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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
                        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 10, 2004, 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  $278,261 based upon a closing bid price of
$.40 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 $2,088,950.


         The following documents are incorporated by reference: None

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                               TABLE OF CONTENTS

PART I.........................................................................3
   ITEM 1. BUSINESS............................................................3
     GENERAL DEVELOPMENT OF BUSINESS...........................................3
     HISTORY OF HCI............................................................3
     JOINT PLAN OF REORGANIZATION..............................................3
     MERGER WITH AVATAR SYSTEMS, INC...........................................4
     NARRATIVE DESCRIPTION OF BUSINESS.........................................4
     PRODUCTS..................................................................4
     PETROWARE2000.............................................................4
     AVATAR400.................................................................4
     RAPID (ASP PRODUCT).......................................................5
     SALES AND MARKETING.......................................................5
     COMPETITION...............................................................5
     CUSTOMERS.................................................................5
     SUPPLIERS.................................................................6
     LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENT, PATENTS, TRADEMARKS
     OR LABOR CONTRACTS........................................................6
     REGULATORY AND ENVIRONMENTAL MATTERS......................................6
     RESEARCH AND DEVELOPMENT..................................................6
     RISKS ASSOCIATED WITH OUR BUSINESS........................................7
   ITEM 2. PROPERTIES..........................................................9
   ITEM 3. LEGAL PROCEEDINGS...................................................9
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................9
PART II........................................................................9
   ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
   MATTERS.....................................................................9
     HOLDERS..................................................................10
     DIVIDENDS................................................................10
   ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR
   PLAN OF OPERATIONS.........................................................10
     RESULTS OF OPERATIONS....................................................10
     LIQUIDITY AND CAPITAL RESOURCES..........................................11
     RECENT ACCOUNTING PRONOUNCEMENTS.........................................12
     USE OF ESTIMATES AND CERTAIN SIGNIFICANT ESTIMATES.......................12
     REVENUE RECOGNITION......................................................13
     SOFTWARE DEVELOPMENT COSTS...............................................13
     INFLATION................................................................13
     FORWARD LOOKING STATEMENTS...............................................13
   ITEM 7. FINANCIAL STATEMENTS...............................................14
   ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
   FINANCIAL DISCLOSURE.......................................................29
   ITEM 8A. CONTROLS AND PROCEDURES...........................................29
PART III......................................................................29
   ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
   WITH SECTION 16(A) OF THE EXCHANGE ACT.....................................29
     COMMITTEES OF THE BOARD OF DIRECTORS.....................................31
     AUDIT COMMITTEE..........................................................31
     CODE OF ETHICS...........................................................31
     SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..................31
   ITEM 10. EXECUTIVE COMPENSATION............................................31
     EXECUTIVE OFFICERS.......................................................31
     EMPLOYMENT AGREEMENTS....................................................31
     KEY MAN INSURANCE........................................................32
     STOCK OPTION PLAN........................................................32
     COMPENSATION TABLE.......................................................33
   ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....33
   ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................34


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   ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..................................34
     STATEMENTS FILED AS PART OF THIS REPORT:.................................34
     EXHIBITS.................................................................34
     REPORTS ON FORM 8-K......................................................36
   ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................36
     AUDIT FEES...............................................................36
     ALL OTHER FEES...........................................................36
   SIGNATURES.................................................................37


































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                                     PART I


ITEM 1. BUSINESS


     General Development of Business


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

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

         On July 10,  2000,  Avatar  International  changed  its name to  Avatar
Systems,  Inc.  On November  14,  2000,  Avatar  Systems  merged  with HCI,  the
surviving entity, which changed its name to Avatar Systems, Inc.

     History of HCI

         Our  predecessor,  HCI Acquisition  1998-2,  Inc., was  incorporated in
Texas on August 7, 1998 as a wholly-owned  subsidiary of Hospitality  Companies,
Inc., which was engaged in the leasing, sale and servicing of refrigeration, air
conditioning and restaurant equipment. HCI conducted its business under the name
of  Precision  Stainless  Fabricators.  Hospitality  Companies'  strategy was to
provide, through its subsidiaries,  a vertically-integrated  entity specializing
in  design,  fabrication  and  installation  of  restaurant  equipment  for  its
customers.  Hospitality  Companies  subsequently  acquired Restaurant  Equipment
Supply  Company of  Columbia,  Missouri  and  Spener  Restaurant  of St.  Louis,
Missouri.  However,  Hospitality Companies and its subsidiaries,  including HCI,
were unsuccessful in the restaurant  equipment  business and on February 1, 2000
filed  voluntary  petitions for relief under Chapter 11 of the Bankruptcy  Code.
The  Bankruptcy  Court  authorized  the  joint   administration  of  Hospitality
Companies and its subsidiaries.

     Joint Plan of Reorganization

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

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


                                       3
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     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.

     Narrative Description of Business

     Products

         Avatar  provides  enterprise  resource  planning  software to companies
engaged in the petroleum  exploration and production  industry.  Avatar provides
the petroleum  industry  with  solutions  for  accounting/financial  management,
production  and land  management,  oil and gas  marketing  and  electronic  data
exchange on both a licensed and ASP basis.

         We provide  technology  products  and  services  to support the ongoing
management of an upstream petroleum business and to facilitate the processing of
oil and gas transactions through the back office systems of buyers,  sellers and
traders. We offer a full line of accounting and resource management software for
the petroleum  industry  including  Avatar400,  Petroware2000  and Remote Access
Private  Integrated  Datalink (RAPID) services.  Our products offer a variety of
applications specific to the accounting,  billing,  financial analysis and land,
royalty and production management functions of a petroleum company.

         Petroware2000Petroware2000  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.



                                       4
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         RAPID (ASP  Product).RAPID or Remote Access Private Integrated Datalink
is an  application  service  provider  (ASP)  hosted  oil  and  gas  accounting,
financial,  land and  production  management  application  which we developed to
reduce the high costs of oil and gas accounting  software ownership and the need
for regular version  upgrades.  By delivering the software  application  through
remote Internet and Wide Area Network  connectivity,  our remote datalink system
facilitates  lowered  system  costs by  eliminating  the  subscriber's  need for
expensive in-house hardware solutions,  software purchases and eventual upgrades
as well as  lowering  or  eliminating  the  expense  of an  internal  technology
department and staff.

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

     Sales and Marketing

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

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

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

     Competition

         The  business-to-business  e-commerce market for the petroleum industry
is intensely competitive, evolving and subject to rapid technological change. We
face competition from other traditional oil and gas service  providers,  as well
as from Internet  companies who have  established  websites and who are pursuing
various e-commerce initiatives in bringing accounting solutions to the petroleum
industry.  Many of our competitors are large well-financed companies who provide
an array of  accounting  and  financial  management  solutions to the  petroleum
industry.

     Customers

         The  Company  completed  a hardware  sale with one  customer,  who is a
related  party,  during 2003 for $188,532.  Total revenue from that customer was
$211,697 which accounted for 10.1% of revenue.  The Company completed a hardware
sale with one customer  during 2002 for  approximately  $500,000 which accounted
for 78% of hardware  revenue and 23% of total revenue in the year ended December
31, 2002.  There were no other customers in 2003 or 2002 that accounted for more
than 10% of revenues.


                                       5
<PAGE>

     Suppliers


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

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

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

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

     Regulatory and Environmental Matters

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

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

         Laws and  regulations  directly  applicable to  electronic  commerce or
Internet  communications are becoming more prevalent.  Congress recently enacted
Internet  laws  regarding  on-line  copyright  infringement.  Although  not  yet
enacted,  Congress is considering laws regarding Internet taxation. In addition,
various state jurisdictions are considering  legislation  directed to electronic
commerce which if enacted could affect our business.  The  applicability of many
of these laws to the  Internet is uncertain  and could expose us to  substantial
liability.  Any new  legislation  or regulation  regarding the Internet,  or the
application of existing laws and regulations to the Internet,  could  materially
and  adversely  affect  us. If we were  alleged  to  violate  federal,  state or
foreign,  civil or  criminal  law,  even if we could  successfully  defend  such
claims, it could materially and adversely affect us.

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

     Research and Development

         Our  capitalized  software  development  costs have been focused on the
development of our Avatar400 and Petroware2000  products. We capitalize software
development costs applicable to each product after technological feasibility has
been established  until the product is released to the market.  It was necessary
for us to develop a  Windows-based  application  to gain a competitive  edge and
have successful  sales in the oil and gas market.  Non-capitalized  research and
development  costs include  research on the readiness and  deployment of various
applications via an application  service provider model over a wide area network
(WAN)  or the  Internet.  We  spent  $576,540  on  software  development  during
2003.


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Employees

         As of  December  31,  2003,  we had  10  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 acquisition  strategy could strain our infrastructure,  management,
internal  controls  and  financial  systems.  We may not be able to  effectively
manage our present growth or any future expansion, which could cause substantial
increases in our operating costs without corresponding increases in our revenue.
To support our growth,  we will need to continue to hire qualified  employees in
all areas of our  business.  This planned  strategy  could strain our ability to
integrate  and properly  train our new  employees.  Inadequate  integration  and
training of our  employees may result in an  inefficient  workforce and may harm
our operating results.

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


                                       7
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implement  our ASP model,  or if our ASP  distribution  model does not  generate
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.

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.

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

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

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

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



                                       8
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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 a 1,496 square foot facility
at 6 Desta Drive, Suite 3350, Midland,  Texas 79705. The lease for this facility
was entered into on October 9, 2003 for a twelve-month  lease term commencing on
October 9, 2003 and expiring on October 9, 2004.

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

         On  September  19,  2003,  Avatar  Systems,  Inc.  held its 2003 Annual
Meeting of  Shareholders.  The results of the ballots cast in person or by proxy
at the Meeting are as follows:


         PROPOSAL I: For the election as director of all nominees listed below:

         -------------------------- --------------- ------------ ---------------
                                         For           Against       Abstain
         -------------------------- --------------- ------------ ---------------
          Robert C. Shreve, Jr.        8,253,094          -             -
         -------------------------- --------------- ------------ ---------------
          Charles Timothy Allen        8,253,094          -             -
         -------------------------- --------------- ------------ ---------------
          Orville Gregory Allen        8,253,094          -             -
         -------------------------- --------------- ------------ ---------------
          Stephen A. Komlosy           8,253,094          -             -
         -------------------------- --------------- ------------ ---------------
          John J. May                  8,253,094          -             -
         -------------------------- --------------- ------------- --------------

         As of July 28,  2003,  the record  date,  there were  8,695,652  common
shares issued and  outstanding.  A quorum consists of a majority of these shares
outstanding,  or 4,347,827 shares. The number of shares voting for proposal 1 by
proxy or in  person  was  8,253,094.  The  total  number  of  shares  voted  was
8,253,094.


         Immediately  following the Annual  Meeting of  Shareholders,  the newly
elected directors by unanimous consent held their Annual Meeting.  At the Annual
Meeting  of  Directors,  the  following  officers  were  elected to serve in the
positions as indicated below until the next Annual Meeting of Directors or until
their successors shall have been duly elected and qualified:

         -------------------------- --------------- ----------------------------
          Name                           Age                   Position(s)
         -------------------------- --------------- ----------------------------
          Robert C. Shreve, Jr.          41          President, Chief Executive
                                                      Officer, Chairman of the
                                                      Board of Directors, and
                                                      Chief Financial Officer
         -------------------------- --------------- ----------------------------

          Cindy Skelton                  43                  Secretary
         -------------------------- --------------- ----------------------------

                                     PART II


ITEM 5.  MARKET  FOR THE  REGISTRANT'S  COMMON  EQUITY AND  RELATED  SHAREHOLDER
         MATTERS

         Our common stock began trading on the  Over-the-Counter  Pink Sheets on
April 2, 2001.  On November 5, 2001,  our  Registration  Statement on Form 10 SB
became  effective and our stock was approved for trading on December 19, 2001 on
the NASD OTC Bulletin Board.  During 2003, there was only nominal trading in the
shares of our common stock. As of March 10, 2004, the last reported trade in our
stock was at $0.30.  No assurance  can be given that an active market will exist
for our common stock in the future. On March 10, 2004 the last date reported for
our common  stock,  the closing bid price was $0.40 and the closing  asked price
was $.78. Our trading symbol is AVSY.OB.


                                       9
<PAGE>

     Holders

         As of March 10, 2004, the Company had approximately 450 shareholders of
record  and its  common  stock had a closing  bid price of $0.40 per share and a
closing asked price of $.78 per share.

     Dividends

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


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

     Results of Operations

         Revenues

         Our net revenues  include four  components:  software  licensing  fees,
maintenance,  professional services and hardware.  Our net revenues for the year
ended December 31, 2003 decreased 2.9% to $2,088,950  compared with net revenues
of $2,152,389 for the year ended  December  31,2002.  Our overall  revenues were
primarily  affected by lower  professional  services and  hardware  sales during
2003.

         Software. Software sales for the year ended December 31, 2003 increased
9.5% to $368,615  compared with software sales of $336,596 in 2002. The increase
in software  revenues is due to the higher levels of sales of our  Petroware2000
software package.

         Maintenance.  Maintenance  revenue for the year ended December 31, 2003
increased  1.7% to $981,874  compared  with  maintenance  revenue of $964,989 in
2002.

         Professional services.  Professional service revenue for the year ended
December  31, 2003  decreased  25.9% to  $155,776,  compared  with  professional
services revenue of $210,356 in 2002. Professional services declined during 2003
due to lower demand for custom programming.

         Hardware.  Hardware  sales for year ended  December 31, 2003  decreased
9.0% to $582,685  compared  with  hardware  sales of $640,448 in 2002.  Although
hardware sales declined from 2002, demand for hardware products  continued to be
strong in 2003.

         Cost of Revenues

         Our cost of revenues includes four components:  cost of software,  cost
of maintenance  revenue,  cost of  professional  services,  and cost of hardware
sales. Our cost of revenues for the year ended December 31, 2003 decreased 14.4%
to $752,082 compared with cost of revenues of $879,003 in 2002. Cost of revenues
as a percentage of net revenues  decreased to 36.0% for the year ended  December
31,  2003 from 40.8% in 2002.  The  decrease  in cost of  revenues is related to
lower labor costs for maintenance and  professional  services.  Cost of hardware
sales declined because of lower hardware sales.

         Cost of software.  Cost of software  increased 12.4% to $97,664 for the
year ended  December  31,  2003 from  $86,864 in 2002.  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 increased to 26.5% for the year
ended December 31, 2003 compared to 25.8% in 2002.



                                       10
<PAGE>

         Cost of  maintenance.  Cost of maintenance  revenue  decreased 14.0% to
$178,456  for the year ended  December 31, 2003 from  $207,496 in 2002.  Cost of
maintenance  revenue as a percentage of the related  revenue  decreased to 18.2%
for the year ended December 31, 2003, compared to 21.5% for the same period last
year.  The  decreases  in  cost  of  maintenance  and  percentages  of  cost  of
maintenance  as a percentage  of the related  revenues are due to  reductions in
personnel providing maintenance support.

         Cost of professional services.  Cost of professional services decreased
35.1% to $38,423 for the year ended December 31, 2003,  compared with $59,173 in
2002.  Cost of  professional  services as a  percentage  of the related  revenue
decreased to 24.7% for the year ended  December  31, 2003,  compared to 28.1% in
2002. The decreases in cost were related to decreases in demand for professional
services. The reduction in percentages of related revenue were due to reductions
in use of outside consultants and reductions in personnel.

         Hardware.  Cost of hardware sold  decreased  16.7% to $437,539 for year
ended December 31, 2003,  compared with $525,470 in 2002.  Cost of hardware as a
percentage of the related revenue decreased to 75.1% for the year ended December
31,  2003,  compared  with 82.0% in 2002.  The  decrease  in cost of hardware is
directly related to lower hardware sales.

         Operating Expenses

         Sales and  Marketing.  Our sales and  marketing  expenses  for the year
ended  December 31, 2003 increased  49.7% to $231,029  compared with $154,376 in
2002. Sales and marketing  expenses as a percentage of net revenues increased to
11.1% for the year ended  December  31, 2003 from 7.2% in 2002.  The increase in
sales and marketing was due to an increased  marketing  effort by the company in
2003 that is expected to impact sales during 2004.  Certain personnel costs that
were previously  classified as sales and marketing in 2002 were  reclassified in
2003 and 2002 to better reflect their actual tasks.

         General and Administrative. Our general and administrative expenses for
the year ended  December  31, 2003  decreased  17.7% to $428,371  compared  with
general  and   administrative   expenses  of  $520,766  in  2002.   General  and
administrative  expenses as a percentage of net revenues  decreased to 20.5% for
the year ended December 31, 2003,  compared with 24.2% in 2002. The decreases in
general  and   administrative   expenses  and  the  percentage  of  general  and
administrative  expenses are related to cost cutting measures implemented by the
company during 2002 and continued in 2003.

         Interest Income. Interest income was $3,980 for the year ended December
31, 2003  compared to $6,905 in 2002.  The decrease was  primarily  due to lower
interest rates and lower average cash balances during 2002.

         Interest  Expense.  Interest  expense  was  $2,197  for the year  ended
December  31,  2003,  compared  to $588 in 2002.  The  increase is due to higher
amounts of average debt outstanding during 2003.

         Provision  for Income Taxes.  For the year ended  December 31, 2003, we
recorded a deferred  tax  provision  on income  before  income  taxes of $84,678
compared to $68,149 in 2002.  The  increase in deferred  tax expense is directly
attributable to the increase in income before income tax.

     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,
2003,  we had  $492,737  in cash  and  cash  equivalents.  Cash  generated  from
operations  was $759,210  and $610,519 for the year ended  December 31, 2003 and
2002, respectively. Cash used for investing activities was $681,412 and $561,883
for the years ended December 31, 2003 and 2002, respectively.  Cash was invested
primarily in software development and property and equipment.  Net cash provided
by  financing  activities  during  2003  was  $19,683.  Net cash  provided  from
financing  activities  during  2003 was  primarily  from the  issuance of a note
payable. Net cash used in financing  activities for 2003 was $50,742.  Cash used
in financing  activities  during 2003 was for  reduction of a note payable and a
capital lease obligation.



                                       11
<PAGE>

         In July 2000, we issued  1,600,000  shares of common stock and warrants
in a private transaction to London & Boston Investments, Plc., formerly known as
Cybertec Holdings,  Plc, for an aggregate consideration of $1.6 million. We have
utilized $1.29 million of the proceeds for legal, accounting, investment banking
fees and other expenses  relating to the merger with HCI,  payment of consulting
fees to a  consultant,  investment  in a  subsidiary,  expenses  relating to the
London & Boston  Investments,  Plc  transaction,  salaries and other general and
administrative  expenses.  At December 31, 2003 and 2002,  we had  approximately
$311,000 and $314,000, respectively, remaining of the proceeds.

         At December 31, 2003, we had cash and cash  equivalents  of $492,737 as
compared to cash and cash  equivalents  of $395,256 at December 31, 2002.  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.

     Recent Accounting Pronouncements

         In May 2003, the FASB issued  Financial  Accounting  Standards No. 150,
Accounting  for  Certain  Financial  Instruments  with  Characteristics  of both
Liabilities and Equity ("FAS No. 150"). FAS 150 establishes standards for how an
issuer   classifies   and   measures   certain   financial    instruments   with
characteristics of both liabilities and equity.  FAS 150 is generally  effective
for  financial  instruments  entered into or modified  after May 31,  2003,  and
otherwise is effective at the  beginning of the first interim  period  beginning
after June 15, 2003 The adoption of this statement's  operational components did
not have an impact on the Company's results of operations or financial  position
at December 31, 2003.

         In January 2003, the FASB issued  Interpretation No. 46,  Consolidation
of Variable  Interest  Entities,  an  Interpretation  of ARB No. 51 ("FIN 46R"),
which was revised and superceded by FASB Interpretation No. 46R in December 2003
(FIN 46R).  FIN 46R  requires the  consolidation  of certain  variable  interest
entities,  as defined.  FIN 46R is  effective  immediately  for special  purpose
entities and variable  interest  entities  created after  December 31, 2003, and
must be applied to other variable  interest  entities no later than December 31,
2004. The Company  believes it has no such variable  interest  entities and as a
result FIN No. 46R will have no impact on its results of  operations,  financial
position or cash flows.

     Use of Estimates and Certain Significant Estimates

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



                                       12
<PAGE>

     Revenue Recognition

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

     Software Development Costs

         The  Company  capitalizes  the costs of  developing  and testing new or
significantly  enhanced  software  products in accordance with the provisions of
Statement of Financial  Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed (SFAS 86). Under SFAS
86, all costs  incurred to  establish  technological  feasibility  of a computer
product are charged to operations as incurred.  After technological  feasibility
is  established,   costs  of  developing  the  computer   software  product  are
capitalized  until the product is available  for general  release to  customers.
Capitalized  software  development  costs are amortized using the greater of the
amount computed by the ratio of current year net revenue to estimated future net
revenue of the product, or the amount computed by the straight-line  method over
a period which approximates the estimated  economic life of the products,  which
historically  has been seven  years.  The amount by which  unamortized  software
costs exceed the net realizable  value,  if any, is recognized in the period the
excess is determined.

     Inflation

         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.







                                       13
<PAGE>

ITEM 7. FINANCIAL STATEMENTS


                               Avatar Systems Inc.
                   Index to Consolidated Financial Statements




Report of Independent Certified Public Accountants                           F-1


Consolidated Financial Statements
   Balance Sheets as of December 31, 2003 and 2002                           F-2
   Statements of Income for the years ended December 31, 2003 and 2002       F-3
   Statements of Stockholders' Equity for the years ended December 31,
    2003 and 2002                                                            F-4
   Statements of Cash Flows for the years ended December 31, 2003
    and 2002                                                                 F-5
   Notes to Consolidated Financial Statements                        F-6 to F-13






























                                       14
<PAGE>

Financial Statements and Report of Independent Certified Public Accountants

Avatar Systems, Inc.

December 31, 2003 and 2002





































                                       15
<PAGE>

               Report of Independent Certified Public Accountants




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


We have audited the  accompanying  balance sheets of Avatar Systems,  Inc. as of
December  31, 2003 and 2002 and the  related  statements  of income,  changes in
stockholders'  equity and cash flows for the years then ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Avatar  Systems,  Inc. as of
December 31, 2003 and 2002, and the results of its operations and cash flows for
the years  then  ended,  in  conformity  with  accounting  principles  generally
accepted in the United States of America.



HEIN & ASSOCIATES LLP

Dallas, Texas
March 8, 2004
















                                       F-1

<PAGE>
<TABLE>
<CAPTION>

                              Avatar Systems, Inc.

                                 BALANCE SHEETS


                                                                   December 31,
                                     ASSETS                  -----------------------
                                                                2003         2002
                                                             ----------   ----------
<S>                                                          <C>          <C>
CURRENT ASSETS
Cash and cash equivalents                                    $  492,737   $  395,256
Accounts receivable - trade, net of allowance for doubtful
accounts of $4,016 and -0- in 2003 and 2002, respectively       129,104      199,102
Prepaid Expenses                                                  7,340        7,603
Deferred income taxes                                            12,340       10,319
                                                             ----------   ----------

Total current assets                                            641,521      612,280

PROPERTY AND EQUIPMENT - at cost, net                           183,385      134,280

PURCHASED SOFTWARE, net of accumulated
amortization of $680,447 and $568,602 in 2003
and 2002, respectively                                          181,215      293,060

SOFTWARE DEVELOPMENT COSTS, net of
accumulated amortization of $647,001 and $384,413
in 2003 and 2002, respectively                                1,876,094    1,562,141
                                                             ----------   ----------

Total assets                                                 $2,882,215   $2,601,761
                                                             ==========   ==========

                      LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES
Current maturities of long-term debt                         $    6,996   $   13,433
Accounts payable - trade                                         56,275       75,937
Accrued expenses                                                 50,690       51,642
Deferred revenue                                                265,328      235,016
                                                             ----------   ----------

Total current liabilities                                       379,289      376,028

DEFERRED INCOME TAXES                                           235,203      148,504

LONG TERM DEBT,  less current maturities                         26,120         --
                                                             ----------   ----------

Total liabilities                                               640,612      524,532

COMMITMENT (Note G)

STOCKHOLDERS' EQUITY
Common Stock, $0.001 par value; 30,000,000 shares
authorized; 8,695,652 shares issued and outstanding               8,696        8,696
Paid-in capital                                               1,768,345    1,768,345
Retained earnings                                               464,562      300,188
                                                             ----------   ----------
Total stockholders' equity                                    2,241,603    2,077,229
                                                             ----------   ----------

Total liabilities and stockholders' equity                   $2,882,215   $2,601,761
                                                             ==========   ==========
</TABLE>



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

                                      F-2
<PAGE>

                              Avatar Systems, Inc.

                              STATEMENTS OF INCOME

                                                          December 31,
                                                   ----------------------------
                                                       2003            2002
                                                   ------------    ------------

Revenue
Software                                           $    368,615    $    336,596
Maintenance                                             981,874         964,989
Consulting                                              155,776         210,356
Hardware                                                582,685         640,448
                                                   ------------    ------------

                                                      2,088,950       2,152,389

Cost of Sales
Software                                                 97,664          86,864
Maintenance                                             178,456         207,496
Consulting                                               38,423          59,173
Hardware                                                437,539         525,470
                                                   ------------    ------------

                                                        752,082         879,003
                                                   ------------    ------------

Gross profit                                          1,336,868       1,273,386

Operating Expenses
Sales and Marketing                                     231,029         154,376
General and administrative                              428,371         520,766
Depreciation and amortization                           430,199         404,123
                                                   ------------    ------------
                                                      1,089,599       1,079,265
                                                   ------------    ------------

Operating income                                        247,269         194,121

Other income (expense)
Interest income                                           3,980           6,905
Interest expense                                         (2,197)           (588)
                                                   ------------    ------------
                                                          1,783           6,317

Income before income taxes                              249,052         200,438

Deferred income tax expense                              84,678          68,149
                                                   ------------    ------------

NET INCOME                                         $    164,374    $    132,289
                                                   ============    ============

Earnings per share - basic                         $       0.02    $       0.02
                                                   ============    ============
Earnings per share - diluted                       $       0.02    $       0.01
                                                   ============    ============

Weighted average shares outstanding
Basic                                                 8,695,652       8,695,652
                                                   ============    ============
Diluted                                               8,695,652      10,437,747
                                                   ============    ============




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

                                      F-3
<PAGE>
<TABLE>
<CAPTION>

                              Avatar Systems, Inc.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                     Years ended December 31, 2003 and 2003

                                    Common stock
                               -----------------------    Paid-in      Retained
                                 Shares       Amount      capital      earnings      Total
                               ----------   ----------   ----------   ----------   ----------
<S>                             <C>         <C>          <C>          <C>          <C>
Balance at January 1, 2002      8,695,652   $    8,696   $1,768,345   $  167,899   $1,944,940

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

Balance at December 31, 2002    8,695,652        8,696    1,768,345      300,188    2,077,229

Net income                           --           --           --        164,374      164,374
                               ----------   ----------   ----------   ----------   ----------

Balance at December 31, 2003    8,695,652   $    8,696   $1,768,345   $  464,562   $2,241,603
                               ==========   ==========   ==========   ==========   ==========
</TABLE>























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

                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                              Avatar Systems, Inc.

                            STATEMENTS OF CASH FLOWS

                                                                              December 31,
                                                                         ----------------------
                                                                           2003         2002
                                                                         ---------    ---------
<S>                                                                      <C>          <C>
Cash flows from operating activities
Net income                                                               $ 164,374    $ 132,289
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization                                              430,199      404,123
Deferred income taxes                                                       84,678       68,149
Changes in operating assets and liabilities
Accounts receivable - trade                                                 69,998       (7,241)
Prepaid expenses and other                                                     263       14,678
Accounts payable and accrued expenses                                      (20,614)     (19,816)
Deferred revenue                                                            30,312       18,195
Other                                                                         --            142
                                                                         ---------    ---------

Net cash provided by operating activities                                  759,210      610,519

Cash flows from investing activities
Software development costs capitalized                                    (576,540)    (550,780)
Purchase of property and equipment                                        (104,872)     (11,103)
                                                                         ---------    ---------

Net cash used in investing activities                                     (681,412)    (561,883)

Cash flows from financing activities
Payments on note payable and capital lease obligations                     (17,331)     (50,742)
Proceeds from note payable                                                  37,014         --
                                                                         ---------    ---------

Net cash provided by (used in) financing activities                         19,683      (50,742)

Net increase/(decrease) in cash and cash equivalents                        97,481       (2,106)

Cash and equivalents at beginning of year                                  395,256      397,362
                                                                         ---------    ---------

Cash and cash equivalents at end of year                                 $ 492,737    $ 395,256
                                                                         =========    =========

Supplemental disclosure of cash paid for:
Interest                                                                 $   2,197    $     588
                                                                         =========    =========

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




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

                                      F-5

<PAGE>

                              Avatar Systems, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2003 and 2002


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.

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

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

   Property and Equipment
   ----------------------

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

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

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

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

   The  Company   capitalizes  the  costs  of  developing  and  testing  new  or
   significantly enhanced software products in accordance with the provisions of
   Statement of Financial  Accounting Standards No. 86, Accounting for the Costs
   of Computer  Software to be Sold,  Leased or  Otherwise  Marketed  (SFAS 86).
   Under SFAS 86, all costs incurred to establish technological feasibility of a
   computer product are charged to operations as incurred.  After  technological
   feasibility is established, costs of developing the computer software product
   are  capitalized  until the  product  is  available  for  general  release to
   customers.   The  Company  capitalized  $576,540  and  $550,780  of  software
   development  costs  during  the  years  ended  December  31,  2003 and  2002,
   respectively.  Capitalized software development costs are amortized using the
   greater of the amount  computed  by the ratio of current  year net revenue to
   estimated  future net revenue of the product,  or the amount  computed by the
   straight-line  method over a period 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  $262,588  and $207,469 for the
   years ending December 31, 2003 and 2002.



                                       F-6


<PAGE>

                              Avatar Systems, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2003 and 2002


   Financial Instruments and Credit Risk
   -------------------------------------

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

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

   Impairment of Long-Lived Assets
   -------------------------------

   The  Company   reviews  its  long-lived   assets  and  certain   identifiable
   intangibles for impairment when events or changes in  circumstances  indicate
   that the carrying amount of the assets may not be recoverable. Recoverability
   of assets to be held and used is measured  by a  comparison  of the  carrying
   amounts of an asset to future net cash flows  expected to be generated by the
   asset.  If such assets are  considered to be impaired,  the  impairment to be
   recognized  is  measured  by the amount by which the  carrying  amount of the
   asset  exceeds the fair value of the assets  based on  estimated  future cash
   flows.  During  the years  ended  December  31,  2003 and 2002,  the  Company
   recorded no impairment charges.

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

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

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

   The Company  computes basic earnings per share based on the weighted  average
   number of common shares  outstanding.  Diluted earnings per share is computed
   based on the weighted average number of shares  outstanding,  plus the number
   of  additional  common  shares that would have been  outstanding  if dilutive
   potential   common  shares  had  been  issued.   The  Company  had  5,773,052
   potentially  dilutive  securities at December 31, 2003 that were not included
   in the earnings per share calculation because they were antidilutive.

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

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



                                       F-7


<PAGE>

                              Avatar Systems, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2003 and 2002



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

   SFAS No. 123,  "Accounting  for Stock-Based  Compensation"  and SFAS No. 148,
   "Accounting  for  Stock-Based  Compensation  - Transition and Disclosure - an
   amendment of FASB  Statement No. 123" require  disclosures  as if the Company
   had  applied  the fair  value  method  to  employee  awards  rather  than the
   intrinsic value method.  The fair value of stock-based awards to employees is
   calculated through the use of option pricing models, which were developed for
   use in  estimating  the fair value of traded  options,  which have no vesting
   restrictions and are fully transferable. These models also require subjective
   assumptions,  including  future stock price  volatility  and expected time to
   exercise,  which greatly affect the calculated values.  There were no options
   granted in 2003 and 2002.

   Use of Estimates and Certain Significant Estimates
   --------------------------------------------------

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

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

   In May  2003,  the  FASB  issued  Financial  Accounting  Standards  No.  150,
   Accounting for Certain  Financial  Instruments with  Characteristics  of both
   Liabilities and Equity ("FAS No. 150"). FAS 150 establishes standards for how
   an  issuer  classifies  and  measures  certain  financial   instruments  with
   characteristics  of  both  liabilities  and  equity.  FAS  150  is  generally
   effective for financial  instruments  entered into or modified  after May 31,
   2003, and otherwise is effective at the beginning of the first interim period
   beginning after June 15, 2003. The adoption of this  statement's  operational
   components  did not have an impact on the Company's  results of operations or
   financial position at December 31, 2003.

   In January 2003,  the FASB issued  Interpretation  No. 46,  Consolidation  of
   Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"), which
   was revised and  superceded by FASB  Interpretation  No. 46R in December 2003
   (FIN 46R). FIN 46R requires the  consolidation of certain  variable  interest
   entities,  as defined.  FIN 46R is effective  immediately for special purpose
   entities and variable  interest entities created after December 31, 2003, and
   must be applied to other  variable  interest  entities no later than December
   31, 2004. The Company believes it has no such variable  interest entities and
   as a result  FIN No. 46R will have no impact on its  results  of  operations,
   financial position or cash flows.

   Reclassifications
   -----------------

   Certain  amounts in the  December  31, 2002  financial  statements  have been
   reclassified to conform with the December 31, 2003 presentations.



                                       F-8


<PAGE>

                              Avatar Systems, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2003 and 2002



NOTE B - PROPERTY AND EQUIPMENT

   Property and equipment are summarized as follows:

                                                              December 31,
                                                         -----------------------
                                                            2003         2002
                                                         ----------   ----------

      Furniture and fixtures                             $  110,439   $  110,439
      Computer equipment and software                       418,454      350,596
      Transportation                                         37,014         --
      Telecommunication equipment                            18,603       18,603
                                                         ----------   ----------
                                                            584,510      479,638
      Less accumulated depreciation                         401,125      345,358
                                                         ----------   ----------
                                                         $  183,385   $  134,280
                                                         ==========   ==========

   During the years  ended  December  31, 2003 and 2002,  the  Company  recorded
   depreciation expense of $55,767 and $73,213, respectively.

   Future amortization table

NOTE C - PURCHASED SOFTWARE

   Purchased software is summarized as follows:

                                                              December 31,
                                                         -----------------------
                                                            2003         2002
                                                         ----------   ----------

      Purchased Software                                    861,662      861,662
      Less accumulated amortization                         680,447      568,602
                                                         ----------   ----------
                                                         $  181,215   $  293,060
                                                         ==========   ==========

   Purchased software is recorded at cost. Amortization of purchased software is
   provided on the  straight-line  method  over 7 years.  During the years ended
   December  31, 2003 and 2002,  the Company  recorded  amortization  expense of
   $111,844 and $123,094, respectively.

   As of December 31, 2003,  purchased  software  amortization  expense for each
   calendar year ended December 31 is:  $89,344 for 2004;  $89,344 for 2005; and
   $2,527 in 2006.












                                       F-9

<PAGE>

                              Avatar Systems, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2003 and 2002


NOTE D - DEVELOPED SOFTWARE

    Developed software is summarized as follows:

                                                            December 31,
                                                     --------------------------
                                                         2003           2002
                                                     -----------    -----------

      Developed Software                               2,523,095      1,946,554
      Less accumulated amortization                     (647,001)      (384,413)
                                                     -----------    -----------
                                                     $ 1,876,094    $ 1,562,141
                                                     ===========    ===========


   Developed software is recorded at cost. Amortization of developed software is
   provided on the  straight-line  method  over 7 years.  During the years ended
   December  31, 2003 and 2002,  the Company  recorded  amortization  expense of
   $262,588 and $207,469, respectively.

   As of December 31, 2003,  developed  software  amortization  expense for each
   calendar  year ended  December 31 is:  $312,668 for 2004;  $343,553 for 2005;
   $343,553  for 2006;  $278,279 for 2007;  $213,004  for 2008;  and $213,004 in
   2009.

NOTE E - LONG-TERM DEBT

    Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                      December 31,
                                                                ------------------------
                                                                   2003          2002
                                                                ----------    ----------
<S>                                                             <C>           <C>
      Note payable to GMAC, collateralized by an automobile,
        bearing interest at 0.0% per annum,
        payable in sixty monthly principal payments of $683,
        beginning in June 2003 through maturity in May 2008     $   33,116    $     --
                                                                ----------    ----------

      Other                                                           --          13,433
                                                                ----------    ----------
                                                                    33,116        13,433
         Less current maturities                                     6,996        13,433
                                                                ----------    ----------
                                                                $   26,120    $     --
                                                                ==========    ==========
</TABLE>


NOTE F - INCOME TAXES

The  Company's  income tax expense in 2003 and 2002  consisted  only of deferred
taxes. The Company had no current income tax expense  primarily because software
development  costs are capitalized in these financial  statements and charged to
expense for federal income tax purposes.




                                      F-10


<PAGE>

                              Avatar Systems, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2003 and 2002


NOTE F - INCOME TAXES - continued

    Deferred tax assets and liabilities consist of the following:

                                                              December 31,
                                                         ----------------------
                                                            2003         2002
                                                         ---------    ---------

      Deferred tax assets
         Net operating loss carryforwards                $  82,291    $  55,126
         Accrued expenses                                   12,340       10,319
         Purchased software amortization                    74,299       55,802
                                                         ---------    ---------
                                                           168,930      121,247

      Deferred tax liability
         Capitalized software                             (364,424)    (254,860)
         Property and equipment                            (27,369)        --
         Other                                                --         (4,572)
                                                         ---------    ---------
                                                          (391,793)    (259,432)

      Net deferred tax liability                         $(222,863)   $(138,185)
                                                         =========    =========

      Net deferred tax asset - current                   $  12,340    $  10,319
      Net deferred tax liability - long-term              (235,203)    (148,504)
                                                         ---------    ---------

                                                         $(222,863)   $(138,185)
                                                         =========    =========

   At  December  31,  2003,   the  Company  had  federal  net   operating   loss
   carryforwards of approximately $242,000 which expire in 2023 and 2022.

NOTE G - LEASE OBLIGATIONS

The Company leases office facilities under two non-cancelable  operating leases.
Future minimum payments are as follows:

         Year ending
         December 31,

           2004                                                          156,177
           2005                                                          108,297
                                                                       ---------
                                                                       $ 264,474
                                                                       =========

Rent expense under the operating  leases was $154,613 and $151,939 for the years
ended December 31, 2003 and 2002, respectively.





                                      F-11



<PAGE>

                              Avatar Systems, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2003 and 2002


NOTE H - EARNINGS PER SHARE

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

                                                        Year ended December 31,
                                                       -------------------------
                                                          2003           2002
                                                       ----------    -----------

      Net Income                                       $  164,374    $   132,289
                                                       ==========    ===========

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

      Weighted average shares outstanding - diluted     8,695,652     10,437,747
                                                       ==========    ===========

      Earnings per share
          Basic                                        $      .02    $       .02
                                                       ==========    ===========
          Diluted                                      $      .02    $       .01
                                                       ==========    ===========


NOTE I - RELATED PARTIES

The Company sells computer hardware and provides software maintenance, training,
and  consulting/development  services  to a company  that is  controlled  by two
members of the Company's  Board of Directors.  Total  revenues from that company
were  $211,697  and $41,685 in 2003 and 2002,  respectively.  Revenues  for 2003
included  a  hardware  sale of  $188,532.  The  Company  had  $1,861 and $823 of
accounts  receivable  at December  31, 2003 and 2002,  respectively,  related to
services performed for that company.

NOTE J - MAJOR CUSTOMERS

The  Company  completed  a  hardware  sale  with one  customer  during  2003 for
$188,532.  Total  revenue from that  customer was $211,697  which  accounted for
10.1% of revenue. The Company completed a hardware sale with one customer during
2002 for approximately  $500,000 which accounted for 78% of hardware revenue and
23% of total  revenue in the year ended  December 31, 2002.  There were no other
customers in 2003 or 2002 that accounted for more than 10% of revenues.












                                      F-12


<PAGE>
<TABLE>
<CAPTION>

                              Avatar Systems, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2003 and 2002



NOTE K - STOCK COMPENSATION PLAN AND WARRANTS

In  2000,  the  Company's   shareholders   approved  the  adoption  of  a  stock
compensation  plan.  Stock options are granted at the quoted market price of the
Company's stock at the date of grant, becoming exercisable over periods of up to
three  years and expire ten years  from the date of grant.  In 2001,  options to
purchase  118,385 shares at $1.25 per share were granted.  No stock options were
granted by the Company  during the years  ended  December  31, 2003 or 2002.  At
December 31, 2003,  1,426,948  common stock  options were  available  for future
grant under the 2000 Stock Compensation Plan.

Option  activity for the years ended December 31, 2003 and 2002 is summarized as
follows:


                                                      2003                        2002
                                           --------------------------   --------------------------
                                                           Weighted                     Weighted
                                                            Average                      Average
                                                           Exercise                     Exercise
                                             Options         Price         Options        Price
                                           -----------    -----------   -----------    -----------
<S>                                        <C>            <C>           <C>            <C>
Options outstanding at beginning of year        89,396    $      1.25       118,358    $      1.25
Options granted                                   --             --            --             --
Options exercised                                 --             --            --             --
Options forfeited                              (16,344)          1.25       (28,962)          1.25
                                           -----------    -----------   -----------    -----------

Options outstanding at end of year              73,052    $      1.25        89,396    $      1.25
                                           ===========    ===========   ===========    ===========
Options exercisable at end of year              73,052    $      1.25        89,396    $      1.25
                                           ===========    ===========   ===========    ===========
</TABLE>



The options  outstanding at December 31, 2003 have a weighted average  remaining
life of 7 years.

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

NOTE L - SUBSEQUENT EVENT

The Company  has entered  into  negotiations  with the holders of the  Company's
5,700,000  outstanding  warrants to purchase common stock. Upon execution of the
agreement  the company will issue shares of its common stock in exchange for the
outstanding warrants.









                                      F-13



<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.


ITEM 8A. CONTROLS AND PROCEDURES

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

         During  the  period  immediately  after the end of the year,  the Chief
Executive  Officer/Chief  Financial  Officer conducts an update and a review and
evaluation  of  the  effectiveness  of the  Company's  disclosure  controls  and
procedures.  It is  the  Chief  Executive  Officer's/Chief  Financial  Officer's
opinion,  based upon the  evaluation  he completed  by March 21, 2004,  that the
controls and procedures currently being utilized by the Company are sufficiently
effective to ensure that any material  information relating to the Company would
become known to him within a reasonable time.

                                    PART 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.    41    President, Chief Executive Officer,
                                        Chief Financial Officer, Chairman of the
                                        Board and Director
         Charles Timothy Allen    53    Director
         Orville Gregory Allen    47    Director
         Stephen A. Komlosy       63    Director
         John J. May              55    Director
         Cindy Skelton            43    Secretary

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





                                       29
<PAGE>

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

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

         Stephen  A.  Komlosy  has  served as a director  of our  Company  since
November 14, 2000. He is also the Chairman of London & Boston Investments,  Plc,
formerly Cybertec  Holdings Plc., a publicly traded United Kingdom company.  Mr.
Komlosy has served Chairman of London & Boston  Investments,  Plc since February
2000.  London  &  Boston  Investments,  Plc  is an  investment  company,  making
strategic  investments  in  companies  whose growth and value can be enhanced by
management  consulting  services,  financial  assistance or mergers with related
businesses and public  flotation's.  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  Energy
Technique,  Plc, a company  traded on the London Stock  Exchange and Chairman of
Netcentric systems plc which is traded on AIM in London.

         John J. May is a Fellow of the Institute of Chartered  Accountants.  He
is a director of The Small Business  Bureau Ltd and The Genesis  Initiative Ltd,
with  responsibility  for policy.  These companies lobby  Government on business
matters  affecting  small and medium  sized  enterprises.  He is also the senior
partner of a boutique London based chartered  accountancy practice  specializing
in SMEs.  Currently he is director of the Aim listed Netcentric  Previously,  he
was finance director of MyVal.com plc, now  Interactivity  plc, whose shares are
traded on AIM.

         He was formerly a senior partner with the leading accountancy  practice
of Howarth Clark  Whitehill,  serving eight years on its managing  board and for
nine years being  chairman of its Thames Valley  offices.  In his capacity as UK
national marketing partner and head of its property consultancy arm, he was also
a  director  of  its  UK  and  International  Associations.  He  has  also  held
Directorships  in a  number  of  diversified  businesses  both  in  the  UK  and
internationally.

         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.



                                       30
<PAGE>

     Committees of the Board of Directors


         The  Company  has an  Audit  Committee.  The  Company  does  not have a
Compensation  Committee  or a  Nominating  Committee.  In the  absence  of  such
committees, the Board as a whole establishes the compensation of officers of the
Company,  administers the 2000 Stock Compensation Plan, prepares recommendations
to the Board on the  adoption of stock  option and other  incentive  plans,  and
grants stock options.  The Board also considers  individuals to recommend to the
Board  for  inclusion  among  management's   nominees  and  considers  corporate
governance  issues. The Board will consider director  candidates  recommended by
shareholders if the name and  qualifications  of candidates are timely presented
to the Board.

     Audit Committee

         The Audit Committee's functions include evaluating, and recommending to
the  Board  the  engagement  of,  the  Company's  independent  certified  public
accountants, reviewing the results of their auditing findings, and monitoring on
a periodic basis the internal controls of the Company.  The Audit Committee does
not have a formally  approved written charter and is in the process of obtaining
board approval.  The Audit Committee currently consists of Charles Timothy Allen
and Stephen A. Komlosy.  The Audit Committee currently does not have a financial
expert as defined under the Sarbannes-Oxley  Act of 2002. However,  the board of
directors has  identified  an  independent  financial  expert who they expect to
appoint to the audit  committee in 2004.  The Audit  Committee held two meetings
during 2003.

     Code of Ethics

         The Company  does not have a formally  approved  written code of ethics
and is in the process of obtaining board approval.

     Section 16(a) Beneficial Ownership Reporting Compliance


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

         Based  solely on the  Company's  review of copies of Forms 3, 4, 5, and
amendments  thereto  furnished  to the Company  pursuant to Rule  16a-3(e),  the
Company  believes  that,  during the year ended  December 31, 2003,  all Section
16(a) filing requirements applicable to the Company's officers,  directors,  and
10% stockholders were met.

ITEM 10. EXECUTIVE COMPENSATION

     Executive Officers

         Our Board appoints the executive officers to serve at the discretion of
the Board until the next  annual  meeting of the Board of  Directors.  Robert C.
Shreve, Jr. President,  Chief Financial Officer and a director of the Company is
the only officer to receive $100,000 or more in annual  compensation.  Directors
who are also employees  receive no  compensation  for serving on the Board.  Our
non-employee  directors  receive no  compensation  for serving on the Board.  We
intend to  reimburse  non-employee  directors  for  travel  and  other  expenses
incurred in connection with attending the Board meetings.

     Employment Agreements

         We have entered into a management agreement with Robert C. Shreve, Jr.,
our President and Chief  Executive  Officer and Chief Financial  Officer,  which
terminates on July 10, 2004. 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


                                       31
<PAGE>

notice to the other  that the  management  agreement  will not be  renewed.  Mr.
Shreve will receive an annual base salary of $125,000, which may be increased at
the discretion of our Board. Additionally, Mr. Shreve may be eligible to receive
an annual bonus based on our financial  performance in the form of stock options
and cash not to exceed 15% of his base salary. Upon agreeing to the terms of the
management  agreement,  we issued to Mr. Shreve a five-year  warrant to purchase
1.6 million  shares of our common stock at an exercise price of $1.00 per share.
All of the warrants are currently exercisable and none of the warrants have been
exercised.  See "Part III,  Item 11- Security  Ownership  of Certain  Beneficial
Owners and Management."


     Key Man Insurance


         We currently pay an annual premium of  approximately  $1,600 for a life
insurance  policy in the amount of  $1,000,000  on the life of Robert C. Shreve,
Jr., our President,  Chief Executive  Officer and Chief Financial  Officer.  The
proceeds of the policy are payable to us.

     Stock Option Plan

         On  November  14,  2000,  our  shareholders  approved  our  2000  Stock
Compensation  Plan.  The  number of shares of common  stock  which may be issued
under the 2000 Plan shall  initially be 400,000  shares which amount may, at the
discretion of the Board, be increased from time to time to a number of shares of
common  stock  equal to 5% of the total  outstanding  shares  of  common  stock,
provided  that the  aggregate  number of shares  of  common  stock  which may be
granted  under the 2000 Plan  shall not  exceed  1,500,000  shares.  We may also
utilize  the  granting  of  options  under  the 2000 Plan to  attract  qualified
individuals to become our employees and  non-employee  directors,  as well as to
ensure the retention of management of any acquired  business  operations.  Under
the 2000 Plan,  we may also grant  restricted  stock  awards.  Restricted  stock
represents shares of common stock issued to eligible participants under the 2000
Plan subject to the  satisfaction  by the  recipient of certain  conditions  and
enumerated  in the specific  restricted  stock grant.  Conditions,  which may be
imposed,  include,  but are not limited  to,  specified  periods of  employment,
attainment  of  personal   performance   standards  or  our  overall   financial
performance. The granting of restricted stock represents an additional incentive
for eligible  participants  under the 2000 Plan to promote our  development  and
growth,  and may be used by our  management as another  means of attracting  and
retaining  qualified  individuals  to  serve  as our  employees  and  directors.
Currently,  options to purchase 73,052 shares of our common stock at an exercise
price of $1.25 per share have been granted to 9 employees.  Such options  expire
on January 10, 2011. No options have been granted to our officers or directors.
<TABLE>
<CAPTION>


--------------------------------------------------------------------------------------------------------------
                                  (a)                      (b)                            (c)
--------------------------------------------------------------------------------------------------------------
Plan Category          Number of securities to be    Weighted-average             Number of securities
                        issued upon exercise of     exercise price of           remaining available for
                          outstanding options,     outstanding options,          future issuance under
                           warrants and rights      warrants and rights        equity compensation plans
                                                                          (excluding securities in column (a))

--------------------------------------------------------------------------------------------------------------
<S>                               <C>                       <C>                        <C>
Equity compensation plans         73,052                    1.25                       1,426,948
approved by security holders
--------------------------------------------------------------------------------------------------------------
Equity compensation plans not       --                       --                             --
approved by security holders
--------------------------------------------------------------------------------------------------------------
Total                              73,052                   1.25                       1,426,948
--------------------------------------------------------------------------------------------------------------
</TABLE>






                                       32
<PAGE>
<TABLE>
<CAPTION>

     Compensation Table


         The  information  set  forth  below  concerns  the  cash  and  non-cash
compensation to executive officers for each of the past three fiscal years ended
December 31, 2003, 2002 and 2001. 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     2003     $125,000          $7,211         None           None
   Executive Officer, Chief Financial       2002     $125,000          $5,208         None           None
   Officer and Director                     2001     $125,000          $6,090         None           None
</TABLE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


         The table below sets forth, as of March 21, 2004,  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.
<TABLE>
<CAPTION>

                                                  Shares Beneficially   Percentage of Shares
                         Name(1)                        Owned             Beneficially Owed
         ---------------------------------------  -------------------  ----------------------
         <S>                                      <C>                  <C>
         Robert C. Shreve, Jr...................    3,201,200(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.......    2,665,502(5)             27.5
         Stephen A. Komlosy.....................    3,266,502(6)             31.7
         Merchant Capital Holdings, Ltd.........    2,000,000(7)             18.7
         Geoffrey Dart..........................    2,000,000(8)             18.7
         Cindy Skelton(9).......................             -0-              -0-
         Officers and directors as a group (5
              persons)..........................   13,765,502(10)            95.6
</TABLE>
---------------
(1)      Unless  otherwise  indicated,  each person named in this table has sole
         voting and  investment  power with  respect to the shares  beneficially
         owned. In addition,  unless  otherwise  indicated,  the address of each
         beneficial owner identified below is c/o Avatar Systems, Inc., 5728 LBJ
         Freeway, Suite 270, Dallas, Texas 75240.
(2)      Includes  1,600,000 shares of common stock,  which may be issued to Mr.
         Shreve upon  exercise of  1,600,000  warrants at $1.00 per share.  Such
         warrants are currently exercisable and expire July 10, 2005. Mr. Shreve
         is the President,  Chief Executive Officer, Chief Financial Officer and
         a director of Avatar.
(3)      Includes  250,000  shares of common  stock,  which may be issued to Mr.
         Allen upon  exercise  of  250,000  warrants  at $1.00 per  share.  Such
         warrants are currently  exercisable and expire July 10, 2005. Mr. Allen
         is a director of Avatar.
(4)      Includes  250,000  shares of common  stock,  which may be issued to Mr.
         Allen upon  exercise  of  250,000  warrants  at $1.00 per  share.  Such
         warrants are currently  exercisable and expire July 10,2005.  Mr. Allen
         is a director of Avatar.
(5)      Includes 1,665,502 shares owned by London & Boston Investments, Plc and
         1,000,000 shares of common stock which may be issued to London & Boston
         upon exercise of warrants to purchase  1,000,000 shares of common stock
         at $1.00 per share. Such warrants are currently  exercisable and expire
         July 10, 2005.  London & Boston's  address is 133 Ebury Street,  London
         SW1W9QU, England.
(6)      Includes 1,665,502 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


                                       33
<PAGE>

         company. Mr. Komlosy has the authority to vote such shares on behalf of
         General Trading Company.  Also includes 600,000 shares of common stock,
         which  may be  issued to Mr.  Komlosy  upon  exercise  of  warrants  to
         purchase  600,000  shares of Avatar's  common stock at $1.00 per share.
         Such  warrants  expire  July 10,  2005.  Mr.  Komlosy is a director  of
         Avatar.  Mr.  Komlosy's  address is 133 Ebury Street,  London  SW1W9QU,
         England.
(7)      Merchants Capital Holdings,  Ltd. address is 133 Ebury Street,  London,
         England SW1W 9QU. Merchant Capital holds warrants to purchase 2,000,000
         shares of Avatar's  common stock at $1.00 per share.  Such warrants are
         currently exercisable and expire July 10, 2005.
(8)      Includes warrants to purchase 2,000,000 shares of Avatar's common stock
         at  $1.00  per  share  held by  Merchant  Capital.  Such  warrants  are
         currently  exercisable  and  expire  July  10,  2005.  Mr.  Dart is the
         Managing  Director of Merchant  Capital  Holdings and has  authority to
         vote such shares when  issued on behalf of Merchant  Capital  Holdings.
         Mr. Dart's address is the same as Merchant Capital  Holdings,  Ltd. Mr.
         Dart served on the Board of Directors  until January 27, 2003,  when he
         resigned from the Board. (9) Ms. Skelton is the Secretary of Avatar.
(10)     See  preceding  notes  for  an  explanation  of  the  ownership  of the
         13,765,502 shares.


         We currently have 8,695,652 outstanding shares of common stock of which
approximately  628,000  shares  are  owned by  approximately  450  persons.  The
remaining  shares are owned by our principal  shareholders as noted in the above
table.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company sells computer hardware and provides software  maintenance,
training, and consulting/development services to a company that is controlled by
two  members of the  Company's  Board of  Directors.  Total  revenues  from that
company were $211,697 and $41,685 in 2003 and 2002,  respectively.  Revenues for
2003  included a hardware  sale of $188,532.  The Company had $1,861 and $823 of
accounts  receivable  at December  31, 2003 and 2002,  respectively,  related to
services performed for that company.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K


     Statements filed as part of this Report:


         1. Consolidated Financial Statements


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


     Exhibits


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


         31.1 Section 302 Certification pursuant to Sarbanes-Oxley Act.


         32.2 Section 906 Certification pursuant to Sarbanes-Oxley Act.

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



                                       34
<PAGE>

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

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



                                       35
<PAGE>

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

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


         The Company filed Form 8-K on November 26, 2003.  Item 5 - Other Events
and Item 12 - Results of Operations and Financial Conditions were reported.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES


     Audit Fees


         The aggregate fees for professional  services rendered for the audit of
the Company's  financial  statements for the fiscal year ended December 31, 2003
and 2002 were $16,708 and $29,350 respectively.. The fees for the reviews of the
financial  statements included in the Company's Form 10-Q were $9,291 and $4,620
for the Fiscal year ended December 31, 2003 and 2002, respectively.


     All Other Fees


         The were no other fees for services  rendered to the Company other than
those  services  covered in the section  captioned  "Audit  Fees" for the fiscal
years ended December 31, 2003 and 2002..


                                       36
<PAGE>

SIGNATURES


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

                                             AVATAR SYSTEMS, INC.

Dated: March 26, 2004                        By: /s/   ROBERT C. SHREVE, JR.
                                                --------------------------------
                                                Robert C. Shreve, Jr., President
                                                     Chief Executive Officer
                                                     Chief Financial Officer


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

Dated: March 26, 2004                        By: /s/   ROBERT C. SHREVE, JR.
                                                --------------------------------
                                                      Robert C. Shreve, Jr.
                                                     Chief Executive Officer
                                                     Chief Financial Officer
                                                            Director

Dated: March 26, 2004                        By: /s/   CHARLES TIMOTHY ALLEN.
                                                --------------------------------
                                                     Charles Timothy Allen
                                                           Director

Dated: March 26, 2004                        By: /s/   ORVILLE GREGORY ALLEN.
                                                --------------------------------
                                                    Orville Gregory Allen
                                                          Director

Dated: March 26, 2004                        By: /s/   STEPHEN A. KOMLOSY
                                                --------------------------------
                                                      Stephen A. Komlosy
                                                           Director


Dated: March 26, 2004                        By:  /s/  JOHN J. MAY
                                                --------------------------------
                                                         John J. May
                                                           Director