY   AND EQUIPMENT**, net of accumulated depreciation of $489,004 and   $265,343, respectively         |   |               | 456,514            |   |   | 438,132 |   |
| **PURCHASED   SOFTWARE**, net of accumulated amortization of $989,144 and   $859,136, respectively             |   |               | 2,014,219          |   |   | 2,526 |   |
| **SOFTWARE   DEVELOPMENT COSTS**, net of accumulated amortization of $1,779,122   and $1,373,073, respectively |   |               | 2,752,417          |   |   | 2,403,614 |   |
| **OTHER   ASSETS, net**                                                                                        |   |               | 173,876            |   |   | 10,569 |   |
|                                                                                                           |   |                    |                    |   |  |  |   |
| **Total   assets**                                                                                             |   | $                  | 6,514,110          |   | $ | 3,688,726 |   |
|                                                                                                           |   |                    |                    |   |  |  |   |
| **LIABILITIES, TEMPORARY EQUITY AND   PERMANENT STOCKHOLDERS' EQUITY**                                         |   |               |               |   |   |   |   |
| **CURRENT   LIABILITIES**                                                                                      |   |               |               |   |   |   |   |
| Accounts   payable                                                                                             |   | $                  | 273,504            |   | $ | 121,050 |   |
| Accrued   expenses                                                                                             |   |               | 161,678            |   |   | 117,316 |   |
| Line-of-credit                                                                                                 |   |               | 145,067            |   |   | —   |   |
| Current   maturities of capital lease obligations                                                              |   |               | 32,335             |   |   | 32,562 |   |
| Current   maturities of long-term debt                                                                         |   |               | 88,165             |   |   | 8,159 |   |
| Current   maturities of notes payable-stockholders                                                             |   |               | 71,608             |   |   | —   |   |
| Deferred   revenue                                                                                             |   |               | 361,604            |   |   | 299,352 |   |
|                                                                                                           |   |                    |                    |   |  |  |   |
| **Total current liabilities**                                                                                  |   |               | 1,133,961          |   |   | 578,439 |   |
| **DEFERRED   INCOME TAXES**                                                                                    |   |               | 587,684            |   |   | 432,705 |   |
| **OTHER   LONG-TERM LIABILITIES**                                                                              |   |               | 93,361             |   |   | 19,377 |   |
| **LONG-TERM   DEBT**                                                                                           |   |               |               |   |   |   |   |
| Long-term   capital lease obligations                                                                          |   |               | 34,549             |   |   | 24,552 |   |
| Long-term   debt                                                                                               |   |               | 412,244            |   |   | 23,908 |   |
| Note   payable-stockholders                                                                                    |   |               | 567,403            |   |   | —   |   |
| Convertible   notes payable-stockholders                                                                       |   |               | 280,000            |   |   | —   |   |
|                                                                                                           |   |                    |                    |   |  |  |   |
| **Total long-term debt**                                                                                       |   |               | 1,294,196          |   |   | 48,460 |   |
|                                                                                                           |   |                    |                    |   |  |  |   |
| **Total liabilities**                                                                                          |   |               | 3,109,202          |   |   | 1,078,981 |   |
| **COMMITMENTS   AND CONTINGENCIES**                                                                            |   |               | —   |   |   | —   |   |
| **TEMPORARY   EQUITY (See Note M)**                                                                            |   |               |               |   |   |   |   |
| Common   stock, subject to put rights (200,000 and -0- shares issued and outstanding,   respectively)          |   |               | 101,000            |   |   | —   |   |
| **PERMANENT   STOCKHOLDERS' EQUITY**                                                                           |   |               |               |   |   |   |   |
| Preferred   stock, $0.001 par value, 10,000,000 shares authorized; none issued                                 |   |               | —   |   |   | —   |   |
| Common   stock, $0.001 par value; 30,000,000 shares authorized; 8,838,152 shares issued   and outstanding      |   |               | 8,838              |   |   | 8,838 |   |
| Paid-in   capital                                                                                              |   |               | 2,154,741          |   |   | 1,768,203 |   |
| Retained   earnings                                                                                            |   |               | 1,130,006          |   |   | 824,249 |   |
| Accumulated   other comprehensive income                                                                       |   |               | 10,323             |   |   | 8,455 |   |
|                                                                                                           |   |                    |                    |   |  |  |   |
| **Total stockholders' equity**                                                                                 |   |               | 3,303,908          |   |   | 2,609,745 |   |
|                                                                                                           |   |                    |                    |   |  |  |   |
| **Total   liabilities, temporary equity and permanent stockholders' equity**                                   |   | $                  | 6,514,110          |   | $ | 3,688,726 |   |
|                                                                                                           |   |                    |                    |   |  |  |   |

See accompanying notes to financial statements.

F-2

----

Avatar Systems, Inc.**STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**

|                                                |   | **Year ended   December 31,** |      |
|-----------------------------------------------------|--------|-------------------------------|-----------|
|                                                |   |                               |      |
|                                                |   | **2006**                      |      | **2005** |   |
|                                                |   |                               |           |   |  |  |   |
| **Revenue:**                                        |   |                          |      |   |   |   |   |
| Software                                            |   | $                             | 816,688   |   | $ | 565,948 |   |
| Maintenance                                         |   |                          | 1,825,639 |   |   | 1,173,333 |   |
| Professional   services                             |   |                          | 686,547   |   |   | 279,865 |   |
| Hardware                                            |   |                          | 326,579   |   |   | 259,258 |   |
|                                                |   |                               |           |   |  |  |   |
| **Total revenue**                                   |   |                          | 3,655,453 |   |   | 2,278,404 |   |
| **Cost of   revenue:**                              |   |                          |      |   |   |   |   |
| Software                                            |   |                          | 324,008   |   |   | 229,458 |   |
| Maintenance                                         |   |                          | 388,277   |   |   | 138,900 |   |
| Professional   services                             |   |                          | 161,546   |   |   | 66,320 |   |
| Hardware                                            |   |                          | 266,655   |   |   | 204,771 |   |
|                                                |   |                               |           |   |  |  |   |
| **Total cost of revenue**                           |   |                          | 1,140,486 |   |   | 639,449 |   |
|                                                |   |                               |           |   |  |  |   |
| **Gross profit**                                    |   |                          | 2,514,967 |   |   | 1,638,955 |   |
| **Operating   expenses:**                           |   |                          |      |   |   |   |   |
| Sales   and marketing                               |   |                          | 453,411   |   |   | 277,161 |   |
| General   and administrative                        |   |                          | 765,484   |   |   | 481,458 |   |
| Amortization                                        |   |                          | 536,057   |   |   | 479,465 |   |
| Depreciation                                        |   |                          | 223,661   |   |   | 148,369 |   |
|                                                |   |                               |           |   |  |  |   |
| **Total operating expenses**                        |   |                          | 1,978,613 |   |   | 1,386,453 |   |
|                                                |   |                               |           |   |  |  |   |
| **Operating income**                                |   |                          | 536,354   |   |   | 252,502 |   |
| **Other   income (expense):**                       |   |                          |      |   |   |   |   |
| Investment   income                                 |   |                          | 22,768    |   |   | 20,259 |   |
| Gain   (loss) on sales of marketable securities     |   |                          | 18,022    |   |   | (10,007 | ) |
| Interest   expense                                  |   |                          | (113,876  | ) |   | (8,165 | ) |
|                                                |   |                               |           |   |  |  |   |
| **Total other income (expense)**                    |   |                          | (73,086   | ) |   | 2,087 |   |
|                                                |   |                               |           |   |  |  |   |
| **Income before income taxes**                      |   |                          | 463,268   |   |   | 254,589 |   |
| Deferred income tax expense                         |   |                          | 157,511   |   |   | 86,459 |   |
|                                                |   |                               |           |   |  |  |   |
| **NET INCOME**                                      |   | $                             | 305,757   |   | $ | 168,130 |   |
| **Other   comprehensive income (loss), net of tax** |   |                          |      |   |   |   |   |
| Unrealized   gain (loss) on marketable securities   |   |                          | 12,349    |   |   | (5,298 | ) |
| Deferred   income tax expense (benefit)             |   |                          | 4,199     |   |   | (1,802 | ) |
| Reclassification   adjustment, net of tax           |   |                          | (6,282    | ) |   | —   |   |
|                                                |   |                               |           |   |  |  |   |
| **Other  comprehensive   income (loss)**       |   |                          | 1,868     |   |   | (3,496 | ) |
|                                                |   |                               |           |   |  |  |   |
| **Total comprehensive income**                      |   | $                             | 307,625   |   | $ | 164,634 |   |
|                                                |   |                               |           |   |  |  |   |
| **Net   income  per share:**                   |   |                          |      |   |   |   |   |
| **Basic and diluted**                               |   | $                             | 0.03      |   | $ | 0.02 |   |
|                                                |   |                               |           |   |  |  |   |
| **Weighted   average common shares outstanding:**   |   |                          |      |   |   |   |   |
| **Basic**                                           |   |                          | 8,912,065 |   |   | 8,838,152 |   |
|                                                |   |                               |           |   |  |  |   |
| **Diluted**                                         |   |                          | 9,252,552 |   |   | 8,838,152 |   |
|                                                |   |                               |           |   |  |  |   |

See accompanying notes to financial statements.

F-3

----

Avatar Systems, Inc.**STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**

Years ended December 31, 2006 and 2005

|                                                                      |   |               |               |                  |   |                    |   |   |               |   |   |               |   | **Accumulated   other   Comprehensive   Income** |               |   |   |      |
|---------------------------------------------------------------------------|--------|--------------------|--------------------|-----------------------|--------|-------------------------|--------|--------|--------------------|--------|--------|--------------------|--------|--------------------------------------------------|--------------------|--------|--------|-----------|
|                                                                      |   | **Common   stock** |               |                  |   |                    |   |   |               |   |   |               |   |
|                                                                      |   |                    |               | **Paid-in   capital** |   | **Retained   earnings** |   |   |               |   |   |
|                                                                      |   | **Shares**         |               | **Amount**            |   |                    |   |   | **Total**          |   |
|                                                                      |   |                    |                    |                  |        |                         |   |        |                    |   |        |                    |   |                                                  |                    |   |        |           |   |
| Balance at December 31,   2004                                            |   |               | 8,838,152          |                  | $      | 8,838                   |   | $      | 1,768,203          |   | $      | 656,119            |   | $                                                | 11,951             |   | $      | 2,445,111 |   |
| Net income                                                                |   |               | —   |                  |   | —        |   |   | —   |   |   | 168,130            |   |                                             | —   |   |   | 168,130   |   |
| Change in unrealized gain   on marketable securities, net of tax          |   |               | —   |                  |   | —        |   |   | —   |   |   | —   |   |                                             | (3,496             | )      |   | (3,496    | ) |
|                                                                      |   |               |               |                  |   |                    |   |   |               |   |   |               |   |                                             |               |   |        |           |   |
| Comprehensive income                                                      |   |               | —   |                  |   | —        |   |   | —   |   |   | —   |   |                                             | —   |   |   | 164,634   |   |
|                                                                      |   |                    |                    |                  |        |                         |   |        |                    |   |        |                    |   |                                                  |                    |   |        |           |   |
| Balance at December 31,   2005                                            |   |               | 8,838,152          |                  |   | 8,838                   |   |   | 1,768,203          |   |   | 824,249            |   |                                             | 8,455              |   |   | 2,609,745 |   |
| Shares issued                                                             |   |               | 200,000            |                  |   | 200                     |   |   | 100,800            |   |   | —   |   |                                             | —   |   |   | 101,000   |   |
| Reclassification of   temporary equity-common stock subject to put rights |   |               | (200,000           | )                     |   | (200                    | )      |   | (100,800           | )      |   | —   |   |                                             | —   |   |   | (101,000  | ) |
| Stock options issued   related to debt issuance                           |   |               | —   |                  |   | —        |   |   | 379,197            |   |   | —   |   |                                             | —   |   |   | 379,197   |   |
| Employee stock option   compensation expense                              |   |               | —   |                  |   | —        |   |   | 7,341              |   |   |               |   |                                             |               |   |   | 7,341     |   |
| Net income                                                                |   |               | —   |                  |   | —        |   |   | —   |   |   | 305,757            |   |                                             | —   |   |   | 305,757   |   |
| Change in unrealized gain   on marketable securities, net of tax          |   |               | —   |                  |   | —        |   |   | —   |   |   | —   |   |                                             | 8,150              |   |   | 8,150     |   |
| Reclassification   adjustment, net of tax                                 |   |               |               |                  |   |                    |   |   |               |   |   |               |   |                                             | (6,282             | )      |   | (6,282    | ) |
|                                                                      |   |               |               |                  |   |                    |   |   |               |   |   |               |   |                                             |               |   |        |           |   |
| Comprehensive income                                                      |   |               | —   |                  |   | —        |   |   | —   |   |   | —   |   |                                             | —   |   |   | 307,625   |   |
|                                                                      |   |                    |                    |                  |        |                         |   |        |                    |   |        |                    |   |                                                  |                    |   |        |           |   |
| Balance at December 31,   2006                                            |   |               | 8,838,152          |                  | $      | 8,838                   |   | $      | 2,154,741          |   | $      | 1,130,006          |   | $                                                | 10,323             |   | $      | 3,303,908 |   |
|                                                                      |   |                    |                    |                  |        |                         |   |        |                    |   |        |                    |   |                                                  |                    |   |        |           |   |

See accompanying notes to financial statements.

F-4

----

Avatar Systems, Inc.**STATEMENTS OF CASH FLOWS**

|                                                                                        |   | **Year ended   December 31,** |               |
|---------------------------------------------------------------------------------------------|--------|-------------------------------|--------------------|
|                                                                                        |   |                               |               |
|                                                                                        |   | **2006**                      |               | **2005** |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| **Cash flows   from operating activities**                                                  |   |                          |               |   |   |   |   |
| Net   income                                                                                |   | $                             | 305,757            |   | $ | 168,130 |   |
| Adjustments   to reconcile net income  to net cash   provided by operating activities: |   |                          |               |   |   |   |   |
| Amortization   of software costs                                                            |   |                          | 536,057            |   |   | 479,465 |   |
| Non-cash   interest expense                                                                 |   |                          | 44,307             |   |   | —   |   |
| Depreciation                                                                                |   |                          | 223,661            |   |   | 148,369 |   |
| (Gain)   loss on sale of marketable securities                                              |   |                          | (18,022            | ) |   | 10,007 |   |
| Stock   compensation expense                                                                |   |                          | 7,341              |   |   | —   |   |
| Deferred   income taxes                                                                     |   |                          | 157,511            |   |   | 86,458 |   |
| Changes   in operating assets and liabilities:                                              |   |                          |               |   |   |   |   |
| Accounts   receivable                                                                       |   |                          | (180,150           | ) |   | 64,591 |   |
| Prepaid   expenses and other current assets                                                 |   |                          | 3,284              |   |   | (19,480 | ) |
| Other   assets                                                                              |   |                          | (12,905            | ) |   | (10,569 | ) |
| Accounts   payable                                                                          |   |                          | 77,452             |   |   | 49,022 |   |
| Accrued   expenses                                                                          |   |                          | 44,362             |   |   | 23,698 |   |
| Deferred   revenue                                                                          |   |                          | 62,252             |   |   | 28,624 |   |
| Other   long-term liabilities                                                               |   |                          | 73,984             |   |   | 19,377 |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| Net   cash provided by operating activities                                                 |   |                          | 1,324,891          |   |   | 1,047,692 |   |
| **Cash flows   from investing activities**                                                  |   |                          |               |   |   |   |   |
| Software   development costs capitalized                                                    |   |                          | (754,852           | ) |   | (628,644 | ) |
| Purchases   of property and equipment                                                       |   |                          | (153,693           | ) |   | (292,083 | ) |
| Acquisition   of Questa Software Systems, Inc., net of cash acquired                        |   |                          | (1,810,548         | ) |   | —   |   |
| Purchases   of marketable securities                                                        |   |                          | (758,234           | ) |   | (483,683 | ) |
| Proceeds   from sale of marketable securities                                               |   |                          | 824,490            |   |   | 354,621 |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| Net   cash used in investing activities                                                     |   |                          | (2,652,837         | ) |   | (1,049,789 | ) |
| **Cash flows   from financing activities**                                                  |   |                          |               |   |   |   |   |
| Proceeds   from line-of-credit                                                              |   |                          | 145,067            |   |   | —   |   |
| Proceeds   from long-term debt                                                              |   |                          | 476,500            |   |   | —   |   |
| Proceeds   from notes payable-stockholders                                                  |   |                          | 823,500            |   |   | —   |   |
| Principal   payments on capital lease obligations                                           |   |                          | (36,829            | ) |   | (25,199 | ) |
| Principal   payments on long-term debt                                                      |   |                          | (15,301            | ) |   | (6,794 | ) |
|                                                                                        |   |                               |                    |   |  |  |   |
| Net   cash provided by (used in) financing activities                                       |   |                          | 1,392,937          |   |   | (31,993 | ) |
|                                                                                        |   |                               |                    |   |  |  |   |
| Net   increase (decrease) in cash and cash equivalents                                      |   |                          | 64,991             |   |   | (34,090 | ) |
| Cash and equivalents at   beginning of year                                                 |   |                          | 257,056            |   |   | 291,146 |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| Cash and cash equivalents   at end of year                                                  |   | $                             | 322,047            |   | $ | 257,056 |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| Supplemental disclosure of   cash paid for:                                                 |   |                          |               |   |   |   |   |
| Interest                                                                                    |   | $                             | 52,723             |   | $ | 8,165 |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| Supplemental disclosure of   noncash investing and financing activities:                    |   |                          |               |   |   |   |   |
| Purchase   of equipment under capital lease obligation                                      |   | $                             | 46,600             |   | $ | 18,428 |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| Change   in unrealized gain on marketable securities, net of tax                            |   | $                             | 8,150              |   | $ | (3,496 | ) |
|                                                                                        |   |                               |                    |   |  |  |   |
| Stock   issued in connection with acquisition                                               |   | $                             | 101,000            |   | $ | —   |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| Debt   issued in connnection with acquisition                                               |   | $                             | 280,000            |   | $ | —   |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| Stock   options issued related to debt                                                      |   | $                             | 379,197            |   | $ | —   |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| Purchase   of vehicle through issuance of note payable                                      |   | $                             | —   |   | $ | 33,716 |   |
|                                                                                        |   |                               |                    |   |  |  |   |
| Debt   repayment through non-cash asset transfer                                            |   | $                             | —   |   | $ | 22,479 |   |
|                                                                                        |   |                               |                    |   |  |  |   |

See accompanying notes to financial statements.

F-5

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE A – ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES**

Nature of Business 

Avatar Systems, Inc. and its predecessor, Avatar Systems, Ltd. (collectively, the “Company”) was formed in 1996 to provide Enterprise Resource Planning (“ERP”) accounting software for small to medium-sized oil and gas producers located throughout the United States.  

Use of Estimates and Certain Significant Estimates 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Significant assumptions and estimates are required in the capitalization and amortization of software development costs.  It is at least reasonably possible those estimates could be revised in the near term and those revisions could be material. 

Concentrations of Credit Risk 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable.  Products are sold to customers located principally in the United States.  The Company continually evaluates the creditworthiness of its customers’ financial condition and generally does not require collateral.  The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, the Company records a specific reserve for bad debts against amounts due.  The Company has not experienced significant losses on uncollectible accounts receivable. 

Fair Value of Financial Instruments 

In accordance with the reporting requirements of Statement of Financial Accounting Standards (“SFAS”) No. 107, *Disclosures About Fair Value of Financial Instruments*, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this statement and includes this additional information in the notes to financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these instruments.  The carrying value of short and long-term debt and capital lease obligations also approximates fair value since these instruments bear market rates of interest.  None of these instruments are held for trading purposes. 

Cash Equivalents 

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  The Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation.  At December 31, 2006 and 2005, the uninsured portion of these deposits was approximately $271,000 and $97,000, respectively.  The Company has not incurred any losses related to its uninsured deposits with financial institutions. 

F-6

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

Marketable Securities

Marketable securities at December 31, 2006 and 2005 consisted of corporate equities.  SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*, requires certain investments be recorded at fair value or amortized cost.  The appropriate classification of the investments in marketable equity is determined at the time of purchase and re-evaluated at each balance sheet date.  As of December 31, 2006 and 2005, the Company’s marketable securities were classified as available-for-sale, which are carried at fair value, with unrealized gains and losses reported as other comprehensive income or loss within the stockholders’ equity section of the accompanying balance sheets.  The cost of marketable equity securities sold is determined on a specific identification basis.  The fair value of marketable equity securities is based on quoted market prices.  The Company had realized gains of $18,022 and losses of$10,007 related to marketable securities for the years ended December 31, 2006 and 2005, respectively.  Marketable securities held at December 31, 2006 and 2005 have a cost basis of $379,475 and $427,709, respectively. 

Software Development Costs 

The Company capitalizes the costs of developing and testing new or significantly enhanced software products in accordance with the provisions of SFAS No. 86, *Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed*.  Under SFAS No. 86, all costs incurred to establish technological feasibility of a computer product are charged to operations as incurred.  After technological feasibility is established, costs of developing the computer software product are capitalized until the product is available for general release to customers.  The Company capitalized $754,852 and $628,644 of software development costs during the years ended December 31, 2006 and 2005, respectively.  Capitalized software development costs are amortized using the greater of the amount computed by the ratio of current year net revenue to estimated future net revenue of the product, or the amount computed by the straight-line method over aperiod that approximates the estimated economic life of the products, which historically has been seven years.  The amount, by which unamortized software costs exceed the net realizable value, if any, is recognized in the period the excess is determined.  No charge was recorded in 2006 or 2005 for unamortized software costs that exceeded the net realizable value.  Amortization of capitalized developed software charged to expense was $406,049 and $390,120 for the years ended December 31, 2006 and 2005, respectively. 

Property and Equipment 

Property and equipment are recorded at cost.  Expenditures for maintenance and repairs are expensed as incurred. Depreciation of property and equipment is provided primarily on the straight-line method over the estimated useful lives ranging from 3 to 7 years.  Amortization of leasehold improvements is provided on the straight-line method over the shorter of the useful lives of the assets or the terms of the corresponding leases. 

Impairment of Long-Lived Assets 

The Company reviews its long-lived assets and certain identifiable intangibles for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amounts of the assets to future net cash flows expected to be generated by the assets.  If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets based on estimated future cash flows.  During the years ended December 31, 2006 and 2005, the Company recorded no impairment charges. 

F-7

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

Revenue Recognition

The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*, as amended by SOP 98-9, *Modification of SOP 97-2*, *Software Revenue Recognition with Respect to Certain Transactions*, Staff Accounting Bulletin (“SAB”) No. 104, *Revenue Recognition*, and Emerging Issues Task Force (“EITF”) No. 00-21, *Revenue Arrangement with Multiple Deliverables*. 

The Company recognizes revenue from the licensing of software when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable, and collection of the resulting receivable is reasonably assured.  

Maintenance agreements are renewable on an annual basis, include rights to upgrades, when and if available, telephone support, updates, enhancements (when not separately priced and marketed), and bug fixes.  Maintenance fees are charged in the initial licensing year and for renewals of annual maintenance in subsequent years.  Revenue is recognized for maintenance ratably over the contract term.  

Other recurring revenue services are offered on a subscription-basis.  Subscription-based revenues are recognized ratably over the term of the agreement.  

Professional services including implementation, data conversion, integration, custom report writing and training are generally billed based on hourly rates together with reimbursement for travel and accommodation expenses. Professional services offered are not essential to the functionality of the software sold. 

Hardware sales are recorded as revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) 104, *Revenue Recognition*.  Revenue is recognized when title and/or risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured.  Revenue is recognized under the gross method in accordance with Emerging Issues Task Force (“EITF”) 99-19, *Reporting Revenue Gross as a Principle vs. Net as an Agent*.  As such, revenue includes the value of the product sold. 

Stock-based Compensation 

On January 1, 2006, the Company adopted SFAS No. 123(R), *Share-Based Payment*, and has elected to use the modified prospective method, which requires the application of the accounting standard to all share-based awards issued on or after January 1, 2006 and any outstanding share-based awards that were issued but not vested as of January 1, 2006.  Accordingly, the financial statements as of December 31, 2006 and 2005, and for the years then ended have not been restated to reflect the impact of SFAS No. 123(R).  For the twelve months ended December 31, 2006, the adoption of SFAS No. 123(R) resulted in incremental stock-based compensation expense of $7,341. 

Prior to the adoption of SFAS No. 123(R), the Company applied Accounting Principles Board (“APB”) No. 25 to account for its stock-based awards.  See Note R for additional disclosures relating to stock based compensation. 

F-8

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

Income Taxes

Deferred income taxes are determined using the liability method in accordance with SFAS No. 109, *Accounting for Income Taxes*.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized. 

Comprehensive Income 

The Company reports comprehensive income in accordance with the provisions of SFAS No. 130, *Reporting Comprehensive Income*.  Comprehensive income consists of net income and gains (losses) on available-for-sale marketable securities and is presented in the statements of changes in stockholders’ equity and the statement of income and comprehensive income,. 

Earnings Per Share 

The Company computes earnings per share in accordance with SFAS No. 128, *Earnings Per Share*.  SFAS No. 128 provides for the calculation of basic and diluted earnings per share.  Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company.  Common stock equivalents, representing convertible debt and stock options totaling approximately 119,477 and 56,808 share at December 31, 2006 and 2005, respectively, are not included in the dilutive earnings per share as they would be antidilutive. 

Recent Accounting Pronouncements 

In September 2006, the SEC issued Staff Accounting Bulletin 108 (“SAB 108”), *Considering the Effects of Prior Year Misstatements**when Quantifying Misstatements in Current Year Financial Statements*.  SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.  The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in the quantification of a misstatement that, when all relevant quantitative and qualitative factors are considered, is material.  The Company adopted SAB 108 in the fourth quarter of 2006 and there was no impact on the Company’s results of operations or financial position. 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*.  SFAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is currently evaluating the impact of SFAS No. 157 on its results of operations and financial position. 

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN No. 48”), *Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109*, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.  The provisions of FIN No. 48 are effective in fiscal years beginning after December 15, 2006.  The Company is currently evaluating the impact of FIN No. 48 on its results of operations and financial position.  

F-9

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE B – ACQUISITION**

On August 18, 2006, the Company acquired all the outstanding common stock of Questa Software Systems, Inc. (“Questa”) pursuant to a Stock Purchase Agreement.  Questa, located in Midland, Texas, was engaged in the development of accounting software for the petroleum production industry.  The purchase price was approximately $2.24 million, subject to certain post-closing adjustments based on Questa’s actual working capital as of the closing date.  The $2.24 million purchase price consisted of: 

| • | cash paid to the Sellers   in the aggregate amount of $1,790,634;                                                                                                                                                                                                                         |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | convertible promissory   notes issued to the Sellers in the aggregate amount of $280,000;                                                                                                                                                                                                 |
| • | an aggregate of 200,000   shares of common stock of the Company issued to the Sellers, valued at $0.505   per share in accordance with EITF 99-12, *Determination   of the Measurement Date for the Market Price of Acquirer Securities Issued in   a Purchase Business Combination*; and |
| • | transaction costs of   $67,789.                                                                                                                                                                                                                                                           |

In connection with the execution of the Stock Purchase Agreement, the Company entered into a Stock Buyback Agreement with the sellers on August 18, 2006.  Pursuant to the Stock Buyback Agreement, the Company granted the sellers the right and option to sell to the Company all or any portion of the shares on the first business day five years from the closing date of the acquisition at a price of $1.00 per share. 

The acquisition was financed with a term loan from a financial institution in the amount of $476,500, the Promissory Note to two stockholders in the amount of $823,500, the convertible promissory notes issued to the seller’s in the amount of $280,000 and the issuance of 200,000 shares of common stock of the Company. 

The acquisition of Questa provides for economies of scale to be achieved by eliminating redundant expense items including major development costs, solidifies our recurring maintenance revenue stream, and increases the professional capacity of our human resources. 

Operating results of Questa have been included in the Company’s financial statements since August 1, 2006, when the Company assumed the risk of loss for Questa’s operations, by recording the transaction from that date directly in the accounts of the Company. 

F-10

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

The following table summarizes the initial fair values of the assets acquired and liabilities assumed at the date of acquisition based on a preliminary valuation.  Subsequent adjustments may be recorded upon the completion of the valuation and the final determination of the purchase price allocation. 

| Current assets         |   | $      | 138,116   |   |
|------------------------|--------|--------|-----------|--------|
| Computers and software |   |   | 27,370    |   |
| Furniture and fixtures |   |   | 14,379    |   |
| Purchased software     |   |   | 2,141,702 |   |
| Current liabilities    |   |   | (82,144   | )      |
|                   |   |        |           |   |
|                   |   | $      | 2,239,423 |   |
|                   |   |        |           |   |

The following unaudited pro forma information presents the 2006 and 2005 results of operations of the Company as if the acquisition had occurred on January 1, 2005.  The unaudited pro forma results are not necessarily indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor are they necessarily indicative of future results. 

|                                          |   | **Year ended   December 31,** |            |
|-----------------------------------------------|--------|-------------------------------|-----------------|
|                                          |   |                               |            |
|                                          |   | **2006**                      |            | **2005** |   |
|                                          |   |                               |                 |   |  |  |   |
|                                          |   |                          | **(unaudited)** |   |   | **(unaudited)** |   |
| Total revenue                                 |   | $                             | 4,721,785       |   | $ | 3,963,647 |   |
| Net income                                    |   | $                             | 618,452         |   | $ | 562,916 |   |
| Net income per share:                         |   |                          |            |   |   |   |   |
| Basic and diluted                             |   | $                             | 0.07            |   | $ | 0.06 |   |
| Weighted average common   shares outstanding: |   |                          |            |   |   |   |   |
| Basic                                         |   |                          | 9,038,152       |   |   | 9,038,152 |   |
| Diluted                                       |   |                          | 9,278,639       |   |   | 9,232,403 |   |

F-11

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE C – MARKETABLE SECURITIES**

At December 31, 2006, marketable securities were summarized as follows: 

|                                 |   | **Cost** |    | **Gross Unrealized Gains** |   | **Gross   Unrealized   Losses** |   | **Aggregate   Fair Value** |               |
|--------------------------------------|--------|----------|---------|--------------------------------------|--------|---------------------------------|--------|----------------------------|--------------------|
|                                 |   |          |         |                                 |        |                                 |   |                            |                    |   |  |  |   |
| Corporate equities mutual   fund     |   | $        | 54,475  |                                 | $      | 15,640                          |   | $                          | —   |   | $ | 70,115 |   |
| Corporate equities preferred   stock |   |     | 325,000 |                                 |   | —                |   |                       | —   |   |   | 325,000 |   |
|                                 |   |          |         |                                 |        |                                 |   |                            |                    |   |  |  |   |
|                                 |   | $        | 379,475 |                                 | $      | 15,640                          |   | $                          | —   |   | $ | 395,115 |   |
|                                 |   |          |         |                                 |        |                                 |   |                            |                    |   |  |  |   |

At December 31, 2005, marketable securities were summarized as follows:

|                                            |   | **Cost** |    | **Gross Unrealized Gains** |   | **Gross   Unrealized   Losses** |   | **Aggregate   Fair Value** |               |
|-------------------------------------------------|--------|----------|---------|--------------------------------------|--------|---------------------------------|--------|----------------------------|--------------------|
|                                            |   |          |         |                                 |        |                                 |   |                            |                    |   |  |  |   |
| Corporate equities exchange   traded index fund |   | $        | 100,851 |                                 | $      | 14,200                          |   | $                          | —   |   | $ | 115,051 |   |
| Corporate equities mutual   fund                |   |     | 101,087 |                                 |   | —                |   |                       | (1,124             | ) |   | 99,963 |   |
| Corporate equities preferred   stock            |   |     | 225,771 |                                 |   | —                |   |                       | (265               | ) |   | 225,506 |   |
|                                            |   |          |         |                                 |        |                                 |   |                            |                    |   |  |  |   |
|                                            |   | $        | 427,709 |                                 | $      | 14,200                          |   | $                          | (1,389             | ) | $ | 440,520 |   |
|                                            |   |          |         |                                 |        |                                 |   |                            |                    |   |  |  |   |

The Company’s marketable securities are classified as available-for-sale.  Management has the ability and intent, if necessary, to liquidate any of these investments in order to meet liquidity needs within the normal operating cycle. Accordingly, all marketable securities are classified as current assets.  Gross realized gains and (losses) on the sales of marketable securities were $18,022 and $(10,007) in 2006 and 2005, respectively. 

F-12

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE D – PROPERTY AND EQUIPMENT**

Property and equipment are summarized as follows: 

|                              |   | **December   31,** |    |
|-----------------------------------|--------|--------------------|---------|
|                              |   |                    |    |
|                              |   | **2006**           |    | **2005** |   |
|                              |   |                    |         |   |  |  |   |
| Computer equipment and   software |   | $                  | 577,804 |   | $ | 427,856 |   |
| Furniture and fixtures            |   |               | 104,358 |   |   | 75,294 |   |
| Leasehold improvements            |   |               | 69,457  |   |   | 54,647 |   |
| Transportation                    |   |               | 33,716  |   |   | 33,716 |   |
| Telecommunication equipment       |   |               | 16,965  |   |   | 15,344 |   |
| Assets under capital lease        |   |               | 143,218 |   |   | 96,618 |   |
|                              |   |                    |         |   |  |  |   |
|                              |   |               | 945,518 |   |   | 703,475 |   |
| Less accumulated   depreciation   |   |               | 489,004 |   |   | 265,343 |   |
|                              |   |                    |         |   |  |  |   |
| Property and equipment, net       |   | $                  | 456,514 |   | $ | 438,132 |   |
|                              |   |                    |         |   |  |  |   |

During the years ended December 31, 2006 and 2005, the Company recorded depreciation expense of $223,661 and $148,369, respectively.  Depreciation expense in 2006 and 2005 also included the depreciation expense on assets recorded under capital leases. 

F-13

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE E – PURCHASED SOFTWARE**

Purchased software is summarized as follows: 

|                            |   | **December   31,** |      |
|---------------------------------|--------|--------------------|-----------|
|                            |   |                    |      |
|                            |   | **2006**           |      | **2005** |   |
|                            |   |                    |           |   |  |  |   |
| Purchased software              |   | $                  | 3,003,363 |   | $ | 861,662 |   |
| Less accumulated   amortization |   |               | 989,144   |   |   | 859,136 |   |
|                            |   |                    |           |   |  |  |   |
| Purchased software, net         |   | $                  | 2,014,219 |   | $ | 2,526 |   |
|                            |   |                    |           |   |  |  |   |

Purchased software is recorded at cost.  Amortization of purchased software is provided on the straight-line method over 7 years.  During the years ended December 31, 2006 and 2005, the Company recorded amortization expense of $130,008 and $89,345, respectively. 

As of December 31, 2006, future purchased software amortization expense is a follows: 

|                                           |   | **Year   ending December 31,** |      |
|------------------------------------------------|--------|-------------------------------------|-----------|
|                                           |   |                                     |           |   |
| 2007                                           |   | $                                   | 305,957   |   |
| 2008                                           |   |                                | 305,957   |   |
| 2009                                           |   |                                | 305,957   |   |
| 2010                                           |   |                                | 305,957   |   |
| 2011                                           |   |                                | 305,957   |   |
| Thereafter                                     |   |                                | 484,434   |   |
|                                           |   |                                     |           |   |
| Total future purchased software   amortization |   | $                                   | 2,014,219 |   |
|                                           |   |                                     |           |   |

F-14

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE F – DEVELOPED SOFTWARE**

Developed software is summarized as follows: 

|                              |   | **December   31,** |      |
|-----------------------------------|--------|--------------------|-----------|
|                              |   |                    |      |
|                              |   | **2006**           |      | **2005** |   |
|                              |   |                    |           |   |  |  |   |
| Software development costs        |   | $                  | 4,531,539 |   | $ | 3,776,687 |   |
| Less accumulated   amortization   |   |               | 1,779,122 |   |   | 1,373,073 |   |
|                              |   |                    |           |   |  |  |   |
| Software development costs,   net |   | $                  | 2,752,417 |   | $ | 2,403,614 |   |
|                              |   |                    |           |   |  |  |   |

Developed software is recorded at cost.  Amortization of developed software is provided on the straight-line method over 7 years.  During the years ended December 31, 2006 and 2005, the Company recorded amortization expense of $406,049 and $390,120, respectively. 

As of December 31, 2006, future developed software amortization expense is a follows: 

|                                           |   | **Year ending December 31,** |      |
|------------------------------------------------|--------|-----------------------------------|-----------|
|                                           |   |                                   |           |   |
| 2007                                           |   | $                                 | 415,187   |   |
| 2008                                           |   |                              | 309,756   |   |
| 2009                                           |   |                              | 253,335   |   |
| 2010                                           |   |                              | 191,643   |   |
| 2011                                           |   |                              | 118,279   |   |
| Thereafter                                     |   |                              | 112,293   |   |
|                                           |   |                                   |           |   |
| Total future developed   software amortization |   | $                                 | 1,400,493 |   |
|                                           |   |                                   |           |   |

Software development costs in process at December 31, 2006 and 2005 were $1,351,924 and $1,045,841, respectively. 

F-15

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE G – LINE OF CREDIT**

On August 16, 2006, the Company entered into a Bank Loan Agreement (“Loan Agreement”) with a financial institution to provide a Line-Of-Credit facility (“Line-Of-Credit”) for $200,000. 

The Line-Of-Credit outstanding principal balance is payable in full in a single payment August 5, 2008.  Interest on the outstanding principal balance of the note is payable monthly beginning September 5, 2006.  The note bears interest at the greater of the prime rate plus three quarters of one percent (0.75%), or nine percent (9.0%). 

The Line-Of-Credit is collateralized by substantially all of the Company’s assets The Line-Of-Credit may be prepaid or terminated at the Company’s option at anytime without penalty.  The Loan Agreement contains certain financial covenants and customary default provisions (with grace periods where customary), including, among other things, failure to pay any principal or interest when due; any materially false or misleading representation, warranty, or financial statement; failure to comply with or to perform any provision of the agreement; and default on any debt in excess of $500,000. 

The outstanding principal balance of the Line-Of-Credit as of December 31, 2006 was $145,067 with the remainder available for future borrowing. 

At December 31, 2006, the Company was not in compliance with certain financial covenants of the Loan Agreement.  The Company has received a waiver of the requirements at December 31, 2006 and for the quarter ending March 31, 2007.  The Company expects to be in compliance with the financial covenants as additional profits are realized in the future as a result of the acquisition. 

F-16

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE H - LONG-TERM DEBT**

On August 16, 2006, the Company entered into a Bank Loan Agreement (Loan Agreement) with a financial institution to provide a promissory note term credit facility (Term Loan) for $476,500. 

The Term Loan is payable in 53 monthly principal payments of $7,942 beginning on March 5, 2007 and a final payment of the outstanding principal balance on August 5, 2011.  Interest on the outstanding principal balance of the note is payable monthly beginning September 5, 2006, with a final payment on the term maturity date.  The note bears interest at the greater of the prime rate plus three quarters of one percent (0.75%), or nine percent (9.0%). 

The Term Loan is collateralized by substantially all of the Company’s assets.  The Term Loan may be prepaid or terminated at the Company’s option at anytime without penalty.  The Loan Agreement contains certain financial covenants and customary default provisions (with grace periods where customary), including, among other things, failure to pay any principal or interest when due; any materially false or misleading representation, warranty, or financial statement; failure to comply with or to perform any provision of the agreement; and default on any debt in excess of $500,000. 

In connection with the Loan Agreement, Robert C. Shreve, Jr., the Company’s Chairman, President, Chief Executive Officer and Chief Financial Officer, provided a guaranty in favor of the financial institution, pursuant to which Mr. Shreve guaranteed up to $676,500 of the Company’s obligations under the Term Loan and the Revolving Loan.  As consideration for providing this guaranty, the Company issued common stock options to purchase 451,000 shares of common stock of the Company to Mr. Shreve at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance.  The value of the options, using the Black-Scholes option pricing model was determined to be $171,018 and was recorded as debt issuance costs included in other assets in the accompanying balance sheets, and will be amortized as interest expense over the life of the loan. 

At December 31, 2005, long-term debt consisted of a note payable to GMAC, collaterized by an automobile, bearing interest at 6.99% per annum, payable in forty-eight monthly principal payments of $845, beginning in August 2005 through maturity in July 2009. 

F-17

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS 

December 31, 2006 and 2005 

Total notes payable at December 31, 2006 were as follows:

|                                  |   | **December   31,** |    |
|---------------------------------------|--------|--------------------|---------|
|                                  |   |                    |    |
|                                  |   | **2006**           |    | **2005** |   |
|                                  |   |                    |         |   |  |  |   |
| Current portion - auto                |   | $                  | 8,748   |   | $ | 8,159 |   |
| Current portion - term note   payable |   |               | 79,417  |   |   | —   |   |
|                                  |   |                    |         |   |  |  |   |
|                                  |   |               | 88,165  |   |   | 8,159 |   |
| Term note payable - auto              |   |               | 15,161  |   |   | —   |   |
| Term note payable                     |   |               | 397,083 |   |   | 23,908 |   |
|                                  |   |                    |         |   |  |  |   |
|                                  |   |               | 412,244 |   |   | 23,908 |   |
|                                  |   |                    |         |   |  |  |   |
| Total   long-term notes payable       |   | $                  | 500,409 |   | $ | 32,067 |   |
|                                  |   |                    |         |   |  |  |   |

Future principal payment requirements on the long-term notes payable at December 31, 2006 were as follows:

|                                          |   | **Year   ending   December 31,** |    |
|-----------------------------------------------|--------|----------------------------------|---------|
|                                          |   |                                  |         |   |
| 2007                                          |   | $                                | 88,165  |   |
| 2008                                          |   |                             | 104,680 |   |
| 2009                                          |   |                             | 101,081 |   |
| 2010                                          |   |                             | 95,300  |   |
| 2011                                          |   |                             | 111,183 |   |
|                                          |   |                                  |         |   |
| Total future principal   payment requirements |   | $                                | 500,409 |   |
|                                          |   |                                  |         |   |

At December 31, 2006, the Company was not in compliance with certain financial covenants of the Loan Agreement. The Company has received a waiver of the requirements at December 31, 2006 and for the quarter ending March 31, 2007. The Company expects to be in compliance with the financial covenants as additional profits are realized in the future as a result of the acquisition.

F-18

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE I – NOTE PAYABLE - STOCKHOLDERS**

On August 16, 2006, the Company entered into a loan agreement and promissory note with two stockholders to provide a promissory note for $823,500.  The stockholders own approximately 27.1% and 26.6%, respectively, of the outstanding common stock of the Company. 

The promissory note is payable in 53 monthly principal payments of $13,725 beginning on March 5, 2007 and a final payment of the outstanding principal balance on the August 5, 2011.  Interest on the outstanding principal balance of the note is payable monthly beginning September 5, 2006, with a final payment on the term maturity date.  The note bears interest at the greater of the prime rate plus three quarters of one percent (0.75%), or nine percent (9.0%). 

The promissory note is collateralized by substantially all of the Company’s assets and is subordinated to the Term Loan from the financial institution.  The stockholder note payable may be prepaid or terminated at the Company’s option at anytime without penalty.  The loan agreement contains certain financial covenants and customary default provisions (with grace periods where customary), including, among other things, failure to pay any principal or interest when due; any materially false or misleading representation, warranty, or financial statement; failure to comply with or to perform any provision of the agreement; and default on any debt in excess of $500,000. 

As consideration for providing the loan agreement and the promissory note, the Company issued common stock options to purchase 274,500 shares of common stock of the Company to the each of the stockholders at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance.  The value of the options, using the Black-Scholes option pricing model was determined to be $208,179 and was recorded as a discount to the related debt and will be amortized as interest expense over the life of the loan.  For the year ended December 31, 2006, $23,690 was recorded as interest expense in the accompanying statement of income and comprehensive income statement. 

F-19

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

|                                          |   | **Note Face Value    December 31,   2006** |    | **Unamortized   Discount   Debt Issuance Costs   December 31,   2006** |   | **Discounted   Face Value   December 31   2006** |   |
|-----------------------------------------------|--------|-------------------------------------------------|---------|------------------------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                          |   |                                                 |         |                                                                   |        |                                                  |   |  |  |   |
| Current portion - note   payable stockholders |   | $                                               | 137,250 |                                                                   | $      | 65,642                                           |   | $ | 71,608 |   |
| Note payable - stockholders                   |   |                                            | 686,250 |                                                                   |   | 118,847                                          |   |   | 567,403 |   |
|                                          |   |                                                 |         |                                                                   |        |                                                  |   |  |  |   |
| Total   notes payable - stockholders          |   | $                                               | 823,500 |                                                                   | $      | 184,489                                          |   | $ | 639,011 |   |
|                                          |   |                                                 |         |                                                                   |        |                                                  |   |  |  |   |

Future principal payment requirements on the notes payable - stockholders at December 31, 2006 were as follows:

|                                          |   | **Year   ending December 31** |    |
|-----------------------------------------------|--------|------------------------------------|---------|
|                                          |   |                                    |         |   |
| 2007                                          |   | $                                  | 137,250 |   |
| 2008                                          |   |                               | 164,700 |   |
| 2009                                          |   |                               | 164,700 |   |
| 2010                                          |   |                               | 164,700 |   |
| 2011                                          |   |                               | 192,150 |   |
|                                          |   |                                    |         |   |
| Total future principal   payment requirements |   | $                                  | 823,500 |   |
|                                          |   |                                    |         |   |

At December 31, 2006, the Company was not in compliance with certain financial covenants of the loan agreement. The Company has received a waiver of the requirements at December 31, 2006 and for the quarter ending March 31, 2007. The Company expects to be in compliance with the financial covenants as additional profits are realized in the future as a result of the acquisition.

F-20

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE J – CONVERTIBLE NOTES PAYABLE-STOCKHOLDERS**

On August 18, 2006, as partial consideration for the acquisition, the Company issued convertible promissory notes to the sellers of Questa (the “Seller Promissory Notes”) in the amounts of $120,000 and $160,000.  Accrued and unpaid interest on the Seller Promissory Notes is payable for a period of five years following the date of the note in twenty quarterly installments commencing on September 30, 2006 and continuing on the last day of each third calendar month.  Thereafter, principal and accrued interest on the notes is payable in twelve equal quarterly installments commencing on the fifth anniversary of the notes, and continuing thereafter on the last day of each third calendar month, with the final installment of the unpaid principal balance and all accrued and unpaid interest due eight years from the date of the notes. 

The outstanding principal balances of the Seller Promissory Notes are convertible, at the option of the holders, in whole or in part and at any time or from time to time, into shares of common stock of the Company at a conversion price of $3.50 per share, as adjusted from time to time for stock splits, combinations, stock dividends and other similar events. 

The Seller Promissory Notes is unsecured and may be prepaid at the Company’s option at anytime without penalty, provided that, after the Company notifies the holders that the outstanding principal balance will be repaid and the date of such prepayment fifteen days in advance.  The holders have the option during the fifteen days to convert all or any portion of the outstanding principal balance of the Seller Promissory Notes in accordance with the conversion features of the notes. 

The principal balance outstanding at December 31, 2006 was $280,000. 

Future principal payment requirements on the convertible notes payable - stockholders at December 31, 2006 were as follows: 

|                                          |   | **Year   ending December 31,** |               |
|-----------------------------------------------|--------|-------------------------------------|--------------------|
|                                          |   |                                     |                    |   |
| 2007                                          |   | $                                   | —   |   |
| 2008                                          |   |                                | —   |   |
| 2009                                          |   |                                | —   |   |
| 2010                                          |   |                                | —   |   |
| 2011                                          |   |                                | 44,308             |   |
| Thereafter                                    |   |                                | 235,692            |   |
|                                          |   |                                     |                    |   |
| Total future principal   payment requirements |   | $                                   | 280,000            |   |
|                                          |   |                                     |                    |   |

F-21

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE K – CAPITAL LEASE OBLIGATIONS**

During 2006, the Company entered into various capital lease arrangements for the rental of computer equipment in our ASP hosting facility in the aggregate amount of $46,600.  The lease agreements require monthly payments of principal and interest of approximately $1,370 at interest rates of approximately 14% and mature thirty-six and forty-eight months from the date of the lease in 2009. 

During 2005, we entered into a capital lease arrangement for the rental of computer equipment in our ASP hosting facility for $18,428.  The lease agreement requires monthly payments of principal and interest of $718 at an interest rate of approximately 23% and matures on October 1, 2008. 

Capital lease obligations at December 31, 2006 were summarized as follows: 

|                                             |   | **December   31,** |   |
|--------------------------------------------------|--------|--------------------|--------|
|                                             |   |                    |   |
|                                             |   | **2006**           |   | **2005** |   |
|                                             |   |                    |        |   |  |  |   |
| Current portion of capital   lease obligations   |   | $                  | 32,335 |   | $ | 32,562 |   |
| Long-term portion of capital   lease obligations |   |               | 34,549 |   |   | 24,552 |   |
|                                             |   |                    |        |   |  |  |   |
| Total   capital lease obligations                |   | $                  | 66,884 |   | $ | 57,114 |   |
|                                             |   |                    |        |   |  |  |   |

Future minimum capital lease obligations in effect at December 31, 2006 were as follows:

|                                             |   | **Year   ending December 31,** |    |
|--------------------------------------------------|--------|-------------------------------------|---------|
|                                             |   |                                     |         |   |
| 2007                                             |   | $                                   | 40,898  |   |
| 2008                                             |   |                                | 23,627  |   |
| 2009                                             |   |                                | 15,289  |   |
| Less   interest                                  |   |                                | (12,930 | ) |
|                                             |   |                                     |         |   |
| Total future minimum capital   lease obligations |   | $                                   | 66,884  |   |
|                                             |   |                                     |         |   |

F-22

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE L – LEASE OBLIGATIONS**

The Company leases its 6,192 square foot facility at 2801 Network Boulevard, Suite 210, Frisco, Texas, 75034.  The lease for the corporate office was entered into on July 29, 2005 for a one hundred twenty-month lease term commencing on November 1, 2005 and expiring on October 31, 2015. 

As part of the acquisition of Questa, the Company assumed the lease of a 7,197 square foot facility at 10 Desta Drive, Suite 250 West, Midland, Texas 79705.  The original lease for the Midland facility was entered into on November 14, 2005 for a seventy-five month lease term commencing on January 1, 2006 and expiring on March 31, 2012. 

The Company leases a 1,496 square foot facility at 6 Desta Drive, Suite 3350, Midland, Texas 79705.  The lease for the Midland facility was entered into on June 1, 2006 for a twelve-month lease term commencing on October 1, 2006 and expiring on September 30, 2007. 

The Company leases a 250 square foot facility at 1901 Rickety, Suite 216, Tyler, Texas.  The lease for the Tyler facility was entered into on June 23, 2006 for a twelve-month lease term commencing on July 1, 2006 and expiring on June 30, 2007. 

Future minimum payments are as follows: 

|                            |   | **Year   ending December 31,** |      |
|---------------------------------|--------|-------------------------------------|-----------|
|                            |   |                                     |           |   |
| 2007                            |   | $                                   | 219,000   |   |
| 2008                            |   |                                | 205,000   |   |
| 2009                            |   |                                | 205,000   |   |
| 2010                            |   |                                | 205,000   |   |
| 2011                            |   |                                | 205,000   |   |
| Thereafter                      |   |                                | 541,000   |   |
|                            |   |                                     |           |   |
| Minimum future lease   payments |   | $                                   | 1,580,000 |   |
|                            |   |                                     |           |   |

Rent expense under the operating leases was $167,994 and $159,027 for the years ended December 31, 2006 and 2005, respectively.

F-23

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE M – TEMPORARY EQUITY**

On August 18, 2006, the Company issued 200,000 shares of its common stock to the sellers of Questa, in connection with the execution of a Stock Purchase Agreement to acquire Questa.  The Company entered into a Stock Buyback Agreement with the sellers on August 18, 2006.  Pursuant to the Stock Buyback Agreement, the Company granted the sellers the right and option to sell to the Company all or any portion of the shares on the first business day five years from the closing date of the acquisition at a price of $1.00 per share.  The shares were valued at $0.505 per share in accordance with EITF 99-12, and because of the potential obligation to repurchase the shares on August 18, 2011, the shares were recorded as temporary equity in accordance with EITF Topic No. 98, *Classification and Measurement of Redeemable Securities.*

**NOTE N – EARNINGS PER SHARE**

Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of commons shares outstanding during the period.  Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock.  The following reconciles amounts reported in the financial statements: 

|                                          |   | **December   31,** |      |
|-----------------------------------------------|--------|--------------------|-----------|
|                                          |   |                    |      |
|                                          |   | **2006**           |      | **2005** |   |
|                                          |   |                    |           |   |  |  |   |
| Numerator:                                    |   |               |      |   |   |   |   |
| Net   income                                  |   | $                  | 305,757   |   | $ | 168,130 |   |
|                                          |   |                    |           |   |  |  |   |
| Denominator:                                  |   |               |      |   |   |   |   |
| Weighted-average shares   outstanding:        |   |               |      |   |   |   |   |
| Basic                                         |   |               | 8,912,065 |   |   | 8,838,152 |   |
| Options   issued to employees and debtholders |   |               | 340,487   |   |   | —   |   |
|                                          |   |                    |           |   |  |  |   |
| Diluted                                       |   |               | 9,252,552 |   |   | 8,838,152 |   |
|                                          |   |                    |           |   |  |  |   |
| Earnings per common share:                    |   |               |      |   |   |   |   |
| Basic                                         |   | $                  | 0.03      |   | $ | 0.02 |   |
|                                          |   |                    |           |   |  |  |   |
| Diluted                                       |   | $                  | 0.03      |   | $ | 0.02 |   |
|                                          |   |                    |           |   |  |  |   |

F-24

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE O – INCOME TAXES**

The Company’s income tax expense in 2006 and 2005 consisted only of deferred taxes.          The Company had no current income tax expense primarily because software development costs are charged to expense for federal income tax purposes and capitalized for financial reporting purposes.

Deferred tax assets and liabilities consist of the following:

|                                       |   | **December   31,** |     |
|--------------------------------------------|--------|--------------------|----------|
|                                       |   |                    |     |
|                                       |   | **2006**           |     | **2005** |   |
|                                       |   |                    |          |   |  |  |   |
| Deferred tax assets                        |   |               |     |   |   |   |   |
| Net   operating loss carryforwards         |   | $                  | 46,497   |   | $ | 77,212 |   |
| Purchased   software amortization          |   |               | 100,435  |   |   | 95,991 |   |
| Accrued   expenses                         |   |               | 22,171   |   |   | 24,702 |   |
|                                       |   |                    |          |   |  |  |   |
|                                       |   |               | 169,103  |   |   | 197,905 |   |
| Deferred tax liabilities                   |   |               |     |   |   |   |   |
| Capitalized   software                     |   |               | 662,373  |   |   | 543,780 |   |
| Property   and equipment                   |   |               | 72,243   |   |   | 62,128 |   |
| Unrealized   gain on marketable securities |   |               | 5,318    |   |   | 4,355 |   |
|                                       |   |                    |          |   |  |  |   |
|                                       |   |               | 739,934  |   |   | 610,263 |   |
|                                       |   |                    |          |   |  |  |   |
| Net   deferred tax liability               |   | $                  | (570,831 | ) | $ | (412,358 | ) |
|                                       |   |                    |          |   |  |  |   |
| Net   deferred tax asset - current         |   | $                  | 16,853   |   | $ | 20,347 |   |
| Net   deferred tax liability - long term   |   |               | (587,684 | ) |   | (432,705 | ) |
|                                       |   |                    |          |   |  |  |   |
| Net   deferred tax liability               |   | $                  | (570,831 | ) | $ | (412,358 | ) |
|                                       |   |                    |          |   |  |  |   |

At December 31, 2006, the Company had federal net operating loss carryforwards of approximately $137,000, which expire in 2024 and 2025.

F-25

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE P - RELATED PARTY TRANSACTIONS**

The Company sells computer hardware and provides software maintenance, training, and consulting/development services to a company that is controlled by two members of the Company’s Board of Directors.  Total revenues from that company were $84,774 and $23,446 in 2006 and 2005, respectively.  The Company had $4,447 and $2,035 of accounts receivable at December 31, 2006 and 2005, respectively, related to services performed for that company. 

As disclosed in Note I, the Company entered into a loan agreement and promissory note with two stockholders to provide a promissory note for $823,500.  The stockholders own approximately 27.1% and 26.6%, respectively, of the outstanding common stock of the Company. 

Total interest expense on the promissory note recorded by the Company for the period ended December 31, 2006 Company was $52,101. 

As disclosed in Note J, the Company issued convertible promissory notes to the sellers of Questa in the amounts of $120,000 and $160,000.  The Company also issued 200,000 shares of its common stock to the sellers of Questa in connection with the execution of a Stock Purchase Agreement to acquire Questa. 

Total interest expense on the convertible promissory notes recorded by the Company for the period ended December 31, 2006 was $4,200. 

Robert C. Shreve, Jr., the Company’s Chairman, President, Chief Executive Officer and Chief Financial Officer, provided a guaranty in favor of a financial institution, pursuant to which Mr. Shreve guaranteed up to $676,500 of the Company’s obligations under the Term Loan and the Revolving Loan.  As consideration for providing this guaranty, the Company issued common stock options to purchase 451,000 shares of common stock of the Company to Mr. Shreve at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance.  The value of the options, using the Black-Scholes option pricing model was determined to be $171,018 and was recorded as debt issuance costs included in other assets in the accompanying balance sheets, and will be amortized as interest expense over the life of the loan. 

The Company recorded $19,462 as interest expense to reflect the amortization of the debt issuance costs for the period ended December 31, 2006. 

F-26

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE Q- STOCK OPTIONS**

2000 Stock Compensation Plan 

The 2000 Stock Compensation Plan authorizes the grant of up to 1,500,000 of the Company’s common stock in the form of incentive stock options (“ISOs”), and, the plan provides that: (i) the exercise price of an ISO must be no less than the fair value of the stock at the date of grant and (ii) the exercise price of an ISO held by an optionee who possesses more than 10% of the total combined voting power of all classes of stock must be no less than 110% of the fair market value of the stock at the time of grant.  The Compensation Committee of the Board of Directors has the authority to set expiration dates no later than ten years from the date of grant (or five years for an optionee who meets the 10% criteria), payment terms and other provisions for each grant.  Shares associated with unexercised options or reacquired shares of common stock become available for options or issuances.  The Compensation Committee of the Board of Directorsmay, at its sole discretion, accelerate or extend the date or dates on which all or any particular award or awards granted under the plan may vest or be exercised.  In the event of a merger, liquidation or sale of substantially all of the assets of the Company, the Board of Directors has the discretion to accelerate the vesting of the options granted under the plan.  At the discretion of the Compensation Committee, any option may include a “reload” feature.  Such feature allows an optionee exercising an option to receive, in addition to the number of shares of common stock due on the exercise, an additional option with an exercise price equal to the fair market value of the common stock on the date such additional option is granted. 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model (“BSOPM”) which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  The Company’s options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates.  The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. 

The fair value of options that were granted under the 2000 Stock Compensation Plan during the year ended December 31, 2006 was $0.47 per share.  The fair values of options granted were estimated using the Black-Scholes pricing model with a weighted average risk-free interest rate of 4.75%.  The following assumptions were also used to determine the fair value of each option grant: dividend yields of 0%; weighted average expected volatility of 137.3%, a weighted average expected term of 6.5 years, and an expected forfeiture rate of 67% based on the Company’s historical experience.  The volatility was determined based on the historic volatility of the Company’s stock for the length of the expected term of the options.  

At December 31, 2006, total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date was $37,830, which is expected to be recognized over a period of 3 years.  There were no 2000 Stock Compensation Plan options exercised during the year ended December 31, 2006. 

F-27

----

**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

Information regarding the 2000 Stock Compensation Plan option transactions for the year ended December 31, 2006 is summarized below:

|                                       |   | **Options** |               | **Weighted Average Exercise   Price** |   | **Weighted Average Remaining Contractual   Term (years)** |   |
|--------------------------------------------|--------|-------------|--------------------|-------------------------------------------------|--------|--------------------------------------------------------------------------|--------|
|                                       |   |             |                    |                                            |        |                                                                          |   |  |  |   |
| Options outstanding at   beginning of year |   |        | 56,808             |                                            | $      | 1.250                                                                    |   |   | —   |   |
| Options granted                            |   |        | 291,000            |                                            | $      | 0.505                                                                    |   |   | —   |   |
| Options exercised                          |   |        | —   |                                            |   | —                                                         |   |   | —   |   |
| Options forfeited                          |   |        | (71,331            | )                                               | $      | 0.686                                                                    |   |   | —   |   |
|                                       |   |             |                    |                                            |        |                                                                          |   |  |  |   |
| Options outstanding at   December 31, 2006 |   |        | 276,477            |                                            | $      | 0.611                                                                    |   |   | 8.80 |   |
|                                       |   |             |                    |                                            |        |                                                                          |   |  |  |   |
| Options exercisable at   December 31, 2006 |   |        | 39,477             |                                            | $      | 1.250                                                                    |   |   | 3.78 |   |
|                                       |   |             |                    |                                            |        |                                                                          |   |  |  |   |

Information regarding the 2000 Stock Compensation Plan options outstanding as of December 31, 2006 is summarized below:

|                 |   | **Options   Outstanding** |    | **Options   Exercisable**                                       |   |
|----------------------|--------|---------------------------|---------|-----------------------------------------------------------------|--------|
|                 |   |                           |    |                                                                 |   |
| **Exercise   Price** |   | **Options**               |    | **Weighted   Average   Remaining   Contractual   Life (years)** |   | **Weighted   Average   Exercise   Price** |   | **Aggregate   Intrinsic   Value** |   | **Options** |   | **Weighted   Average   Exercise   Price** |   | **Aggregate   Intrinsic   Value** |   |
|                      |   |                           |         |                                                            |        |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| 1.250                |   |                      | 39,477  |                                                            |   | 3.78 |   |   | 1.250 |   |   | —   |   |   | 39,477 |   |   | 1.250 |   |   | —   |   |
| 0.505                |   |                      | 237,000 |                                                            |   | 9.63 |   |   | 0.505 |   | $ | 67,545 |   |   | —   |   |   | 0.505 |   |   | —   |   |

F-28

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**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

Nonqualified Stock Options 

As previously indicated under Note H, Robert C. Shreve, Jr., the Company’s Chairman, President, Chief Executive Officer and Chief Financial Officer, provided a guaranty in favor of a financial institution, pursuant up to $676,500 of the Company’s obligations under the Term Loan and the Revolving Loan for the Questa acquisition.  As consideration for providing this guaranty, the Company issued common stock options to purchase 451,000 shares of common stock of the Company to Mr. Shreve at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance.   

The Company also issued, as consideration for providing a loan agreement and promissory note in connection with the Questa acquisition, common stock options to purchase 274,500 shares of common stock of the Company to two stockholders at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance. 

The Nonqualified Stock Option Agreement provides that the option price is $0.505, and the optioned shares are fully vested and fully exercisable.  The option period commences on August 16, 2006 and expires on August 16, 2013, unless earlier terminated by the grantee’s termination of service, death, disability, failure to pay the exercise price, or makes an assignment of the option without written consent of the Company.  In the event of a merger, liquidation or sale of substantially all of the assets of the Company, the option shall pertain to and apply to the securities or rights to which a holder of the number of shares of common stock subject to this option would have been entitled.  The option may be canceled by the Company, in its sole discretion, as of the effective date of any change of control, merger, consolidation or share exchange, or any issuance of bonds, debentures, preferred or preference stocks ranking prior to or otherwiseaffecting the common stock, or the rights thereof, or of any proposed sale of all or substantially all of the assets of the Company, or of any dissolution or liquidation of the Company, by either: (i) giving notice to grantee of its intention to cancel the optioned shares for which the issuance of shares of common stock involved payment by grantee for such shares and, permitting the purchase during the 30 day period next preceding such effective date of any or all of the shares of common stock subject to this option; or (ii) paying grantee an amount equal to a reasonable estimate of the difference between the net amount per share payable in such transaction or as a result of such transaction. 

The fair value of each option grant is estimated on the date of grant using the BSOPM which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  The Company’s options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates.  The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. 

The fair value of non-qualified stock options that were granted during the year ended December 31, 2006 was $0.38 per share.  The fair values of options granted were estimated using the Black-Scholes pricing model with a risk-free interest rate of 4.75%.  The following assumptions were also used to determine the fair value of each option grant: dividend yields of 0%; expected volatility of 117.1%, and an expected term of 3.5 years.  The volatility was determined based on the historic volatility of the Company’s stock for the length of the expected term of the options.

There were no non-qualified stock options exercised during the year ended December 31, 2006. 

F-29

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**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

|                                       |   | **Options** |               | **Weighted Average Exercise Price** |   | **Weighted Average Remaining Contractual Term (years)** |   |
|--------------------------------------------|--------|-------------|--------------------|----------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
|                                       |   |             |                    |                                               |        |                                                                             |   |  |  |   |
| Options outstanding at   beginning of year |   |        | —   |                                               | $      | —                                                            |   |   | —   |   |
| Options granted-Robert C.   Shreve, Jr.    |   |        | 451,000            |                                               | $      | 0.505                                                                       |   |   | —   |   |
| Options granted-Stockholders               |   |        | 549,000            |                                               | $      | 0.505                                                                       |   |   | —   |   |
| Options exercised                          |   |        | —   |                                               |   | —                                                            |   |   | —   |   |
| Options forfeited                          |   |        | —   |                                               | $      | —                                                            |   |   | —   |   |
|                                       |   |             |                    |                                               |        |                                                                             |   |  |  |   |
| Options outstanding at   December 31, 2006 |   |        | 1,000,000          |                                               | $      | 0.505                                                                       |   |   | 6.63 |   |
|                                       |   |             |                    |                                               |        |                                                                             |   |  |  |   |
| Options exercisable at   December 31, 2006 |   |        | 1,000,000          |                                               | $      | 0.505                                                                       |   |   | 6.63 |   |
|                                       |   |             |                    |                                               |        |                                                                             |   |  |  |   |

Information regarding non-qualified stock options outstanding as of December 31, 2006 is summarized below:

|                 |   | **Options   Outstanding** |      | **Options   Exercisable**                                       |   |
|----------------------|--------|---------------------------|-----------|-----------------------------------------------------------------|--------|
|                 |   |                           |      |                                                                 |   |
| **Exercise   Price** |   | **Options**               |      | **Weighted   Average   Remaining   Contractual   Life (years)** |   | **Weighted   Average   Exercise   Price** |   | **Aggregate   Intrinsic   Value** |   | **Options** |   | **Weighted   Average   Exercise   Price** |   | **Aggregate   Intrinsic   Value** |   |
|                      |   |                           |           |                                                            |        |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| 0.505                |   |                      | 1,000,000 |                                                            |   | 6.63 |   |   | 0.505 |   | $ | 285,000 |   |   | 1,000,000 |   |   | 0.505 |   | $ | 285,000 |   |

F-30

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**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

**NOTE R – STOCK BASED COMPENSATION**

Effective January 1, 2006, the Company adopted SFAS No. 123(R) for stock-based compensation plans.  Under SFAS No. 123(R) , all stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense in the statements of income over the requisite service period. 

The Company adopted SFAS No. 123(R) using a modified prospective application in compliance with the revised implementation date on January 1, 2006.  Under the modified prospective application, prior periods are not revised for comparative purposes.  The valuation provisions of SFAS No. 123(R) apply to new awards and to awards that were outstanding at the effective date and subsequently modified or cancelled. 

The fair value of each option grant is estimated on the date of grant using the BSOPM, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  The weighted-average fair value of options that were granted during the year ended December 31, 2006 was $0.40 per share.  The Company’s options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates.  The fair values of options granted were estimated using the Black-Scholes pricing model with a weighted average risk-free interest rate of 4.75%.  The following assumptions were also used to determine the fair value of each option grant: dividend yields of 0%; weighted average expected volatility of 122.1%, a weighted average expected term of 4.18 years, and an expected forfeiture rate of 67% based on the Company’shistorical experience.  The volatility was determined based on the historic volatility of the Company’s stock for the length of the expected term of the options.  

Share-based compensation expense included in general and administrative expenses and share-based interest expense for options issued in connection with the stockholder debt and debt issuance costs recognized for the year ended December 31, 2006 were as follows: 

|                                                    |   | **Year ended December 31, 2006** |    |
|---------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                    |   |                                            |         |   |
| Operating expenses:                                     |   |                                       |    |   |
| General   and administrative (employee related options) |   | $                                          | 7,341   |   |
| Other income (expense):                                 |   |                                       |    |   |
| Interest   expense                                      |   |                                       | 43,152  |   |
|                                                    |   |                                            |         |   |
| Share-based   compensation expense before taxes         |   |                                       | 50,493  |   |
| Related income tax benefits                             |   |                                       | (17,168 | ) |
|                                                    |   |                                            |         |   |
| Share-based   compensation expense, net of taxes        |   | $                                          | 33,325  |   |
|                                                    |   |                                            |         |   |

F-31

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**Avatar Systems, Inc.**

NOTES TO FINANCIAL STATEMENTS

December 31, 2006 and 2005

Robert C. Shreve, Jr., the Company’s Chairman, President, Chief Executive Officer and Chief Financial Officer, provided a guaranty in favor of a financial institution, pursuant to which Mr. Shreve guaranteed up to $676,500 of the Company’s obligations under the Term Loan and the Line-of-Credit.  As consideration for providing this guaranty, the Company issued common stock options to purchase 451,000 shares of common stock of the Company to Mr. Shreve at an exercise price of $0.505 per share.  The options were fully vested on the date of issuance. The value of the options, using the BSOPM model was determined to be $171,018 and was recorded as debt issuance costs included in other assets in the accompanying balance sheets, and will be amortized as interest expense over the life of the loan.  The Company recorded $19,462 as interest expense to reflect the amortization of the debt issuance costs for the period ended December 31, 2006.

The Company entered into a loan agreement and promissory note with two stockholders to provide a promissory note for $823,500.  The stockholders own approximately 27.1% and 26.6%, respectively, of the outstanding common stock of the Company.  The Company recorded $23,690 as interest expense to reflect the amortization of the unamortized discount on the promissory note payable to the stockholders for the period ended December 31, 2006. 

Pro Forma Information under SFAS No. 123(R)  for Periods Prior to January 1, 2006 

Prior to the adoption of SFAS No. 123(R), the Company had elected to account for stock-based compensation arrangements through the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25, “*Accounting for Stock-Based Compensation*.”  Under the intrinsic value method, compensation expense is measured as the excess, if any, of the market value of the underlying common stock over the amount the employee is required to pay on the date both the number of shares and the price to be paid are known. No compensation expense had been recognized in the statements of income as option grants generally are made with exercise prices equal to the fair value of the underlying common stock on the award date, which is typically the date of compensation measurement.  Had compensation cost been determined based on the fair value at the date of grant, in accordance with the provisions of SFAS No. 123, “*Accounting forStock-Based Compensation*,” the Company’s net income and basic and diluted earnings per share for the year ended December 31, 2005 would not have been impacted because there were no unvested options outstanding and there would have been no unrecognized compensation costs during the period. 

**NOTE S - EMPLOYEE RETIREMENT PLAN**

The Company sponsors an IRC 401(k) Profit Sharing Plan (the “Plan”), which covers all the Company’s corporate employees.  The Plan allows the corporate employees to contribute up to the maximum amount allowed by law, with the Company making a matching contribution of 3% of the employee’s salary.  Expenses related to matching contributions to the Plan were $26,032 and $20,504 for the years ended December 31, 2006 and 2005, respectively. 

F-32

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**Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure**

          None.

**Item 8a. Controls and Procedures**

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

          As of the date of this report, the Chief Executive Officer/Chief Financial Officer conducted 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, based upon the evaluation he completed as of the date of this report, 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.

**Item 8b. Other Information**

          Not applicable.

-63-

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**PART III**

**Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(A) of the Exchange Act**

          The following sets forth information concerning our officers and directors, including their ages, present principal occupations, other business experience during the last five years, memberships on committees of the board of directors and directorships in other publicly held companies.

| **Name**              |   | **Age** |   | **Position   with Avatar**                                                                          |
|-----------------------|--------|---------|--------|-----------------------------------------------------------------------------------------------------|
|                       |   |         |   |                                                                                                     |
| Robert C. Shreve, Jr. |   | 44      |   | President, Chief Executive Officer,   Chief Financial Officer,   Chairman of the Board and Director |
| Allen D. Farris       |   | 55      |   | Director                                                                                            |
| Stephen A. Komlosy    |   | 66      |   | Director                                                                                            |
| John J. May           |   | 58      |   | Director                                                                                            |
| Cindy Skelton         |   | 48      |   | Secretary                                                                                           |

**          Robert C. (Chuck) Shreve, Jr.** was managing partner of Avatar Systems, Ltd. and an officer of Avatar Systems, Inc., the predecessors of our Company, from 1996 to November 2000.  He has served as the President, Chief Executive Officer, Chief Financial Officer, Chairman of the Board and a director of our Company since November 14, 2000.  He has over twenty years experience in accounting and financial management with emphasis in the oil and gas industry and the real estate development industry. Mr. Shreve also has technical certifications in the technology field and over eighteen years in PC-based network and IBM AS400 systems.  Mr. Shreve received his BBA from the University of Texas of the Permian Basin, and attended graduate school at the University of Texas at Dallas.  As a Certified Public Accountant, he is a member of the American Institute of CPAs, the Texas Society of CPAsand the Dallas Chapter of the Texas Society of CPAs.

**          Stephen A. Komlosy**, a member of MENSA, has over 45 years experience in business as a proprietor and has been a director of a number of public companies operating in the UK and the USA, and was until October 2005 chairman of AIM listed London and Boston Investments Plc (now PSG Solutions Plc), moving the company to OFEX and then to AIM.  Previously, he was instrumental in the flotation of PremiSys Plc, the Laurie March Group and, on NASDAQ, Avatar Systems Inc., of which he remains a director.  Mr. Komlosy has been a director of a number of publicly listed companies, including LPO, Pavilion Leisure Plc and Branon Plc, a supplier to North Sea Oil Companies and Ministry of Defence supplier, which he co-founded and where he was the director in charge of the launch of Cavendish Petroleum Plc, an Ohio, USA gas producer.  Additionally, since 1964, he has built up three private propertycompanies, two of which have been amalgamated with public companies.

**          John J. May** is a Fellow of the Institute of Chartered Accountants in England and Wales. He is policy director of the Small Business Bureau Limited and deputy chairman of The Genesis Initiative Limited, a lobby group for small business to the UK Parliament.  Mr. May is the principal of his own London-based chartered accountancy practice.  He was finance director of AIM listed PSG Solutions PLC, formerly London & Boston Investments Plc, until December 2005, and was previously finance director of Healthcare Enterprise Group Plc (formerly Interactivity Plc) and non-executive director of Croma Group Plc, both of which are listed on AIM. From 1977 to 1994 Mr. May was a senior partner with Horwath Clark Whitehill, where he served for eight years on the managing board and for nine years as chairman of its Thames Valley offices. In his capacity as UK national marketing partner and head of itsproperty consultancy division, he was a director of its UK and international associations.  He is currently a non-executive director of Platinum Diversified Mining Inc. listed on AIM, NASDAQ-listed Avatar Systems Inc. and non-executive chairman of Southbank UK Plc, listed on the Channel Islands Stock Exchange.

-64-

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**          Allen D. Farris** was appointed to the board of directors on September 24, 2004.  Mr. Farris is currently the Chief Financial Officer of Eland Energy, Inc. and has held that position since December of 1999.  Mr. Farris has thirty years of accounting and financial experience including financial reporting, treasury management, cash forecasting and budgeting, financial forecasting and modeling, computer system installation and maintenance, income tax planning, and maintaining banking relationships.  His experience also includes both public and privately owned companies covering a broad range of industries at levels including Chief Financial Officer, Treasurer, Controller, and Tax Manager.  Two specific areas of his expertise include all phases of the petroleum and real estate industries.  Mr. Farris holds a Bachelor of Business Administration degree in Accounting from theUniversity of Texas at Austin and a Master of Science degree in Accounting from Texas Tech University.  He is a Certified Public Accountant and a member of the American Institute, Texas Society, and Dallas Chapter of CPAs, and a member of the Dallas Chapter of the Petroleum Accountants’ Society.

**          Cindy Skelton** currently serves as the Secretary of our Company and she manages the benefit plans and employee relations for us.  She has served as our Secretary since November 27, 2000.  Ms. Skelton is primarily employed by Eland and since 1986 has served as Eland’s Accounting Manager and Controller.  Since 1994, she has held the position of Director of Human Resources with Eland. She received a BBA degree from Texas Tech University in 1981.  She will devote as much of her time as necessary to fulfill her duties as an officer of our Company.

**     Committees of the Board of Directors**

          The Company is not a listed company on a national stock exchange and is therefore, not required to have an Audit Committee, a Compensation Committee, or a Nominating Committee.  In the absence of such committees, the Board as a whole evaluates and recommends the engagement of the Company’s independent registered public accounting firm, reviews the results of their audit findings, and monitors on a periodic basis the internal controls of the Company, establishes the compensation of officers of the Company, administers the 2000 Stock Compensation Plan, prepares recommendations to the Board on the adoption of stock option and other incentive plans, and grants stock options.  The Board also considers individuals to recommend to the Board for inclusion among management’s nominees and considers corporate governance issues.  The Board will consider director candidates recommended byshareholders if the name and qualifications of candidates are timely presented to the Board.

**     Code of Ethics**

          The Company has not formally approved a written code of ethics because it has only one member of management making it impractical and cost prohibitive for the Company to implement.

     **Section 16(a) Beneficial Ownership Reporting Compliance**

          Section 16(a) of the Securities and Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than ten percent (10%) of a registered class of the Company’s equity securities, to file certain reports regarding ownership of, and transactions in, the Company’s securities, with the Securities and Exchange Commission.  Such officers, directors and 10% stockholders are also required to furnish the Company with copies of all Section 16(a) forms that they file.

          Based solely on the Company’s review of copies of Forms 3, 4, 5, and amendments thereto furnished to the Company pursuant to Rule 16a-3(e), the Company believes that, during the year ended December 31, 2006, all Section 16(a) filing requirements applicable to the Company’s officers, directors, and 10% stockholders were met.

**Item 10. Executive Compensation**

     **Executive Officers**

          Our Board appoints the executive officers to serve at the discretion of the Board until the next annual meeting of the Board of Directors.  Robert C. Shreve, Jr. President, Chief Financial Officer and a director of the Company is the only officer to receive $100,000 or more in annual compensation

-65-

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     **Employment Agreements**

          We have entered into a management agreement with Robert C. Shreve, Jr., our President and Chief Executive Officer and Chief Financial Officer, which terminates on July 10, 2007.  The management agreement shall be automatically extended for an additional one-year period after the initial term unless at least 30 days prior to the termination date either Mr. Shreve or we give written notice to the other that the management agreement will not be renewed.  Mr. Shreve receives an annual base salary of $150,000, which may be increased at the discretion of our Board.  Additionally, Mr. Shreve may be eligible to receive an annual bonus based on our financial performance in the form of stock options and cash not to exceed 15% of his base salary.

     **Key Man Insurance**

          We currently pay an annual premium of $3,467 for a life insurance policy for $2,550,000 on the life of Robert C. Shreve, Jr., our President, Chief Executive Officer and Chief Financial Officer.  The proceeds of the policy are payable to the Company.

     **Compensation Table**

          The information set forth below concerns the cash and non-cash compensation to executive officers for each of the past three fiscal years ended December 31, 2006, 2005 and 2004.  In each case, the compensation listed was paid by our Company.  Except for Robert C. Shreve, Jr., our President, Chief Executive Officer, and Chief Financial Officer, no executive officer has an employment agreement with us and all executive officers serve at the discretion of the Board.

     **Summary Compensation Table**

| **Name and   Principal Position** |   | **Year** |   | **Salary** |   | **All Other   Compensation** |   | **Total** |   |
|-----------------------------------|--------|----------|--------|------------|--------|------------------------------|--------|-----------|--------|
|                                   |   |          |        |       |        |                              |   |           |        |   |  |  |   |
| Robert   C. Shreve, Jr.           |   |     | 2006   |       | $      | 150,000                      |   | $         | 8,654  |   | $ | 158,654 |   |
| Chief   Executive Officer         |   |     | 2005   |       | $      | 133,333                      |   | $         | 7,211  |   | $ | 140,544 |   |
|                              |   |     | 2004   |       | $      | 125,000                      |   | $         | 5,208  |   | $ | 130,208 |   |

-66-

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     **Outstanding Equity Awards at Fiscal Year End**

|                  |   | **Option   Awards**                                                                   |    |
|-----------------------|--------|---------------------------------------------------------------------------------------|---------|
|                  |   |                                                                                       |    |
| **Name**              |   | **Number   of   Securities   Underlying   Unexercised   Options   (#)   Exercisable** |    | **Number   of   Securities   Underlying   Unexercised   Options   (#)   Unexercisable** |   | **Equity   Incentive   Plan   Awards   Number of   Securities   Underlying   Unexercised   Unearned   Options (#)** |   | **Option   Exercise   Price** |   | **Option   Expiration   Date** |   |
|                       |   |                                                                                       |         |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Robert C. Shreve, Jr. |   |                                                                                  | 451,000 |   |   | —   |   |   | —   |   | $ | 0.505 |   |   | 8/16/2013 |   |

     **Director Compensation**

          Directors who are also employees receive no compensation for serving on the Board.  Our non-employee directors receive no compensation for serving on the Board.  We intend to reimburse non-employee directors for travel and other expenses incurred in connection with attending the Board meetings.

**Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters**

          The table below sets forth, as of April 12, 2007, certain information with respect to the beneficial ownership of the common stock of our Company by each person who we know to be a beneficial owner of more than 5% of any class or series of our capital stock, each of the directors and executive officers individually, and all directors and executive officers as a group.

| **Name(1)**                                         |   | **Shares   Beneficially   Owned** |               | **Percentage   of Shares   Beneficially Owned** |   |
|-----------------------------------------------------|--------|-----------------------------------|--------------------|-------------------------------------------------|--------|
|                                                     |   |                                   |                    |                                            |        |  |   |
| Robert C. Shreve, Jr.                               |   |                              | 1,641,200          |                                            |   | 18.2 |   |
| Charles Timothy Allen (6)                           |   |                              | 2,449,973          |                                            |   | 27.1 |   |
| Orville Gregory Allen (6)                           |   |                              | 2,406,250          |                                            |   | 26.6 |   |
| PSG Solutions Plc (2) (6)                           |   |                              | 1,679,002          |                                            |   | 18.6 |   |
| Stephen A. Komlosy (3)                              |   |                              | 16,000             |                                            |   | 0.2 |   |
| Allen D. Farris (4)                                 |   |                              | —   |                                            |   | —   |   |
| John J. May (4)                                     |   |                              | —   |                                            |   | —   |   |
| Cindy Skelton (5)                                   |   |                              | —   |                                            |   | —   |   |
| Officers and directors as a group (5   persons) (7) |   |                              | 1,657,200          |                                            |   | 18.3 |   |