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, 2001
                        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 28, 2002,  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  $17,391 based upon a closing bid price of
$.25 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 $2,391,295.


     The following documents are incorporated by reference: None

<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...........................................2
     Narrative Description of Business.........................................2
     Products..................................................................2
     Petroware2000.............................................................2
     Avatar400.................................................................2
     RAPID (ASP Product).......................................................2
     Sales and Marketing.......................................................3
     Competition...............................................................3
     Customers.................................................................3
     Suppliers.................................................................3
     Licenses, Franchises, Concessions, Royalty Agreement, Patents,
     Trademarks or Labor Contracts.............................................3
     Regulatory and Environmental 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
     Holders...................................................................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
     Forward Looking Statements...............................................10
   ITEM 7. FINANCIAL STATEMENTS...............................................11
   ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE...............................................28
PART III......................................................................28
   ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
           COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT..................28
     Committees of the Board of Directors.....................................29
     Section 16(a) Beneficial Ownership Reporting Compliance..................29
   ITEM 10. EXECUTIVE COMPENSATION............................................30
     Executive Officers.......................................................30
     Employment Agreements....................................................30
     Key Man Insurance........................................................30
     Stock Option Plan........................................................30
     Compensation Table.......................................................31
     Summary Compensation Table...............................................31
   ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
            AND MANAGEMENT....................................................31
   ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................32
   ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
            ON FORM 8-K.......................................................32
     Statements filed as part of this Report:.................................32
     Reports on Form 8-K......................................................35
     Exhibits.................................................................35
     Financial Statement Statements...........................................35


                                       -i-
<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,  including  486,731  shares  issued to
Halter Financial Group, Inc., a Texas corporation.

     HCI had  secured a  post-petition  loan in the amount of $7,500 from Halter
Financial  to meet  certain  of the costs and  expenses  associated  with  HCI's
reorganization efforts. Under the Reorganization Plan, Halter Financial received
486,731  shares  of  common  stock  of HCI in  satisfaction  of the loan and for
services  and  expenses  relating  to the merger  transaction  between HCI and a
privately-owned  operating  business.  Under the  Reorganization  Plan,  HCI was
discharged from all debts and liabilities that arose before October 10, 2000.

                                       1
<PAGE>

     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.

     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.-

     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.

     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.


                                       2
<PAGE>

     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

     No customer accounted for more than 10% of our revenues during 2001.


     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.


                                       3
<PAGE>

     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  research and  development  costs have been focused on the
development of our Avatar400 and Petroware2000 products. 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  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 $389,892 on research and development during 2001.


                                       4
<PAGE>

     Employees


     As of December 31, 2001, we had 14 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.

     Since  our  common  stock  only  recently  began  trading,  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 June 1,  2001  for a  sixteen-month  lease  term
commencing on June 1, 2001 and expiring on October 31, 2002.

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 2001.




                                     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 Form 10 SB became  effective and our stock was
approved for trading on December 19, 2001 on the NASD OTC Bulletin Board.  Since
our common stock only recently began trading, 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. On March 28, 2002 the last date reported
for our common stock, the closing bid price was $0.25and the closing asked price
was $3.00.

     Holders

     As of March 28, 2002,  the Company had 450  shareholders  of record and its
common  stock  had a closing  bid  price of $0.25 per share and a closing  asked
price of $3.00 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/recurring,  professional services and hardware. Our net revenues for
the year ended December 31, 2001  increased 41% to $2,391,295  compared with net
revenues of $1,697,919 for the year ended December 31,2000.

     Software.  Software  sales for the year ended  December 31, 2001  increased
467% to $830,423  compared with software sales of $177,826 in 2000. The increase
in software  revenues is primarily  from sales of the  Petroware  2000  software
package, which was released in October 2000.

     Maintenance  and other  recurring  revenue  Maintenance and other recurring
revenue  for the year  ended  December  31,  2001  increased  18% to  $1,014,067
compared with  maintenance and other recurring  revenue of $856,579 in 2000. The
increase in maintenance and other recurring revenues is related to the Petroware
2000 software package, which was released in October of 2000.

     Professional  services  Professional  service  revenue  for the year  ended
December 31, 2001 decreased 13% to $379,803, compared with professional services
revenue of $436,063 in 2000.

     Hardware.  Hardware sales for year ended December 31, 2001 decreased 36% to
$167,002  compared  with  hardware  sales of $227,451 in 2000.  The  decrease in
hardware  sales is due to a  decline  in  customer  demand as well as a shift in
sales focus to the higher margin software sales.

     Cost of Revenues

     Our cost of revenues  includes four components:  cost of software,  cost of
maintenance  and other  recurring,  cost of professional  services,  and cost of
hardware  sales.  Our cost of  revenues  for the year ended  December  31,  2001
increased  60% to  $1,676,093  compared  with cost of revenues of  $1,050,492 in
2000. Cost of revenues as a percentage of net revenues  decreased to 30% for the
year ended December 31, 2001 from 38% in 2000.

     Cost of software.  Cost of software increased 218% to $163,757 for the year
ended  December 31, 2001 from $112,194 in 2000. The increase in cost of software
is directly related to the increase in software  revenue.  Cost of software as a
percentage of the related revenues  decreased to 20% for the year ended December
31, 2001  compared  to 29% in 2000,  primarily  due to the  increase in software
sales.

     Cost of maintenance and other recurring  revenues.  Cost of maintenance and
other recurring  revenues  increased 32% to $290,058 for the year ended December
31, 2001 from  $220,011 in 2000.  This increase was due to the  reallocation  of
certain programming and development personnel from software  development,  which
is  capitalized,  to customer  support.  Cost of maintenance and other recurring
revenues as a percentage  of the related  revenue  increased to 29% for the year
ended December 31, 2001, compared to 26% for the same period last year.

     Cost of professional services.  Cost of professional services decreased 31%
to $120,598  for the year ended  December 31, 2001,  compared  with  $175,715 in


                                       8
<PAGE>

2000.  Cost of  professional  services as a  percentage  of the related  revenue
decreased to 32% for the year ended December 31, 2001,  compared to 40% in 2000.
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.

     Hardware.  Cost of hardware  sold  decreased 30% to $140,789 for year ended
December  31,  2001,  compared  with  $200,138  in 2000.  Cost of  hardware as a
percentage of the related  revenue  decreased to 84% for the year ended December
31, 2001, compared with 88% in 2000.

         Operating Expenses

     Sales and  Marketing.  Our sales and marketing  expenses for the year ended
December 31, 2001 increased 43% to $281,653, compared with $197,019 in 2000. The
increase in expense for the year ended December 31, 2001 compared with last year
was primarily due to an increase in sales and marketing  personnel and increased
sales and  marketing  in our core  markets.  Sales and  marketing  expenses as a
percentage of net revenues  remained  stable at 12% for the year ended  December
31, 2001 and 2000.

     General and Administrative. Our general and administrative expenses for the
year ended  December 31, 2001  increased 51% to $664,069,  compared with general
and administrative  expenses of $439,727 in 2000. The increase was due primarily
to nonrecurring  legal and accounting  expenses of  approximately  $165,000.  We
increased  staffing  and  related  costs to  support  our  growth.  General  and
administrative expenses as a percentage of net revenues increased to 28% for the
year ended December 31, 2001, compared with 26% in 2000.

     Interest  Income.  Interest  income was $23,706 for the year ended December
31, 2001 compared to $43,601 in 2000.  The decrease was primarily due to smaller
balances  available for investments  because of costs we incurred in our reverse
merger and deposits we made on contracts for potential acquisition candidates.

     Interest Expense.  Interest expense was $16,883 for the year ended December
31, 2001, compared to $32,989 in 2000.

     Provision  for Income  Taxes.  For the year ended  December  31,  2001,  we
recorded a tax provision on income from  continuing  operations of $32,317 based
on our  pretax  income  using  an  effective  tax  rate  of  34%,  which  is our
anticipated  effective tax rate for the fiscal year 2001.  The actual  effective
tax rate for the entire fiscal year could vary substantially depending on actual
results achieved.

     Capitalized  Offering Costs. In 2001, the Company  determined that costs in
the amount of $231,133 had been incorrectly capitalized in the December 31, 2000
balance sheet and should have been reflected as costs  associated  with the sale
of common stock in 2000.  Accordingly,  the December 31, 2000 balance  sheet has
been restated to properly  reflect  these costs as a reduction to  stockholders'
equity.

     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,
2001,  we had  $397,362  in cash  and  cash  equivalents.  Cash  generated  from
operations  was $135,632  and $445,809 for the year ended  December 31, 2001 and
2000, respectively.

     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 $1.24 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, 2001, we had  approximately  $360,000
remaining of the proceeds.


                                       9
<PAGE>

     At  December  31,  2001,  we had cash and cash  equivalents  of $397,362 as
compared to cash and cash  equivalents  of $933,008 at December 31, 2000.  Based
upon  current  financial  resources,  we  believe  that we will have  sufficient
reserves  to meet our  anticipated  working  capital  needs for our  business as
currently  conducted for the next twelve months.  However, we anticipate that we
will need  additional  working capital to fund our business  strategy  including
acquisitions.  There  can be no  assurance  that  additional  financing  will be
available, or if available,  that such financing will be on favorable terms. Any
such failure to secure additional financing, if needed, could impair our ability
to achieve our business  strategy.  There can be no assurance  that we will have
sufficient  funds or successfully  achieve our plans to a level that will have a
positive effect on our results of operations or financial condition. Our ability
to execute our growth strategy is contingent upon sufficient  capital as well as
other factors,  including our ability to further increase consumer  awareness of
our  products,   our  ability  to  consummate   acquisitions  of   complimentary
businesses,  general economic and industry  conditions,  our ability to recruit,
train and retain a qualified sales staff,  and other factors,  many of which are
beyond our control.  Even if our revenues and earnings grow rapidly, such growth
may  significantly  strain our  management  and our  operational  and  technical
resources. If we are successful in obtaining greater market penetration with our
products,  we will be required to deliver  increasing volumes of our products to
our customers on a timely basis at a reasonable  cost to us. No assurance can be
given  that we can  meet  increased  product  demand  or that we will be able to
deliver our products on a timely and cost-effective basis.

     At December 31, 2001, we had an outstanding note payable to Bank One, Texas
N.A.,  bearing interest at 10.5% per annum,  with monthly principal and interest
payments  of  $14,444   through   maturity  in  February   2002.   The  note  is
collateralized by substantially all of our assets and is guaranteed by Robert C.
Shreve, Jr., Tim Allen and Gregg Allen, three of our officers and directors.  At
December 31, 2001, the principal balance of the note was $43,333.

     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.


                                       10
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

                       Avatar Systems Inc. and Subsidiary
                   Index to Consolidated Financial Statements


Report of Independent Certified Public Accountants                           F-1


Consolidated Financial Statements

   Balance Sheet as of December 31, 2001 and 2000                            F-2
   Statements of Income for the years ended December 31, 2001
      and 2000                                                               F-3
   Statements of Stockholders' Equity for the years ended
      December 31, 2001 and 2000                                             F-4
   Statements of Cash Flows for the years ended December 31, 2001
      and 2000                                                               F-5
   Notes to Consolidated Financial Statements                        F-6 to F-15


                                       11
<PAGE>



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Avatar Systems Inc.

     We have  audited the  accompanying  consolidated  balance  sheets of Avatar
Systems  Inc.  and  subsidiary  of December  31, 2001 and 2000,  and the related
consolidated  statements of income,  stockholders' equity and cash flows for the
years then ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance  with  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 our audits  provide a reasonable
basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects,  the consolidated financial position of Avatar Systems
Inc.  and  subsidiary  as of December  31, 2001 and 2000,  and the  consolidated
results of their operations and their consolidated cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.





         /s/ GRANT THORNTON LLP
         ----------------------

         Dallas, Texas
         March 8, 2002


                                      F-1

<PAGE>
<TABLE>
<CAPTION>

                       Avatar Systems, Inc. and Subsidiary
                                 BALANCE SHEETS

                                                                      December 31,
                                                                -----------------------
                                     ASSETS                           2001         2000
                                                                ----------   ----------
                                                                             (Restated,
                                                                             See Note D)
<S>                                                             <C>          <C>
CURRENT ASSETS
   Cash and cash equivalents                                    $  397,362   $  933,008
   Accounts receivable - trade, net of allowance for doubtful
       accounts of $20,000 in 2001                                 191,861      101,619
   Inventories                                                        --         45,387
   Prepaid expenses                                                 22,281        6,030
   Deferred income taxes                                           110,564       72,121
   Note receivable                                                  51,122         --
   Net assets from discontinued operations                            --         29,369
                                                                ----------   ----------

                  Total current assets                             773,190    1,187,534

PROPERTY AND EQUIPMENT - at cost, net                              145,268      130,204

PURCHASED SOFTWARE, net of accumulated
   amortization of $445,508 and $322,413 in 2001
   and 2000, respectively                                          416,154      539,249

SOFTWARE DEVELOPMENT COSTS, net of
   accumulated amortization of $ 176,944 and $33,246
   in 2001 and 2000, respectively                                1,218,831      972,638

OTHER ASSETS                                                           488      321,585
                                                                ----------   ----------

                  Total assets                                  $2,553,931   $3,151,210
                                                                ==========   ==========

                             LIABILITIES AND EQUITY

CURRENT LIABILITIES
   Current maturities of long-term debt                         $   60,402   $  187,037
   Accounts payable - trade                                        109,307      145,054
   Accrued expenses                                                 38,088      115,389
   Deferred revenue                                                216,821      640,880
                                                                ----------   ----------

                  Total current liabilities                        424,618    1,088,360

DEFERRED INCOME TAXES                                              180,600      112,797

LONG TERM DEBT, less current maturities                              3,773       53,203
                                                                ----------   ----------

                  Total liabilities                                608,991    1,254,360

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                                               167,899      119,809
                                                                ----------   ----------
                                                                 1,944,940    1,896,850

                  Total liabilities and equity                  $2,553,931   $3,151,210
                                                                ==========   ==========
</TABLE>


        The accompanying notes are an integral part of these statements.

                                      F-2

<PAGE>
<TABLE>
<CAPTION>

                       Avatar Systems, Inc. and Subsidiary
                              STATEMENTS OF INCOME



                                                                       Years ended December 31,
                                                                      --------------------------
                                                                          2001           2000
                                                                      -----------    -----------
<S>                                                                   <C>            <C>
Revenue
   Software                                                           $   830,423    $   177,826
   Maintenance                                                          1,014,067        856,579
   Consulting                                                             379,803        436,063
   Hardware                                                               167,002        227,451
                                                                      -----------    -----------
                                                                        2,391,295      1,697,919

Cost of Sales
   Software                                                               163,757         51,563
   Maintenance                                                            290,058        220,011
   Consulting                                                             120,598        175,715
   Hardware                                                               140,789        200,138
                                                                      -----------    -----------
                                                                          715,202        647,427
                                                                      -----------    -----------

                  Gross profit                                          1,676,093      1,050,492

Operating expenses
   Sales and marketing                                                    281,653        197,019
   General and administrative                                             664,009        439,727
   Depreciation and amortization                                          329,080        222,409
   Write off of acquisition costs                                         323,539           --
                                                                      -----------    -----------
                                                                        1,598,341        859,155
                                                                      -----------    -----------

                  Operating income                                         77,752        191,337

Other income (expense)
   Interest income                                                         23,706         43,601
   Interest expense                                                       (16,883)       (32,989)
                                                                      -----------    -----------
                                                                            6,823         10,612
                                                                      -----------    -----------

                  Income from continuing operations before
                    income taxes                                           84,575        201,949

Deferred income tax expense                                                32,317         39,189

                  Income from continuing operations                        52,258        162,760

Discontinued Operations
   Income from operations of Talon Global Systems Inc. (net of
      income taxes)                                                         7,393          2,884
   Loss on disposal of Talon Global Systems Inc. (net of applicable
      income taxes)                                                       (11,561)          --
                                                                      -----------    -----------

                  NET INCOME                                          $    48,090    $   165,644
                                                                      ===========    ===========

<PAGE>

                       Avatar Systems, Inc. and Subsidiary
                        STATEMENTS OF INCOME - CONTINUED




                                                                       Years ended December 31,
                                                                      --------------------------
                                                                          2001            2000
                                                                      -----------     -----------
Earnings per share - basic
   Income from continuing operations                                  $       .01    $       .02
                                                                      ===========    ===========

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

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

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

Weighted average shares outstanding:
   Basic                                                                8,695,652      7,336,653
                                                                      ===========    ===========

   Diluted                                                              9,512,992      7,336,653
                                                                      ===========    ===========
 </TABLE>


        The accompanying notes are an integral part of these statements.

                                       F-3

<PAGE>
<TABLE>
<CAPTION>

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

                     Years ended December 31, 2001 and 2000




                                        Common stock
                                 -------------------------     Paid-in        Retained     Partners'
                                    Shares        Amount       capital        earnings      capital         Total
                                 -----------   -----------   -----------    -----------   -----------    -----------
<S>                              <C>           <C>           <C>            <C>           <C>            <C>
Balance at January 1, 2000              --     $      --     $      --      $      --     $   489,154    $   489,154

Net income                            45,835        45,835

Conversion to corporation
   (Note B)                        6,400,000         6,400       528,589           --        (534,989)          --

Sale of common stock, net of
   selling costs of $357,948       1,600,000         1,600     1,240,452           --            --        1,242,052

Recapitalization (Note B)            695,652           696          (696)          --            --             --

Net income                              --            --            --          119,809          --          119,809
                                 -----------   -----------   -----------    -----------   -----------    -----------

Balance at December 31, 2000 -
   restated (see Note D)           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
                                 ===========   ===========   ===========    ===========   ===========    ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-4



<PAGE>
<TABLE>
<CAPTION>

                       Avatar Systems, Inc. and Subsidiary
                            STATEMENTS OF CASH FLOWS

                             Year ended December 31,

                                                                                                   Years ended
                                                                                                   December 31,
                                                                                            --------------------------
                                                                                                2001           2000
                                                                                            -----------    -----------
<S>                                                                                         <C>            <C>
         Cash flows from operating activities
    Net income from continuing operations                                                   $    52,258    $   162,760
    Adjustments to reconcile net income from continuing
       operations to net cash provided by operating activities
          Depreciation and amortization                                                         329,080        222,409
          Deferred income taxes                                                                  32,317         39,189
          Write-off of acquisition costs                                                        323,539           --
          Changes in operating assets and liabilities
              Accounts receivable - trade                                                       (90,242)        48,659
              Inventory                                                                          45,387        (45,387)
              Prepaid expenses and other                                                        (16,251)          --
              Accounts payable and accrued expenses                                            (113,048)        26,370
              Deferred revenue                                                                 (424,059)       (26,455)
              Other                                                                              (3,349)        18,264
                                                                                            -----------    -----------

                  Net cash provided by operating activities                                     135,632        445,809
                                                                                            -----------    -----------

         Cash flows from investing activities
    Software development costs capitalized                                                     (389,892)      (574,698)
    Deposits                                                                                       --         (326,754)
    Purchase of property and equipment                                                          (76,443)       (20,132)
    Payments received on notes receivable                                                         4,478           --
                                                                                            -----------    -----------

                  Net cash used in investing activities                                        (461,857)      (921,584)
                                                                                            -----------    -----------

         Cash flows from financing activities
    Sale of common stock                                                                           --        1,242,052
    Payments on note payable and capital lease obligations                                     (176,065)      (181,253)
    Other                                                                                          --             (685)
                                                                                            -----------    -----------

                  Net cash provided by (used in) financing activities                          (176,065)     1,058,114
                                                                                            -----------    -----------

                  Net cash provided by (used in) continuing operations                         (502,290)       582,339

Net cash used in discontinued operations                                                        (33,356)       (27,882)
                                                                                            -----------    -----------

                  Net increase (decrease) in cash and cash equivalents                         (535,646)       554,457

Cash and cash equivalents at beginning of period                                                933,008        378,551
                                                                                            -----------    -----------

Cash and cash equivalents at end of period                                                  $   397,362    $   933,008
                                                                                            ===========    ===========

Supplemental disclosure of cash paid for:
    Interest                                                                                $    16,883    $    32,989
</TABLE>


        The accompanying notes are an integral part of these statements

                                       F-5



<PAGE>

                       Avatar Systems, Inc. and Subsidiary

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

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 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 its computer
software products is recognized over the term of the contracts.

                                       F-6

<PAGE>


                       Avatar Systems, Inc. and Subsidiary

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     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 producing 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, 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 $143,698 and $33,246
for the years ending December 31, 2001 and 2000.

     Financial Instruments
     ---------------------

     The fair values of the Company's financial instruments,  consisting of cash
and cash equivalents, accounts receivable, accounts payable, and long-term debt,
approximate their carrying values.

     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.  In  reviewing
recoverability,  the Company  estimates the future cash flows expected to result
from  using the  assets  and  eventually  disposing  of them.  If the sum of the
expected future cash flows  (undiscounted  and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.

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

     Prior to July 1, 2000,  the Company  operated as a partnership  and federal
income taxes were not  reflected in the  financial  statements,  as the partners
individually reported their share of taxable income or loss.

     Effective July 1, 2000,  the Company  incorporated  as a C corporation  for
federal  income  tax  purposes  and  began  providing  for  income  taxes in the
financial statements.

     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.

                                      F-7

<PAGE>

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     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  compensation to employees using the
intrinsic  value  method.  Accordingly,  compensation  cost for  employee  stock
options is measured as the  excess,  if any, of the fair value of the  Company's
common stock at date of grant over the exercise price.

     Use of 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.

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

     In June  2001,  the  Financial  Accounting  Standards  Board  approved  for
issuance  Statement  of  Financial  Accounting  Standards  No.  141 (SFAS  141),
Business Combinations. This standard eliminates the pooling method of accounting
for business combinations  initiated after June 30, 2001. In addition,  SFAS 141
addresses  the  accounting  for  intangible  assets and  goodwill  acquired in a
business  combination.  This  portion  of SFAS  141 is  effective  for  business
combinations completed after June 30, 2001. The Company does not expect SFAS 141
to have a  material  effect on the  Company's  financial  position,  results  of
operations, or cash flows.


     In June  2001,  the  Financial  Accounting  Standards  Board  approved  for
issuance  Statement  of  Financial  Accounting  Standards  No.  142 (SFAS  142),
Goodwill and  Intangible  Assets,  which  revises the  accounting  for purchased
goodwill and intangible  assets.  Under SFAS 142, goodwill and intangible assets
with  indefinite  lives  will no longer  be  amortized,  but will be tested  for
impairment  annually.  SFAS 142 is effective  for fiscal years  beginning  after
December 15, 2001, with early adoption permitted for companies with fiscal years
beginning after March 15, 2001 if their first quarter financial  statements have
not  previously  been  issued.  The  Company  does not expect SFAS 142 to have a
material effect on the Company's financial position,  results of operations,  or
cash flows.



                                       F-8

<PAGE>

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     In August 2001, the Financial  Accounting  Standards Board issued Statement
     of Financial  Accounting  Standards No. 144,  Accounting  for Impairment or
     Disposal of Long-Lived Assets. SFAS No. 144 addresses financial  accounting
     and reporting for the  impairment  or disposal of long-lived  assets.  This
     statement is effective for fiscal years  beginning after December 15, 2001.
     The Company does not believe that the  implementation of this standard will
     have a material effect on its financial position, results of operations, or
     cash flows.


NOTE B - RECAPITALIZATION

     In July 2000, Avatar Systems, Ltd. (the predecessor) was merged into Avatar
     Systems,  Inc.,  a C  corporation.  As a result of the  merger,  all of the
     partnership  interests of Avatar Systems, Ltd. were exchanged for 6,400,000
     shares of common stock and warrants to purchase  2,100,000 shares of common
     stock of Avatar  Systems,  Inc.,  which  represented all of the outstanding
     equity instruments of Avatar Systems, Inc.

     Concurrent with the aforementioned  transaction,  Avatar Systems, Inc. sold
     1,600,000  shares of its common  stock and  warrants to purchase  3,600,000
     shares of its common stock for net proceeds of $1,242,052.

     The  warrants  have an  exercise  price  of $1.00  per  common  share,  are
     exercisable immediately, and expire in five years.

     In October  2000,  Avatar  Systems,  Inc.  was merged into HCI  Acquisition
     1998-2 Inc. (HCI), a publicly traded company, and HCI was renamed as Avatar
     Systems,  Inc. At the completion of the merger,  the shareholders of Avatar
     Systems,  Inc. owned  approximately  92% of the  outstanding  shares of the
     public  company.  For  accounting  purposes,  the merger is  reflected as a
     reverse acquisition and  recapitalization of Avatar Systems,  Inc., and the
     historical financial statements of the Company are those of Avatar Systems,
     Inc. and Avatar Systems, Ltd.

NOTE C - 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 for all periods presented.

                                       F-9

<PAGE>

NOTE C - DISCONTINUED OPERATIONS - Continued

     Operating results from discontinued operations were as follows:

                                                         Year ended December 31,
                                                         -----------------------
                                                           2001          2000
                                                        ----------    ----------

     Revenues                                           $  517,370    $   37,213
     Income before income taxes                             10,349         4,369
     Income tax expense                                      2,956         1,485
     Income from discontinued operations                     7,393         2,884


NOTE D - RESTATEMENT

     In 2001,  the Company  determined  that costs in the amount of $231,133 had
     been  incorrectly  capitalized  in the December 31, 2000 balance  sheet and
     should  have been  reflected  as costs  associated  with the sale of common
     stock in 2000.  Accordingly,  the December 31, 2000 balance  sheet has been
     restated to properly  reflect  these costs as a reduction to  stockholders'
     equity.


NOTE E - PROPERTY AND EQUIPMENT

     Property and equipment are summarized as follows:

                                                                  December 31,
                                                             -------------------
                                                              2001       2000
                                                             --------   --------

     Furniture and fixtures                                  $108,861   $ 85,884
     Computer equipment and software                          289,950    236,484
     Telecommunication equipment                               18,603     18,603
                                                             --------   --------
                                                              417,414    340,971
     Less accumulated depreciation                            272,146    210,767
                                                             --------   --------

                                                             $145,268   $130,204
                                                             ========   ========

     During the year ended December 31, 2000, the Company acquired approximately
$41,000 of property and equipment  under capital  leases,  which are included in
long-term debt.


                                      F-10

<PAGE>
<TABLE>
<CAPTION>

NOTE F - OTHER ASSETS

     Other assets consist of the following:

                                                                  December 31,
                                                             -------------------
                                                              2001       2000
                                                             --------   --------

     Deposits                                                $   --     $318,900
     Other                                                        488      2,685
                                                             --------   --------

                                                             $    488   $321,585
                                                             ========   ========


NOTE G - LONG-TERM DEBT

     Long-term debt consists of the following:

                                                                                     December 31,
                                                                                 -------------------
                                                                                  2001       2000
                                                                                 --------   --------
<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   $202,222

     Other                                                                         20,842     38,018
                                                                                 --------   --------
                                                                                   64,175    240,240
        Less current maturities                                                    60,402    187,037
                                                                                 --------   --------

                                                                                 $  3,773   $ 53,203
                                                                                 ========   ========
</TABLE>


NOTE H - INCOME TAXES

     Prior to July 1, 2000,  the Company  operated as a  partnership  and income
     taxes were not reflected in the  financial  statements.  Effective  July 1,
     2000,  the Company  incorporated  as a C  corporation  and began  recording
     federal income taxes in the financial statements.

                                      F-11

<PAGE>
<TABLE>
<CAPTION>

NOTE H - INCOME TAXES - Continued

     The Company's  effective  income tax rate  differed  from the U.S.  Federal
statutory rate as follows:

                                                                    Year ended December 31,
                                                                    -----------------------
                                                                      2001          2000
                                                                    ---------     ---------
<S>                                                                 <C>           <C>
       Income tax at statutory rate                                 $  28,756     $  68,663
       Effect of conversion to C corporation                             --         (17,133)
       Partnership income                                                --         (15,584)
       Other                                                            3,561         3,243
                                                                    ---------     ---------

       Income tax expense                                           $  32,317     $  39,189
                                                                    =========     =========

    Deferred tax assets and liabilities consist of the following:

                                                                          December 31,
                                                                    -----------------------
                                                                      2001          2000
                                                                    ---------     ---------

       Deferred tax assets
          Net operating loss carryforwards                          $ 183,265     $  68,023
          Deferred revenue                                            106,630       217,899
          Accrued expenses                                              4,098         4,098
          Purchased software amortization                              42,070          --
          Property and equipment                                        1,266          --
                                                                    ---------     ---------
                                                                      337,329       290,020

       Deferred tax liability
          Capitalized software                                        400,657       330,696
          Other                                                         6,708          --
                                                                    ---------     ---------
                                                                      407,365       330,696
                                                                    ---------     ---------

       Net deferred tax liability                                   $ (70,036)    $ (40,676)
                                                                    =========     =========

       Net deferred tax asset - current                             $ 110,564     $  72,121
       Net deferred tax liability - long-term                        (180,600)     (112,797)
                                                                    ---------     ---------

                                                                    $ (70,036)    $ (40,676)
                                                                    =========     =========
</TABLE>

     At  December  31,  2001,   the  Company  had  federal  net  operating  loss
     carryforwards of approximately $540,000 which expire in 2021 and 2020.

                                      F-12


<PAGE>
<TABLE>
<CAPTION>

NOTE I - LEASE OBLIGATIONS

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

        Year ending
       December 31,

               2002                                                     $137,500
               2003                                                      133,080
               2004                                                      133,080
               2005 and thereafter                                        99,810
                                                                        --------

                                                                        $503,470

     Rent expense  under the  operating  leases was  approximately  $124,000 and
     $77,000 for the years ended December 31, 2001 and 2000.


NOTE J - EARNINGS PER SHARE

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

                                                              Year ended December 31,
                                                              -----------------------
                                                                 2001         2000
                                                              ----------   ----------
<S>                                                           <C>          <C>
     Income from continuing operations                        $   52,258   $  162,760
                                                              ==========   ==========

     Income (loss) from discontinued operations                   (4,168)       2,884
                                                              ==========   ==========

     Weighted average shares outstanding - basic               8,695,652    7,336,653
     Effect of dilutive employee stock options                    16,580         --
     Effect of dilutive stock warrants                           800,760         --
                                                              ----------   ----------

     Weighted average shares outstanding - diluted             9,512,992    7,336,653
                                                              ==========   ==========

     Earnings per share from continuing operations
         Basic                                                $      .01   $      .02
                                                              ==========   ==========

         Diluted                                              $      .01   $      .02
                                                              ==========   ==========
     Earnings (loss) per share from discontinued operations
         Basic                                                $      . -   $      . -
                                                              ==========   ==========

         Diluted                                              $      . -   $      . -
                                                              ==========   ==========
</TABLE>


                                      F-13
<PAGE>

NOTE J - EARNINGS PER SHARE - Continued

     For the year ended December 31, 2000, warrants to purchase 5,700,000 shares
     of the  Company's  common  stock were not  included in the  computation  of
     diluted earnings per share because their effect would be anti-dilutive.


NOTE K - STOCK COMPENSATION PLAN

     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.  At  December  31,  2001,  118,500
     shares of common stock were  reserved for future grant under the 2000 Stock
     Compensation Plan.

     The Company has adopted  only the  disclosure  provisions  of  Statement of
     Financial  Accounting   Standards  No.  123  (SFAS  123),   Accounting  for
     Stock-based Compensation, for employee stock options and continues to apply
     Accounting  Principles Board Opinion No. 25, Accounting for Stock Issued to
     Employees,  for recording stock options granted. If the Company had elected
     to recognize  compensation  expense  based upon the fair value at the grant
     date for options granted subsequent to March 31, 1995,  consistent with the
     methodology prescribed by SFAS 123, net income and earnings per share would
     have been reduced to the pro forma amounts indicated below:

                                                                     Year ended
                                                                    December 31,
                                                                        2001
                                                                   -------------
     Net income (loss) - as reported                               $      48,090

     Net income (loss) - pro forma                                        18,895

     Earnings (loss) per share - as reported
         Basic                                                               .01
         Diluted                                                             .01

     Earnings (loss) per share - pro forma
         Basic                                                              --
         Diluted                                                            --

     The fair value of these  options was  estimated  at the date of grant using
     the Black-Scholes option pricing model with the following  weighted-average
     assumptions  used  for  grants  in  fiscal  2001:  dividend  yield  of  0%;
     volatility of 100%;  risk-free interest rates of 4.5% and expected lives of
     five years.  The weighted  average  fair value of options  granted was $.74
     during fiscal 2001.

                                      F-14

<PAGE>

NOTE K - STOCK COMPENSATION PLAN - Continued

     Option  activity  for the year ended  December  31, 2001 is  summarized  as
follows:

                                         Number of Shares     Weighted Average
                                        Underlying Options     Exercise Price
                                        ------------------    ----------------

     Outstanding at January 1, 2001             --                  --
     Granted                                 118,358                1.25
     Exercised                                  --                  --
     Canceled/forfeited                         --                  --
                                             -------

     Outstanding at December 31, 2001        118,358                1.25
                                             =======             =======

     Exercisable at December 31, 2001        118,358                1.25
                                             =======             =======



                                      F-15


<PAGE>

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

     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.      39      President, Chief Executive Officer,
                                        Chief Financial Officer, Chairman of the
                                        Board and Director
     Charles Timothy Allen      51      Director
     Orville Gregory Allen      45      Director
     Stephen A. Komlosy         60      Director
     Geoffrey Dart              54      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.

     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


                                       28
<PAGE>

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.

     Geoffrey Dart has served as a director of our Company since  November 2000.
He is a London-based merchant banker with over twenty years of experience in the
investment field. Mr. Dart is chairman of First Merchant Capital Ltd., a company
incorporated under the laws of England and Wales. First Merchant  specializes in
obtaining  financing for mergers and  acquisitions,  mainly in small-cap  United
Kingdom and U.S. companies in the $1 million to $10 million bracket. Mr. Dart is
also the Managing Director of Merchant Capital Holdings,  Ltd., a British Virgin
Island company,  which provides financial consulting services to United Kingdom,
and U.S.  small cap  companies.  Mr.  Dart and  members  of his family own First
Merchant and Merchant  Capital  Holdings.  For at least the past five years, Mr.
Dart has been engaged in providing investment banking services to United Kingdom
and U.S.  companies  through  his  family-owned  businesses.  Mr. Dart is also a
director of Mortgage Advisors,  Ltd.,  Shillington,  Ltd.,  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

     Our Board of Directors does not have any committees at this time.


     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.


                                       29
<PAGE>
<TABLE>
<CAPTION>

     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, 2001,  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.


---------------------------  ---------------------------------  ------------  ------------
                                     Annual Compensation
    Name and Principal       ---------------------------------   Long Term      All Other
        Position               Year       Salary       Bonus    Compensation  Compensation
---------------------------  -------- --------------- --------  ------------  ------------
<S>                          <C>      <C>             <C>       <C>           <C>
   Robert C. Shreve, Jr.     2001        $125,000        -0-        -0-          6,090
---------------------------  -------- --------------- --------  ------------  ------------
</TABLE>



     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  $1,000 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.

     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


                                       30
<PAGE>
<TABLE>
<CAPTION>

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  118,500  shares of our common stock at an exercise  price of $1.25 per
share have been  granted to 12  employees.  Such  options  expire on January 10,
2011. No options have been granted to our officers or directors.

     Compensation Table

     The information set forth below concerns the cash and non-cash compensation
to certain of our  executive  officers  for each of the past three  fiscal years
ended December 31, 2001,  2000 and 1999. 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     2001      $125,000          6,090           None            None
   Executive Officer, Chief Financial       2000      $108,160           N/A            None        1,600,000(1)
   Officer and Director                     1999      $106,163           N/A            None            None
--------------------
</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."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The table below sets forth,  as of December 31, 2001,  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)                       Owned           Beneficially Owed
-------------------------------------- -------------------  --------------------
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......     2,600,000(5)             28.9
Stephen A. Komlosy....................     3,201,000(6)             31.1
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 (6
     persons).........................   13,701,000(10)             95.2
---------------


                                       31
<PAGE>

(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 0Systems, 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  1,600,000  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 Rosedale  House,  Rosedale  Road,
     Richmond, Surrey TW9 2SZ, England.
(6)  Includes  1,600,000 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 Rosedale House,  Rosedale
     Road, Richmond, Surrey TW9 2SZ, 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 is a director of Avatar.
(9)  Ms. Skelton is the Secretary of Avatar.
(10) See preceding  notes for an  explanation of the ownership of the 13,701,000
     shares.


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

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There were no  material  transactions  between  the  Company and any of its
officers,  directors  or  principal  shareholders  during the fiscal  year ended
December 31, 2001.

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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.

     2.   Consolidated Financial Statements


                                       32
<PAGE>

     See  "Index to  Consolidated  Financial  Statements"  under  Item 7 of this
Report.  All  schedules  have  been  omitted,  as the  required  information  is
inapplicable or the information is presented in the financial  statements or the
notes thereto.


     3.   Exhibits


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


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)

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


                                       33
<PAGE>

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.

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


                                       34
<PAGE>


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.


     Exhibits

     The response to this portion of Item 13 is submitted as a separate  section
of this report.


     Financial Statement Statements

     The response to this portion of Item 13 is submitted as a separate  section
of this report.

                                   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: April 12, 2002                          By: /s/ ROBERT C. SHREVE, JR.
                                                  --------------------------
                                                Robert C. Shreve, Jr., President
                                                     Chief Executive Officer
                                                     Chief Financial Officer





                                       35
<PAGE>

     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: April 12, 2002                           By: /s/ ROBERT C. SHREVE, JR.
                                                   --------------------------

                                                       Robert C. Shreve, Jr.
                                                      Chief Executive Officer
                                                      Chief Financial Officer
                                                             Director

Dated: April 12, 2002                           By: /s/ CHARLES TIMOTHY ALLEN
                                                   --------------------------

                                                       Charles Timothy Allen
                                                             Director

Dated: April 12, 2002                           By: /s/ ORVILLE GREGORY ALLEN
                                                   --------------------------
                                                       Orville Gregory Allen
                                                             Director

Dated: April 12, 2002                           By: /s/ STEPHEN A. KOMLOSY
                                                   --------------------------
                                                        Stephen A. Komlosy
                                                             Director

Dated: April 12, 2002                           By: /s/ GEOFFREY DART
                                                   --------------------------
                                                           Geoffrey Dart
                                                             Director