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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, 2002
                       COMMISSION FILE NUMBER: 000-32925

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

                      Texas                              75-2796037
            (State of incorporation)        (IRS Employer Identification Number)

5728 LBJ Freeway, Suite 270, Dallas, Texas 75240           75240
    (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 (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.
[X] Yes [ ] No

         As of March 21, 2003, 8,695,652 shares of the Issuer's $0.001 par value
common stock were  outstanding and the aggregate  market value of the share held
by non-affiliates  was approximately  $187,826 based upon a closing bid price of
$.27 per share of Common Stock on the OTC Bulletin Board.


         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of the  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]


         The Issuer's revenue for its most recent fiscal year was $2,152,389.


The following documents are incorporated by reference: None

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<PAGE>

                                TABLE OF CONTENTS


PART I.........................................................................1
   ITEM 1. BUSINESS............................................................1
     General Development Of Business...........................................1
     History Of HCI............................................................1
     Joint Plan Of Reorganization..............................................1
     Merger with Avatar Systems, Inc...........................................1
     Narrative Description Of Business.........................................2
     Products..................................................................2
     Petroware2000.............................................................2
     Avatar400.................................................................2
     RAPID (ASP Product).......................................................3
     Sales adn Marketing.......................................................3
     Competition...............................................................3
     Customers.................................................................3
     Suppliers.................................................................4
     Licenses, Franchises, Concessions, Royalty Agreement,
     Patents, Trademarks Or Labor Contracts....................................4
     Regulatory and Enviromental Matters.......................................4
     Research and Development..................................................4
     Employees.................................................................5
     Risks Associated with Our Business........................................5
   ITEM 2. PROPERTIES..........................................................7
   ITEM 3. LEGAL PROCEEDINGS...................................................7
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................7
PART II........................................................................7
   ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
   MATTERS.....................................................................7
     Hlderss...................................................................7
     Dividends.................................................................8
   ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
   OR PLAN OF OPERATIONS.......................................................8
     Results Of Operations.....................................................8
     Liquidity And Capital Resources...........................................9
     Recent Accounting Pronouncements.........................................10
     Use of Estimates and Certain Significant Estimates.......................10
     Revenue Recognition......................................................11
     Software Development Costs...............................................11
     Forward Looking Statements...............................................11
   ITEM 7. FINANCIAL STATEMENTS...............................................12
   ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
   AND FINANCIAL DISCLOSURE...................................................29
PART III......................................................................29
   ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
   WITH SECTION 16(A) OF THE EXCHANGE ACT.....................................29
   COMMITTEES OF THE BOARD OF DIRECTORS.......................................30
     Section 16(A) Beneficial Ownership Reporting Compliance..................31
   ITEM 10. EXECUTIVE COMPENSATION............................................31
     Executive Officers.......................................................31
     Employment Agreements....................................................31
     Key Man Insurance........................................................31
     Stock Option Plan........................................................32
     Compensation Table.......................................................33
     Summary Compensation Table...............................................33
   ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....34
   ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................35
   ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..................................35
     Statements Filed as Part of this Report:.................................35

<PAGE>

                                TABLE OF CONTENTS

     Exhibits.................................................................35
     Reports On Form 8-K......................................................37
   ITEM 14. CONTROLS AND PROCEDURES...........................................37
   SIGNATURES.................................................................38
   EXHIBIT 99.2...............................................................40
   Statement Furnished Pursuant to Section 906 of the Sarbanes-oxley Act
   Of 2002, 18 U.s.c. Section 1350............................................40



























                                      -ii-
<PAGE>

                                     PART I

ITEM 1. BUSINESS

     General Development of Business

         Avatar  was  formed  on  September  1,  1996  with the  acquisition  of
Information  Resources,  Inc.  We  are  the  successor  business  entity  of HCI
Acquisition  1998-2, Inc. and initially conducted our business from 1996 to July
2000 as Avatar Systems,  Ltd., a Texas limited partnership,  which was organized
on September 1, 1996. Avatar International,  Inc., a Texas corporation,  was the
general partner of the  partnership  and Robert C. Shreve,  Jr., Gregg Allen and
Tim Allen, three of our current officers,  directors and principal shareholders,
were limited  partners of the  partnership.  The limited  partners owned all the
outstanding common stock of Avatar International.


         On July  7,  2000,  the  limited  partners  assigned  their  respective
partnership  interests to Avatar  International  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,  Avatar  Systems  merged  with HCI,  the
surviving entity, which changed its name to Avatar Systems, Inc.


     History of HCI

         Our  predecessor,  HCI Acquisition  1998-2,  Inc., 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. HCI conducted its business under the name
of  Precision  Stainless  Fabricators.  Hospitality  Companies'  strategy was to
provide, through its subsidiaries,  a vertically-integrated  entity specializing
in  design,  fabrication  and  installation  of  restaurant  equipment  for  its
customers.  Hospitality  Companies  subsequently  acquired Restaurant  Equipment
Supply  Company of  Columbia,  Missouri  and  Spener  Restaurant  of St.  Louis,
Missouri.  However,  Hospitality Companies and its subsidiaries,  including HCI,
were unsuccessful in the restaurant  equipment  business and on February 1, 2000
filed  voluntary  petitions for relief under Chapter 11 of the Bankruptcy  Code.
The  Bankruptcy  Court  authorized  the  joint   administration  of  Hospitality
Companies and its subsidiaries.


     Joint Plan of Reorganization


         HCI and the other  subsidiaries of Hospitality  Companies  continued to
operate  their  business and manage  their  properties  as  debtor-in-possession
pursuant  to the  Bankruptcy  Code until  August 21,  2000 when the  Hospitality
Companies  and  subsidiaries  proposed  a  Joint  Plan  of  Reorganization  (the
"Reorganization Plan") for approval by the Bankruptcy Court and their creditors.
The Reorganization  Plan was modified on September 15, 2000 and was confirmed by
the U.S.  Bankruptcy  Court for the Northern  District of Texas on September 27,
2000.


         The  Reorganization  Plan provided for the vesting of all of the assets
of  Hospitality   Companies  and  its   subsidiaries  in  a  liquidating   trust
administered  by  a  trust  committee  and  distribution  of  the  proceeds,  in
descending  order,  to  secured  creditors,  priority  creditors  and  unsecured
creditors.  The  Reorganization  Plan further  provided that HCI would remain in
existence,  although all capital stock  outstanding as of the filing date of the
bankruptcy  petition was canceled.  Under the  Reorganization  Plan,  HCI issued
695,652  shares of its  common  stock to  approximately  450 of HCI's  unsecured
creditors in settlement of their claims  against HCI.  Under the  Reorganization
Plan,  HCI was  discharged  from all debts and  liabilities  that  arose  before
October 10, 2000.


     Merger with Avatar Systems, Inc.


         HCI's initial business purpose as stated in the Reorganization Plan was
to seek a  merger  transaction  with an  operating  business  to  provide  HCI's
shareholders  with growth  potential by owning an interest in a viable  business
enterprise. HCI was required to enter into an agreement for the acquisition of a
private   operating  company  as  a  condition  for  the  effectiveness  of  the
Reorganization Plan.


                                       1
<PAGE>


         On November 14, 2000, HCI acquired all of the outstanding  common stock
of Avatar Systems 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.


     Narrative Description of Business


     Products


         Avatar  provides  enterprise  resource  planning  software to companies
engaged in the petroleum  exploration and production  industry.  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 and ASP basis.


         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 and resource management software for
the petroleum  industry  including  Avatar400,  Petroware2000  and Remote Access
Private  Integrated  Datalink (RAPID) services.  Our products offer a variety of
applications specific to the accounting,  billing,  financial analysis 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 licensing.  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.


         Avatar400Avatar 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.


                                       2
<PAGE>


         RAPID (ASP  Product).RAPID or Remote Access Private Integrated Datalink
is an  application  service  provider  (ASP)  hosted  oil  and  gas  accounting,
financial,  land and  production  management  application  which we developed to
reduce the high costs of oil and gas accounting  software ownership and the need
for regular version  upgrades.  By delivering the software  application  through
remote Internet and Wide Area Network  connectivity,  our remote datalink system
facilitates  lowered  system  costs by  eliminating  the  subscriber's  need for
expensive in-house hardware solutions,  software purchases and eventual upgrades
as well as  lowering  or  eliminating  the  expense  of an  internal  technology
department and staff.


         Our application service provider (ASP) system delivers worldwide remote
access  availability  to companies  for their oil and gas  accounting,  land and
production needs.  Users remotely connect into our host server on a subscription
basis and utilize the advanced  technology of our remote  datalink system via an
advanced IBM server.  Our remote  application  service  provider system provides
access to a high availability,  secure, fast processing IBM server for a limited
monthly  expenditure  and  eliminates  the  need  for  an  expensive  technology
department as the server  equipment and all the oil and gas featured modules are
maintained by us.


     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 Dallas.


         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.


         We  launched  our web site  (www.avatarsystems.net)  in 1997 to provide
customer  leads and to promote our products and services over the Internet.  Our
web site is also used to provide current  customers  information on new products
and services, product training dates and company sponsored seminars.


     Competition


         The  business-to-business  e-commerce market for the petroleum industry
is intensely competitive, evolving and subject to rapid technological change. 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 completed a hardware sale with one customer during 2002 for
approximately  $500,000 which  accounted for 78% of hardware  revenue and 23% of
total revenue in the year ended December 31, 2002. There were no other customers
in 2002 or 2001 that accounted for more than 10% of revenues.




                                       3
<PAGE>

     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


         We hold  copyrights to all of our products  including,  the  Avatar400,
RAPID,  Petroware2000,  and Petroware Version 6. In addition, we have trademarks
for Avatar400, Petroware2000, and Petroware Version 6.


         In August 1998, we purchased assets, including software technology from
one of our  competitors.  We are obligated to pay a royalty to the former owners
of products acquired by us. Our obligation to pay royalty payments terminates in
August 2003.


     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  revenues
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.  Congress recently enacted
Internet  laws  regarding  on-line  copyright  infringement.  Although  not  yet
enacted,  Congress is considering laws regarding Internet taxation. In addition,
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.


         Several    telecommunications    carriers    are    seeking   to   have
telecommunications  over the Internet  regulated  by the Federal  Communications
Commission   in  the  same   manner   as  other   telecommunications   services.
Additionally,   local   telephone   carriers   have   petitioned   the   Federal
Communications  Commission  to regulate  Internet  service  providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on such providers.  If either of these petitions are granted,
the cost of communicating on the Internet could increase substantially. This, in
turn,  could slow the growth of use of the  Internet.  Any such  legislation  or
regulation  could  materially  and  adversely  affect  our  business,  financial
condition and operating results.


     Research and Development


         Our  capitalized  software  development  costs have been focused on the
development of our Avatar400 and Petroware2000  products. We capitalize software
development costs applicable to each product after technological feasibility has
been established  until the product is released to the market.  It was necessary
for us to develop a  Windows-based  application  to gain a competitive  edge and
have successful  sales in the oil and gas market.  Non-capitalized  research and
development  costs include  research on the readiness and  deployment of various
applications via an application  service provider model over a wide area network
(WAN) or the  Internet.  We spent  $550,780 on research and  development  during
2002.

                                       4
<PAGE>

     Employees


         As of  December  31,  2002,  we had  11  employees,  none  of  whom  is
represented  by a collective  bargaining  agreement.  All of our  employees  are
full-time employees.


     Risks Associated With Our Business

         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:

         o        diversion  of   management's   attention   from  our  existing
                  business;
         o        increased fixed costs, which could cause profits to decrease;
         o        assumption  of  unknown   material   liabilities  of  acquired
                  companies;
         o        large write-offs and amortization expenses related to goodwill
                  and other intangible assets;
         o        difficulty in integrating an acquired company's  personnel and
                  culture with our personnel and culture;
         o        difficulty in integrating an acquired company's accounting and
                  information   systems  with  our  accounting  and  information
                  systems;
         o        difficulty in maintaining standards,  controls, procedures and
                  policies across the combined companies;
         o        issuances of equity  securities  that may dilute your interest
                  in our company;
         o        incurring additional debt; and
         o        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  planned   rapid   expansion   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 rapid growth 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.

         OUR  STRATEGY  OF  DISTRIBUTING  SOFTWARE  AND  ANALYSIS  TOOLS  AS  AN
         APPLICATION SERVICE PROVIDER IS UNPROVEN AND MAY NOT BE SUCCESSFUL.

         We intend to establish  ourselves as an ASP serving the software  needs
of industry  professionals,  as well as the general enterprise resource planning
needs of the upstream  petroleum  industry.  The ASP model is a new and unproven
distribution strategy,  particularly in our marketplace.  To fully implement our
ASP model, we will need to develop additional  technology,  as well as establish
relationships  with developers and distributors of software  products,  which we
may be unable to do on a  cost-effective  basis,  if at all. If we are unable to
implement  our ASP model,  or if our ASP  distribution  model does not  generate



                                       5
<PAGE>

sufficient revenue to cover the costs of creating, deploying and supporting this
distribution  model,  our  operating  results will be harmed.  In addition,  ASP
revenue accounting  generally recognizes revenue over the life of the particular
contract.

         IF WE DO NOT HIRE AND RETAIN  QUALIFIED  STAFF,  OUR BUSINESS  WILL NOT
         GROW AS EXPECTED.

         If we cannot attract,  retain,  manage and motivate skilled  employees,
the  growth  of our  business  will be  limited.  The  programmers  and  network
engineers  that are  necessary  to deploy  our  Internet  strategies  are highly
trained  professionals that are in considerable demand consistent with the rapid
expansion of the Internet.

         WE MAY NOT BE ABLE TO OBTAIN  ADDITIONAL  CAPITAL TO FUND  ACQUISITIONS
         WHEN NEEDED.

         We  believe  that our cash  resources  will be  sufficient  to fund our
operations for at least the next twelve months.


         If we cannot  obtain  adequate  funds on  acceptable  terms,  we may be
unable to:

         o        fund our capital requirements;
         o        take advantage of strategic opportunities;
         o        respond to competitive pressures; or
         o        develop or enhance our services.

         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  customers'  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.


                                       6
<PAGE>

         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.

         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   95%  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.


ITEM 2. PROPERTIES


         The Company  leases its 7,004 square foot facility at 5728 LBJ Freeway,
Suite 270, Dallas, Texas, 75240. The lease for this facility was entered into on
August 29, 2000 for a  sixty-month  lease term  commencing on August 1, 2000 and
expiring on September 30, 2005.  The company  leases an 884 square foot facility
at 310 West Wall Street,  Suite 10,  Midland,  Texas  79701.  The lease for this
facility  was  entered  into on  October 1, 2001 for a  twelve-month  lease term
commencing on November 1, 2002 and expiring on October 31, 2003.


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

         No matters were submitted to a vote of the Company's  security  holders
during the fourth quarter of 2002.

                                     PART II


ITEM 5.  MARKET  FOR THE  REGISTRANT'S  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 2002, there was only nominal trading in the
shares of our common stock. As of March 25, 2003, the last reported trade in our
stock was at $0.53.  No assurance  can be given that an active market will exist
for our common stock in the future. On March 25, 2003 the last date reported for
our common stock, the closing bid price was $0.27and the closing asked price was
$1.01. Our trading symbol is AVSY.OB.


     Holders


         As of March 21, 2003, the Company had approximately 450 shareholders of
record  and its  common  stock had a closing  bid price of $0.27 per share and a
closing asked price of $1.01 per share.




                                       7
<PAGE>

     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  foreseeable
future  since we intend to utilize our  earnings,  if any, to finance our future
growth, including possible acquisitions.


ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION OR PLAN OF
        OPERATIONS


     Results of Operations


         Revenues


         Our net revenues  include four  components:  software  licensing  fees,
maintenance,  professional services and hardware.  Our net revenues for the year
ended December 31, 2002  decreased 10% to $2,152,389  compared with net revenues
of $2,391,295 for the year ended  December  31,2001.  Our overall  revenues were
affected  by  higher   software  sales  in  2001  due  to  the  release  of  our
Petroware2000  software  package,  which was  released  in October of 2000 and a
large hardware sale to one of our customers during the current year.


         Software. Software sales for the year ended December 31, 2002 decreased
59.5% to $336,596 compared with software sales of $830,423 in 2001. The decrease
in software  revenues  is due to the high  levels of sales of our  Petroware2000
software package in 2001, which was released in October 2000.


         Maintenance.  Maintenance  revenue for the year ended December 31, 2002
decreased 4.8% to $964,989  compared with  maintenance  revenue of $1,014,067 in
2001.


         Professional services.  Professional service revenue for the year ended
December  31, 2002  decreased  44.6% to  $210,356,  compared  with  professional
services  revenue of $379,803 in 2001. The decrease in professional  services is
related to the lower sales volume of our Petroware2000 software package in 2002.


         Hardware.  Hardware  sales for year ended  December 31, 2002  increased
283.5% to  $640,448  compared  with  hardware  sales of  $167,002  in 2001.  The
increase in hardware sales is due to a large sale of  approximately  $500,000 to
one of our customers in 2002.


         Cost of Revenues


         Our cost of revenues includes four components:  cost of software,  cost
of maintenance  revenue,  cost of  professional  services,  and cost of hardware
sales. Our cost of revenues for the year ended December 31, 2002 increased 22.9%
to $879,003 compared with cost of revenues of $715,202 in 2001. Cost of revenues
as a percentage of net revenues  increased to 40.8% for the year ended  December
31, 2002 from 29.9% in 2001.  The  increase in cost of  revenues  are  primarily
related to the higher cost of a hardware sale that we made to one customer.


         Cost of  software.  Cost of software  decreased  47% to $86,864 for the
year ended  December  31, 2002 from  $163,757 in 2001.  The  decrease in cost of
software  is directly  related to the  decrease  in  software  revenue.  Cost of
software as a percentage of the related revenues increased to 25.8% for the year
ended  December  31,  2002  compared  to 19.7% in 2001  due to the  decrease  in
economies of scale.


         Cost of  maintenance.  Cost of maintenance  revenue  decreased 28.5% to
$207,496  for the year ended  December 31, 2002 from  $290,058 in 2001.  Cost of
maintenance  revenue as a percentage of the related  revenue  increased to 21.5%
for the year ended December 31, 2002, compared to 28.6% for the same period last
year.  The  decreases  in  cost  of  maintenance  and  percentages  of  cost  of
maintenance  as a percentage  of the related  revenues are due to  reductions in
personnel providing maintenance support.


                                       8
<PAGE>

         Cost of professional services.  Cost of professional services decreased
50.9% to $59,173 for the year ended December 31, 2002, compared with $120,598 in
2001.  Cost of  professional  services as a  percentage  of the related  revenue
decreased to 28.1% for the year ended  December  31, 2002,  compared to 31.8% in
2001. The decreases in cost were related to decreases in demand for professional
services. The reduction in percentages of related revenue were due to reductions
in use of outside consultants and reductions in personnel.


         Hardware.  Cost of hardware sold increased  273.2% to $525,470 for year
ended December 31, 2002,  compared with $140,789 in 2001.  Cost of hardware as a
percentage of the related  revenue  decreased to 82% for the year ended December
31, 2002,  compared  with 84.3% in 2001.  The  increases in cost of hardware are
directly related to the cost of a hardware sale that was made to one customer.


         Operating Expenses


         Sales and  Marketing.  Our sales and  marketing  expenses  for the year
ended December 31, 2002 decreased  13.7% to $243,026,  compared with $281,653 in
2001.  Sales and  marketing  expenses as a percentage  of net revenues  remained
comparable at 11.3% for the year ended December 31, 2002 and 11.8% in 2000.


         General and Administrative. Our general and administrative expenses for
the year ended  December 31, 2002  decreased  34.9% to $432,116,  compared  with
general  and   administrative   expenses  of  $664,069  in  2001.   General  and
administrative  expenses as a percentage of net revenues  decreased to 20.1% for
the year ended December 31, 2002,  compared with 27.8% in 2001. The decreases in
general  and   administrative   expenses  and  the  percentage  of  general  and
administrative  expenses are related cost cutting  measures  implemented  by the
company during the current year.


         Interest Income. Interest income was $6,905 for the year ended December
31, 2002  compared to $23,706 in 2001.  The decrease was  primarily due to lower
interest rates and lower average cash balances during 2002.


         Interest Expense. Interest expense was $588 for the year ended December
31, 2002,  compared to $16,883 in 2001.  The decrease is due to lower amounts of
average debt outstanding during 2002.


         Provision  for Income Taxes.  For the year ended  December 31, 2002, we
recorded a deferred  tax  provision  on income  from  continuing  operations  of
$68,149  compared to $32,317 in 2001.  The  increase in deferred  tax expense is
directly attributable to increased net income.


     Liquidity and Capital Resources


         We have historically  financed our liquidity needs through a variety of
sources including proceeds from the sale of common stock,  borrowing from banks,
loans from our  stockholders,  and cash flows from  operation.  At December  31,
2002,  we had  $395,256  in cash  and  cash  equivalents.  Cash  generated  from
operations  was $610,519  and $135,632 for the year ended  December 31, 2002 and
2001, respectively. Cash used for investing activities was $561,883 and $461,857
for the years ended December 31, 2002 and 2001,  respectively primarily for cash
invested  software  development  and  property  and  equipment.  Cash  used  for
financing  activities  was $50,742 and $176,065 for the years ended December 31,
2002 and 2001,  respectively  primarily for principal reduction of our long term
debt.


         In July 2000, we issued  1,600,000  shares of common stock and warrants
in a private transaction to London & Boston Investments, Plc., formerly known as
Cybertec Holdings,  Plc, for an aggregate consideration of $1.6 million. We have
utilized $1.29 million of the proceeds for legal, accounting, investment banking
fees and other expenses  relating to the merger with HCI,  payment of consulting
fees to a  consultant,  investment  in a  subsidiary,  expenses  relating to the
London & Boston  Investments,  Plc  transaction,  salaries and other general and
administrative  expenses.  At December 31, 2002, we had  approximately  $311,000
remaining of the proceeds.


         At December 31, 2002, we had cash and cash  equivalents  of $395,256 as
compared to cash and cash  equivalents  of $397,362 at December 31, 2001.  Based
upon  current  financial  resources,  we  believe  that we will have  sufficient
reserves  to meet our  anticipated  working  capital  needs for our  business as
currently  conducted for the next twelve months.  However, we anticipate that we


                                       9
<PAGE>

will need  additional  working capital to fund our business  strategy  including
acquisitions.  There  can be no  assurance  that  additional  financing  will be
available, or if available,  that such financing will be on favorable terms. Any
such failure to secure additional financing, if needed, could impair our ability
to achieve our business  strategy.  There can be no assurance  that we will have
sufficient  funds or successfully  achieve our plans to a level that will have a
positive effect on our results of operations or financial condition. Our ability
to execute our growth strategy is contingent upon sufficient  capital as well as
other factors,  including our ability to further increase consumer  awareness of
our  products,   our  ability  to  consummate   acquisitions  of   complimentary
businesses,  general economic and industry  conditions,  our ability to recruit,
train and retain a qualified sales staff,  and other factors,  many of which are
beyond our control.  Even if our revenues and earnings grow rapidly, such growth
may  significantly  strain our  management  and our  operational  and  technical
resources. If we are successful in obtaining greater market penetration with our
products,  we will be required to deliver  increasing volumes of our products to
our customers on a timely basis at a reasonable  cost to us. No assurance can be
given  that we can  meet  increased  product  demand  or that we will be able to
deliver our products on a timely and cost-effective basis.


     Recent Accounting Pronouncements


         The Financial  Accounting Standards Board  ("FASB")recently  issued FAS
No. 144,  Accounting for the  Impairment or Disposal of Long-Lived  Assets ("FAS
144"),  which the  Company  adopted on January 1, 2002.  The FASB's new rules on
asset  impairment  supersede  FAS No.  121,  Accounting  for the  Impairment  of
Long-Lived  Assets and for Long-Lived  Assets to Be Disposed Of ("FAS 121"). FAS
144 retains the requirements of FAS 121 to (a) recognize an impairment loss only
if the  carrying  amount  of a  long-lived  asset  is not  recoverable  from its
undiscounted  cash flows and (b) measure an  impairment  loss as the  difference
between the carrying  amount and fair value of the asset,  but removes  goodwill
from its scope.  This aspect of FAS 144 will primarily impact the accounting for
intangible  assets  subject to  amortization  and  property and  equipment.  The
Company's adoption of FAS 144 did not have a significant impact on its financial
condition or results of operations.


         In July  2002,  the  FASB  issued  Statement  of  Financial  Accounting
Standards  No.  146,  Accounting  for Costs  Associated  with  Exit or  Disposal
Activities ("FAS 146"). FAS 146 nullifies FASB Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other  Costs to Exit an  Activity  (including  Certain  Costs  Incurred in a
Restructuring)". It requires that a liability be recognized for those costs only
when the  liability  is  incurred,  that is, when it meets the  definition  of a
liability in the FASB's  conceptual  framework.  FAS 146 also  establishes  fair
value as the objective for initial measurement of liabilities related to exit or
disposal  activities.  FAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002,  with earlier  adoption  encouraged.  The
Company does not expect that the adoption of FAS 146 will have a material impact
on its financial position or results from operations.


         In December  2002,  the FASB issued  Statement of Financial  Accounting
Standards  148,  Accounting  for  Stock-Based   Compensation  -  Transition  and
Disclosure - an amendment of FASB Statement 123 ("SFAS 148").  For entities that
change their accounting for stock-based  compensation  from the intrinsic method
to the fair value  method under SFAS 123, the fair value method is to be applied
prospectively  to those  awards  granted  after the  beginning  of the period of
adoption  (the  prospective   method).  The  amendment  permits  two  additional
transition  methods for  adoption of the fair value  method.  In addition to the
prospective  method,  the entity can choose to either (i)  restate  all  periods
presented  (retroactive  restatement method) or (ii) recognize compensation cost
from the  beginning  of the fiscal year of adoption as if the fair value  method
had been used to account for awards (modified  prospective  method).  For fiscal
years beginning  after December 15, 2003, the prospective  method will no longer
be allowed.  The Company  currently  accounts for its  stock-based  compensation
using the intrinsic  value method as proscribed  by APB No. 25,  Accounting  for
Stock Issued to  Employees,  and plans to continue  using this method to account
for  stock  options.  Therefore,  it does not  intend  to adopt  the  transition
requirements  as specified in SFAS 148. The Company has adopted the new SFAS 148
disclosure requirements in these financial statements.


     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


                                       10
<PAGE>

expenses  during the reporting  period.  Actual  results could differ from those
estimates.   Significant   assumptions   and   estimates  are  required  in  the
capitalization  and  amortization  of  software  development  costs and  revenue
recognition.  It is a least reasonably possible those estimates could be revised
in the near term and those revisions could be material.


     Revenue Recognition


         The Company  recognizes  revenue from the initial  license for computer
software  product  sales upon  delivery  of a  software  package.  Revenue  from
installation, training and customer support is recognized in the period in which
the  services  are  provided.  Revenue  from  contracts to maintain the computer
software products is recognized over the term of the contracts.


     Software Development Costs


         The  Company  capitalizes  the costs of  developing  and testing new or
significantly  enhanced  software  products in accordance with the provisions of
Statement of Financial  Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed (SFAS 86). Under SFAS
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.
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 which 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.  We do not believe that inflation has materially  affected
our results of operation.


     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  changing  technology.   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.





                                       11
<PAGE>

ITEM 7. FINANCIAL STATEMENTS



                               Avatar Systems Inc.
                   Index to Consolidated Financial Statements




Reports of Independent Certified Public Accountants                          F-1


Consolidated Financial Statements

    Balance Sheets as of December 31, 2002 and 2001                          F-3

    Statements of Income for the years ended December 31, 2002 and 2001      F-4

    Statements of Stockholders' Equity for the years ended
      December 31, 2002 and 2001                                             F-6

    Statements of Cash Flows for the years ended December 31, 2002 and 2001  F-7

    Notes to Consolidated Financial Statements                       F-8 to F-16











                                       12
<PAGE>


               Report of Independent Certified Public Accountants




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


We have audited the accompanying  consolidated  balance sheet of Avatar Systems,
Inc. as of December 31, 2002 and the related consolidated  statements of income,
changes in  stockholders'  equity and cash flows for the year then ended.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management  as well as  evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Avatar Systems,
Inc. as of December 31, 2002, and the  consolidated  results of their operations
and cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.



HEIN + ASSOCIATES LLP

Dallas, Texas
February 19, 2003















                                       F-1


<PAGE>

               Report of Independent Certified Public Accountants




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


We have audited the accompanying  consolidated  balance sheet of Avatar Systems,
Inc.  and  Subsidiary,  as of December  31,  2001 and the  related  consolidated
statements  of income,  changes in  stockholders'  equity and cash flows for the
year 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 audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management  as well as  evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Avatar Systems,
Inc.  and  Subsidiary  as of December 31, 2001 and the  consolidated  results of
their operations and their  consolidated  cash flows for the year ended December
31, 2001, in conformity with  accounting  principles  generally  accepted in the
United States of America.



GRANT THORNTON LLP

Dallas, Texas
March 8, 2002













                                       F-2


<PAGE>
<TABLE>
<CAPTION>

                              Avatar Systems, Inc.

                           CONSOLIDATED BALANCE SHEETS


                                                                         December 31,
                                                                   -----------------------
                         ASSETS                                       2002         2001
                                                                   ----------   ----------
<S>                                                                <C>          <C>
CURRENT ASSETS
   Cash and cash equivalents                                       $  395,256   $  397,362
   Accounts receivable - trade, net of allowance for doubtful
       accounts of $0 and $20,000 in 2002 and 2001, respectively      199,102      191,861
   Prepaid expenses                                                     7,603       22,281
   Deferred income taxes                                               10,319      110,564
   Note receivable                                                       --         51,122
                                                                   ----------   ----------

                  Total current assets                                612,280      773,190

PROPERTY AND EQUIPMENT - at cost, net                                 134,280      145,268

PURCHASED SOFTWARE, net of accumulated
   amortization of $568,602 and $445,508 in 2002
   and 2001, respectively                                             293,060      416,154

SOFTWARE DEVELOPMENT COSTS, net of
   accumulated amortization of $384,413 and $176,944
   in 2002 and 2001, respectively                                   1,562,141    1,218,831

OTHER ASSETS                                                             --            488
                                                                   ----------   ----------

                  Total assets                                     $2,601,761   $2,553,931
                                                                   ==========   ==========

               LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Current maturities of long-term debt                            $   13,433   $   60,402
   Accounts payable - trade                                            75,937      109,307
   Accrued expenses                                                    51,642       38,088
   Deferred revenue                                                   235,016      216,821
                                                                   ----------   ----------

                  Total current liabilities                           376,028      424,618

DEFERRED INCOME TAXES                                                 148,504      180,600

LONG TERM DEBT, less current maturities                                  --          3,773
                                                                   ----------   ----------

                  Total liabilities                                   524,532      608,991

COMMITMENT (Note G)

STOCKHOLDERS' EQUITY
   Common stock, $0.001 par value; 30,000,000 shares
       authorized; 8,695,652 shares, issued and outstanding             8,696        8,696
   Paid-in capital                                                  1,768,345    1,768,345
   Retained earnings                                                  300,188      167,899
                                                                   ----------   ----------
                  Total stockholders' equity                        2,077,229    1,944,940
                                                                   ----------   ----------

                  Total liabilities and stockholders' equity       $2,601,761   $2,553,931
                                                                   ==========   ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-3



<PAGE>
<TABLE>
<CAPTION>

                              Avatar Systems, Inc.

                        CONSOLIDATED STATEMENTS OF INCOME

                                                                          Years ended December 31,
                                                                         --------------------------
                                                                             2002           2001
                                                                         -----------    -----------
<S>                                                                      <C>            <C>
Revenue
   Software                                                              $   336,596    $   830,423
   Maintenance                                                               964,989      1,014,067
   Consulting                                                                210,356        379,803
   Hardware                                                                  640,448        167,002
                                                                         -----------    -----------
                                                                           2,152,389      2,391,295

Cost of Sales
   Software                                                                   86,864        163,757
   Maintenance                                                               207,496        290,058
   Consulting                                                                 59,173        120,598
   Hardware                                                                  525,470        140,789
                                                                         -----------    -----------
                                                                             879,003        715,202
                                                                         -----------    -----------

                  Gross profit                                             1,273,386      1,676,093

Operating expenses
   Sales and marketing                                                       243,026        281,653
   General and administrative                                                432,116        664,069
   Depreciation and amortization                                             404,123        329,080
   Write off of acquisition costs                                               --          323,539
                                                                         -----------    -----------
                                                                           1,079,265      1,598,341

                  Operating income                                           194,121         77,752

Other income (expense)
   Interest income                                                             6,905         23,706
   Interest expense                                                             (588)       (16,883)
                                                                         -----------    -----------
                                                                               6,317          6,823
                                                                         -----------    -----------

                  Income from continuing operations before
                    income taxes                                             200,438         84,575

Deferred income tax expense                                                   68,149         32,317
                                                                         -----------    -----------

                  Income from continuing operations                          132,289         52,258

Discontinued Operations
   Income from operations of Talon Global Solutons, Inc. (net of
      income taxes)                                                             --            7,393
   Loss on disposal of Talon Global Solutions, Inc. (net of applicable
      income taxes)                                                             --          (11,561)
                                                                         -----------    -----------

                  NET INCOME                                             $   132,289    $    48,090
                                                                         ===========    ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-4


<PAGE>

                              Avatar Systems, Inc.

                  CONSOLIDATED STATEMENTS OF INCOME - CONTINUED


                                                        Years ended December 31,
                                                       -------------------------
                                                           2002          2001
                                                       -----------   -----------

Earnings per share - basic
   Income from continuing operations                   $       .02   $       .01
                                                       ===========   ===========

   Net income                                          $       .02   $       .01
                                                       ===========   ===========

Earnings per share - diluted
   Income from continuing operations                   $       .01   $       .01
                                                       ===========   ===========

   Net income                                          $       .01   $       .01
                                                       ===========   ===========

Weighted average shares outstanding:
   Basic                                                 8,695,652     8,695,652
                                                       ===========   ===========
   Diluted                                             1 0,437,747     9,512,992
                                                       ===========   ===========






















   The accompanying notes are an integral part of these financial statements.
                                      F-5


<PAGE>
<TABLE>
<CAPTION>


                              Avatar Systems, Inc.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                     Years ended December 31, 2002 and 2001




                                    Common stock
                               -----------------------     Paid-in     Retained
                                  Shares      Amount       capital     earnings      Total
                               ----------   ----------   ----------   ----------   ----------
<S>                            <C>          <C>          <C>          <C>          <C>
Balance at January 1, 2001      8,695,652        8,696    1,768,345      119,809    1,896,850

Net income                           --           --           --         48,090       48,090
                               ----------   ----------   ----------   ----------   ----------

Balance at December 31, 2001    8,695,652        8,696    1,768,345      167,899    1,944,940

Net income                           --           --           --        132,289      132,289
                               ----------   ----------   ----------   ----------   ----------

Balance at December 31, 2002    8,695,652   $    8,696   $1,768,345   $  300,188   $2,077,229
                               ==========   ==========   ==========   ==========   ==========
</TABLE>













   The accompanying notes are an integral part of these financial statements.
                                       F-6


<PAGE>
<TABLE>
<CAPTION>

                              Avatar Systems, Inc.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                            Years ended
                                                                            December 31,
                                                                         2002         2001
                                                                      ---------    ---------
<S>                                                                   <C>          <C>

     Cash flows from operating activities
Income from continuing operations                                    $ 132,289    $  52,258
Adjustments to reconcile income from continuing
   operations to net cash provided by operating activities
      Depreciation and amortization                                    404,123      329,080
      Deferred income taxes                                             68,149       32,317
      Write-off of acquisition costs                                      --        323,539
      Changes in operating assets and liabilities
          Accounts receivable - trade                                   (7,241)     (90,242)
          Inventory                                                       --         45,387
          Prepaid expenses and other                                    14,678      (16,251)
          Accounts payable and accrued expenses                        (19,816)    (113,048)
          Deferred revenue                                              18,195     (424,059)
          Other                                                            142       (3,349)
                                                                     ---------    ---------

              Net cash provided by operating activities                610,519      135,632
                                                                     ---------    ---------

     Cash flows from investing activities
Software development costs capitalized                                (550,780)    (389,892)
Purchase of property and equipment                                     (11,103)     (76,443)
Payments received on notes receivable                                     --          4,478
                                                                     ---------    ---------

              Net cash used in investing activities                   (561,883)    (461,857)
                                                                     ---------    ---------

     Cash flows from financing activities
Payments on note payable and capital lease obligations                 (50,742)    (176,065)
                                                                     ---------    ---------

              Net cash used in financing activities                    (50,742)    (176,065)
                                                                     ---------    ---------

              Net cash used in continuing operations                    (2,106)    (502,290)

Net cash used in discontinued operations                                  --        (33,356)
                                                                     ---------    ---------

                  Net decrease in cash and cash equivalents             (2,106)    (535,646)

Cash and cash equivalents at beginning of year                         397,362      933,008
                                                                     ---------    ---------

Cash and cash equivalents at end of year                             $ 395,256    $ 397,362
                                                                     =========    =========

Supplemental disclosure of cash paid for:
    Interest                                                             $     588    $  16,883
                                                                         =========    =========

Supplemental disclosure of noncash investing and financing activities:
    Equipment acquired through foreclosure of note receivable            $  51,122    $    --
                                                                         =========    =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-7



<PAGE>

                              Avatar Systems, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2002 and 2001


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT 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  to small to  medium-sized  oil and gas  producers  located
throughout the United States.

Principles of Consolidation
---------------------------

The accompanying  financial  statements  include the accounts of the Company and
its inactive wholly-owned subsidiary.  All significant intercompany accounts and
transactions have been eliminated in consolidation.

Cash Equivalents
----------------

The Company  considers  investments with original maturity dates of three months
or less to be cash equivalents.

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.

Revenue Recognition
-------------------

The Company  recognizes  revenue from the initial license for computer  software
product sales upon delivery of a software  package.  Revenue from  installation,
training and customer  support is recognized in the period in which the services
are provided.  Revenue from contracts to maintain the computer software products
is recognized over the term of the contracts.

Software Development Costs
--------------------------

The Company capitalizes the costs of developing and testing new or significantly
enhanced  software  products in accordance  with the  provisions of Statement of
Financial  Accounting  Standards  No. 86,  Accounting  for the Costs of Computer
Software to be Sold, Leased or Otherwise  Marketed (SFAS 86). Under SFAS 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.  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 which 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.  Amortization of capitalized  software  charged to expense
was $207,469 and $143,698 for the years ending December 31, 2002 and 2001.


                                       F-8
<PAGE>

                              Avatar Systems, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2002 and 2001


Financial Instruments and 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.

The fair values of the Company's financial  instruments,  consisting of cash and
cash equivalents,  accounts  receivable,  accounts  payable,  and notes payable,
approximate their carrying values due to their short term nature.

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  to be  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, 2002 and 2001, the Company recorded no impairment charges.

Income Taxes
------------

Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts  of assets and  liabilities  and their  respective  income tax
bases.

Earnings Per Share
------------------

The Company  computes  basic  earnings per share based on the  weighted  average
number of common  shares  outstanding.  Diluted  earnings  per share is computed
based on the weighted average number of shares  outstanding,  plus the number of
additional common shares that would have been outstanding if dilutive  potential
common shares had been issued.

Stock-based Compensation
------------------------

The Company  accounts for  stock-based  awards to employees  using the intrinsic
value method  described in  Accounting  Principles  Board  Opinion (APB) No. 25,
"Accounting  for Stock  Issued to  Employees"  and its related  interpretations.
Accordingly,  no compensation  expense has been  recognized in the  accompanying
consolidated  financial  statements for stock-based awards to employees when the
exercise  price of the award is equal to or greater than the quoted market price
of the stock on the date of the grant.

                                       F-9


<PAGE>

                              Avatar Systems, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2002 and 2001



Stock-based Compensation - continued
------------------------------------

SFAS No.  123,  "Accounting  for  Stock-Based  Compensation"  and SFAS No.  148,
"Accounting  for  Stock-Based  Compensation  -  Transition  and  Disclosure - an
amendment of FASB  Statement No. 123" require  disclosures as if the Company had
applied the fair value method to employee awards rather than the intrinsic value
method.  The fair value of stock-based awards to employees is calculated through
the use of option pricing models, which were developed for use in estimating the
fair value of traded options,  which have no vesting  restrictions and are fully
transferable. These models also require subjective assumptions, including future
stock price  volatility and expected time to exercise,  which greatly affect the
calculated  values.  The Company's fair value calculations for awards from stock
option plans were made using the  Black-Scholes  option  pricing  model with the
following weighted average  assumptions for the grants in 2001: expected term of
five years from the date of grant;  stock price  volatility  of 100%;  risk free
interest rate of 4.5%; and no dividends  during the expected term as the Company
does not have a history of paying cash dividends.  There were no options granted
in 2002.

If the  computed  fair values of the  stock-based  awards had been  amortized to
expense  over the vesting  period of the  awards,  net income and  earnings  per
share,  basic and diluted,  for the year ended December 31, 2001 would have been
as follows:

   Net income, as reported                                           $   48,090

   Add: Stock-based employee compensation included in reported net
   loss                                                                    --

   Deduct:  Total stock-based  employee  compensation  expense
   determined under fair value method for all awards                    (29,195)
                                                                     ----------

   Net income, proforma                                              $   18,895
                                                                     ==========

   Earnings per share, as reported:
        Basic                                                        $     0.01
                                                                     ==========
        Diluted                                                      $     0.01
                                                                     ==========

   Earnings per share, proforma:
        Basic                                                        $     0.00
                                                                     ==========
        Diluted                                                      $     0.00
                                                                     ==========

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 those estimates.
Significant  assumptions  and estimates are required in the  capitalization  and
amortization of software  development  costs. It is a least reasonably  possible
those  estimates  could be revised in the near term and those revisions could be
material.

                                      F-10
<PAGE>

                              Avatar Systems, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2002 and 2001

Recent Accounting Pronouncements
--------------------------------

The Financial  Accounting Standards Board  ("FASB")recently  issued FAS No. 144,
Accounting  for the  Impairment  or Disposal of  Long-Lived  Assets ("FAS 144"),
which the  Company  adopted on  January  1, 2002.  The FASB's new rules on asset
impairment  supersede FAS No. 121,  Accounting  for the Impairment of Long-Lived
Assets and for Long-Lived  Assets to Be Disposed Of ("FAS 121"). FAS 144 retains
the  requirements  of FAS 121 to (a)  recognize an  impairment  loss only if the
carrying amount of a long-lived  asset is not recoverable  from its undiscounted
cash flows and (b)  measure an  impairment  loss as the  difference  between the
carrying  amount and fair  value of the asset,  but  removes  goodwill  from its
scope.  This  aspect  of FAS  144  will  primarily  impact  the  accounting  for
intangible  assets  subject to  amortization  and  property and  equipment.  The
Company's adoption of FAS 144 did not have a significant impact on its financial
condition or results of operations.

In July 2002, the FASB issued  Statement of Financial  Accounting  Standards No.
146,  Accounting for Costs  Associated  with Exit or Disposal  Activities  ("FAS
146").  FAS 146 nullifies FASB Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity  (including Certain Costs Incurred in a Restructuring)".  It
requires that a liability be recognized  for those costs only when the liability
is incurred,  that is, when it meets the definition of a liability in the FASB's
conceptual  framework.  FAS 146 also establishes fair value as the objective for
initial measurement of liabilities related to exit or disposal  activities.  FAS
146 is  effective  for exit or  disposal  activities  that are  initiated  after
December 31, 2002, with earlier adoption encouraged. The Company does not expect
that the  adoption  of FAS 146 will  have a  material  impact  on its  financial
position or results from operations.

In December 2002, the FASB issued  Statement of Financial  Accounting  Standards
148,  Accounting for  Stock-Based  Compensation - Transition and Disclosure - an
amendment of FASB  Statement  123 ("SFAS  148").  For entities that change their
accounting for stock-based  compensation  from the intrinsic  method to the fair
value   method  under  SFAS  123,  the  fair  value  method  is  to  be  applied
prospectively  to those  awards  granted  after the  beginning  of the period of
adoption  (the  prospective   method).  The  amendment  permits  two  additional
transition  methods for  adoption of the fair value  method.  In addition to the
prospective  method,  the entity can choose to either (i)  restate  all  periods
presented  (retroactive  restatement method) or (ii) recognize compensation cost
from the  beginning  of the fiscal year of adoption as if the fair value  method
had been used to account for awards (modified  prospective  method).  For fiscal
years beginning  after December 15, 2003, the prospective  method will no longer
be allowed.  The Company  currently  accounts for its  stock-based  compensation
using the intrinsic  value method as proscribed  by APB No. 25,  Accounting  for
Stock Issued to  Employees,  and plans to continue  using this method to account
for  stock  options.  Therefore,  it does not  intend  to adopt  the  transition
requirements  as specified in SFAS 148. The Company has adopted the new SFAS 148
disclosure requirements in these financial statements.










                                      F-11



<PAGE>

                              Avatar Systems, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2002 and 2001


NOTE B - DISCONTINUED OPERATIONS

In October 2001, the Company elected to exit its direct sales software business.
In accordance with this plan, the Company sold Talon Global Solutions, Inc., its
direct sales software  business,  to its minority  shareholder for $20,000 and a
note receivable in the amount of $55,600. The Company recorded a loss of $11,561
on the disposition, net of related income tax benefit of $5,912.

The financial  data related to direct sales  software  business is classified as
discontinued operations in 2001.

Operating  results  from  discontinued  operations  were as follows for the year
ended December 31, 2001:

       Revenues                                                         $517,370
       Income before income taxes                                         10,349
       Income tax expense                                                  2,956
       Income from discontinued operations                                 7,393


NOTE C - PROPERTY AND EQUIPMENT

    Property and equipment are summarized as follows:

                                                                December 31,
                                                             -------------------
                                                               2002       2001
                                                             --------   --------

       Furniture and fixtures                                $110,439   $108,861
       Computer equipment and software                        350,596    289,950
       Telecommunication equipment                             18,603     18,603
                                                             --------   --------
                                                              479,638    417,414
       Less accumulated depreciation                          345,358    272,146
                                                             --------   --------
                                                             $134,280   $145,268
                                                             ========   ========

       During the years  ended December 31, 2002  and 2001, the Company recorded
       depreciation expense of $73,213 and $61,379, respectively.


NOTE D - PURCHASED SOFTWARE

    Purchased software is summarized as follows:

                                                                  December 31,
                                                             -------------------
                                                               2002       2001
                                                             --------   --------

       Purchased Software                                     861,662    861,662
       Less accumulated amortization                          568,602    445,508
                                                             --------   --------
                                                             $293,060   $416,154
                                                             ========   ========

       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, 2002 and 2001, the Company recorded amortization
       expense of $123,094 in each year.

                                      F-12
<PAGE>
<TABLE>
<CAPTION>

                              Avatar Systems, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2002 and 2001


NOTE E - LONG-TERM DEBT

     Long-term debt consists of the following:

                                                                            December 31,
                                                                          -----------------
                                                                            2002      2001
                                                                          -------   -------
       <S>                                                                <C>       <C>
       Note payable to bank, bearing interest at 10.5% per annum,
         monthly principal and interest payments of $14,444 through
         maturity in February 2002, collateralized by substantially all
         assets of the Company and guaranteed by certain stockholders
         of the Company                                                   $  --     $43,333
                                                                          -------   -------

       Other                                                               13,433    20,842
                                                                          -------   -------
                                                                           13,433    64,175
         Less current maturities                                           13,433    60,402
                                                                          -------   -------
                                                                          $  --     $ 3,773
                                                                          =======   =======
</TABLE>


NOTE F - INCOME TAXES

The  Company's  income tax expense in 2002 and 2001  consisted  only of deferred
taxes. The Company had no current income tax expense  primarily because software
development  costs are capitalized in these financial  statements and charged to
expense for federal income tax purposes.



















                                      F-13
<PAGE>

                              Avatar Systems, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2002 and 2001


NOTE F - INCOME TAXES - Continued

     Deferred tax assets and liabilities consist of the following:

                                                             December 31,
                                                        ----------------------
                                                           2002         2001
                                                        ---------    ---------

       Deferred tax assets
          Net operating loss carryforwards              $  55,126    $ 183,265
          Deferred revenue                                   --        106,630
          Accrued expenses                                 10,319        4,098
          Purchased software amortization                  55,802       42,070
          Property and equipment                             --          1,266
                                                        ---------    ---------
                                                          121,247      337,329

       Deferred tax liability
          Capitalized software                           (254,860)    (400,657)
          Other                                            (4,572)      (6,708)
                                                        ---------    ---------
                                                         (259,432)    (407,365)

       Net deferred tax liability                       $(138,185)   $ (70,036)
                                                        =========    =========

       Net deferred tax asset - current                 $  10,319    $ 110,564
       Net deferred tax liability - long-term            (148,504)    (180,600)
                                                        ---------    ---------

                                                        $(138,185)   $ (70,036)
                                                        =========    =========

At December 31, 2002, the Company had federal net operating  loss  carryforwards
of approximately $162,000 which expire in 2022 and 2021.


NOTE G - LEASE OBLIGATIONS

The Company leases its office facility under a  non-cancelable  operating lease.
Future minimum payments are as follows:

        Year ending
       December 31,

           2003                                                          137,900
           2004                                                          133,080
           2005 and thereafter                                            99,810
                                                                        --------

                                                                        $370,790

Rent expense under the operating  leases was $151,939 and $123,668 for the years
ended December 31, 2002 and 2001, respectively.

                                      F-14
<PAGE>
<TABLE>
<CAPTION>

                              Avatar Systems, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2002 and 2001


NOTE H - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

                                                                 Year ended December 31,
                                                                ------------------------
                                                                   2002          2001
                                                                ----------   -----------
<S>                                                             <C>          <C>
       Income from continuing operations                        $  132,289   $    52,258
                                                                ==========   ===========

       Loss from discontinued operations                              --          (4,168)
                                                                ==========   ===========

       Weighted average shares outstanding - basic               8,695,652     8,695,652
       Effect of dilutive employee stock options                    14,251        16,580
       Effect of dilutive stock warrants                         1,727,844       800,760
                                                                ----------   -----------

       Weighted average shares outstanding - diluted            10,437,747     9,512,992
                                                                ==========   ===========

       Earnings per share from continuing operations
           Basic                                                $      .02   $       .01
                                                                ==========   ===========
           Diluted                                              $      .01   $       .01
                                                                ==========   ===========
       Earnings (loss) per share from discontinued operations
           Basic                                                $     --     $      --
                                                                ==========   ===========
           Diluted                                              $     --     $      --
                                                                ==========   ===========
</TABLE>


















                                      F-15



<PAGE>
<TABLE>
<CAPTION>


NOTE I - STOCK COMPENSATION PLAN AND WARRANTS

In  2000,  the  Company's   shareholders   approved  the  adoption  of  a  stock
compensation  plan.  Stock options are granted at the quoted market price of the
Company's stock at the date of grant, becoming exercisable over periods of up to
three years and expire in 2011. In 2001,  options to purchase  118,385 shares at
$1.25 per share were  granted.  No stock options were granted by the Company for
the year ended December 31, 2002. At December 31, 2002, 118,500 shares of common
stock were reserved for future grant under the 2000 Stock Compensation Plan.

Option  activity for the years ended December 31, 2002 and 2001 is summarized as
follows:


                                                     2002                      2001
                                           ------------------------   -----------------------
                                                          Weighted                  Weighted
                                                          Average                   Average
                                                          Exercise                  Exercise
                                             Options       Price        Options      Price
                                           ----------    ----------   ----------   ----------
<S>                                        <C>           <C>          <C>          <C>
Options outstanding at beginning of year      118,358    $     1.25         --     $     --
Options granted                                  --            --        118,358         1.25
Options exercised                                --            --           --           --
Options forfeited                             (28,962)         1.25         --           --
                                           ----------    ----------   ----------   ----------

Options outstanding at end of year             89,396    $     1.25      118,358   $     1.25
                                           ==========    ==========   ==========   ==========

Options exercisable at end of year             89,396    $     1.25      118,358   $     1.25
                                           ==========    ==========   ==========   ==========
</TABLE>




The options  outstanding at December 31, 2002 have a weighted average  remaining
life of 8 years.

The Company has outstanding  warrants to purchase 5,700,000 shares of stock. The
warrants  have  an  exercise  price  of  $1.00  per  share,  are  all  currently
exercisable and expire in July 2005.

NOTE J - RELATED PARTIES

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  $41,685 and $49,813 in 2002 and 2001,  respectively.  The Company had $823
and $3,568 of accounts  receivable at December 31, 2002 and 2001,  respectively,
related to services performed for that company.

NOTE K - MAJOR CUSTOMERS

The  Company  completed  a  hardware  sale  with one  customer  during  2002 for
approximately  $500,000 which  accounted for 78% of hardware  revenue and 23% of
total revenue in the year ended December 31, 2002. There were no other customers
in 2002 or 2001 that accounted for more than 10% of revenues.




                                      F-16

<PAGE>

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE


         (a) On  November  6, 2002,  Avatar  Systems,  Inc.  (the  "Registrant")
engaged Hein & Associates LLP as its independent accountants for the fiscal year
ending  December  31,  2002.  Also on November 6, 2002,  Grant  Thornton LLP was
dismissed as the Registrant's independent accountant.


         (b) The  report of Grant  Thornton  LLP on the  Registrant's  financial
statements  for the fiscal year ended  December 31,  2001,  contained no adverse
opinion or  disclaimer  of opinion  nor was it  qualified  as to audit  scope or
accounting principles.


         (c) The  Registrant's  Board of  Directors  made the decision to engage
Hein & Associates LLP.


         (d) In  connection  with the prior  audit  for the  fiscal  year  ended
December 31, 2001,  and from  December 31, 2001 to November 6, 2002,  there have
been no  disagreements  with  Grant  Thornton  LLP on any  matter of  accounting
principles and practices,  financial  statement  disclosure or auditing scope or
procedure.


         (e) The  Registrant  did not consult  with Hein &  Associates  LLP with
regard to any matter concerning the application of accounting  principles to any
specific  transactions,  either  completed  or  proposed,  or the  type of audit
opinion  that  might be  rendered  with  respect to the  Registrant's  financial
statements.


         The Company has had no disagreements  with its independent  accountants
on accounting and financial disclosure matters.

                                    PART III


ITEM 9.  DIRECTORS AND EXECUTIVE  OFFICERS OF THE  REGISTRANT;  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.    40   President, Chief Executive Officer,
                                        Chief Financial Officer, Chairman of the
                                        Board and Director
          Charles Timothy Allen    52   Director
          Orville Gregory Allen    46   Director
          Stephen A. Komlosy       61   Director
          Cindy Skelton            42   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  eighteen  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 CPAs and the Dallas Chapter of
the Texas Society of CPAs.


                                       29
<PAGE>

         Charles  Timothy  (Tim)  Allen has served as a director  of our Company
since November 14, 2000. Mr. Allen was a limited partner of Avatar Systems, Ltd.
and an officer of Avatar Systems,  Inc., the  predecessors of our Company,  from
1996 to November  2000.  Mr. Allen is the President of Eland Energy  Corporation
("Eland") located in Dallas,  Texas and is responsible for the financial affairs
of Eland.  He has been  employed  by Eland since 1984 in various  positions.  He
co-founded  Eland with his brother,  Orville Gregory Allen. He has been drilling
and operating  wells in Texas,  Oklahoma,  Louisiana and New Mexico for the past
twenty years. Mr. Allen formed Allen Oil Company in 1979, where he was primarily
involved in generating  prospects for other  companies.  In 1982,  Mr. Allen and
three partners started drilling and operating wells in the North Texas area with
the primary  purpose of  developing  Mississippi  reef wells using CDP  seismic,
which  resulted in over 20 Mississippi  reef  discoveries in the area. Mr. Allen
graduated  from  Texas Tech  University  with a BBA in  management  and a MBA in
finance.


         Orville  Gregory  (Gregg) Allen has served as a director of our Company
since November 14, 2000. Mr. Allen was a limited partner of Avatar Systems, Ltd.
and an officer of Avatar Systems,  Inc., the  predecessors of our Company,  from
1996 to November  2000.  He is currently a Vice  President of Eland and has been
employed by Eland since 1984 in various  positions.  He is  responsible  for the
day-to-day  management of Eland's  land,  operations  engineering  and financial
functions.  Mr. Allen is also responsible for oil and gas acquisition activities
for Eland.  He has over sixteen years of experience in the oil and gas industry.
Before  co-founding  Eland in 1984,  he  worked  for F.  Mark  Robert  Oil & Gas
Properties,  where he served as a contract  landman  for  various  oil  industry
clients.  Mr.  Allen  is a  graduate  of  Texas  Tech  University  with a BBA in
marketing. Gregg Allen and Tim Allen are brothers.


         Stephen  A.  Komlosy  has  served as a director  of our  Company  since
November  14,  2000.  He is also  the  Managing  Director  of  London  &  Boston
Investments,  Plc,  formerly  Cybertec  Holdings Plc., a publicly  traded United
Kingdom company.  Mr. Komlosy has served as Managing Director of London & Boston
Investments,  Plc since February 2000.  London & Boston  Investments,  Plc is an
investment  company,  making  strategic  investments in real estate and Internet
related  companies  whose  growth  and  value  can  be  enhanced  by  management
consulting  services,  financial  assistance or mergers with related businesses.
Mr. Komlosy  currently  resides in England.  Since 1967, Mr. Komlosy has managed
several family owned  businesses,  which are engaged in real estate  acquisition
and  development  activities.  In  1981,  he  co-founded  Branon  PLC,  a public
industrial  holding  company  selling  bonded  oil  drilling  and pipe  handling
equipment to North Sea oil operators; the large-scale manufacture of dump trucks
for the Ministry of Defense;  and of road planners and oil consoles.  At Branon,
he had  specific  responsibility  for  establishing  its oil and gas  purchasing
associate  Covendish  Petroleum Plc that purchased 140 producing  wells in Ohio,
USA. Mr. Komlosy is also a director of Chroma Group,  Harrell Hospitality Group,
Inc.,  a public  company  traded  on the NASD  Over-the-Counter  Bulletin  Board
("HLTLA")  and  Energy  Technique,  Plc, a company  traded on the  London  Stock
Exchange.


         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

         Members of the audit  committee are Mr.  Charles  Timothy Allen and Mr.
Stephen A. Komlosy. The Board of Directors does not have any other committees at
this time.


                                       30
<PAGE>

     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, 2002,  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.  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.


     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, 2003. 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 we or Mr. Shreve give written
notice to the other  that the  management  agreement  will not be  renewed.  Mr.
Shreve will receive an annual base salary of $125,000, 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. Upon agreeing to the terms of the
management  agreement,  we issued to Mr. Shreve a five-year  warrant to purchase
1.6 million  shares of our common stock at an exercise price of $1.00 per share.
All of the warrants are currently exercisable and none of the warrants have been
exercised.  See "Part III,  Item 11- Security  Ownership  of Certain  Beneficial
Owners and Management."


     Key Man Insurance


         We currently pay an annual premium of  approximately  $1,600 for a life
insurance  policy in the amount of  $1,000,000  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 us.



                                       31
<PAGE>
<TABLE>
<CAPTION>

     Stock Option Plan


         On  November  14,  2000,  our  shareholders  approved  our  2000  Stock
Compensation  Plan.  The  number of shares of common  stock  which may be issued
under the 2000 Plan shall  initially be 400,000  shares which amount may, at the
discretion of the Board, be increased from time to time to a number of shares of
common  stock  equal to 5% of the total  outstanding  shares  of  common  stock,
provided  that the  aggregate  number of shares  of  common  stock  which may be
granted  under the 2000 Plan  shall not  exceed  1,500,000  shares.  We may also
utilize  the  granting  of  options  under  the 2000 Plan to  attract  qualified
individuals to become our employees and  non-employee  directors,  as well as to
ensure the retention of management of any acquired  business  operations.  Under
the 2000 Plan,  we may also grant  restricted  stock  awards.  Restricted  stock
represents shares of common stock issued to eligible participants under the 2000
Plan subject to the  satisfaction  by the  recipient of certain  conditions  and
enumerated  in the specific  restricted  stock grant.  Conditions,  which may be
imposed,  include,  but are not limited  to,  specified  periods of  employment,
attainment  of  personal   performance   standards  or  our  overall   financial
performance. The granting of restricted stock represents an additional incentive
for eligible  participants  under the 2000 Plan to promote our  development  and
growth,  and may be used by our  management as another  means of attracting  and
retaining  qualified  individuals  to  serve  as our  employees  and  directors.
Currently,  options to purchase 89,396 shares of our common stock at an exercise
price of $1.25 per share have been granted to 9 employees.  Such options  expire
on January 10, 2011. No options have been granted to our officers or directors.




-----------------------------------------------------------------------------------------------------------------------
                                        (a)                      (b)                             (c)
-----------------------------------------------------------------------------------------------------------------------
      Plan Category          Number of securities to be     Weighted-average          Number of securities remaining
                               issued upon exercise of      exercise price of      available for future issuances under
                                 outstanding options,      outstanding options,          equity compensation plans
                                 warrants and rights       warrants and rights    (excluding securities in column (a))
-----------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                       <C>                                <C>
Equity compensation plans                        89,396                    1.25                               1,410,604
approved by security holders
-----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not                      --                        --                                    --
approved by security holders
-----------------------------------------------------------------------------------------------------------------------
Total                                            89,396                    1.25                               1,410,604
-----------------------------------------------------------------------------------------------------------------------
</TABLE>









                                       32
<PAGE>
<TABLE>
<CAPTION>

     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, 2002, 2001 and 2000. In each case, the compensation listed was paid
by our Company or Avatar  Systems,  Ltd.,  our  predecessor  entity.  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

                                                                                       Long-Term Compensation
                Name/Title                           Annual Compensation                        Awards
----------------------------------------------------------------------------------- -----------------------------
                                                                                                      Securities
                                                                                                      Underlying
                                                                     Other Annual    Restricted     Options/SARs/
                                             Year    Salary/Bonus    Compensation   Stock Awards      Warrants
                                           -------- --------------  --------------- -------------- --------------
<S>                                         <C>       <C>               <C>         <C>            <C>
Robert C. Shreve, Jr., President, Chief     2002      $125,000          $5,208          None            None
   Executive Officer, Chief Financial       2001      $125,000          $6,090          None            None
   Officer and Director                     2000      $108,160           N/A            None         1,600,000(1)
</TABLE>
--------------------
(1)      On July 10, 2000, we issued Mr. Shreve  warrants to purchase  1,600,000
         shares of our common stock at an exercise price of $1.00 per share. The
         warrants  are  currently  exercisable  and  expire  in July  2005.  The
         warrants  were issued to Mr. Shreve in  conjunction  with his signing a
         management  agreement  with us.  See "Item 11-  Security  Ownership  of
         Certain Beneficial Owners and Management."




















                                       33
<PAGE>
<TABLE>
<CAPTION>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


         The table below sets forth, as of March 17, 2003,  certain  information
with respect to the  beneficial  ownership of the common stock of our Company by
each person who we know to be  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.

                                                 Shares Beneficially  Percentage of Shares
         Name(1)                                        Owed           Owned Beneficially
         --------------------------------------  -------------------  --------------------
         <S>                                     <C>                  <C>
         Robert C. Shreve, Jr..................      3,200,000(2)             31.1
         Charles Timothy Allen.................      2,650,000(3)             29.6
         Orville Gregory Allen.................      2,650,000(4)             29.6
         London & Boston Investments, Plc......      2,619,402(5)             27.9
         Stephen A. Komlosy....................      3,220,402(6)             31.3
         Merchant Capital Holdings, Ltd........      2,000,000(7)             18.7
         Geoffrey Dart.........................      2,000,000(8)             18.7
         Cindy Skelton(9)......................               -0-              -0-
         Officers and directors as a group (5
              persons).........................    13,720,402(10)             95.3
</TABLE>
---------------
(1)      Unless  otherwise  indicated,  each person named in this table has sole
         voting and  investment  power with  respect to the shares  beneficially
         owned. In addition,  unless  otherwise  indicated,  the address of each
         beneficial owner identified below is c/o Avatar Systems, Inc., 5728 LBJ
         Freeway, Suite 270, Dallas, Texas 75240.
(2)      Includes  1,600,000 shares of common stock,  which may be issued to Mr.
         Shreve upon  exercise of  1,600,000  warrants at $1.00 per share.  Such
         warrants are currently exercisable and expire July 10, 2005. Mr. Shreve
         is the President,  Chief Executive Officer, Chief Financial Officer and
         a director of Avatar.
(3)      Includes  250,000  shares of common  stock,  which may be issued to Mr.
         Allen upon  exercise  of  250,000  warrants  at $1.00 per  share.  Such
         warrants are currently  exercisable and expire July 10, 2005. Mr. Allen
         is a director of Avatar.
(4)      Includes  250,000  shares of common  stock,  which may be issued to Mr.
         Allen upon  exercise  of  250,000  warrants  at $1.00 per  share.  Such
         warrants are currently  exercisable and expire July 10,2005.  Mr. Allen
         is a director of Avatar.
(5)      Includes 1,619,402 shares owned by London & Boston Investments, Plc and
         1,000,000 shares of common stock which may be issued to London & Boston
         upon exercise of warrants to purchase  1,000,000 shares of common stock
         at $1.00 per share. Such warrants are currently  exercisable and expire
         July 10, 2005.  London & Boston's  address is 133 Ebury Street,  London
         SW1W9QU, England.
(6)      Includes 1,619,402 shares owned by London & Boston and 1,000,000 shares
         of common  stock,  which may be issued to London & Boston upon exercise
         of  warrants  to  purchase  1,000,000  shares at $1.00 per share.  Such
         warrants are currently exercisable and expire July 10, 2005. Stephen A.
         Komlosy is the Managing  Director of London & Boston and is  authorized
         to vote such shares on behalf of London & Boston.  Also includes  1,000
         shares owned by General  Trading  Corporation,  Ltd., a Komlosy  family
         company. Mr. Komlosy has the authority to vote such shares on behalf of
         General Trading Company.  Also includes 600,000 shares of common stock,
         which  may be  issued to Mr.  Komlosy  upon  exercise  of  warrants  to
         purchase  600,000  shares of Avatar's  common stock at $1.00 per share.
         Such  warrants  expire  July 10,  2005.  Mr.  Komlosy is a director  of
         Avatar.  Mr.  Komlosy's  address is 133 Ebury Street,  London  SW1W9QU,
         England.
(7)      Merchants Capital Holdings,  Ltd. address is 133 Ebury Street,  London,
         England SW1W 9QU. Merchant Capital holds warrants to purchase 2,000,000
         shares of Avatar's  common stock at $1.00 per share.  Such warrants are
         currently exercisable and expire July 10, 2005.
(8)      Includes warrants to purchase 2,000,000 shares of Avatar's common stock
         at  $1.00  per  share  held by  Merchant  Capital.  Such  warrants  are
         currently  exercisable  and  expire  July  10,  2005.  Mr.  Dart is the
         Managing  Director of Merchant  Capital  Holdings and has  authority to
         vote such shares when  issued on behalf of Merchant  Capital  Holdings.
         Mr. Dart's address is the same as Merchant Capital  Holdings,  Ltd. Mr.
         Dart served on the Board of Directors  unitl January 27, 2003,  when he
         resigned from the Board. (9) Ms. Skelton is the Secretary of Avatar.
(10)     See  preceding  notes  for  an  explanation  of  the  ownership  of the
         13,720,402 shares.


         We currently have 8,695,652 outstanding shares of common stock of which
approximately  675,000  shares  are  owned by  approximately  450  persons.  The
remaining  shares are owned by our principal  shareholders as noted in the above
table.


                                       34
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 $41,685 and $49,813 in 2002 and 2001, respectively. The Company had
$823  and  $3,568  of  accounts  receivable  at  December  31,  2002  and  2001,
respectively, related to services performed for that company.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K


     Statements filed as part of this Report:


         1. Consolidated Financial Statements


         See "Index to Consolidated  Financial  Statements" under Item 7 of this
Report.


     Exhibits


         The  following  documents  are  filed  as  exhibits  herewith,   unless
otherwise specified, and are incorporated herein by this reference:


         Exhibit  99.2  Statement  Furnished  Pursuant  To  Section  906  Of The
Sarbanes-Oxley Act Of 2002, 18 U.S.C. Section 1350

Exhibit
Number   Description of Exhibit
-------  -----------------------------------------------------------------------

2.0*     Joint Plan of  Reorganization  Proposed by the Debtors dated August 21,
         2000 as filed with the U.S.  Bankruptcy Court for the Northern District
         of Texas,  Dallas Division,  on August 21, 2000 (without exhibits which
         will be supplied to the Commission upon request)

2.1*     Modification to the Debtors' Joint Plan of  Reorganization  Proposed by
         the Debtors Dated August 21, 2000

2.2*     Order Confirming Joint Plan of Reorganization  and Fixing Deadlines for
         Filing Administrative  Claims, Fee Claims and Rejection Claims as filed
         with the U.S.  Bankruptcy  Court for the  Northern  District  of Texas,
         Dallas Division, on September 29, 2000

2.3*     Certificate  of Compliance  with Reverse  Acquisition  Requirements  as
         filed  with the U.S.  Bankruptcy  Court for the  Northern  District  of
         Texas, Dallas Division, on November 20, 2000

2.4*     Motion for Post Confirmation Technical Amendment as filed with the U.S.
         Bankruptcy Court for the Northern  District of Texas,  Dallas Division,
         on November 30, 2000

2.5*     Order  Granting   Debtors'  Motion  for   Post-Confirmation   Technical
         Amendment  as filed  with the U.S.  Bankruptcy  Court for the  Northern
         District of Texas, Dallas Division, on January 18, 2001

2.6*     Order  Supplementing  Order  of  Confirmation  as  filed  with the U.S.
         Bankruptcy Court for the Northern  District of Texas,  Dallas Division,
         on January 18, 2001

2.7*     Agreement  and Plan of Merger  dated  October  9,  2000 by and  between
         Avatar Systems,  Inc. and HCI Acquisition  1998-2, Inc. d/b/a Precision
         Stainless  Fabricators  whereby Avatar on November 14, 2000 merged with
         and into HCI Acquisition 1998-2, Inc. with HCI Acquisition 1998-2, Inc.
         being the surviving  corporation  (without exhibits and schedules which
         will be supplied to the Commission upon request)

2.8*     Certificate  of Merger of Avatar  Systems,  Inc.  with HCI  Acquisition
         1998-2,  Inc. as filed on November 14, 2000 with the Secretary of State
         of Texas (please see Exhibit 3.2 attached  hereto for a copy of Exhibit
         "A" to this Certificate of Merger)

                                       35
<PAGE>

Exhibit
Number   Description of Exhibit
-------  -----------------------------------------------------------------------

3.0*     Articles of  Incorporation  of HCI Acquisition  1998-2,  Inc., as filed
         with the Secretary of State of Texas on August 7, 1998

3.1*     Articles of Amendment to Articles of  Incorporation  of HCI Acquisition
         1998-2,  Inc. as filed with the  Secretary of State of Texas on October
         23, 2000

3.2*     Certificate of Restated  Articles of  Incorporation  of Avatar Systems,
         Inc. as filed with the Secretary of State of Texas on November 14, 2000

3.3*     Amended and Restated Bylaws of Avatar Systems, Inc.

4.0*     Common Stock Specimen - Avatar Systems, Inc.

9.0*     Shareholders'  Agreement by and between Avatar Systems,  Inc., Cybertec
         Holdings,  Plc., Robert C. Shreve, Jr., Tim Allen, Gregg Allen, Stephen
         A. Komlosy and Merchant Capital Holdings, Ltd. as of July 10, 2000

10.0*    Stock  Purchase  Agreement  by and between  Avatar  Systems,  Inc.  and
         Cybertec  Holdings,  Plc.  dated July 10, 2000  (without  exhibits  and
         schedules  which  will be  supplied  to the  Commission  upon  request)
         providing for the issuance of 1,600,000 shares of Avatar's Common Stock
         to Cybertec for $1.6 million

10.1*    Management Agreement by and between Avatar Systems,  Inc. and Robert C.
         Shreve, Jr. as of July 10, 2000

10.2*    Consulting  Agreement  by and  among  Avatar  Systems,  Inc.,  Merchant
         Capital  Holdings,  Ltd. and its  affiliate,  First  Merchants  Capital
         Limited, as of July 10, 2000

10.3*    Investors' Rights Agreement by and among Avatar Systems, Inc., Cybertec
         Holdings,  Plc.,  Merchants Capital  Holdings,  Ltd., Robert C. Shreve,
         Jr., Tim Allen, Gregg Allen and Stephen A. Komlosy as of July 10, 2000

10.4*    Warrant to Purchase  Common  Stock of Avatar  Systems,  Inc.  issued to
         Cybertec Holdings Plc. as of July 10, 2000

10.5*    Warrant to Purchase  Common  Stock of Avatar  Systems,  Inc.  issued to
         Robert C. Shreve, Jr. as of July 10, 2000

10.6*    Warrant to Purchase  Common  Stock of Avatar  Systems,  Inc.  issued to
         Merchants Capital Holdings, Ltd. as of July 10, 2000

10.7*    Warrant to Purchase  Common  Stock of Avatar  Systems,  Inc.  issued to
         Stephen A. Komlosy as of July 10, 2000

10.8*    Warrant to Purchase Common Stock of Avatar Systems,  Inc. issued to Tim
         Allen as of July 10, 2000

10.9*    Warrant to Purchase  Common  Stock of Avatar  Systems,  Inc.  issued to
         Gregg Allen as of July 10, 2000

10.10*   2000 Stock  Compensation Plan of Avatar Systems,  Inc. dated October 9,
         2000

10.11*   Amended and Restated Loan Agreement  dated July 10, 2000 between Avatar
         Systems, Inc. and Bank One, Texas, N.A.

10.12*   Amended and Restated Term Loan  Promissory  Note dated July 10, 2000 in
         the principal amount of $288,888.96

10.13*   Security Agreement dated July 10, 2000 between Avatar Systems, Inc. and
         Bank One, Texas, N.A.

10.14*   Copyright  Security  Agreement  dated  July  10,  2000  between  Avatar
         Systems, Inc. and Bank One, Texas, N.A.



                                       36
<PAGE>

Exhibit
Number   Description of Exhibit
-------  -----------------------------------------------------------------------

10.15*   Trademark  Security  Agreement  dated  July  10,  2000  between  Avatar
         Systems, Inc. and Bank One, Texas, N.A.

10.16*   Uniform  Commercial  Code Financial  Statement  between Avatar Systems,
         Inc. and Bank One, Texas, N.A.

10.17*   Guaranty  of Charles T. Allen  dated July 10,  2000 for benefit of Bank
         One, Texas, N.A.

10.18*   Guaranty  of Orville G. Allen  dated July 10,  2000 for the  benefit of
         Bank One, Texas, N.A.

10.19*   Limited  Guaranty of Robert C. Shreve,  Jr. dated July 10, 2000 for the
         benefit of Bank One, Texas, N.A.

10.20*   Executive  Employment  Agreement  dated November 23, 2000 between Talon
         Global Solutions, Inc. and Chad P. Statham

10.21*   Executive  Employment  Agreement  dated November 23, 2000 between Talon
         Global Solutions, Inc. and Carla Rogers

22.0*    Subsidiaries of the Registrant
-----------------
* Previously filed as exhibits to the Company's  Registration  Statement on Form
10-SB as filed on June 25,  2001  with the  Commission  which  are  incorporated
herein by reference.


     Reports on Form 8-K


         No reports on Form 8-K were filed  during the last  quarter of the year
for which this report is filed.


ITEM 14. CONTROLS AND PROCEDURES


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


         During  the  period  immediately  after the end of the year,  the Chief
Executive  Officer/Chief  Financial  Officer conducts an update and a review and
evaluation  of  the  effectiveness  of the  Company's  disclosure  controls  and
procedures.  It is  the  Chief  Executive  Officer's/Chief  Financial  Officer's
opinion,  based upon the  evaluation  he completed  by March 21, 2003,  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.

















                                       37
<PAGE>

SIGNATURES


         Pursuant to the  requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                               AVATAR SYSTEMS, INC.

Dated: March 28, 2003                          By: /s/ ROBERT C. SHREVE, JR.
                                                  ------------------------------
                                                Robert C. Shreve, Jr., President
                                                     Chief Executive Officer
                                                     Chief Financial Officer


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.


Dated: March 28, 2003                          By: /s/    ROBERT C. SHREVE, JR.
                                                  ------------------------------
                                                      Robert C. Shreve, Jr.
                                                     Chief Executive Officer
                                                     Chief Financial Officer
                                                            Director

Dated: March 28, 2003                          By: /s/ CHARLES TIMOTHY ALLEN.
                                                  ------------------------------
                                                      Charles Timothy Allen
                                                            Director

Dated: March 28, 2003                          By: /s/ ORVILLE GREGORY ALLEN.
                                                  ------------------------------
                                                      Orville Gregory Allen
                                                            Director

Dated: March 28, 2003                          By: /s/  STEPHEN A. KOMLOSY
                                                  ------------------------------
                                                       Stephen A. Komlosy
                                                            Director








                                       38
<PAGE>


                                 CERTIFICATIONS

I, Robert C. Shreve, Jr., certify that:

1.       I have  reviewed  this annual  report on Form 10-KSB of Avatar  Systems
         Inc.;
2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;
3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;
4.       I am responsible for establishing and maintaining  disclosure  controls
         and  procedures (as defined in Exchange Act Rule 13a-14 and 15d-14) for
         the registrant and I have:
         a)       designed  such  disclosure  controls and  procedures to ensure
                  that material  information  relating to the registrant is made
                  known to me by  others  within  those  entities,  particularly
                  during the period in which this annual report was prepared;
         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and
         c)       presented  in this  annual  report  my  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on the required evaluation as of the Evaluation Date;
5.       I  have  disclosed,   based  on  my  most  recent  evaluation,  to  the
         registrant's  auditors and the audit committee of registrant's board of
         directors (or persons performing the equivalent function):
         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and
         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and
6.       I have  indicated  in this  annual  report  whether  or not there  were
         significant changes in internal controls or in other factors that could
         significantly  affect internal  controls  subsequent to the date of our
         most recent evaluation, including any corrective actions with regard to
         significant deficiencies and material weaknesses.

Date:     March 28, 2003

                              /s/ Robert C. Shreve, Jr.
                             ---------------------------------------------------
                             Chief Executive Officer and Chief Financial Officer
                                 (principal executive and accounting officer)





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