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# U.S.
SECURITIES AND EXCHANGE COMMISSION

# Washington, D.C. 20549

# FORM 10-KSB/A No. 2

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# [X]  ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31,
2002

# [  ] TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-16423

SAN Holdings, Inc.
(Name of Small Business Issuer in its Charter)

|                         |  | 
|------------------------ |  | 
|Colorado                 |  | 
|(State of incorporation) |  | 

900 West
Castleton Road, Suite 210, Castle Rock, CO 80104
             
(303) 660-3933
(Address including zip code, area code and telephone number of Registrants
principal executive offices.)

Securities
registered pursuant to Section 12(b) of the Act:     
None

Securities registered pursuant to Section 12(g) of the Act:

|                           |  |                                          
|-------------------------- |  | -----------------------------------------
|Title of Each Class        |  | Name of Each Exchange on Which Registered
|Common stock, no par value |  | OTC Bulletin Board                       

Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act during the past 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X]  No [  ]

Check if disclosure of
delinquent filers in response to Item 405 of Regulation S-B is not contained in
this form, and no disclosure will be contained, to the best of Registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[  ]

Issuers
revenues for its most recent fiscal year: $33,002,509.

As of
March 31, 2003, 38,269,102 shares of the Registrants common stock were
outstanding.

State
the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the Registrants most recently completed second fiscal
quarter (June 28, 2002): $11,410,000.

Transitional Small
Business Disclosure Format (check one): Yes [  ] No
[X]

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# SAN
HOLDINGS, INC.FORM 10-KSB/A

# TABLE OF
CONTENTS

Item No
             
             
             
             
             
             
             
             
             
             
             
             
     Page

Part
I

|   |  |                                                    
|-- |  | ---------------------------------------------------
|1. |  | Description of Business                            
|2. |  | Description of Property                            
|3. |  | Legal Proceedings                                  
|4. |  | Submission of Matters to a Vote of Security Holders

Part
II

|   |  | 
|-- |  | 
|5. |  | 
|6. |  | 
|7. |  | 
|8. |  | 
|   |  | 

Part
III

|    |  | 
|--- |  | 
|9.  |  | 
|    |  | 
|10. |  | 
|11. |  | 
|    |  | 
|12. |  | 
|13. |  | 
|14. |  | 

2

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# PART
I

Item 1.
Description of Business

This
annual report on Form 10-KSB contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 In
many but not all cases you can identify forward-looking statements by words such
as expects, anticipates, believes,
plans, intends, estimates, variations of
such words, and similar expressions. These forward-looking statements include
statements regarding our expectations, beliefs, or intentions about the future,
and are based on information available to us at this time. We assume no
obligation to update any of these statements and specifically decline any
obligation to update or correct any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events. Actual events and results could differ
materially from our expectations as a result of many factors, including those
identified in the section titled Investment Considerations under
Item 6, Managements Discussion and Analysis or Plan of Operation and other
sections of this Form 10-KSB. We urge you to review and consider those factors,
and those identified from time to time in our reports and filings with the SEC,
for information about risks and uncertainties that may affect our future
results. All forward-looking statements we make after the date of this filing
are also qualified by this cautionary statement and identified risks.

Overview

SAN
Holdings, Inc. (referred to hereafter as SANZ) provides sophisticated
enterprise-level data storage and data management solutions to clients in the
commercial and government markets. We focus on the design, delivery and
management of data storage systems, especially those that are built using a
network architecture. Because we typically design integrated solutions for our
clients rather than merely selling them hardware, we are known in the industry
as a storage solution provider.

In
the course of our business, we provide the following products and services:

°        Custom
storage solutions that we design and deliver as a customized
project to meet a clients specific needs.

°        Integrated
solution products that are optimized for specific market
segments.

°        Storage-related
consulting services.

Historically,
we have generated revenue from a mix of custom-designed projects consisting of
both goods and services, re-sale of data storage products without a significant
service element, and project-based and time-and-materials based consulting and
similar services. Approximately two years ago, we also began development of
integrated solution products to provide data storage and management solutions
that are tailored to deliver optimized performance for particular market
segments. That development effort has led to our EarthWhereTMproduct, which is designed to facilitate storage and distribution of
geospatial data (e.g., map data, satellite and aerial imagery, etc.). We
recorded several early sales of EarthWhereTM in 2002, and expect to develop
additional sales in 2003.

Growing
demand for data storage is the result of a proliferation of data intensive
applications, from areas as sophisticated as document imaging, pharmaceutical
development, electronic banking, satellite imagery manipulation, and scientific
research, to those as basic as email. A combination of business, regulatory and
geopolitical concerns have also caused businesses to recognize the need for
effective archiving of their data and recovery of that data in the event of
disaster or other failure. The common thread among these applications is that
data storage is an enabling element. In addition to fundamental issues of data
storage, data availability becomes critical. Todays businesses depend on
rapid response time, both internally and with vendors and customers via the
Internet, making high availability essential for a wide variety of applications.
Consolidating data storage in networks at centralized data centers lowers costs
through increased utilization and more efficient management.

Because
we have attempted to grow rapidly, and simultaneously have incurred substantial
expenses in our efforts to develop our integrated solution products, we have
generated significant losses over our operating history. ITIS Services, Inc.,
which we acquired at the end of 2001, also generated significant losses as an
independent company prior to its acquisition by SANZ. While we have narrowed
these losses in recent periods and we hope to generate positive earnings before
interest, taxes, depreciation and amortization (EBITDA) in the near future, we
have yet to generate a profit.

Our
Background

SANZ
was formed as a Colorado corporation in 1983. We commenced our current business
in 2000, when we acquired three companies with varying degrees of presence in
the storage products and solutions marketplace. These three companies merged
their operations to operate as a single wholly owned subsidiary, Storage Area
Networks, Inc. In October 2001 we acquired certain operating assets of
ECOSoftware Systems, Inc. a privately held storage networking consulting and
integration firm based in Boulder, Colorado, which were then integrated into our
Storage Area Networks subsidiary.

3

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In
December 2001, we acquired ITIS Services, Inc., a privately held data storage
consulting and storage solution provider firm with offices in Norwalk,
Connecticut and Boston, Massachusetts. ITISs business model closely
matched ours, except that it had not yet developed its own integrated solution
products. ITIS had historically served exclusively the commercial markets. Its
client base included large, national financial services, healthcare and
technology companies. By acquiring ITIS, we established a more significant
market presence in the eastern United States and in the commercial markets in
general. Effective July 1, 2002, we merged ITIS with and into our Storage Area
Networks subsidiary in order to further integrate and streamline or operations.

SANZ
principal executive offices are located at 900 West Castleton Road, Suite 100,
Castle Rock, CO 80104. Our telephone number is (303) 660-3933.

Subsequent
Event  Acquisition of Solunet Storage

In
April 2003, subsequent to the date of the financial statements included in this
report, we completed the acquisition of Solunet Storage, Inc. (d.b.a
StorNet Solutions). Solunet Storage is another storage solution
provider, and is also based in the greater-Denver area. Solunet Storage, Inc.
itself acquired substantially all of the assets and selected liabilities of
StorNet, Inc. in September 2002 in a private transaction. At the time of the
acquisition by SANZ, Solunet Storage was owned by Sun Solunet LLC, an affiliate
of Sun Capital Partners, Inc. (a private investment firm located in Boca Raton,
Florida) and management of Solunet Storage.

We
acquired Solunet Storage in an all-stock transaction in which we issued to the
two shareholders of Solunet Storage an aggregate of 20,000,000 shares of common
stock and shares of preferred stock that are convertible into an additional
37,403,653 shares of common stock (i.e., an aggregate of 57,403,653 shares of
common stock on a fully-converted basis). In addition to these shares of common
stock and preferred stock, we issued to Sun Solunet LLC, as the principal
stockholder of Solunet Storage, a warrant to purchase a maximum of 19,976,737
shares of common stock at various prices and over various terms in each case
corresponding to a warrant and option that SANZ had outstanding prior to the
Solunet Storage acquisition. The various exercise prices range from $.29 to
$10.82. This warrant mirrors the terms of those previously
outstanding warrants and options both as to exercise price and as to duration,
but on a 1.5 shares : 1 share ratio, except that Sun Solunet LLC will not be
entitled to exercise its warrant with respect to the first 2,958,951
previously-outstanding warrants or options that are exercised by their
respective holders. Sun Solunets warrant will expire in pro rata part each
time that a previously outstanding warrant or option expires without exercise by
the holder.

As
part of the acquisition transaction, an affiliate of Sun Capital Partners, Inc.
has agreed to guaranty a minimum of $3 million of the debt of the combined
company. This guaranty is currently in place in support of a loan facility
maintained by Solunet Storage.

More
information regarding Solunet Storage and the acquisition transaction will be
included in subsequent filings.

4

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Our
Business

The
market for data storage solutions is generally robust and broad-based, though
not immune to the capital spending slump that began affecting the U.S. economy
in 2001. We design, deliver and manage sophisticated data storage solutions
based on storage area network (SAN) and network attached storage
(NAS) architectures, as well as related data backup and disaster
recovery systems. SAN and NAS systems are secondary, high-speed computer
networks dedicated to data storage and backup functions. This networked storage
subset of the overall storage market (which is the segment of the storage market
that is our primary focus) is predicted by industry analyst The Yankee Group to
grow from approximately $7 billion in 2001 to in excess of $14 billion in 2003.

SAN
and NAS have become recognized as the state-of-the-art architectures that have
the capability to solve many of the storage issues arising in todays open
systems networks. These issues include:

| | ° Rising
cost in server-based storage environments due to inefficient storage utilization and high
maintenance costs
| | --------------------------------------------------------------------------------------------------------------------

| | ° Increased
isolation and resulting performance degradation of storage resulting from
restrictive server-to-storage connectivity and incompatible storage protocols
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ° Increased
complexity in upgrading server and storage capacities
| | -----------------------------------------------------------------

| | ° Requirements
for comprehensive data security, protection and disaster recovery capabilities.
| | ----------------------------------------------------------------------------------------------

By
centralizing data storage functions, storage networks create a reservoir of data
storage that can be shared by multiple servers and is accessible over long
distances. Networked storage solutions permit large amounts of data to be
shared, managed and accessed among diverse servers and storage systems running
different computer operating systems or software applications. This increased
manageability and superior performance are particularly important for
applications that depend on transfer of high volumes of data, such as those
found in imaging, pharmaceutical development, complex financial analysis and a
variety of business services.

Our
Clients

While
we have always sought to serve both federal government and commercial markets,
until the acquisition of ITIS our sales were highly concentrated in the federal
government sector. By acquiring ITIS, with its East-coast commercial client
base, we have achieved a more balanced mix of federal government and commercial
business.

Our
federal government clients include agencies involved in national defense, law
enforcement, and high performance government computing and government logistics.
Included in our federal government business are sales directly to government
end-users, as well as sales to prime contractors who provide various services to
government end-users. While our sales in the government sector during 2002
amounted to 50% of total sales, approximately 36% consisted of sales directly to
the federal government and the remaining 14% consisted of sales to third parties
acting as prime contractors or sales to state or local governments.

While
we do not restrict our commercial business to specified industries, we have
developed a relatively greater number of clients in certain segments, including:

|° computer services | ° financial services
|------------------- | --------------------

|° general business     
              services | ° health care
|---------------------------------------------- | -------------

|° biotechnology and     
              pharmaceuticals | 
|------------------------------------------------------ | 

These
segments are in various states of maturity in their use of data storage
technology.

We
have developed specific expertise in certain market segments and can provide
solutions that are tailored to the needs of particular business environments.
This approach led us to undertake the development and introduction of integrated
solution products (known sometimes generally as storage appliances).
Integrated solution products address extraordinary data storage and management
requirements not readily addressed by technologies and products available in
conventional fashion. In our current model, our integrated solution products
seek to combine proprietary software, architectures or processes with third
party hardware and software to create the integrated solution. This model also
allows for the sale of the proprietary software independent of the hardware in
appropriate circumstances. Our principal current development effort consists of
an integrated solution product for geospatial data storage and management, which
we are marketing under the name EarthWhereTM. We expect
to continue our efforts to develop efficient, integrated storage solutions for
additional market segments as we identify new opportunities.

5

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In
our Custom Client Solutions business, we employ a direct sales model, but rely
heavily on cooperative selling with our technology partners, all of whom have
sales personnel who are tasked to support channel partners such as SANZ. Our
technology partners may provide opportunity leads for us to execute directly, or
include us as part of a large system solution delivery project that they manage.
In our own efforts, we often call upon our technology partners for direct
support in the sales process, in the implementation process, or to provide lease
financing for large projects. In our Integrated Solutions business, we seek to
make direct sales but we are also conducting discussions with third parties
regarding selling the software portion of the product through those parties in a
channel distribution model in parallel with our direct sales.

We
operate from an engineering-centric business model. To support our ability to
deliver complex technical solutions, we operate testing laboratories at our
offices in Norwalk, CT and Castle Rock, CO. These are used to test proposed
solutions, and to demonstrate those solutions to prospective clients.

Significant
Customers. In 2002, no single customer accounted for more than 10% of our
total revenue. However, various separate branches and agencies within the U.S.
Department of Defense (which undertake buying decisions independently of one
another) taken together accounted for approximately 35% of our total revenue in
2002 (including both direct sales and sales through prime contractors). In 2001,
three customers accounted for 29%, 13% and 11%, of our total revenue
respectively; the largest of these was an agency within the U.S. Department of
Defense and the second largest was another agency of the U.S. federal government
(outside of the Department of Defense). We believe the decline in concentration
from 2001 to 2002 is largely attributable to the larger volume of total sales in
2002 and the enhancement of our commercial market presence, both resulting
principally from the acquisition of ITIS Services.

SANZ
Products and Services

Our
products can be broken into two distinct general categories, Custom Client
Solutions and Integrated Product Solutions. As noted above, we have only
recently begun to market our Integrated Product Solutions and recorded less than
$100,000 in sales of these products during 2002.

We
also generate revenue from consulting services delivered independently of our
Custom Client Solutions and Integrated Product Solutions (although sometimes to
the same customers), and from installation and similar services rendered as a
part of the sale of a solution. In 2001 and 2002, services revenues of all types
aggregated less than 5% of our total revenues, and are therefore not separately
reported.

Custom
Client Solutions

We
design and deliver custom solutions by working with our clients to understand
both their current and their projected data storage needs, and the business
drivers that affect those needs. A critical element in our typical sales process
is that of providing detailed support of the financial justification of a
proposed solution using a conventional return on investment analysis and, often,
a separate return on information management analysis initially
developed by ITIS.

In
a full Custom Client Solution project, our engineering staff designs a
best of breed system to best meet the clients business and
technology needs, selects and acquires the hardware and software components from
our technology suppliers, performs interoperability testing as required, and
finally coordinates installation of the system at the clients facility. We
augment our own engineering resources by engaging our vendors engineers to
perform installations or other tasks on a case-by-case basis. We have developed
our product and service offerings specifically to be able to engage a client at
any point in the evolution of their storage requirements, and to continue to
provide solutions as the clients needs change in scope. At times our
clients needs are more limited and do not involve design and installation
of a full solution. In these cases (such as follow-on sales of additional goods
to existing customers), our role may be more limited and consist simply of
reselling third-party hardware or software for inclusion in an existing system.

Integrated
Product Solutions

As
a logical extension of our custom client solution business and vertical market
focus, we have invested in designing integrated solutions to address identified
niche market opportunities. As we work with many clients in a particular
industry and determine common requirements, our product development staff looks
for opportunities to address those common requirements with a standard design or
configuration. For some industries, a relatively simple standard configuration
can address these requirements. For others, the solution includes a more complex
package of products and services, such as our EarthWhereTM solution
described below.During 2001 and early 2002, we discontinued our efforts
to develop and bring to market two other products, SANZGuard and SANZStream,
after we reassessed the forecasted product development and market development
costs versus the near-term potential market interest for each of those products.

6

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EarthWhereTM
is a system that allows geospatial data (digital images of the earths
surface captured by satellite or aerial observation) to be stored, retrieved and
manipulated from any location. Applications for this product range from defense
surveillance to city planning functions to commercial markets such as oil and
gas development. EarthWhereTM is designed to provide a broad range of
potential users with more efficient and more effective provisioning and
manipulation of the massive amounts of digital mapping information that is
available. With recent enhancements, we now can offer EarthWhereTM
either as a complete appliance, bundling our own software with third
party hardware and software, or in a software-only configuration for customers
who already own an appropriate hardware platform.

Our
Technology Partners

SANZ
is an independent storage solution provider, not under common ownership with
manufacturers of the products used in our networked storage solutions. We build
and manage our best of breed solutions by integrating product offerings from our
technology product suppliers. Current key suppliers include:

|° StorageTek | ° Hitachi Data    
   Systems | ° Sun MicrosystemsSystems
|------------ | ----------------------------- | -------------------------

|° Veritas | ° Network    
   Appliance | ° Brocade
|--------- | -------------------------- | ---------

We
believe we have strong relationships with these product suppliers. SANZ holds
federal government General Services Administration schedules for many of these
products, which gives us a distinct advantage in working with our government
clientele. In some cases, our technology partners engage us for the expertise we
bring to a technology team, in particular in heterogeneous technology
environments, where individual manufacturers lack the skills necessary to work
with the full range of software and hardware components presented in a
sophisticated solution.

Competition

The
rapidly evolving and highly competitive market for data storage is served by
many manufacturers, value added resellers, storage solution providers, and
storage service providers.

Major
computer system firms all offer storage devices along with their server,
workstation and desktop computer systems. To some extent, our products compete
with those systems.

We
face more direct competition from manufacturers specializing in storage
technology products. These include ADIC, EMC, Hitachi Data Systems, Legato, LSI
Logic, MTI Technology, Network Appliance, Qualstar, Spectralogic, StorageTek,
and Veritas. Some product companies address the market with a direct sales
model, some employ a channel partner-only strategy, and some use a hybrid
strategy that includes both. As noted below under Investment
Considerations, many or all of these manufacturers have greater financial
and other resources than we have.

A
number of these competitors also are key technology suppliers of SANZ. Those
that are not provide competition in our accounts and markets. In some cases, in
large legacy accounts of our technology partners, we will face competition
directly from those suppliers. A large number of private company value added
resellers serve as sales and distribution outlets for the manufacturers listed
above, although many of these offer only component sales and distribution. We
sometimes compete with these companies at the user client level. At times, we
face competition from other resellers offering the same or similar equipment
from the same technology partners. In general, these competitors are regional.

We
compete with companies that characterize themselves as storage solution
providers, such as Bell Microsystems, Cranel, Datalink and Alanco. Some of
these, such as Bell Microsystems, are large component resellers who have
recently moved into the market for complete solution delivery. Others, such as
Datalink, have applied the solution sale model for a longer time.

Employees

As
of December 31, 2002, we employed 56 people, all but two in full-time positions.
None of our employees are subject to collective bargaining agreements. We
believe that our relations with our employees are good.

7

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Item
2. Description of Property

SANZ
occupies 6,725 square feet of office and data center space in Castle Rock,
Colorado. The lease for the Castle Rock facility expires on May 31, 2004. The
monthly rent under this lease is $9,578 plus the costs of utilities, property
taxes, insurance, repair and maintenance expenses and common area utilities.

The
following leases for our regional offices are also material to our operations:

|Office Location | Current Lease Expiration | Monthly Rent    | Square Footage
|--------------- | ------------------------ | --------------- | --------------
|Norwalk, CT     |                          | June 30, 2003   |               
|Waltham, MA     |                          | July 31, 2005   |               
|McLean, VA      |                          | June 30, 2003   |               
|Phoenix, AZ     |                          | August 31, 2003 |               

At
various times in the past we closed regional offices in Orlando, Florida,
Phoenix, Arizona, Boulder, Colorado and Austin, Texas, for which we are still
subject to leases. The Orlando and Boulder offices have been subleased to third
parties, although at sublease rent rates lower than the rent that we are
currently paying to the respective landlords. In all cases except Phoenix,
Arizona (which was closed subsequent to December 31, 2002), we have accrued the
net remaining obligation for the life of the lease. We will continue to pay rent
for the Boulder office (offset by the sublease rental) and Austin office through
July 2003; we will continue to pay rent for the Phoenix office through October
2005; and we will continue to pay rent for the Orlando office (offset in part by
the sublease rental) through January 2006. The total amount of these leases, net
of the amounts received under the subleases, is $11,313 per month.

We
believe that our properties, equipment, fixtures and other assets are adequately
insured against loss, that suitable alternative facilities are readily available
if the lease agreements described above are not renewed, and that our existing
facilities are adequate to meet current requirements.

Item
3 Legal Proceedings

None.

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

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

8

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# PART
II

Item 5.
Market for Common Equity and Related Stockholder Matters

Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
SANZ. The following table shows the high and low bid quotations for
our common stock in 2002 and 2001. These over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission and
may not represent actual transactions. The trading market in our securities may
at times be moderately illiquid due to low volume.

|               | Common Stock |  
|-------------- | ------------ | -
|
|2002           |              |  
|First Quarter  |              | 1
|Second Quarter |              |  
|Third Quarter  |              |  
|Fourth Quarter |              |  
|2001           |             
|First Quarter  |              | 1
|Second Quarter |              | 1
|Third Quarter  |              | 1
|Fourth Quarter |              | 1

On
April 11, 2003, the last reported sale price for our common stock was $0.75.

Holders

As of
March 31, 2003, there were 38,269,102 SANZ shares outstanding, held of record by
approximately 350 registered holders. Registered holders include brokerage firms
and clearinghouses holding our shares for their clientele, with each brokerage
firm and clearinghouse considered as one holder.

Dividend
Policy

We
have never declared or paid any cash dividends on our common stock. We currently
intend to retain future earnings, if any, for the operation and development of
our business, and do not intend to pay any dividends in the foreseeable future.

9

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Item
6. Managements Discussion and Analysis or Plan of Operation

Critical
Accounting Policies and Estimates

We
prepare our financial statements in accordance with accounting principles
generally accepted in the United States (GAAP). The two accounting policies most
fundamental to understanding our financial statements are those relating to
recognition of revenue, and those relating to our use of estimates.

Revenue
Recognition

Our
revenue is derived primarily from two sources: (i) the resale and installation
of data storage systems, which consist of computer hardware and software, and
data storage related services; and (ii) revenue from the resale of maintenance
agreements on data storage devices.

Revenue
from the resale and installation of data storage systems is recognized upon
completion of delivery and, where applicable, any material service obligations,
provided that no significant uncertainties regarding client acceptance exist and
collection is probable. Revenue from the resale of computer software is
recognized when: (i) the Company enters into a legally binding arrangement with
the client for the license of software; (ii) delivery of the software has
occurred; (iii) client payment is fixed or determinable and free of
contingencies or significant uncertainties; and (iv) collection is probable.
Service revenue is recognized as the related services are completed.

We do
not currently perform a material portion of the maintenance services when we
resell maintenance agreements on computer hardware and software. Accordingly,
revenue from the resale of all maintenance agreements is currently recognized
net of the cost to acquire the related maintenance agreements from the hardware
and software vendors, at the beginning of the maintenance period. We anticipate
that in the future we may begin performing a portion of the maintenance services
with respect to some or all of the maintenance contracts that we sell. If we
should begin performing such a portion of the maintenance services, we
anticipate that we will recognize the gross sale price of the applicable
maintenance contracts as revenue, and defer and recognize such revenue over the
contractual terms of the maintenance agreements. The cost to acquire such
maintenance agreements from the hardware and software vendors would likewise be
deferred and amortized over the contractual terms of the maintenance agreements.

Use of
Estimates

The
preparation of our financial statements in conformity with GAAP requires us to
make estimates, judgments and assumptions that affect the reported amounts of
assets and liabilities, the reported amount of revenues and expenses during the
reporting period, and the disclosure of contingent assets and liabilities at the
date of the financial statements. Some of these estimates, judgments and
assumptions relate to expected outcomes or uncertainties of specified events.
Others relate to the anticipated dollar amounts arising out of events that are
reasonably certain to occur. The areas in which we most frequently are required
to make such estimates, judgments and assumptions are allowances for credit
losses on accounts receivable, allowances for impairment in the value of
inventory, certain aspects of the recognition of revenue from professional
services, and assessment of the carrying value of goodwill.

We
believe that the estimates, judgments and assumptions upon which we rely are
reasonable based on the information available to us at the time that those
estimates, judgments and assumptions are made, and they are continually
evaluated based on available information and experience. As you might expect, in
the case of estimated or assumed amounts, the actual results or outcomes are
often different from the estimated or assumed amounts. These differences are
usually minor and are included in our consolidated financial statements as soon
as they are known. However, to the extent that there are material differences
between these estimates, judgments and assumptions and actual results, our
financial statements will be affected.

10

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We
utilize a specific reserve methodology for our accounts receivable, in which we
periodically review each of those accounts based on aging, the financial status
of the client and other known factors that may indicate that an account has
become uncollectable. In doing so, we make judgments about our ability to
collect outstanding receivables and apply a reserve where we believe our ability
to collect a specified receivable has become doubtful. We also consider our
exposure to a single client; in this regard (as further discussed under the
heading Description of Business  Our Clients), in 2002 we had
no single client that represented more than 10% of our total revenue although
various separate branches and agencies within the U.S. Department of Defense in
the aggregate represented approximately 35% of our revenue. This process of
reviewing our accounts receivable involves the application of managements
judgment and estimates regarding a future event, i.e., the likelihood of
collection of a receivable and whether or not collection will be of the full
amount owed. If our judgment does not accurately predict our future ability to
collect those outstanding receivables, whether because the data on which we rely
in making that judgment proves to be inaccurate or otherwise, additional
provisions for doubtful accounts may become needed and the future results of
operations could be materially affected.

We
also utilize a specific reserve methodology for our inventory, in which we
periodically review the tangible inventory to assess whether, due to aging,
changes in technology, our effectiveness in marketing a given type of product to
our usual client base or other factors, our ability to sell that inventory for
at least our carrying value has become impaired. This process involves the
application of managements judgment and estimates regarding a future
event, i.e., the likelihood of the sale of an item of inventory and an estimate
of the price at which such sale will occur. If our judgment does not accurately
predict our future ability to sell that inventory or the price at which we will
sell it, whether because the data on which we rely in making that judgment
proves to be inaccurate or otherwise, a reduction in the carrying value of that
inventory may become needed and the future results of operations could be
materially affected.

Our
recognition of revenue from services that we perform with our internal staff
also involves certain estimates, judgments and assumptions. Among these are
estimates and assumptions used in reallocating an appropriate portion of the
compensation and other costs that we incur with respect to our staff from
operating expense to cost of sales. If we are incorrect
in those estimates and assumptions, our financial statements may inaccurately
overstate gross profit and simultaneously overstate operating expense, or vice
versa. (The net effect of either outcome would, however, be neutral to net
income.) Also among these estimates, judgments and assumptions are judgments
regarding when a given services engagement has achieved substantial
completion and recognition of revenue is therefore appropriate.

We
review the carrying value of goodwill annually, or more often in certain
circumstances.. The performance of the test involves a two-step process. The
first step of the impairment test involves comparing the fair value of the
Companys reporting unit with the reporting units carrying amount,
including goodwill. If the carrying amount of the our reporting unit exceeds its
fair value, we perform the second step to determine the amount of the impairment
loss. The impairment loss is determined by comparing the implied fair value of
our goodwill with the carrying amount of that goodwill. We believe that our
estimates of fair value are reasonable. Changes in estimates of such fair value,
however, could effect the calculation. It is at least reasonably possible that
the estimates we use to evaluate the realizability of goodwill will be
materially different from actual amounts or results.

General

SANZ
current line of business operations commenced in 2000. In October 2001, we
acquired operating assets of ECOSoftware Systems, Inc., and effective December
31, 2001, we acquired ITIS Services, Inc., a data storage company operating out
of Norwalk, CT. The consolidated financial statements discussed below include
the accounts of Storage Area Networks, Inc. for all periods presented, plus
subsidiaries from the dates of their acquisition by SANZ. All significant
intercompany balances have been eliminated.

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ITIS
Services was acquired as of December 31, 2001, and while its assets and
liabilities as of that date are included in the December 31, 2001 balance sheet,
its results of operations are not reflected for periods ending on or prior to
December 31, 2001.

For
the year commencing January 1, 2002, we adopted a policy to record revenue from
the resale of maintenance agreements on computer hardware and software net of
the cost to acquire the related maintenance agreements from the hardware and
software vendors, at the beginning of the maintenance period. We adopted this
policy because we currently do not perform a material portion of the maintenance
services when we resell maintenance agreements on computer hardware and
software. Previously we employed a policy under which we recorded the full (or
gross) sale price of the maintenance agreement, and deferred the
revenue over the life of the agreement. Prior year data in this report has been
restated to reflect the newly-adopted accounting policy. We anticipate that
in the future we may begin performing a portion of the maintenance services with
respect to some or all of the maintenance contracts that we sell. If we do begin
performing such a portion of the maintenance services, we anticipate that we
will recognize the gross sale price of those maintenance contracts as revenue,
and defer and recognized such revenue over the contractual terms of the
maintenance agreements; contracts on which we do not perform any portion of the
services will continue to be reported on a net basis.

Results
of Operations

Year
Ended December 31, 2002 Compared to Year Ended December 31, 2001

ITIS
Services was acquired as of December 31, 2001. Its results of operations are not
reflected in our financial statements for the period ended December 31, 2001 but
they are reflected for the period ended December 31, 2002. To aid in comparison,
applicable portions of this discussion of the results of operations present both
the actual data for SANZ (i.e., without ITIS Services) for the year ended
December 31, 2001, and pro forma combined data for SANZ and ITIS Services for
the year ended December 31, 2001 as though that combination had occurred on
January 1, 2001.

Sales.
SANZ sales during the year ended December 31, 2002 were $33.0 million, an
increase of $14.2 million, or 76%, over the $18.8 million recorded by SANZ for
the year ended December 31, 2001, and an increase of $4.9 million or 17% over
pro forma combined 2001 sales. Of this increase, we estimate that approximately
$12 million is primarily attributable to sales in markets penetrated through the
acquisition of ITIS Services. The remainder of the increase consists primarily
of increased sales in the federal sector, where we were successful in expanding
our customer base and in expanding the range of products that we sold to
existing customers.

Gross
Margin. Gross margin for the year ended December 31, 2002 was
22%, compared to a gross margin of 17% for SANZ on a standalone basis for the
year ended December 31, 2001, and compared to 18% on a pro forma combined basis
for 2001. We estimate that more than half of this increase in margin was caused
by a change in the revenue mix from a predominantly government focus in 2001 to
an evenly balanced mix of commercial and governmental sales in 2002, resulting
from the acquisition of ITIS services with its exclusively commercial customer
base. We believe that the remainder of the margin increase is principally due to
increased sales of professional services, which carry significantly higher
margins, and to a lesser extent from a modest improvement in pricing from our
vendors resulting from larger volumes.

Selling,
General and Administrative. Selling, general and administrative
expenses (including depreciation and amortization) (SG&A) for
2002 were $10.2 million, including $1.0 million of depreciation and
amortization. This amount represents an increase of $800,000 over 2001 SG&A
expense for SANZ on a standalone basis. Excluding the effect of a $1.4 million
litigation settlement incurred in 2001, for which there was no comparable
expense in 2002, SG&A expense increased by $2.2 million in 2002. The 2002
SG&A expense represents a decline of $4.5 million ($3.1 million before the
effect of the litigation settlement) relative to the pro forma combined SG&A
expense of SANZ and ITIS Services in 2001. The increase in total operating
expense principally reflects increases in sales and engineering personnel
attributable to the overall increase in sales volume (as a result of the ITIS
Services acquisition and otherwise), and to a lesser extent an increase in
administration expense attributable to the addition of the ITIS Services
locations and operations. Offsetting these increases were reductions in the
development and marketing costs associated with our integrated solution product,
SANZstreamTM,, for which we ceased development and marketing efforts
during the course of 2002. Operating expenses (excluding depreciation,
amortization and the 2001 litigation settlement) represented 28% of total
revenue in 2002, compared to 41% of total revenue in 2001 (45%of total 2001
revenue for SANZ and ITIS on a pro forma combined basis). We believe this
improvement in our operating expense ratio is principally due to the operating
leverage inherent in our business, in which we have substantial fixed costs but
the marginal cost (excluding the cost of goods) of additional sales grows at a
more limited pace.

Over
the course of the third and fourth quarters of 2002, we took certain actions
intended to reduce expenses to levels at or below then-anticipated gross profit
levels and, in so doing, to reduce net cash requirements. Those actions
consisted principally of the elimination of a limited number of positions,
reducing our headcount by 14% from the number at June 30, 2002. The savings
associated with those changes were realized in stages, beginning in the third
quarter of 2002 and completed in the first quarter of 2003. Principally as a
result of these changes, total operating expense for the fourth quarter of 2002
(including depreciation and amortization) was reduced by approximately $150,000
from total operating expense for the second quarter of 2002 ($2,618,000 vs.
$2,772,000). Operating expense excluding depreciation and amortization was
reduced by a comparable amount, to $2,309,000 from $2,481,000. Gross profit
increased between the same periods by $264,000 (to $2,053,000 from $1,789,000).

12

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As
noted above, the 2001 SG&A expense includes $1.4 million in losses from the
forgiveness of two large receivables from customers (3Si and XS Data,
respectively), against whom we had previously filed collection litigation. In
December 2001, we entered into binding settlements of each of these disputes.

Interest
Expense. During 2002, interest expense (net) increased by
$133,000, from $54,000 to $187,000. Approximately $100,000 of this increase
results from increases in our borrowings under our credit facility, and the
balance reflects a decline in interest income.

Liquidity
and Capital Resources

At December 31, 2002, the
Company had $2.2 million in cash and cash equivalents. This amount represents a
decrease of $3.1 million from December 31, 2001. We believe this decrease
principally results from our net loss of $3.0 million in 2002.

For the year ended December
31, 2002, our continuing operating activities used $8.1 million of cash compared
to $0.9 million of cash generated during the prior year. This decrease primarily
is due to an increase in accounts receivable of $4.8 million, and an increase in
net loss of $3.2 million. Accrued expenses, deferred revenue and inventory were
lower than at December 31, 2001, offset by increases in prepaid expenses and
accounts payable.

Cash provided by investing
activities was $225,000 in 2001 and $70,000 in 2002.

Cash provided by financing was
$4.9 million in 2002, compared to $3.9 million in 2001 due to a increase in
short term borrowings, offset in part by decreased proceeds from the sale of
equity in 2002 as compared to 2001.

In March 2002, we closed a
private offering of units, at $6,800 per unit, that raised $798,018, net of
fees. Each unit consisted of 10,000 shares and a five-year warrant to purchase
2,000 shares at $.85 per share. A total of 1,415,694 shares and 600,196
warrants, including those issued as placement agent compensation, were issued in
this offering.

During May 2001, we
established a $2.5 million line of credit agreement with Wells Fargo Business
Credit, Inc. Effective July 1, 2002, the maximum amount of this credit facility
was increased to $5.0 million. The credit facility is a revolving
facility under which we routinely draw and repay funds on a daily or near-daily
basis to address timing differences between our collections from clients and our
payments to vendors. It should be noted, however, that the funds available under
the credit line are limited to 80% of the amount of eligible accounts receivable
we hold at any given time, and fluctuations in the timing of customer orders can
adversely affect our ability to draw on the line when required. Eligible
accounts consist of substantially all accounts receivable, subject to customary
exceptions (including those aged over 90 days, otherwise-current receivables
from customers with material amounts outstanding over 90 days, and more than a
pre-set percentage of total receivables from a single customer). Borrowings
against receivables owed directly by federal government end-users are further
limited to $500,000 in the aggregate unless we have obtained an assignment
of claim executed by the government agency. Receivables from commercial
entities acting as prime contractors for federal government end-users are not
subject to this sub-limit. As of December 31, 2002, we had the full $5.0 million
available (based on eligible receivables of $7.5 million) and $4.3 million drawn
against this line of credit.

Covenants permit the lender
to declare the loan in default if Storage Area Networks, Inc., our operating
subsidiary, has a net loss greater than specified amounts during each calendar
quarter, or if the book net worth of our operating subsidiary falls below levels
that we have agreed to maintain. These levels were determined based on our
discussions with the lender and are periodically reset following negotiation
with the lender to reflect changes in our business. At December 31, 2002, we
were in compliance with our covenants regarding maximum net loss but not in
compliance with our covenant regarding net worth; however, our lender has agreed
to waive the non-compliance with the net worth covenant at December 31, 2002.

We are again not in
compliance with our covenants regarding net worth and maximum net loss at March
31, 2003, and are currently negotiating with our lender to establish new
covenants and to obtain a waiver of the existing default. At March 31, 2003, the
outstanding loan balance was $1.6 million and we had $2.7 million of undrawn
availability on the loan facility based on our eligible collateral at that date.
Based on our discussions with our lender to date, we believe that we will be
able to obtain such a waiver and that we will be able thereafter to maintain
compliance with the new covenants once they have been set. If, contrary to that
belief, the lender were to exercise its right to declare the loan in default on
the basis of our failure to meet these covenants at March 31, 2003, management
believes its credit availability from other sources would be adequate to repay
the loan.

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As noted above, in
connection with the acquisition of Solunet Storage in April 2003, we have
additional credit availability in the form of a $10 million revolving loan
facility maintained by Solunet Storage. In connection with that acquisition, an
affiliate of Sun Capital Partners has also committed to guarantee a minimum of
$3 million of debt on behalf of the combined company, which is currently being
used to support the Solunet Storage loan facility. At March 31, 2003, Solunet
Storage had drawn $4.8 million on that facility, and had $1.2 million of undrawn
availability on that facility based on Solunet Storages eligible
collateral at that date. Both the availability of this guaranty and the
borrowing capacity under the loan facility maintained by Solunet Storage
(subject to our ability to generate eligible receivables to support that
facility) are significant factors in managements belief described in the
foregoing paragraph.

Prior to resetting covenant
levels pursuant to the currently-ongoing negotiations, our covenants to Wells
Fargo Business Credit for 2003 are as follows:

| | Period | Minimum Net Income (Loss)(Operating Subsidiary Only)
| | ------ | ----------------------------------------------------
| |        | Three months ending March 31, 2003                  
| |        | Six months ending June 30, 2003                     
| |        | Nine months ending September 30, 2003               
| |        | Twelve months ending December 31, 2003              

| | Period | Minimum Book Net Worth(Operating Subsidiary Only)
| | ------ | -------------------------------------------------
| |        | March 31, 2003                                   
| |        | April 30, 2003                                   
| |        | May 31, 2003                                     
| |        | June 30, 2003                                    
| |        | July 31, 2003                                    
| |        | August 31, 2003                                  
| |        | September 30, 2003                               
| |        | October 31, 2003                                 
| |        | November 30, 2003                                
| |        | December 31, 2003 and                            
| |        | each month thereafter                            

As
described above, over the course of the third and fourth quarters of 2002, we
took actions intended to reduce expenses to levels at or below then-anticipated
gross profit levels and, in so doing, to reduce net cash requirements. Those
actions consisted principally of the elimination of a limited number of
positions, reducing our headcount by 14% from the number at June 30, 2002,
including both two senior management positions and several personnel in a
variety of other functions. One operational area was fully eliminated by the
elimination of the two positions then engaged in market development of the
Companys SANZStreamTM product, for which sales had
yet to develop. The savings associated with those changes were realized in
stages, beginning in the third quarter of 2002 and completing in the first
quarter of 2003. Principally as a result of these changes, total operating
expense for the fourth quarter of 2002 (including depreciation and amortization)
was reduced by approximately $150,000 from total operating expense for the
second quarter of 2002 ($2,618,000 vs. $2,772,000). Cash expense (i.e.,
excluding depreciation and amortization but including interest costs and other
non-operating expense and income) was reduced by a comparable amount, to
$2,309,000 from $2,481,000. Gross profit increased between the same periods by
$264,000 (from $1,789,000 to $2,053,000).

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With
the changes in expense levels described above, net cash used in operations has
been reduced to an average of approximately $100,000 per month, based on fourth
quarter gross profit levels. Accordingly, management believes that these actions
will be sufficient to enable the Company to operate with its existing capital
base for at least the next twelve months.

While
these actions are currently projected to enable us to reach profitability
without raising additional capital, there can be no assurance that we will
succeed in doing so. For this reason, and because of the continuing slow pace of
the economy in general and of technology spending in particular, there is a
possibility that we could need either to take further action to reduce expenses
(which could entail curtailing certain operations), or to raise additional
capital, or both. Management regularly evaluates contingency plans regarding
what additional actions could be taken to further reduce expenses, and a variety
of changes occur regularly in the ordinary course of business, but no
significant additional reductions are currently contemplated outside of actions
relating to the consolidation of legacy SANZ operations with those of Solunet
Storage. If we do seek to raise capital, there is no assurance that it will be
available on favorable terms or in an amount sufficient to avoid further cost
cutting. If equity capital were raised, the issuance of those shares would also
be dilutive to the ownership interests of all other stockholders.

Capital
Expenditures

During
the year ended December 31, 2002, we purchased approximately $200,000 of
property and equipment for cash. We anticipate a modest increase in this level
of spending on capital expenditures during 2002, to levels in the range of
$250,000 to $500,000.

Seasonality

Historically,
we have not experienced significant seasonality in our business, although our
revenue is subject to fluctuation due to government and commercial purchasing
cycles. See Investment Considerations, below.

Effect
of New Accounting Pronouncements

In
June 2002, the Financial Accounting Standards Board issued Statement 146,
Accounting for Costs Associated with Exit or Disposal Activities.
This statement requires entities to recognize costs associated with exit or
disposal activities when liabilities are incurred rather than when the entity
commits to an exit or disposal plan, as currently required. Examples of costs
covered by this guidance include one-time employee termination benefits, costs
to terminate contracts other than capital leases, costs to consolidate
facilities or relocate employees, and certain other exit or disposal activities.
This statement is effective for fiscal years beginning after December 31, 2002,
and will impact any exit or disposal activities the Company initiates after that
date.

In
December 2002, the Financial Accounting Standards Board issued Statement 148
(SFAS 148), Accounting for Stock-Based Compensation  Transition and
Disclosure, as an amendment of FASB Statement 123 (SFAS 123), to provide
alternative transition methods for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in annual financial statements about the method of accounting for
stock-based employee compensation and the pro forma effect on reported results
value method of accounting. The pro forma effect disclosures are also required
to be prominently disclosed in interim period financial statements. This
statement is effective for financial statements for fiscal years ending after
December 15, 2002 and is effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002, with
earlier application permitted. The Company does not plan to change to the fair
value based method of accounting for stock-based employee compensation at this
time and have included the disclosure requirements of SFAS 148 in the financial
statements included in this report.

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Investment
Considerations

In addition to the other
information in this Annual Report, the following factors should be considered in
evaluating our business and financial condition. We believe the risks and
uncertainties described below may materially affect SANZ. There also could be
additional risks and uncertainties that we are currently unaware of, or that we
are aware of but currently do not consider to be material, but that may become
important in the future or prove to be material and affect our financial
condition or results of operations.

We may not be successful in
generating revenues and gross profits at a level sufficient to support the
investment we have made in infrastructure and technical resources. Even after
recent cost reductions and revenue increases, our gross profits still may not be
sufficient to cover this overhead and to enable us to become profitable without
further reductions in that overhead.

We incurred net losses of
$4.8 million in the fiscal year ended December 31, 2001 and $3.0 million in the
fiscal year ended December 31, 2002. As of December 31, 2002 we had an
accumulated deficit of $14.2 million. We have not had a profitable quarter since
inception. Our December 2001 acquisition of ITIS has led to substantial
increases in our revenues and a narrowing of our net loss and we hope to achieve
the same results with our April 2003 acquisition of Solunet Storage; however, we
there can be no assurance whether or when we will achieve profitability.

We have expanded our
engineering staff and sales force and improved our infrastructure, both through
internal growth and through acquisitions, to support both expanded selling and
project execution elements necessary for our growth objectives. Including the
employees added through the ITIS acquisition, our total workforce increased from
37 full-time-equivalents at January 1, 2001 to 55 full-time-equivalents at
December 31, 2003, after peaking at approximately 65 in June, 2002. We have also
made investments in various software packages, testing lab equipment and other
fixed assets to support operations over recent periods. A combination of
increases in gross profits and reductions in this overhead (some of which were
recently undertaken) will be necessary to enable us to become profitable, and
there can be no assurance that we will be successful in doing so.

We must effectively
integrate any acquired businesses with SANZ and recognize expected synergies.

Acquisitions entail a
number of risks, including: problems integrating the acquired operations
technologies or products with our existing business and products; diversion of
managements time and attention from our core business; and difficulties in
retaining business relationships with suppliers and customers of the acquired
company. Achieving the anticipated benefits of any acquisition will depend in
part upon whether we are able to effectively integrate the businesses. Even if
we are able to integrate the acquired business operations and economic
conditions remain stable, there can be no assurance that the anticipated
synergies will be achieved.

Our
operations currently rely on continued access to bank debt. If we lose access to
such debt, our operations may be significantly impaired.

At
December 31, 2002, we had $2.2 million of cash. For the year ended December 31,
2002, we had an EBITDA loss (i.e., earnings before depreciation, amortization,
taxes and interest) of $2.0 million. At December 31, 2002 we also had a working
capital deficit (current liabilities are greater than current assets) of
$2,564,000.

We executed a bank line of
credit in 2001, and began drawing on this line early in 2002. Following the
increase at July 1, 2003, the borrowing limit under that line is $5 million. It
should be noted, however, that the funds available under the credit line are
limited by the amount of eligible accounts receivable we hold at any given time,
and fluctuations in the timing of customer orders can adversely affect our
ability to draw on the line when required. Covenants also permit the lender to
declare the loan in default if our operating subsidiary has a net loss greater
than specified amounts during each calendar quarter, or if the book net worth of
our operating subsidiary falls below levels that we have agreed to maintain. We
have periodically been in default under those covenants, and we are in default
under those covenants at March 31, 2003. We are negotiating with the lender to
obtain a waiver of that default and to set new covenant levels with which we
will be in compliance, and we believe that we will succeed in obtaining such a
waiver thereafter maintaining compliance with the new covenants once they have
been set. If we are unable to obtain such a waiver and/or to meet covenants in
the future (either the existing covenants or newly-set covenants) and the lender
were to accelerate the loan, the company would need to obtain credit from other
sources to repay the loan. We believe that we have credit available from other
sources adequate to repay the loan, but there can be no assurance such credit
would in fact be available if and when needed. These matters are discussed
further in Managements Discussion and Analysis or Plan of Operation
 Liquidity and Capital Resources, at page 14.

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We
may seek to raise additional capital through bank borrowings or public or
private offerings of equity or debt securities or from other sources. No
assurance can be given that additional financing will be available or that, if
available, it will be on terms favorable to us. Future issuances of securities
could adversely affect the interests of our prior shareholders.

During
the second half of 2002 we took actions intended to reduce expenses to levels at
or below anticipated gross profit levels and, in so doing, to reduce net cash
requirements. The principal reductions were to personnel expense, through the
reduction of headcount by approximately 14%. The reductions included the
elimination of two senior management positions and several personnel in a
variety of other functions, including two personnel who had been engaged in
market development in the Companys SANZStreamTM
product, for which sales had yet to materialize. However, these actions have not
fully closed the gap between gross profits and expenses. Management believes
that continued scrutiny of expenses coupled with anticipated and modest
increases in gross profits will be sufficient to enable SANZ to operate with its
existing capital base for at least the next twelve months. These actions and
their effects are discussed in Managements Discussion and Analysis
or Plan of Operation, at pages 13  14.

While
these actions are currently projected to enable us to reach profitability
without raising additional capital, there can be no assurance that they will
succeed in doing so. For this reason, and because of the continuing slow pace of
the economy in general and of technology spending in particular, there is a
possibility that we will need either to take further action to reduce expenses
(which could entail curtailing certain operations), or to seek additional
capital, or both. If we do seek additional debt or equity financing, there is no
assurance that it will be available on favorable terms or in an amount
sufficient to avoid further cost cutting.

The
issuance of securities has been a significant source of cash in the past. We
also have issued material amounts of securities at various times to acquire
other companies and assets. Due to our limited cash resources, any future
acquisitions likely could be effected only by our issuance of securities, and
management may in the future deem raising capital through the sale of additional
securities to be preferable to bank financing. Additional funds raised through
the issuance of equity securities or securities convertible into our common
stock could dilute the percentage ownership of prior shareholders, or result in
our issuance of securities with rights, preferences or privileges may be senior
to those of the common shares.

Our
ability to grow our business depends on relationships with others. If we were to
lose those relationships, we could lose our ability to sell certain of our
products.

Most
of our revenue and a majority of our gross profit come from selling integrated
solutions, consisting of combinations of hardware and software products produced
by others. While our relationships change from time to time, some of our most
significant technology partners at this time are Sun Microsystems, Storage
Technology Corporation (StorageTek), Hitachi Data Systems, and Veritas Software.
If a given technology partner changes its marketing strategy and de-emphasizes
its use of marketing partners such as SANZ, our ability to generate revenue from
reselling its products would diminish and our operations and results of
operations would be materially and adversely affected.

There
will be risks associated with introducing new products. If we are not successful
with those product introductions, we will not realize on our investment in
developing those products.

Our
EarthWhereTM product has had some initial sales. We also expended
considerable resources on a second product, SANZstreamTM, before
determining that the near-term market opportunity for that product was not
sufficient to warrant further investment. Direct costs of these activities
(without allocation of overhead and similar costs) totaled approximately
$500,000 during 2002. We will continue to evaluate opportunities to develop
other integrated product solutions; if we choose to develop other such products,
we will incur expenses in those development efforts. Market acceptance of new
products may be slow or less than we expect. Our products also may not perform
in a manner that is required by the market, or our competitors may be more
effective in reaching the market segments we are targeting with these products.
Slow market acceptance of these products will delay or eliminate our ability to
recover our investment in these products. During any period that we
unsuccessfully seek to market these products, we will also incur marketing costs
without corresponding revenue.

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Due
to our limited operating history, the uncertain acceptance of our new products,
and the continued decline in technology spending in general, we may have
difficulty accurately predicting revenue for future periods and appropriately
budgeting for expenses, resulting in expense levels unjustified by actual
revenues.

A
variety of factors coincide to reduce our ability to accurately forecast our
quarterly and annual revenue. These include SANZ limited operating
history, significant growth and changes in our operations due to acquisitions,
the continuing economic slowdown in the United States and resultant decline in
technology spending by customers, and other factors beyond our control. If our
revenue does not increase as anticipated or if it decreases, significant losses
could result due to expense levels that were established in anticipation of
revenue growth.

We
have experienced, and expect to continue to experience, significant
period-to-period fluctuations in our revenue and operating results. As a
consequence, financial results from any one period may not be indicative of
results that will be realized in future periods.

A
number of factors may particularly contribute to fluctuations in our revenue and
operating results. Significant among these is the increasing size of individual
orders received by the company; two of the three largest orders ever received by
the company ($3.1 million and $2.0 million respectively) were received in the
fourth quarter of 2002. The timing of large orders from customers and the
product integration cycle of those orders can cause significant fluctuations
from period to period. Other factors include the tendency of customers to change
their order requirements frequently with little or no advance notice to us;
deferrals of customer orders in anticipation of new products, services, or
product enhancements from us or our competitors or from other providers of
storage networking products; and the rate at which new markets emerge for
products we are currently developing. In addition to the budgeting difficulties
posed by these fluctuations, these fluctuations may cause our reported results
from any one period not to be a reliable indicator to investors of the financial
results that may be expected in future periods.

A
significant portion of our sales has historically been to the U.S. Federal
Government, and if we lost the ability to sell to the government our sales would
decline significantly.

As
discussed further under the heading SANZ and Its Business  Our
Clients at page 5, approximately one-half of our current sales are to
government customers. Moreover, various agencies and branches of the U.S.
Department of Defense, taken together, accounted for approximately 35% of total
sales in 2002. While it is not legally necessary to be an approved vendor in
order to sell to the government, we have established GSA Schedules
with the U.S. General Services Administration (GSA) with respect to many of the
products we sell. GSA schedules are product and price lists that are
periodically reviewed and approved by the GSA as the basis for purchases by
federal government agencies. Those GSA Schedules greatly facilitate our sales to
government end-users. If the GSA were to refuse to renew those GSA Schedules, we
could lose much of our government revenue base and our business and results of
operations would be materially and adversely affected. Our GSA Schedules were
most recently renewed in February 2003.

Public
sale of previously restricted shares could cause the market price of our shares
to drop significantly, even if our business is doing well.

Over
one-half of our shares outstanding at March 31, 2003 are restricted
securities. While all of these shares are currently eligible for sale
under Rule 144, approximately 33% of overall outstanding shares are subject to
volume limitations under Rule 144 (i.e., the holders may legally sell only
limited quantities during a given period). When those limitations lapse, the
increased supply of shares available for sale into the public market could have
a depressive effect on the market price for our shares.

Acquisitions
of other companies could disrupt our business and harm our financial condition.

SANZ
has grown over the past few years in significant part through acquiring other
companies. It is possible that we will seek opportunities to acquire other
businesses or technologies. All acquisitions entail a number of risks that could
materially and adversely affect our business and operating results. These risks
include problems integrating the acquired operations, technologies or products
with our existing business and products. There can be no assurance that our
current management, personnel and other corporate infrastructure will be
adequate to manage growth and operations that are geographically dispersed.
Successfully integrating the operations of acquired companies is likely to take
management time and attention away from day-to-day operations.

18

---

We
are a relatively small company with limited resources compared to some of our
current and potential competitors, which may hinder our ability to compete
effectively.

Some
of our current and potential competitors have longer operating histories,
significantly greater resources, broader name recognition, and a larger
installed base of customers than we have. As a result, these competitors may
have greater credibility with our existing and potential customers. They also
may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than us to new or
emerging technologies or changes in customer requirements. In addition, some of
our current and potential competitors have already established supplier or joint
development relationships with decision makers at our current or potential
customers.

No
dividends.

SANZ
has never paid cash dividends on its common stock. We it do not contemplate
paying dividends in the foreseeable future since we will use all of our
earnings, if any, to finance current operations and the possible expansion of
our operations. See Market for Our Shares and Related Shareholder Matters
 Dividends at page 9.

Our
Articles of Incorporation permit us to issue preferred stock with rights
superior to the common stock.

We are
authorized under our Articles to issue up to 10,000,000 shares of preferred
stock. The board of directors has the power to establish the dividend rates,
liquidation preferences, voting rights, redemption and conversion terms and
privileges with respect to any series of preferred stock. At any time the board
may issue additional shares of preferred stock having rights superior to those
of the common stock. Such an issuance could cause the market price of our common
stock to decrease. Preferred shares could be issued as a device to prevent a
change in control of SANZ. Holders of preferred stock may have the right to
receive dividends, certain preferences in liquidation and conversion rights.

Item
7. Financial Statements.

Required
financial statements immediately follow this page, and are listed below.

|                                                                    | 
|------------------------------------------------------------------- | 
|Report  of Independent Certified Public Accountant                  | 
|Consolidated Balance Sheets, December 31, 2001 and 2002             | 
|Consolidated Statements of Operations for the Years Ended           | 
|December 31, 2001 and 2002                                          | 
|Consolidated Statements of Stockholders' Equity for the Years Ended | 
|Ended December 31, 2001 and 2002                                    | 
|Consolidated Statements of Cash Flows for the Years Ended           | 
|December 31, 2001 and 2002                                          | 
|Notes to Consolidated Financial Statements                          | 

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

There
are no changes or disagreements required to be reported under this Item 8.

19

---

# Report
of Independent Certified Public Accountants

The
Board of Directors and StockholdersSAN Holdings, Inc.

We
have audited the accompanying consolidated balance sheet of SAN Holdings, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders equity and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

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

In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of SAN Holdings, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

As
discussed in Note A to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets on January 1, 2002.

/s/ GRANT
THORNTON LLP

Dallas,
Texas
February 28, 2003, except for Notes D and J, as to
             which the date is April 1, 2003

F-1

---

# SAN
Holdings, Inc.

CONSOLIDATED
BALANCE SHEETS

December
31,

|                                                            | 2002 | 2001        
|----------------------------------------------------------- | ---- | ------------
|ASSETS                                                      |      |             
|CURRENT ASSETS                                              |     
|Cash and cash equivalents                                   |      | $  2,206,701
|Accounts receivable, less allowance for doubtful accounts   |     
|of $35,759 in 2002 and $212,750 in 2001                     |      | 9,450,308   
|Other receivables, less allowance for doubtful accounts of  |     
|$150,000 in 2002 and $-0- in 2001                           |      | 649,219     
|Inventory, less valuation allowance of $141,696 in 2002 and |     
|$100,527 in 2001                                            |      | 1,752,030   
|Prepaid expenses                                            |      | 462,210     
|                                                            |      |             
|Total current assets                                        |      | 14,520,468  
|PROPERTY AND EQUIPMENT AT COST                              |     
|Furniture and fixtures                                      |      | 473,795     
|Leasehold improvements                                      |      | 48,477      
|Computer equipment and software                             |      | 787,048     
|Demonstration equipment                                     |      | 544,834     
|                                                            |      |             
|                                                            |      | 1,854,154   
|Less accumulated depreciation and amortization              |      | 792,678     
|                                                            |      |             
|                                                            |      | 1,061,476   
|OTHER ASSETS                                                |     
|Goodwill, net of accumulated amortization of                |     
|$384,407 in 2002 and 2001                                   |      | 18,846,703  
|Other                                                       |      | 137,402     
|                                                            |      |             
|                                                            |      | 18,984,105  
|                                                            |      |             
|                                                            |      | $34,566,049 
|                                                            |      |             
|                                                            |      |             

The
accompanying notes are an integral part of these statements.

F-2

---

# SAN
Holdings, Inc.

CONSOLIDATED
BALANCE SHEETS  CONTINUED

December
31,

|                                                             | 2002 | 2001        
|------------------------------------------------------------ | ---- | ------------
|LIABILITIES                                                  |      |             
|CURRENT LIABILITIES                                         
|                                                             |      |             
|Accounts payable                                             |      | $ 10,969,592
|Accrued expenses                                             |      | 1,518,167   
|Deferred revenue                                             |      | 380,767     
|Line of credit                                               |      | 4,265,928   
|Other short-term debt                                        |      | --          
|                                                             |      |             
|Total current liabilities                                    |      | 17,134,454  
|COMMITMENTS AND CONTINGENCIES                                |      | --          
|STOCKHOLDERS EQUITY                                         |     
|Preferred stock, no par value; 10,000,000 shares authorized; |     
|none issued and outstanding                                  |      | --          
|Common stock, no par value; 75,000,000 shares authorized;    |     
|issued and outstanding, 38,269,102 shares in 2002 and        |     
|37,022,624 shares in 2001                                    |      | 31,593,389  
|Accumulated deficit                                          |      | (14,161,794 
|                                                             |      |             
|Total stockholders' equity                                   |      | 17,431,595  
|                                                             |      |             
|                                                             |      | $ 34,566,049
|                                                             |      |             
|                                                             |      |             

The
accompanying notes are an integral part of these statements.

F-3

---

# SAN
Holdings, Inc.

CONSOLIDATED
STATEMENTS OF OPERATIONS

For
the years ended December 31,

|                                                               | 2002 | 2001           
|-------------------------------------------------------------- | ---- | ---------------
|
|Sales                                                          |      | $ 32,329,505   
|Maintenance contract fees, net                                 |      | 673,004        
|                                                               |      |                
|                                                               |      | 33,002,509     
|Cost of sales                                                  |      | 25,714,406     
|                                                               |      |                
|Gross profit                                                   |      | 7,288,103      
|General and administrative expenses                            |      | 9,263,513      
|Litigation settlement                                          |      | --             
|Depreciation and amortization                                  |      | 1,030,692      
|                                                               |      |                
|                                                               |      | 10,294,205     
|                                                               |      |                
|Loss from operations                                           |      | (3,006,102     
|Other income (expense)                                         |     
|Interest expense                                               |      | (196,257       
|Interest income                                                |      | 9,181          
|Other income                                                   |      | 162,444        
|Other expenses                                                 |      | --             
|                                                               |      |                
|                                                               |      | (24,632        
|                                                               |      |                
|NET LOSS                                                       |      | $(3,030,734    
|                                                               |      |                
|                                                               |      |                
|Loss per common share - basic and diluted                      |      | $         (0.08
|                                                               |      |                
|                                                               |      |                
|Weighted average common shares outstanding - basic and diluted |      | 37,925,779     
|                                                               |      |                
|                                                               |      |                

The
accompanying notes are an integral part of these statements.

F-4

---

# SAN
Holdings, Inc.

CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

For the years
ended December 31, 2002 and 2001

|                                   | Common stock      Shares                      Amount | Accumulateddeficit | Total |              
|---------------------------------- | ---------------------------------------------------- | ------------------ | ----- | -------------
|Balances at January 1, 2001        |                                                      | 9,300,874          |       | $   9,888,902
|Sale of common stock, net of       |                                                     
|placement costs of $699,167        |                                                      | 8,960,488          |       | 4,848,115    
|Issuance of stock warrants         |                                                      | --                 |       | 170,500      
|Acquisitions of businesses         |                                                     
|ITIS                               |                                                      | 18,511,262         |       | 15,850,298   
|Other acquisitions                 |                                                      | 250,000            |       | 200,000      
|                                   |                                                      |                    |       |              
|                                   |                                                      | 18,761,262         |       | 16,050,298   
|Net loss                           |                                                      | --                 |       | --           
|                                   |                                                      |                    |       |              
|Balances at December 31, 2001      |                                                      | 37,022,624         |       | 30,957,815   
|Sale of common stock, net of       |                                                     
|placement costs of $119,164        |                                                      | 1,415,694          |       | 798,018      
|Shares acquired in connection with |                                                     
|litigation settlement              |                                                      | (169,216           | )     | (162,444     
|Net loss                           |                                                      | --                 |       | --           
|                                   |                                                      |                    |       |              
|Balances at December 31, 2002      |                                                      | 38,269,102         |       | $ 31,593,389 
|                                   |                                                      |                    |       |              
|                                   |                                                      |                    |       |              

The
accompanying notes are an integral part of these statements.

F-5

---

# SAN
Holdings, Inc.

CONSOLIDATED
STATEMENTS OF CASH FLOWS

For
the years ended December 31,

|                                                  | 2002 | 2001       
|------------------------------------------------- | ---- | -----------
|
|Cash flows from operating activities:             |      |            
|Net loss                                          |      | $(3,030,734
|Adjustments to reconcile net loss to net cash     |     
|provided by (used in) operating activities        |     
|Depreciation and amortization                     |      | 1,030,692  
|Litigation settlement                             |      | --         
|Other                                             |      | (137,444   
|Changes in operating assets and liabilities,      |     
|net of acquisitions                               |     
|Accounts receivable                               |      | (3,052,393 
|Other receivables                                 |      | (383,584   
|Inventory                                         |      | 1,141,124  
|Prepaid expenses                                  |      | (308,564   
|Accounts payable                                  |      | 62,589     
|Accrued expenses                                  |      | (1,176,744 
|Deferred revenue                                  |      | (1,742,502 
|                                                  |      |            
|Net cash provided by (used in) operating          |     
|activities                                        |      | (7,597,560 
|Cash flows from investing activities              |     
|Acquisitions of businesses, net of cash acquired  |      | --         
|Maturity of certificate of deposit and investment |     
|securities                                        |      | --         
|Notes receivable                                  |      | --         
|Purchase of property and equipment                |      | (188,822   
|Purchase of other assets                          |      | (191,235   
|Deposits                                          |      | --         
|Preacquisition advance to ITIS Services, Inc.     |      | --         
|                                                  |      |            
|Net cash provided by (used in)                    |     
|investing activities                              |      | (380,057   

The
accompanying notes are an integral part of these statements.

F-6

---

# SAN
Holdings, Inc.

CONSOLIDATED
STATEMENTS OF CASH FLOWS  CONTINUED

For
the years ended December 31,

|                                                    | 2002 | 2001            
|--------------------------------------------------- | ---- | ----------------
|
|Cash flows from financing activities                |      |                 
|Proceeds from issuance of common stock and warrants |      | $    798,018    
|Net proceeds from line of credit                    |      | 4,265,928       
|Payments on notes payable                           |      | (200,349        
|Loan origination fees paid                          |      | --              
|                                                    |      |                 
|Net cash provided by financing activities           |      | 4,863,597       
|                                                    |      |                 
|Net increase (decrease) in cash and cash            |     
|equivalents                                         |      | (3,114,020      
|Cash and cash equivalents at beginning of year      |      | 5,320,721       
|                                                    |      |                 
|Cash and cash equivalents at end of year            |      | $ 2,206,701     
|                                                    |      |                 
|                                                    |      |                 
|Supplemental disclosure of cash flow information:   |     
|Cash paid during period for:                        |     
|Interest                                            |      | $    147,031    
|Supplemental disclosure of non-cash investing and   |     
|financing activities:                               |     
|Acquisitions of businesses                          |     
|Assets acquired                                     |      | $             --
|Notes payable issued                                |      | --              
|Cash received, net of cash acquired                 |      | --              
|Common stock issued                                 |      | --              
|                                                    |      |                 
|Liabilities assumed                                 |      | $             --
|                                                    |      |                 
|                                                    |      |                 

The
accompanying notes are an integral part of these statements.

F-7

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

December
31, 2002 and 2001

NOTE
A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

| | SAN
Holdings, Inc. (the Company), a Colorado corporation, was formed on July 1,
1983. The Company operates a single business segment, which sells and installs
computer data storage systems and provides related services throughout the
United States.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

Principles
of Consolidation

| | The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances are eliminated in consolidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cash
Equivalents

| | For
the purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased with a maturity of three months or less to be cash
equivalents.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Significant
Customers

| | In
2002, no single customer accounted for more than 10% of total revenue. However,
various separate branches within the United States Department of Defense taken
together accounted for approximately 35% of total revenue in 2002. In 2001,
three customers accounted for 29%, 13% and 11% of total revenue.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Allowance
for Doubtful Accounts

| | The
majority of the Companys accounts receivable are due from governmental and
commercial entities. Credit is extended based on evaluation of the
customers financial condition and, generally, collateral is not required.
Accounts receivable are generally due within 30 to 60 days and are stated at
amounts due from customers net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Companys previous loss history, the customers current ability to pay
its obligation to the Company, and economic and industry conditions. The Company
writes off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Credit losses have consistently been within managements
expectations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Inventory

| | Inventories
are stated at the lower of cost or market, with cost determined principally by  the
first-in, first-out method.
| | ---------------------------------------------------------------------------------------------------------------------------

F-8

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December
31, 2002 and 2001

NOTE
A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued

Property
and equipment

| | Property
and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of three to seven years or
for leasehold improvements, the lesser of such period or the life of the lease.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Goodwill

| | The
Company adopted SFAS 142, Goodwill and Other Intangible Assets,
effective January 1, 2002 and has identified one reporting unit. In accordance
with SFAS 142, the Company discontinued recording goodwill amortization
effective January 1, 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
142 requires that goodwill be tested for impairment on an annual basis and
between annual tests in certain circumstances. The performance of the test
involves a two-step process. The first step of the impairment test involves
comparing the fair value of the Companys reporting unit with the reporting
units carrying amount, including goodwill. If the carrying amount of the
Companys reporting unit exceeds its fair value, the Company performs the
second step to determine the amount of the impairment loss. The impairment loss
is determined by comparing the implied fair value of the Companys goodwill
with the carrying amount of that goodwill.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Impairment
of long-lived assets

| | The
Company evaluates the carrying value of long-lived assets, including goodwill,
annually and whenever events or changes in circumstances indicate the carrying
amount may not be fully recoverable. If the total of the expected future
undiscounted cash flows is less than the carrying amount of the asset, a loss is
recognized based on the amount by which the carrying value exceeds the
assets fair market value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial
Instruments

| | The
fair values of the Companys financial instruments, consisting of cash and
cash equivalents, accounts receivable, and debt approximate their
carrying values.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenue
Recognition

| | The
Companys revenue is derived primarily from two sources: (i) the resale and
installation of data storage systems, which consist of computer hardware and
software, and data storage related services; and (ii) revenue from the resale of
maintenance agreements on data storage devices.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
from the resale and installation of data storage systems is recognized upon
completion of delivery and, where applicable, any material service obligations,
provided that no significant uncertainties regarding customer acceptance exist
and collection is probable.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
from the resale of computer software is recognized when: (i) the Company enters
into a legally binding arrangement with the customer for the license of
software; (ii) delivery of the software has occurred; (iii) customer payment is
fixed or determinable and free of contingencies or significant uncertainties;
and (iv) collection is probable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Service
revenue is recognized as the related services are completed.
| | --------------------------------------------------------------------

F-9

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December
31, 2002 and 2001

NOTE
A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued

| | The
Company does not currently perform a material portion of the maintenance
services when it resells maintenance agreements on computer hardware and
software. Accordingly, revenue from the resale of all maintenance agreements is
currently recognized net of the cost to acquire the related maintenance
agreements from the hardware and software vendors, at the beginning of the
maintenance period. The Company anticipates that in the future it may begin
performing a portion of the maintenance services with respect to some or all of
the maintenance contracts that it sells. If it should begin performing such a
portion of the maintenance services, the company anticipates that it will
recognize the gross sale price of the applicable maintenance contracts as
revenue, and defer and recognized such revenue over the contractual terms of the
maintenance agreements. The cost to acquire such maintenance agreements from the
hardware and software vendors would likewise be deferred and amortized over the
contractual terms of the maintenance agreements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Use
of Estimates

| | In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company evaluates the realizibility of goodwill based on managements best
estimates of future cash flows from operations. However, the Company
participates in a highly competitive industry that is characterized by
aggressive pricing practices, and price sensitivity and changing demands of
customers. As a result, it is at least reasonably possible that the estimates
used by the Company to evaluate the realizibility of goodwill will be materially
different from actual amounts or results. These differences could result in the
impairment of all or a portion of the Companys goodwill, which could have
a materially adverse effect on the Companys results of operations and
financial position.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock-Based
Compensation

| | The
Company accounts for stock-based compensation to employees using the intrinsic
value method. Accordingly, compensation cost for employee stock options is
measured as the excess, if any, of the quoted market price of the Companys
common stock at the date of grant over the exercise prices.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December
31, 2002 and 2001

NOTE
A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued

| | If
the fair value method had been applied in measuring stock compensation expense,
the pro forma effect in net loss and net loss per share would have been as
follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year
ended December 31,

| |  | 2002                                   | 2001
| |  | -------------------------------------- | ----
| |  | Net loss                               |     
| |  | As reported                            |     
| |  | Stock compensation expense             |     
| |  |                                        |     
| |  | Pro forma                              |     
| |  |                                        |     
| |  |                                        |     
| |  | Net loss per share - basic and diluted |     
| |  | As reported                            |     
| |  | Pro forma                              |     

| | See
Note H for the assumptions and methodology used to determine the fair value of
stock-based compensation.
| | ------------------------------------------------------------------------------------------------------------

Earnings
(Loss) Per Share>

| | The
Company computes basic earnings (loss) per share based on the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed using the weighted-average number of common shares outstanding plus the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. For the years ended December 31, 2002
and 2001, all potential common shares were anti-dilutive.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

New
Accounting Pronouncements

| | In
June 2001, the Company adopted Statement of Financial Accounting Standards No.
141 (SFAS 141), Business Combinations. This standard eliminated the
pooling method of accounting for business combinations initiated after June 30,
2001. In addition, SFAS 141 addresses the accounting for intangible assets and
goodwill acquired in a business combination. The adoption of SFAS 141 did not
have a material effect on the Companys financial position, results of
operations or cash flows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Intangible Assets, which
clarified the accounting for impairments to purchased goodwill and intangible
assets. Under SFAS 142, goodwill and intangible assets with indefinite lives are
no longer amortized, but are tested for impairment annually and also in the
event of an impairment indicator.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December
31, 2002 and 2001

NOTE
A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued

| | Net
loss and loss per share for the year ended December 31, 2001, adjusted to  exclude
amortization expense, is as follows:
| | ---------------------------------------------------------------------------------------------------------------------------

| |  | Year ended December 31,                        | 
| |  | ---------------------------------------------- | 
|
| |  | Net loss - as reported                         | 
| |  | Goodwill amortization                          | 
| |  |                                                | 
| |  | Net loss - as adjusted                         | 
| |  |                                                | 
| |  |                                                | 
| |  | Basic and diluted loss per share - as reported | 
| |  | Goodwill amortization                          | 
| |  |                                                | 
| |  | Basic and diluted loss per share as adjusted   | 
| |  |                                                | 
| |  |                                                | 

| | On
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144 (SFAS 144), Accounting for the Impairment or Disposal of
Long-Lived Assets.This standard addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The adoption of
SFAS 144 did not have a material effect on the Companys financial position
or result of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

New
Accounting Pronouncements Not Yet Adopted

| | Accounting
for Costs Associated with Exit or Disposal Activities. In June 2002, the FASB
issued Statement 146, Accounting for Costs Associated with Exit or
Disposal Activities. This statement requires entities to recognize costs
associated with exit or disposal activities when liabilities are incurred rather
than when the entity commits to an exit or disposal plan, as currently required.
Examples of costs covered by this guidance include one-time employee termination
benefits, costs to terminate contracts other than capital leases, costs to
consolidate facilities or relocate employees, and certain other exit or disposal
activities. This statement is effective for fiscal years beginning after
December 31, 2002, and will impact any exit or disposal activities the Company
initiates after that date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock-Based
Employee Compensation. In December 2002, the FASB issued Statement 148 (SFAS
148), Accounting for Stock-Based Compensation  Transition and
Disclosure: an amendment of FASB Statement 123 (SFAS 123), to provide
alternative transition methods for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in annual financial statements about the method of accounting for
stock-based employee compensation and the pro forma effect on reported results
of applying the fair value based method for entities that use the intrinsic
value method of accounting. The pro forma effect disclosures are also require to
be prominently disclosed in interim period financial statements. This statement
is effective for financial statements for fiscal years ending after December 15,
2002 and is effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002, with
earlier application permitted. The Company does not plan to change to the fair
value based method of accounting for stock-based employee compensation at this
time and have included the disclosure requirements of SFAS 148 in these
financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December
31, 2002 and 2001

NOTE
A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued

Changes in Accounting
Policy Regarding Maintenance Contract Revenues

| | Prior
to the fourth quarter of 2002, the Company accounted for the sales of
hardware and software maintenance agreements on a gross basis. In the fourth
quarter of 2002, management concluded that the portion of the maintenance
service the Company provided to the customer was not material when compared to
the service provided by the manufacturer, and accordingly concluded that the
Company should report maintenance revenue on a net basis. Accordingly,
maintenance revenue for the year ended December 31, 2002 has been presented net
of costs. Revenues and cost of sales for 2001 have been restated to present
maintenance revenue on a net basis. The effect of this change is to reduce
previously reported revenue and cost of sales by $2,374,000
for 2001.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE
B  CREDIT RISK AND CONCENTRATIONS

| | The
Company provides credit in the normal course of business to customers throughout
the United States. The Company currently performs ongoing credit evaluations of
its customers. For the year ended December 31, 2002, one customer accounted for
10% of the Companys revenues. For the year ended December 31, 2001, three
customers accounted for 29%, 13% and 11% of the Companys revenues.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE
C  ACQUISITIONS OF BUSINESSES

| | In
October 2001, the Company acquired certain assets of ECOSoftware Systems in
exchange for $150,000, a note payable in the amount of $80,000 and 250,000
shares of the Companys common stock valued at $200,000. The Company
recorded goodwill of approximately $500,000 on this acquisition which was
accounted for using the purchase method of accounting.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
December 31, 2001, the Company acquired all of the outstanding stock of ITIS
Services, Inc. (ITIS) in exchange for 18,511,262 shares of the Companys
common stock valued at $13,883,446, options to acquire 3,315,050 shares of the
Companys common stock valued at $1,966,852, and $330,466 of acquisition
costs. The acquisition of ITIS gives the Company a greater market presence in
the eastern United States. ITIS sells and installs computer data storage systems
throughout the eastern United States. In 2001, the Company recorded goodwill of
$16,180,714 in connection with the ITIS acquisition which was accounted for
using the purchase method of accounting. The purchase price and purchase price
allocation are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |                                   
| |  | ----------------------------------
| |  | Fair value of common stock issued 
| |  | Fair value of stock options issued
| |  | Acquisition costs                 
| |  |                                   
| |  | Total purchase price              
| |  |                                   
| |  |                                   

F-13

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December
31, 2002 and 2001

NOTE
C  ACQUISITIONS OF BUSINESSES  Continued

| | Estimated
fair value of assets acquired:
| | ----------------------------------------

|                               | 
|------------------------------ | 
|Cash                           | 
|Accounts receivable            | 
|Inventory                      | 
|Property and equipment         | 
|Other assets                   | 
|                               | 
|                               | 
|Accounts payable               | 
|Accrued expenses               | 
|Note payable                   | 
|                               | 
|Value of net tangible assets   | 
|Value of net intangible assets | 
|                               | 
|                               | 
|                               | 
|                               | 
|                               | 

During the year
ended December 31, 2002, goodwill related to the ITIS acquisition increased by $142,256
due to  additional acquisition costs incurred in fiscal 2002.

NOTE
D  FINANCING ARRANGEMENT

| | The
Company has a revolving credit facility (the Facility) which permits the Company
to borrow up to $5 million, subject to availability under its borrowing
base. At December 31, 2002, $4,265,928 was outstanding. The Facility bears
interest at prime plus 3% (7.25% at December 31, 2002), expires in May 2005 and
requires the maintenance of certain financial covenants. The facility is secured
by certain assets of a subsidiary of the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2002, the Company was in violation of the net worth covenant under
the Facility. At March 31, 2003, the Company was again in violation of the
covenants regarding net worth and maximum net loss, and is currently negotiating
with its lender to establish new covenants and to obtain a waiver of the
existing default. At March 31, 2003, the outstanding loan balance was $1.6
million and the Company had had $2.7 million of undrawn availability on the loan
facility based on its eligible collateral at that date. Based on discussions
with the lender to date, management believes that the Company will be able to
obtain such a waiver and that it will be able thereafter to maintain compliance
with the new covenants once they have been set. If, contrary to that belief, the
lender were to exercise its right to declare the loan in default on the basis of
the Companys failure to meet these covenants at March 31, 2003, the
Company believes its credit availability from other sources would be adequate to
repay the loan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the acquisition of Solunet Storage, Inc. (Solunet Storage) in
April 2003, the Company has additional credit availability in the form of a $10
million revolving loan facility maintained by Solunet Storage. At March 31,
2003, Solunet Storage had drawn $4.8 million on that facility, and had $1.2
million of undrawn availability on that facility based on Solunet Storages
eligible collateral at that date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE
E  INCOME TAXES

| | Following
is a reconciliation of income tax expense at the statutory federal income tax
rate of 34% to the actual income tax expense:
| | -------------------------------------------------------------------------------------------------------------------------------------

| |  | 2002                                 | 2001
| |  | ------------------------------------ | ----
| |  | Income tax benefit at statutory rate |     
| |  | Nondeductible expenses               |     
| |  | Increase in valuation reserve        |     
| |  | Other                                |     
| |  |                                      |     
| |  |                                      |     
| |  |                                      |     
| |  |                                      |     

F-14

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December
31, 2002 and 2001

NOTE
E  INCOME TAXES  Continued

| | Deferred
income tax assets and liabilities reflect the tax consequences on future years
of differences between the tax basis of assets and liabilities and their basis
for financial reporting purposes. Temporary differences that give rise to
deferred tax assets are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 | December 31, |                 
|-------------------------------- | ------------ | ----------------
|
|Net operating loss carryforwards |              | $ 4,596,611     
|Accounts receivable              |              | 46,158          
|Investments                      |              | --              
|Other                            |              | 39,242          
|                                 |              |                 
|Deferred tax assets              |              | 4,682,011       
|Valuation allowance              |              | (4,682,011      
|                                 |              |                 
|Net deferred tax asset           |              | $             --
|                                 |              |                 
|                                 |              |                 

| | At
December 31, 2002, the Company has net operating loss carryforwards available to
offset future federal taxable income of approximately $13,500,000. Such
carryforwards expire principally in 2021 and 2022.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the significant net losses incurred in 2002 and 2001, the Company
recorded a valuation allowance to fully reserve its deferred tax assets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE
F  COMMITMENTS AND CONTINGENCIES

| | As
of December 31, 2002, the Company had long-term noncancelable lease agreements
for office space with the following minimum commitments:
| | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | Amount
| |  | ------
|
| |  | 2003  
| |  | 2004  
| |  | 2005  
| |  | 2006  
| |  |       
| |  |       
| |  |       
| |  |       

| | In
December 2001, the Company settled all of its litigation with 3Si Holdings, Inc.
(3Si) and XS Data Inc. (XS Data) by forgiving certain accounts receivable owed
by 3Si and XS Data and the release of a pledge on certain shares of 3Si common
stock. During the year ended December 31, 2001, the Company recorded a charge of
$1,384,419 related to these matters.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December
31, 2002 and 2001

NOTE
F  COMMITMENTS AND CONTINGENCIES  Continued

| | The
Company is engaged in the defense of certain claims and lawsuits arising out of
the ordinary course and conduct of its business, the outcome of which is not
determinable at this time. In the opinion of management, any liability that
might be incurred by the Company upon the resolution of these claims and
lawsuits will not, in the aggregate, have a material adverse effect on the
Companys consolidated results of operations, cash flows or financial
condition.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE
G  STOCKHOLDERS EQUITY

Private
Placements

| | In
June 2001, the Company completed a private placement of 8,960,488 shares of
common stock, warrants to purchase 2,207,747 shares of common stock at $.625 per
share and warrants to purchase 2,207,747 shares of common stock at $1.25 per
share for net proceeds of $4,848,115 (net of offering costs of $699,167).
Additionally, the Company issued warrants to purchase 1,156,942 shares of common
stock at $.625 per share and warrants to purchase 271,000 shares of common stock
at $1.15 per share for sales commissions incurred in connection with the private
placement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2002, the Company completed a private placement of units, at $6,800 per
unit, for net proceeds of $798,018 (net of offering costs of $119,164). Each
unit consisted of 10,000 shares of common stock and a five-year warrant to
purchase 2,000 shares of common stock at $.85 per share. In addition, the
Company issued 65,694 shares of common stock as commissions incurred in
connection with the private placement. A total of 1,415,694 shares and 431,450
warrants, including those issued as placement agent compensation, were issued.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock
options

| | On
September 20, 2001, the Company approved the 2001 Stock Option Plan (2001 Plan).
The total number of shares of common stock subject to options under this plan
may not exceed 5,000,000 shares. Options granted under the plan vest generally
over three to ten years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2001, 5,000,000 and 282,000 shares of common stock were reserved
for future grants under the 2001 Plan and 2000 Plan, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has adopted only the disclosure provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-based
Compensation, for employee stock options and continues to apply Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, for recording stock options granted.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 2002 and 2001, respectively: dividend
yield of 0% for all periods; volatility of 105% and 105%; risk-free interest
rates of 2.6% and 4.1% and expected lives of one to five years. The weighted
average fair value of options granted were $.29 and $.80 per share during
fiscal 2002 and 2001, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December
31, 2002 and 2001

NOTE
G  STOCKHOLDERS EQUITY  Continued

| | Option
activity for the two years ended December 31, 2002 is summarized as follows:
| | -----------------------------------------------------------------------------------

|                                 | Number of SharesUnderlying Options | Weighted AverageExercise Price
|-------------------------------- | ---------------------------------- | ------------------------------
|Outstanding at January 1, 2001   |                                    | 1,404,499                     
|Granted                          |                                    | 7,205,050                     
|Forfeited                        |                                    | (1,492,604                    
|                                 |                                    |                               
|Outstanding at December 31, 2001 |                                    | 7,116,945                     
|Granted                          |                                    | 1,218,000                     
|Forfeited                        |                                    | (1,793,065                    
|                                 |                                    |                               
|Outstanding at December 31, 2002 |                                    | 6,541,880                     
|                                 |                                    |                               
|                                 |                                    |                               
|Exercisable at December 31, 2001 |                                    | 1,088,561                     
|                                 |                                    |                               
|                                 |                                    |                               
|Exercisable at December 31, 2002 |                                    | 4,192,548                     
|                                 |                                    |                               
|                                 |                                    |                               

| | Further
information regarding options outstanding and options exercisable at December  31, 2002
is summarized below:
| | --------------------------------------------------------------------------------------------------------------------

|                 | Options Outstanding | Options Exercisable |  |     | 
|---------------- | ------------------- | ------------------- |  | --- | 
|
|$.29 to $.50     |                     | 1,210,000           |  | 9.6 | 
|$.51 to $1.00    |                     | 3,340,159           |  | 8.5 | 
|$1.01 to $1.50   |                     | 654,826             |  | 7.5 | 
|$1.51 to $2.00   |                     | 600,000             |  | 8.5 | 
|$2.01 to $2.50   |                     | 666,895             |  | 4.9 | 
|$10.00 to $11.00 |                     | 70,000              |  | 2.3 | 
|                 |                     |                     |  |     | 
|                 |                     | 6,541,880           |  | 8.2 | 
|                 |                     |                     |  |     | 
|                 |                     |                     |  |     | 

F-17

---

# SAN
Holdings, Inc.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December
31, 2002 and 2001

NOTE
G  STOCKHOLDERS EQUITY  Continued

| | Warrant
activity for the two years ended December 31, 2002 is summarized as follows:
| | ------------------------------------------------------------------------------------

|                                 | Number of SharesUnderlying Warrants | Weighted AverageExercise Price
|-------------------------------- | ----------------------------------- | ------------------------------
|Outstanding at January 1, 2001   |                                     | 1,250,000                     
|Granted                          |                                     | 6,743,436                     
|Exercised                        |                                     | (1,000,000                    
|                                 |                                     |                               
|Forfeited                        |                                    
|Outstanding at December 31, 2001 |                                     | 6,993,436                     
|Granted                          |                                     | 506,442                       
|Forfeited                        |                                     | (150,000                      
|                                 |                                     |                               
|Outstanding at December 31, 2002 |                                     | 7,349,878                     
|                                 |                                     |                               
|                                 |                                     |                               
|Exercisable at December 31, 2001 |                                     | 6,993,436                     
|                                 |                                     |                               
|                                 |                                     |                               
|Exercisable at December 31, 2002 |                                     | 7,349,878                     
|                                 |                                     |                               
|                                 |                                     |                               

| | In
2001, a warrant to purchase 100,000 shares of common stock at $1.00 per share,
valued at $51,000, in connection with the acquisition of assets and warrants to
purchase 500,000 shares of common stock at $1.00 to $2.00 per share, with a fair
value of $186,000, as consideration for certain consulting services. The
warrants issued to non-employees were valued by using the Black-Scholes option
pricing model with the following weighted average assumptions; dividend yield of
0%; volatility of 98%; risk free interest rate of 4.4%, and expected life of 2.6
years. The related expense was recorded at the date of grant, which approximated
the performance of the service.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE
I  DEFINED CONTRIBUTION PLAN

| | In
October 2001, the Company implemented a defined contribution plan covering all
employees who have three months of service with the Company. The Plan allows
participants to make voluntary pre-tax contributions, which are partially
matched by the Company. For the years ended December 31, 2002 and 2001, employer
contributions were approximately $60,000 and $93,000, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE
J  SUBSEQUENT EVENT

| | On
March 31, 2003, the Company entered into a definitive agreement to acquire
Solunet Storage, Inc. (Solunet Storage). Consideration consisted of 20,000,000
shares of common stock, shares of preferred stock that are convertible into
37,403,653 shares of common stock, and warrants to purchase a maximum of
19,976,737 shares of common stock. In connection with this transaction, an
affiliate of the former majority shareholder of Solunet Storage committed to
guarantee $3,000,000 of debt of the Company. Such guaranty is currently in place
with respect to a $10,000,000 revolving loan facility of Solunet
Storage.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18

---

# PART
III

|Item 9. | Directors,
Executive Officers, Promoters and Control Persons; Compliance With Section  16(a) of the
Exchange Act
|------- | ----------------------------------------------------------------------------------------------------------------

Our
Directors are elected for one-year terms at the annual meeting of our
shareholders. The board of directors elects executive officers annually.

Pursuant
to the agreements under which we acquired Solunet Storage, two of our directors
(Fred Busk and William Hipp) resigned, and three other individuals (Messrs.
Leder, Krouse and Terry) were elected as Directors. Pursuant to those
agreements, we agreed to nominate (but have not yet nominated) as a director,
for election at the next annual meeting and thereafter through December 31,
2004, the designee of one shareholder, Hollger LLC, and shareholder Sun Solunet
LLC agreed to vote for that designee. We currently anticipate that Gary Holloway
will be designated by Hollger LLC. Pursuant to those agreements, we also agreed
to nominate (but have not yet nominated) the following additional persons as
directors: Benjamin Emmons, C. Daryl Hollis, David Kreilein, M. Steven Liff,
Michael Phelan and George Rae. Each of Messrs. Emmons, Kreilein, Krouse, Leder,
Liff and Terry is an officer and employee of Sun Capital Partners, Inc., an
affiliate of Sun Solunet LLC, the principal shareholder of Solunet Storage prior
to our acquisition of that entity. Mr. Phelan was the president of Solunet
Storage prior to the acquisition. Except as described above, there are no other
arrangements or understandings between any officer or director and any other
person pursuant to which anyone was or is to be selected as an officer or
director.

Our
current directors and executive officers are as follows:

John
Jenkins, Age 53, Chairman and CEO since November 2000. From
January 1995 through June 2000, Mr. Jenkins was CEO, president and a director of
TAVA Technologies, Inc., where he led the build-out of a national systems
integration business. In 1999, all outstanding TAVA shares were sold in a cash
transaction approved by TAVA shareholders. From 1990 until he joined TAVA in
1995, he had served as president of Morgan Technical Ceramics, Inc., a
wholly-owned subsidiary of Morgan Crucible plc, a diversified industrial
products company based in England and publicly-traded on the London stock
exchange. From 1973 until 1990, Mr. Jenkins served in various capacities (most
recently as vice president and general manager) with the structural ceramic
division of Coors Ceramic Company, a subsidiary of Adolph Coors Company. Mr.
Jenkins holds a B.S. from the University of Washington and a J.D. from the
University of Denver.

Brendan
Reilly, Age 37, Chief Technology Officer and Director since
December 2001, pursuant to our acquisition agreement with ITIS Services, Inc. In
1998, Mr. Reilly a co-founded ITIS Services, a data storage solutions provider,
and served as its Executive Vice President and Chief Technology officer until
our acquisition of ITIS in 2001. Prior to founding ITIS, Mr. Reilly spent seven
years with EMC Corporation in various capacities, most recently as senior
territory manager. During the two years before joining EMC, he co-founded and
operated Veritas International Trading Company, an import-export company
conducting East Asian trade for companies such as LL Bean, Starter and Redman.
Mr. Reilly earned his undergraduate degree in Business Marketing from Providence
College.

Robert
K. Brooks, Age 59, Director since June 2000. Mr. Brooks has over
30 years of experience in the information technology industry, having held
positions in recruiting, sales and management. In June 1993, he became chairman
and managing partner of The Systems Group and Technical Directions, Inc., after
it merged with his contract programming, consulting and project management firm.
In January 1995, The Systems Group was acquired by ACS Technology Solutions, a
wholly owned subsidiary of Affiliated Computer Services, an international IT
services company (NYSE:ACS). From June 1995 through December 1999, Mr. Brooks
served as senior vice president of Affiliated Computer Services and as executive
vice president of ACS Technology Solutions, Inc. Currently, he is a director of
Cornus Corporation of Medford, Oregon, a privately held desktop software
products company. He received a Bachelor of Science Degree in Psychology from
the University of New Mexico.

Marc J.
Leder, Age 41, Director since April 2003, pursuant to our acquisition agreement
with Solunet Storage. Mr. Leder has served as a managing director of Sun Capital
Partners, Inc., a private investment firm, since May 1995. Prior to founding Sun
Capital Partners (with Mr. Krouse) in 1995, Mr. Leder served in various capacities with
Lehman Brothers, an investment bank based in New York City, most recently as Senior Vice
President. Mr. Leder also currently serves as a director of Catalina Lighting, Inc.,
Northland Cranberries, Inc., Celebrity, Inc., and Mackie Designs, Inc., all of which are
publicly held companies, and as a director of a number of private companies.

20

---

Rodger R.
Krouse, Age 41, Director since April 2003, pursuant to our acquisition agreement
with Solunet  Storage. Mr. Krouse has served as a managing director of Sun Capital
Partners, Inc., a private investment  firm, since May 1995.  Prior to founding Sun
Capital Partners (with Mr. Leder) in 1995, Mr. Krouse served in  various capacities with
Lehman Brothers, an investment bank based in New York City, most recently as Senior  Vice
President. Mr. Krouse also currently serves as a director of Catalina Lighting, Inc.,
Northland  Cranberries, Inc., Celebrity, Inc., and Mackie Designs, Inc., all of which are
publicly held companies, and as  a director of a number of private companies.

Clarence
Terry, Age 56, Director since April 2003, pursuant to our acquisition
agreement with Solunet Storage.  Mr. Terry has served as a managing director of Sun
Capital Partners, Inc., a private investment firm, since  September 1999. From October
1973 to September 1999, Mr. Terry was principally employed as vice president of  Rain
Bird Sprinkler Manufacturing Corporation, a leading irrigation manufacturer.  Currently,
he also serves  as a  director of Catalina Lighting, Inc., Northland Cranberries, Inc.,
Celebrity, Inc., and Mackie Designs,  Inc., all of which are publicly held companies, and
as a director of a number of private companies.

Michael
J. Phelan, Age 46, President and Chief Operating Officer,joined
SANZ in April 2003 pursuant to our acquisition agreement with Solunet Storage,
where he had served as President and Chief Executive Officer since the formation
of Solunet Storage in September 2002. Mr. Phelan has been involved in sales and
management in the computer and UNIX marketplace since 1980, and entered the data
storage business in 1990 when he founded StorNet, Inc. He served as President
and Chairman of the Board of StorNet until the merger of that company with
Vanguard Technologies in 2000. Following the merger with Vanguard, Mr. Phelan
became a consultant to resulting company but ceased participation in daily
operations for a period to pursue personal interests. In late 2001, at the
request of the then-current management of StorNet, Mr. Phelan re-joined the
company as its Acting Chief Executive Officer, a position he held until the sale
of StorNets assets to Sun Storage. Mr. Phelan serves on the advisory
boards of a variety of academic and philanthropic organizations. Mr. Phelan
holds a B.S. from West Chester University.

Hugh A. OReilly, Age
39, Chief Financial Officer, General Counsel and Senior Vice President, Finance and
Legal, joined SANZ in December 2001 pursuant to our acquisition agreement with ITIS
Services, where he had  served as Chief Financial Officer and General Counsel. Mr.
OReilly joined ITIS in October 2000. Prior to  joining ITIS, Mr. OReilly was a partner
at Nutter, McClennen & Fish LLP, a law firm based in Boston,  Massachusetts, where he
practiced corporate law for eleven years and served as the primary outside counsel for
ITIS. Mr. OReilly holds a J.D. from Vanderbilt University and an A.B in English from
Dartmouth College. Mr.  OReilly and Mr. Reilly are related by marriage.

Chris
M. Wilkes, Age38, Executive Vice President,joined SANZ in April
2003 pursuant to our acquisition agreement with Solunet Storage, where he served
as Executive Vice President since the formation of Solunet Storage in September
2002. From December 2001 until Solunet Storages acquisition of the assets
of StorNet, Inc. in September 2002, Mr. Wilkes served as Vice President of
Managed Services for StorNet, Inc. Prior to joining StorNet, Inc., Mr. Wilkes
was the Director of Sales of Managed Storage International, a storage services
provider, which he joined in 2000. From 1996 until he joined Managed Storage
International, Mr. Wilkes was General Manager  South/Central District for
Pioneer Standard Electronics, a computer equipment reseller and
distributor.  Mr. Wilkes holds an MBA from Texas A & M University, and
BBA in Marketing from Texas Tech University.

Board
Committees

The
Board of Directors has established a compensation committee and an audit
committee. Until the resignation of William Hipp in April 2003 pursuant to the
agreements under which we acquired Solunet Storage, each of these committees
consisted of Mr. Hipp and Mr. Brooks. A replacement for Mr. Hipp has yet to be
named. The prior audit committee members were independent, and when Mr.
Hipps post is filled the audit committee members will be independent, as
defined by the National Association of Securities Dealers listing
standards.

21

---

Section
16(a) Beneficial Reporting Compliance

Based
on a review of filings with the SEC, as well as copies of the reports and
written representations we received from directors and officers required to file
and their written representations, we believe that during the year ended
December 31, 2002, no Directors or officers were late in filing any reports
under Section 16 of the Securities Exchange Act.

Item
10. Executive Compensation.

# Summary
Compensation Table

The
following table sets forth information regarding compensation paid during the
past three fiscal years to our Chief Executive Officer and to any of the four
most highly compensated executive officers who earned total salary and bonus in
excess of $100,000 per year during the year ended December 31, 2002.

|                        |  | Annual Compensation |  |           |     |        
|----------------------- |  | ------------------- |  | --------- | --- | -------
|
|                       
|John Jenkins,           |  | 2002                |  | $227,400  |     | $23,950
|President and CEO       |  | 2001                |  | $188,469  |     | -0-    
|                        |  | 2000                |  | $  58,230 | (2) | -0-    
|                       
|Hugh A. O'Reilly,       |  | 2002                |  | $192,500  |     | -0-    
|Senior Vice President   |  |                     | 
|CFO and General Counsel |  | l                   | 
|                       
|Fred T. Busk, III,      | 
|Executive Vice          |  | 2002                |  | $195,900  |     | -0-    
|President and COO       | 
|                       
|Holly J. Burlage, CFO   |  | 2002                |  | $117,387  |     | $20,000
|                        |  | 2001                |  | $143,175  |     | -0-    
|                       

|(1) |  | Mr.
Jenkins became Chief Executive Officer and President in November 2000.
|--- |  | --------------------------------------------------------------------------

|(2) |  | Represents
compensation paid pursuant to consulting agreements.
|--- |  | ---------------------------------------------------------------

|(3) |  | These
options are exercisable at $.29 per share.
|--- |  | ------------------------------------------------

|(4) |  | These
options are exercisable at $2.25 per share
|--- |  | ------------------------------------------------

|(5) |  | Consists
solely of company matching contributions to 401(k) defined contribution plan, available
to  all employees of the company following 90 days of full time employment.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Mr.
Busk was our employee from January 1 through December 31, 2002, serving as Executive Vice
President and Chief Operating Officer until August, 2002.  Amounts shown represent
compensation for  services in all capacities.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Ms.
Burlage served as Chief Financial Officer until August, 2002.
|--- |  | -----------------------------------------------------------------

|(8) |  | These
warrants are exercisable at $.68 per share.
|--- |  | -------------------------------------------------

|(9) |  | Consists
of 100,000 warrants exercisable at $.81 per share, 100,000 warrants exercisable at $.89
per  share, 100,000 warrants exercisable at $1.00 per share, and 30,000 options,
exercisable at $2.25  per share, which expired prior to exercise.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

---

# Option and
Stock Appreciation Right Grants Table

The
following table sets forth information regarding the grant of options (including warrants
issued  as compensation) (and stock appreciation rights during the year ended December
31, 2002, to each of our  executive officers required to be named in the Summary
Compensation Table.

|Name              | Number of SecuritiesUnderlying Options/ SARsgranted (#) | Percent of total options/SARs granted to employeesin fiscal year (%) | Exercise orbase price($/Sh) | Expiration      date
|----------------- | ------------------------------------------------------- | -------------------------------------------------------------------- | --------------------------- | --------------------
|                 
|John Jenkins      |                                                         | 500,000                                                              |                             | 38                  
|                 
|Hugh A. OReilly  |                                                         | 200,000                                                              |                             | 15                  
|                 
|Fred T. Busk, III |                                                         | -0-                                                                  |                             | -0-                 
|                 
|Holly J. Burlage  |                                                         | 50,000                                                               |                             | 3                   
|                 

Aggregated
Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values

The
following table shows the number of shares underlying unexercised options
(including warrants issued as compensation) held at December 31, 2002 by each of
the executive officers required to be named in the Summary Compensation Table,
and the aggregate dollar value of in-the-money, unexercised options held at the
end of the fiscal year. SANZ has not granted any stock appreciation rights.

|Name                  | Number of unexercised options at FY-end (#)                exercisable/unexercisable | Value of unexercised in-the-moneyoptions at FY-end ($)
|--------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------
|                     
|John Jenkins, CEO     |                                                                                      | 300,000 / 500,000                                     
|Hugh A. OReilly, CFO |                                                                                      | 1,063,982 / 200,000                                   
|Fred T. Busk, III     |                                                                                      | 1,495,677 / 0                                         
|Holly J. Burlage      |                                                                                      | 350,000 / 0                                           
|                     

| | (1) | 300,000
of these options are exercisable at $2.25 per share, which is in excess of the market
price  of the shares at December 31, 2002.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

| | (2) | 576,871
of these options are exercisable at $.625 per share, and 287,111 of these options are
exercisable at $.70 per share, both of which prices are in excess of the market price of
the  shares at December 31, 2002.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | 1,345,677
of these options are exercisable at $.625 per share, which is in excess of the market
price  of the shares at December 31, 2002.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Includes
100,000  warrants are exercisable at $.81 per share, 100,000  warrants exercisable at
$.89  per share, 100,000  warrants exercisable at $1.00 per share, and 50,000 warrants
exercisable at  $.68 per share, all of which prices are in excess of the market price of
the shares at December  31, 2002.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Compensation
of Directors

We
paid no cash compensation and granted no options to our directors for their services as
directors  during 2002.

# Employment
Contracts and Termination of Employmentand Change in Control Arrangements

We
have three year employment agreements with Messrs. Jenkins, Reilly and OReilly which
require us to  continue paying their salaries for a period of 12 months following
termination of employment in the following  cases:

| | ° | if
the employee terminates his employment within 90 days following specified change of
control events,
| | - | ------------------------------------------------------------------------------------------------------

| | ° | if
the employee terminates his employment due to our material change of his employment
conditions; or
| | - | -----------------------------------------------------------------------------------------------------

| | ° | if
we terminate his employment agreement other than for cause.
| | - | --------------------------------------------------------------

23

---

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

The table below
reflects the number of shares beneficially owned as of April 4, 2003 by:

| | ° | each
person or group we believe to be the beneficial owner of more than five percent of our
shares;
| | - | ---------------------------------------------------------------------------------------------------

| | ° | each
director;
| | - | --------------

| | ° | all
executive officers required to be named in the Summary Compensation Table; and
| | - | ----------------------------------------------------------------------------------

| | ° | all
directors and executive officers as a group.
| | - | ------------------------------------------------

Beneficial
ownership includes shares  represented by all options that are exercisable within 60 days
after  April 4, 2002.

|Name and Address of Beneficial Ownerof Common Stock | Amount and Natureof Beneficial Ownership(1) | Percent ofClass (1)
|--------------------------------------------------- | ------------------------------------------- | -------------------
|John Jenkins                                        |                                             | 1,040,000          
|900 West Castleton Road, Suite 100                  |                                            
|Castle Rock, CO 80104                               |                                            
|                                                    |                                             |                    
|Brendan T. Reilly                                   |                                             | 4,839,117          
|50 Day Street                                       |                                            
|Norwalk, CT 06854                                   |                                            
|Hugh A. O'Reilly                                    |                                             | 1,319,593          
|50 Day Street                                       |                                            
|Norwalk, CT 06854                                   |                                            
|Robert K. Brooks                                    |                                             | 150,000            
|900 West Castleton Road, Suite 100                  |                                            
|Castle Rock, CO 80104                               |                                            
|Marc J. Leder                                       |                                             | 57,403,653         
|c/o Sun Capital Partners II, LP                     |                                            
|5200 Town Center Circle, Suite 470                  |                                            
|Boca Raton, FL 33486                                |                                            
|Rodger D. Krouse                                    |                                             | 57,403,653         
|c/o Sun Capital Partners II, LP                     |                                            
|5200 Town Center Circle, Suite 470                  |                                            
|Boca Raton, FL 33486                                |                                            
|Clarence Terry                                      |                                             | -0-                
|c/o Sun Capital Partners II, LP                     |                                            
|5200 Town Center Circle, Suite 470                  |                                            
|Boca Raton, FL 33486                                |                                            
|Michael J. Phelan                                   |                                             | 1,435,091          
|1109 Saunders Court                                 |                                            
|West Chester, PA 19380                              |                                            
|All executive officers and                          |                                             | 64,752,363         
|directors as a group (8 persons)                    |                                            
|Sun Solunet LLC(5)(8)                               |                                             | 57,403,653         
|c/o Sun Capital Partners II, LP(5)                  |                                            
|c/o Sun Capital Advisors II, LP(5)                  |                                            
|c/o Sun Capital Partners, LLC(5)                    |                                            
|5200 Town Center Circle, Suite 470                  |                                            
|Boca Raton, FL 33486                                |                                            
|Hollger LLC (9)                                     |                                             | 2,797,209          
|c/o 5 Mile Ventures                                 |                                            
|95B Rowayton Avenue                                 |                                            
|Rowayton, CT 06855                                  |                                            
|Andrew K. Reilly                                    |                                             | 4,856,900          
|7 Extension Street                                  |                                            
|Newport, RI                                         |                                            

24

---

_________________

* Less
than 1%.

|(1) |  | Includes shares of common stock issuable upon the conversion of the
Companys Series B Preferred Stock. The Series B Preferred Stock will
convert automatically into Common Stock at a conversion ratio of 50,000 : 1 when
our Articles of Incorporation are amended to increase the number of authorized
shares of Common Stock sufficient to enable such conversion. This ratio is fixed
(subject to adjustment only in the case of stock splits, stock dividends,
capital reclassifications and similar events) and is not dependent on the market
value of the Common Stock or any similar factor. The Series B Preferred Stock
contains no obligatory dividends and no preferences over the Common Stock with
respect to dividends, liquidation or other matters (other than the power to vote
with the Common Stock on an as-converted basis).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 500,000 shares underlying an option currently exercisable at $.29 per
share, 300,000 shares underlying an option currently exercisable at $2.25 per
share, 40,000 shares underlying a warrant currently exercisable at $.625 per
share, and 40,000 shares underlying a warrant currently exercisable at $1.25 per
share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes: 200,000 shares underlying an option currently exercisable at $.29 per
share, 200,000 shares underlying an option currently exercisable at $.33 per
share, 576,871 shares underlying an option currently exercisable at $.625 per
share, and 287,111 shares underlying an option currently exercisable at $.70 per
share.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes 50,000 shares underlying an option currently exercisable at $.70 per
share, 15,000 shares underlying an option currently exercisable at $.81 per
share, 5,000 shares underlying an option currently exercisable at $10.82 per
share, 10,000 shares underlying a warrant currently exercisable at $.625 per
share and 10,000 shares underlying a warrant currently exercisable at $1.25 per
share.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Consists solely of shares held by Sun Solunet LLC (further described in Note 8),
over which he may be deemed to have control.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(6) |  | Consists of (a) 500,000 shares of Common Stock, and (b) 18.702 shares of Series
B Preferred Stock, which are convertible into 935,091 shares of Common Stock.
All such shares are held by Mr. Phelan jointly with his wife.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | All of Mr. Phelans shares are subject to a Shareholder Agreement that,
among other things, (a) grants Sun Solunet LLC sole power to vote those shares,
(b) grants Sun Solunet a right of first refusal on those shares, (c) obligates
Mr. Phelan to sell his shares to a party that intends to purchase shares from
Sun Solunet LLC, if so demanded by Sun Solunet LLC, and (d) grants Mr. Phelan
the right to require a purchaser of shares from Sun Solunet LLC also to purchase
a pro rata number of Mr. Phelans shares on the same terms.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Consists of (a) 19,500,000 shares of Common Stock owned directly by Sun Solunet
LLC, (b) 500,000 shares of Common Stock owned by Mr. Phelan over which Sun
Solunet LLC has voting control, (c) 748.073 shares of Series B Preferred Stock
owned directly by Sun Solunet LLC, which are convertible into 36,468,562 shares
of Common Stock, and (d) 18.702 shares of Series B Preferred Stock owned by Mr.
Phelan over which Sun Solunet LLC has voting control, which are convertible into
935,091 shares of Common Stock. Messrs. Leder, Krouse and Terry may each be
deemed to have voting and dispositive power over the shares held by Sun Solunet
LLC.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Messrs. Gary Holloway and Konrad Kruger may each be deemed to have voting and
dispositive power over the shares held by Hollger, LLC.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

25

---

# Equity
Compensation Plan Information

The following
table sets forth information regarding compensation plans (including individual
compensation  arrangements) in effect at December 31, 2002, under which equity securities
are authorized for issuance,  aggregated as follows: (i) all compensation plans
previously approved by shareholders; and (ii) all  compensation plans not previously
approved by shareholders.

|Plan Category                | Number of securities to beissued upon exercise ofoutstanding options,warrants and rights | Weighted-average exerciseprice of outstandingoptions, warrants andrights | Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in column (a))
|---------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------
|                            
|                             |                                                                                          | (a)                                                                      |                                                                                                                                       
|                            
|Equity compensation plans    |                                                                                          | 1,457,657(1)                                                             |                                                                                                                                       
|approved by security holders |                                                                                         
|                            
|Equity compensation plans    |                                                                                         
|not approved by security     |                                                                                          | 4,804,831                                                                |                                                                                                                                       
|holders                      |                                                                                         
|                            
|Total                        |                                                                                          | 6,262,488                                                                |                                                                                                                                       
|                            

(1)
Excludes 400,000 options with an exercise price of $1.50 per share that failed
to vest at an accelerated date of December 31, 2002 when specified performance
targets were not met at that date. If the holder is still employed by us on June
30, 2012, the options will vest at that date.

Description
of Non-Shareholder Approved Plan.

On
September 20, 2001, our Board of Directors adopted the 2001 Stock Option
Plan At December 31, 2002, the total number of shares of common stock reserved
for options issuable under this plan was 5,000,000.  Options granted under
the plan vest generally over three to ten years. The exercise price of
options granted under this plan shall be not less than 80% of the fair
market value per share on the date of option grant  With the exception of
roll-over options that were included in the plan upon our
acquisition of ITIS Services (i.e., options previously issued by ITIS Services
that we assumed in that acquisition), all options granted to date under the plan
have had an exercise price equal to, or in excess of, fair market value.

Item
12. Certain Relationships and Related Transactions.

Pursuant
to our acquisition agreement with Solunet Storage, Sun Solunet LLC became our
majority shareholder, holding 58.5% of our common stock (including shares of
Series B Preferred Stock that is convertible into common stock). Sun Capital
Partners II, LP (Sun Capital II) and Sun Capital Partners Management
LLC (Sun Capital Management) are both affiliates of Sun Solunet LLC.

Pursuant
to that acquisition agreement, we entered into a Credit Support Agreement with
Sun Capital II under which Sun Capital II has agreed to guarantee a minimum of
$3 million of our the debt of the combined company. This guaranty is currently
in place in support of a loan facility maintained by Solunet Storage. The
guaranty has been used to obtain greater liquidity (in the form of a higher
advance rate) under that loan facility than would have been available in the
absence of a guaranty. We have not paid Sun Capital II or its affiliates any
separate consideration for this guaranty.

In
addition, under the Credit Support Agreement we may request at any time that Sun
Capital II guaranty up to an additional $2 million of our debt. However, Sun
Capital II has the discretion whether or not to issue such a guaranty if so
requested. If it does issue such a guaranty and we do not discharge the debt or
otherwise obtain a release of the guaranty within eighteen months after its
issuance, we will issue warrants to Sun Capital II in payment for that guaranty,
and we will be obligated to issue additional warrants to Sun Capital II as
further payment at the end of each six-month period that the guaranty is not
released.

26

---

Also
pursuant to our acquisition agreement with Solunet Storage, we entered into a
Management Services Agreement with Sun Capital Management. This Management
Services Agreement replaced and superseded a similar agreement between Sun
Capital Management and Solunet Storage that was in effect prior to our
acquisition of Solunet Storage. Pursuant to this agreement, we will receive
financial and management consulting services from Sun Capital Management in
exchange for a quarterly a fee of $75,000 per calendar quarter (plus
reimbursement of out-of-pocket expenses. The fee is fixed at this rate through
the quarter ending March 31, 2005, at which time it will be reset, based
primarily on the fees Sun Capital Management is then charging the other Sun
Capital portfolio companies. This agreement will remain in effect until our next
annual meeting of shareholders and thereafter until the first date when all of
the following have occurred: (a) the designees of Sun Capital Management and its
affiliates no longer constitute a majority of our Board of Directors; (b) Sun
Capital Management and its affiliates no longer own or control at least 30% of
our outstanding shares; and (c) Sun Capital Management and its affiliates
(including Sun Capital II) no longer guarantee any portion of our debt. If the
foregoing three events have not yet occurred, the Management Services Agreement
will nonetheless terminate on April 4, 2013.

Item 13.
Exhibits and Reports on Form 8-K.

|Exhibit
Number | Description                                                                                                                                                                                                                                       | Location                                                                                                                                 
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------
|2.1            | Agreement and Plan of Merger dated December 10, 2001 by and among SAN Holdings, Inc., ITIS Acquisition Corp. and ITIS Services, Inc., including exhibits thereto, but omitting listed schedules which will be furnished to the staff upon request | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K dated December 19, 2001, filed December 31, 2001             
|2.2            | Credit Support Document dated March 31, 2003.                                                                                                                                                                                                     | Incorporated by reference to Exhibit 2.3 to the Current Report on Form 8-K/A dated April 1, 2003, filed April 3, 2003                    
|3.1            | Amended and Restated Articles of Incorporation                                                                                                                                                                                                    | Incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-QSB for the quarter ended September 30, 2001                 
|3.2            | By-laws, as amended, effective March 31, 2000                                                                                                                                                                                                     | Incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-KSB for the year ended December 31, 1999                        
|10.1           | Credit and Security Agreement, dated May 31, 2001, by and between Storage Area Networks, Inc., and Wells Fargo Business Credit, Inc.                                                                                                              | Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001                     
|10.2           | Executive Employment Agreement dated February 1, 2001 - John Jenkins                                                                                                                                                                              | Incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-KSB for the year ended December 31, 2001, filed April 1, 2002. 
|10.3           | Executive Employment Agreement dated December 19, 2001- Fred T. Busk, III                                                                                                                                                                         | Incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-KSB for the year ended December 31, 2001, filed April 1, 2002  
|10.4           | Amended and Restated Employment Agreement dated August 19, 2002 - Fred T. Busk, III                                                                                                                                                               | Incorporated by reference to Exhibit 10.17 to the Registration Statement on Form SB-2/A No. 2, File No. 333-87196, filed November 4, 2002

27

---

|Exhibit
Number | Description                                                                                                                                               | Location                                                                                                                                 
|-------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------
|10.5           | Executive Employment Agreement dated December 19, 2001- Brendan T. Reilly                                                                                 | Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-KSB for the year ended December 31, 2001, filed April 1, 2002. 
|10.6           | Executive Employment Agreement dated December 19, 2001- Hugh A. OReilly                                                                                  | Incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-KSB for the year ended December 31, 2001, filed April 1, 2002.
|10.7           | Executive Employment Agreement dated December 19, 2001- F. William Tilt                                                                                   | Incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-KSB for the year ended December 31, 2001, filed April 1, 2002.
|10.8           | 2000 Stock Option Plan                                                                                                                                    | Incorporated by reference to Exhibit 99.1 in the Form S-8 (File No. 333-81910) filed January 31, 2002.                                   
|10.9           | 2001 Stock Option Plan                                                                                                                                    | Incorporated by reference to Exhibit 99.2 in the Form S-8 (File No. 333-81910) filed January 31, 2002.                                   
|10.10          | First Amendment to Credit and Security Agreement by and between Storage Area Networks, Inc. and Wells Fargo Business Credit, Inc.                         | Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-QSB for the quarter ended March 31, 2002.                   
|10.11          | Subordination Agreement by and between SAN Holdings, Inc. and Wells Fargo Business Credit, Inc.                                                           | Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-QSB for the quarter ended March 31, 2002.                   
|10.12          | Second Amendment, dated July 1, 2002, to Credit and Security Agreement, by and between Storage Area Networks, Inc., and Wells Fargo Business Credit, Inc. | Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form SB-2/A No. 2, File No. 333-87196, filed November 4, 2002
|21.1           | List of Subsidiaries                                                                                                                                      | Incorporated by reference to Exhibit 21.1 to the Registration Statement on Form SB-2/A No. 1, File No. 333-87196, filed July 23, 2002    
|23.1           | Consent of Grant Thornton LLP                                                                                                                             | Previously filed                                                                                                                         
|99.1           | Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350                                           | Filed herewith                                                                                                                           

(b)  Reports
filed on Form 8-K.  No reports on Form 8-K were filed during the quarter ended December
31, 2002.

28

---

Item 14.
Controls and Procedures.

Within the 90
days prior to the date of this report, an evaluation was performed, under the supervision
and  with the participation of our management, including the Chief Executive Officer and
Chief Financial Officer,  of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to  Exchange Act Rule 13a-14. That evaluation
has provided our Chief Executive Officer and Chief Financial Officer  with reasonable
assurance that our disclosure controls and procedures are effective in timely alerting
them to  material information required to be included in our periodic SEC filings. We
have not made any significant  changes in our disclosure controls and procedures or in
other factors that could significantly affect those  disclosure controls and procedures
subsequent to the date of the evaluation described above.

# SIGNATURES

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

| | SAN Holdings, Inc.
             
   (Registrant)
| | ------------------------------------------------

|Date: July 23, 2003 | By: /s/ Hugh A. OReilly
        Hugh A. OReilly
        
Senior Vice President and Chief Financial Officer
|------------------- | ------------------------------------------------------------------------------------------------------------

29

---

# CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER

I, John
Jenkins, Chief Executive Officer of SAN Holdings, Inc., certify that:

1.
I have reviewed this annual report on Form 10-KSB of SAN Holdings, Inc.;

2.
Based on my knowledge, this annual report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;

4.
The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

| | a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b)
evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c)
presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.
The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

| | a)
all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b)
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal controls; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

6.
The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|Date: July 23, 2003 | /s/ John Jenkins
     John Jenkins, President and
     Chief Executive Officer
|------------------- | ------------------------------------------------------------------------------

30

---

# CERTIFICATION
OF PRINCIPAL FINANCIAL OFFICER

I, Hugh A.
O'Reilly, Chief Financial Officer of SAN Holdings, Inc., certify that:

1.
I have reviewed this annual report on Form 10-KSB of SAN Holdings, Inc.;

2.
Based on my knowledge, this annual report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;

4.
The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

| | a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b)
evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c)
presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.
The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

| | a)
all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b)
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal controls; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

6.
The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|Date: July 23, 2003 | /s/ Hugh A. OReilly
     Hugh A. OReilly
     Senior Vice President and
     Chief Financial Officer
|------------------- | ------------------------------------------------------------------------------------------------------

31

---