**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM
      10-K/A**


**(Amendment
      No. 1)**







(Mark
      One)


**x** **ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE** **** **SECURITIES** **EXCHANGE
      ACT OF 1934**




For
      the fiscal year ended December 31, 2004






**o** **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE** **** **SECURITIES** **EXCHANGE
      ACT OF 1934**


For
      the
      transition period from ___________ to ___________




Commission
      File Number 0-16423




**SAN
      Holdings, Inc.**


(Exact
      name of registrant  as
      specified in its Charter)




**Colorado**
            
            **84-0907969**(State
                of incorporation)
            
            (I.R.S.
                EmployerIdentification
                No.)




9800
                Pyramid Court, Suite 130, Englewood, CO 80112
                             
                (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:      NoneSecurities
                registered pursuant to Section 12(g) of the Act:




Title
                of Each Class
            
            Name
                of Each Exchange on Which RegisteredCommon
                stock, no par value
            
            OTC
                Bulletin Board




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 934 during the
      past 12 months (or for such shorter period that the registrant was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days. Yes x No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of the registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o




Indicate
      by checkmark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Act): Yes o No x




The aggregate market value of the voting and non-voting common equity held by
      non-affiliates of
      the
      registrant, computed
      by reference to the
      average closing bid and asked prices the
      price
      at which the common equity was last sold as of the last business day of the
      registrant's most recently completed second fiscal quarter (June 30,
      2004) ,
      was
      approximately  $13.7
      million.




As
      of
      March 25, 2005, 95,811,278 shares of the registrant's common stock were
      outstanding.





DOCUMENTS
      INCORPORATED BY REFERENCE: None














**SAN
        HOLDINGS, INC.**


**FORM
      10-K**




**TABLE
      OF CONTENTS**


**Item
                No.**
            
            
            PageForward-Looking
                Statements
            4





**Part
      I**





1.
            
            
            Business
            42.
            
            
            Properties
            153.
            
            
            Legal
                Proceedings
            164.
            
            
            Submission
                of Matters to a Vote of Security Holders
            16





**Part
      II**





5.
            
            
            Market
                forCommonEquityand
                Related Stockholder Matters
            176.
            
            
            Selected
                Financial Data
            197.
            
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            217A.
            
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            368.
            
            
            Financial
                Statements and Supplementary Data
            369.
            
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            369A.
            
            
            Controls
                and Procedures
            369B.
            
            
            Other
                Information
            37





**Part
      III**





10.
            
            
            Directors
                and Executive Officers of the Registrant
            3711.
            
            
            Executive
                Compensation
            4012.
            
            
            Security
                Ownership of Certain Beneficial Owners and Management
              and
                Related Stockholder Matters
            4213.
            
            
            Certain
                Relationships and Related Transactions
            4414.
            
            
            Principal
                Accountant Fees and Services
            45





**Part
      IV**





15.
            
            
            Exhibits
                and Financial Statement Schedules
            46






2






**SAN
      HOLDINGS, INC.**




**EXPLANATORY
      NOTE**





As
      previously disclosed in filings made with the Securities and Exchange Commission
      (“SEC”), San Holdings, Inc. (“SANZ,” the “Company” or “we”) is restating its
      consolidated financial statements for the year 2004 (the “Restatement”). During
      the September 2005 quarter, we initiated a project to prepare stand-alone
      financial statements for audit of our EarthWhereTM (“EarthWhere”) business. We
      believe that this is an important step in further supporting the growth
      opportunities of that business. Beginning in 2003, the Company capitalized
      certain software development costs related to its EarthWhere geospatial imaging
      software in accordance with Statement
      of Financial Accounting Standard No. 86, “Accounting for the Costs of Computer
      Software to Be Sold, Leased, or Otherwise Marketed” (“SFAS 86”) .
      As all
      of the Company’s capitalized software costs pertain to the EarthWhere business,
      such costs are considered to be material to the total assets of that business
      unit, but were not considered material to the total assets of the Company as
      a
      whole as of December 31, 2003 or December 31, 2004. As we undertook this
      project, we determined that the assumptions and evidential matter that the
      Company had used in capitalization of software development costs during 2003
      and
      2004 did not provide sufficient “contemporaneous documentation” to support
      capitalization.





As
      a result, on November 14, 2005, the
      Board
      of Directors of the Company in consultation with management concluded that
      the
      Company’s financial statements as of and for the year ended December 31, 2004
      and the interim financial statements as of and for the quarter and six months
      ended June 30, 2004, as of and for the quarter and nine months ended September
      30, 2004, for the quarter ended December 31, 2004 and as of March 31, 2005
      and
      June 30, 2005 should not be relied upon.





The
      restatement reflects the expensing of certain software development costs in
      2004
      related to the Company’s proprietary software that were capitalized on the
      Company’s previously reported financial statements for the 2004 periods referred
      to above. Our restated consolidated financial statements also include disclosure
      of restated (unaudited) quarterly results for 2004, as reported in “Part II,
      Item 6—Supplementary Data.”





This
      Amendment No. 1 on Form 10−K/A (the “Form 10−K/A”) to the Company’s Annual
      Report on Form 10−K for the year ended December 31, 2004, initially filed with
      the SEC on March 31, 2005 (the “Original Filing”), is being filed to reflect
      restatements of the Company’s consolidated balance sheet as of December 31, 2004
      and the Company’s consolidated statements of operations, cash flows and
      stockholders’ equity for the year ended December 31, 2004 and the notes related
      thereto. Concurrently with the filing of this Form 10−K/A, the Company is also
      filing restated 2005 interim financial statements on Form 10-Q/A for each of
      the
      quarters ended March 31, 2005 and June 30, 2005 to report restated comparative
      2004 financial information and the effects of this restatement on the March
      31,
      2005 and June 30, 2005 balance sheets. The Company is not restating its 2003
      financial statements due to the immateriality of the impact to both 2003 and
      2005 (the period of correction being the quarter ended September 30,
      2005).





For
      a
      more detailed description of the Restatement, see Note 1A, “Restatement of
      Financial Statements” to the accompanying audited consolidated financial
      statements and the section entitled “Restatement” in Management’s Discussion and
      Analysis of Financial Condition and Results of Operations contained in this
      Form
      10−K/A.





For
      the
      convenience of the reader, this Form 10−K/A sets forth the Original Filing in
      its entirety. However, this Form 10−K/A only amends and restates Item
      1—Business—Investment Considerations of Part I, Items 6, 7, 8 and 9A of Part II,
      and Item 15 of Part IV of the Original Filing, in each case, solely as a result
      of, and to reflect, the Restatement, and no other information in the Original
      Filing is amended hereby. The foregoing items have not been updated to reflect
      other events occurring after the Original Filing or to modify or update those
      disclosures affected by subsequent events. In addition, pursuant to the rules
      of
      the SEC, Item 15 of Part IV of the Original Filing has been amended to contain
      the consent of the Company’s independent registered public accounting firm and
      currently dated certifications from the Company’s Chief Executive Officer and
      Chief Financial Officer, as required by Sections 302 and 906 of the
      Sarbanes−Oxley Act of 2002. The consent of the Company’s independent registered
      public accounting firm and the certifications of the Company’s Chief Executive
      Officer and Chief Financial Officer are attached to this Form 10−K/A as Exhibits
      23.01, 31.01, 31.02, 32.01 and 32.02.






3






Except
      for the foregoing amended information, this Form 10−K/A continues to speak as of
      the date of the Original Filing, and the Company has not updated the disclosures
      contained herein to reflect events that occurred at a later date. Other events
      occurring after the filing of the Original Filing or other disclosures necessary
      to reflect subsequent events have been or will be addressed in the Company’s
      amended Quarterly Report on Form 10−Q/A for the quarterly periods ended March
      31, 2005 and June 30, 2005 which are being filed concurrently with the filing
      of
      this Form 10−K/A, and/or the Company’s Quarterly Report on Form 10−Q for the
      quarterly period ended September 30, 2005, filed on November 21, 2005, and
      any
      reports filed with the SEC subsequent to the date of this filing.





The
      Company has not amended and does not intend to amend its previously filed
      Quarterly Reports on Form 10−Q for the periods affected by the Restatement prior
      to December 31, 2004. For this reason, the consolidated financial statements
      and
      related financial information for the affected periods contained in such reports
      should no longer be relied upon.






**FORWARD-LOOKING
      STATEMENTS**




This
      reportcontains
      “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 suchas  “ anticipate ,” 
      “ believe ,” 
      “ could ,” 
      “ estimate ,” 
      “ expect,” 
      “intend,”  “may,”  “plan,”  “potential,”  “should,” 
“will” and “would” or the negative of these terms or other similar
      expressions.  These
      forward-looking statements include statements regard ing
      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
      “ Item 7.  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations —Investment
      Considerations” and other sections of this report . We urge you to review and consider those factors, and those identified from
      time
      to time in our reports and filings with the Securities
      and Exchange Commission (“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.





**PART
      I**





**Item
      1. Business**




**Overview
      and Background**




When
      used
      in this report, the terms “we,”  “our,”  “us,”  “our
      company,”  “the Company” and “SANZ” refer to SAN Holdings, Inc., a Colorado
      corporation, and our subsidiaries, unless the context indicates otherwise. SANZ provides sophisticated enterprise-level data storage and data management
      solutions to commercial and government clients. We focus on the design, delivery
      and management of data storage systems, especially those that are built using
      a
      network architecture. In addition, we have developed and sell a proprietary
      data-management software application designed specifically for the Geospatial
      Information Systems (GIS) market. 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.”





SANZ
      was formed as a Colorado corporation in 1983. Our current business operations
      commenced in 2000 when we acquired three companies in the data storage products
      and solutions business. In late 2001 we acquired (either by asset acquisition
      or
      subsidiary merger) two additional storage solution providers, ECOSoftware
      Systems, Inc. and ITIS Services, Inc . (“ITIS”). In early 2003, we acquired Solunet Storage Holding Corp. (“Solunet Storage”) and, indirectly,
      its operating subsidiary Solunet Storage, Inc. (d.b.a. “StorNet Solutions”).
      Solunet Storage was another storage solution provider, and like SANZ was based
      in the greater Denver area. Solunet Storage itself had acquired substantially
      all of the assets of StorNet, Inc. in September 2002 in a private foreclosure
      transaction. At the time of the acquisition by SANZ, Solunet Storage was owned
      by Sun Solunet LLC (“Sun Solunet”), an affiliate of Sun Capital Partners, Inc.
      (“Sun Capital”), a private investment firm located in Boca Raton, Florida.
      Further details of the transaction in
      which
      we acquired Solunet Storage are
      included below in Note 4 to our consolidated financial statements and under the
      section of this report titled “ Item 13. Certain Relationships and Related Transactions, ” and can also be found in a Form 8-K dated April 4, 2003 filed by the Company on
      April 21, 2003 and amended September 25, 2003 and March 31, 2004.






4





As
      further discussed in Note 1 to our consolidated financial statements included
      in this report ,
      because the transaction with Solunet Storage was accounted for as a reverse acquisition,
      the consolidated financial statements of Solunet Storage have been adopted
      as
      the historical financial statements of SANZ for all periods prior to April
      1,
      2003. The consolidated financial statements consist of the operations of both
      Solunet Storage and SANZ for the period from April 1, 2003 through December
      31,
      2003 and for all of 2004.





From
      the time that we commenced our current business operations in 2000 until 2003,
      our primary operating subsidiary had the legal name “Storage Area Networks,
      Inc.” Over this period, we increasingly used the name “SANZ” as a trade name in
      the conduct of our business. In 2003 we changed the legal name of Storage Area
      Networks, Inc. to “SANZ Inc.” to align the legal name with the trade name used
      in operations.





Our
      principal executive offices are located at 9800 Pyramid Court, Suite 130,
      Englewood, CO 80112. Our telephone number is (303) 660-3933.




**Products
      and Services**




In
      the course of our business, we provide the following products and services,
      all
      of which are reported as a single segment in our financial statements included
      in this report:




·
            
            ***Data
              storage solutions***that we design and deliver as a customized project to meet a client’s
              specific needs, including both data storage networks and data
              backup/recovery systems;·
            
            ***Maintenance
              services***on storage hardware and software;·
            
            ***Storage-related
                consulting services***;·
            
            ***A
                proprietary data management software product known as
                “EarthWhere**TM,”*which facilitates imagery data access and provisioning for geospatial
                digital imageryusers(principally satellite and aerial imagery and map data),together with associated support and consulting services.




*Data
      Storage Networks, and Backup and Recovery Systems.* 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. We sell these
      solutions to both commercial and government customers throughout the United States. We
      believe the market for data storage solutions is generally robust and broad-based, although
      not immune to fluctuations in capital spending generally and in information technology
      ( “ IT ” )
      spending in particular.





SAN
      and NAS systems are secondary, high-speed computer networks dedicated to data
      storage and backup functions. 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 commonplace as email.
      In addition to our clients’ fundamental need to store vast quantities of data,
      the ability to access that data rapidly (referred to as “availability”) also
      drives infrastructure requirements, as today’s businesses depend on rapid
      response times in many functions, both for internal operations and to enable
      responsiveness to customers and vendors. Moreover, regulatory and geopolitical
      developments over the past several years have converged with general business
      requirements to cause businesses to recognize the need for effective data
      archiving and the corresponding need for rapid recovery of that data in the
      event of disaster or other failure. Consolidating data storage in networks
      at
      centralized data centers addresses each of these requirements by increasing the accessibility of data to multiple end-users, maintaining
      effective archives of that data, and at the same time lowering costs through
      increased utilization and more efficient management.






5





SAN
      and NAS have become the prevailing, state-of-the-art architectures for data
      storage, and are rapidly replacing traditional server-based (or
“direct-attached”) storage architectures in which the storage device is
      incorporated into a single server or otherwise dedicated to a single computing
      device. SAN and NAS have been adopted because they address many of the
      storage-related challenges arising in today’s open systems networks, including:




·
              
              The
                  high cost of direct-attached storage environments due to inefficient
                  storage utilization and high maintenance costs in those
                  environments;·
              
              The
                  isolation and resulting performance degradation of direct-attached
                  storage
                  environments that result from restrictive server-to-storage connectivity
                  and incompatible storage protocols;·
              
              Greater
                    complexity of upgrading server and storage capacities in direct-attachedenvironments;and·
              
              Greater
                    complexity of providing comprehensive data security, protection
                    and
                    disaster recovery functionalities in direct-attached environments.


By
      centralizing data storage functions, storage networks create a reservoir of
      storage resources that can be shared by multiple servers both locally and over
      long distances, thereby increasing resource utilization and allowing the data
      to
      be shared, managed and accessed by diverse end-users operating on diverse
      servers, even those running different computer operating systems or software
      applications. Because the personnel and other costs of managing a computer
      infrastructure are often greater than the hardware and software costs, this
      increased manageability also provides significant cost savings over traditional
      direct-attached storage. In addition, centralizing and networking an
      organization’s data storage provides superior system performance, which is
      particularly important for applications that depend on the transfer of high
      volumes of data such as those often found in complex research and development,
      financial analysis, imaging, records management and a variety of business
      services.





Data
      backup and disaster recovery systems are natural adjuncts to data storage
      systems. We design and implement these in both networked and direct-attached
      environments, depending on the client’s requirements. These systems create
      repositories for maintaining additional electronic copies of an organization’s
      data, which can guard against both small-scale failures, such as the malfunction
      of a single computer, and large-scale disasters, such as the destruction of
      an
      entire data center. There now exist a variety of technologies for building
      such
      backup and disaster recovery systems, including both tape and disk systems .
      A significant part of our role is to advise clients on which technologies best suit their
      requirements.





*Maintenance
      Services.* Because of the complexity of data storage hardware and software, clients
      generally purchase maintenance and support contracts on those products. Prior
      to
      the acquisition of Solunet Storage in 2003, the only maintenance and support
      contracts we sold were serviced entirely by the product manufacturers. Through
      that acquisition, we obtained Solunet Storage’s “technical services center,” a
      call center in which our own engineers now field support calls from clients
      with
      respect to many of the products that we sell. Depending on the nature of the
      client’s issue (among other factors, whether the problem is caused by hardware
      or by software), our engineers may resolve the call remotely or may pass the
      call on to the product vendor to send a technician into the field to fix the
      issue. This process is referred to in the industry as taking “first call.” We
      generally receive higher gross margins on service contracts under which we
      take
      first call than on service contracts under which we do not take first call.
      The
      ongoing communication with the client associated with taking first call also
      helps us to maintain a closer relationship with the client as its “trusted
      advisor,” and helps us to identify new sale opportunities within the client.





Revenues
      from maintenance services are reflected in two separate categories in the
      financial statements included in this report: “maintenance services” are
      services under contracts that obligate us to take first call, and “maintenance
      contract fees” are net revenues from the resale of manufacturer’s contracts
      where the manufacturer provides all of the service.





*Storage-Related
      Consulting Services.* In many cases, we provide systems design recommendations and similar expertise
      to our clients as part of the sales process, yielding higher product margins
      than those typically obtained from a simple resale of off-the-shelf products,
      but not resulting in a separately identifiable charge to the client. In other
      cases, however, clients engage us as consultants to obtain our specialized
      expertise, including such projects as assessing the adequacy of their systems,
      advising them on systems design, providing implementation services and providing
      ongoing operational support. We have increased the volume of our consulting services in 2003
      and 2004, which generally yield higher margins than sales of hardware or third-party
      software. Nonetheless, in both 2003 and 2004, revenues from consulting and
      integration services combined aggregated less than 5% of our total revenues,
      and
      are not separately reported in the financial statements included in this report.






6






*EarthWhereTM
      Software.* EarthWhere TM is our proprietary software application, which is designed to facilitate a
      user’s provisioning and distribution of stored geospatial data (e.g., satellite
      and aerial imagery, map data, etc.). We sell EarthWhere TM predominantly to government agencies and companies who use geospatial digital
      imagery in their business or mission. These uses may include, among many others:
      agricultural crop management, environmental remediation, land use planning,
      military mission planning, and transportation management.  EarthWhere TM
      provides these users of geospatial data what
      we
      believe is a
      much more efficient way to retrieve, combine and otherwise manipulate datasets
      in a client-server and web-enabled environment.





We
      began developing EarthWhere TM in 2000, when our experience in designing data storage solutions led us to
      undertake the development of several products tailored to deliver optimized
      data
      storage and data management for particular market segments that we
      believe were
      not being adequately served by the conventional products available in the
      marketplace. We originally sought to develop integrated solution products,
      or
“storage appliances, ” that combined proprietary software with third-party hardware in an appliance
      designed to fulfill a market segment’s unique data storage and management
      requirements. After an initial development period, we concluded that producing
      and selling full-scale storage appliances (including the integrated hardware)
      under our own brand was not cost-justified. At the same time, however, we also
      determined that the proprietary software we had developed presented substantial
      sales opportunities as a stand-alone product. In 2003, we released the
      proprietary software under the name “EarthWhere TM .”
      In 2004, we took the further step of filing for U.S. patent protection on
      certain aspects of the EarthWhere TM software .
      The government’s review and subsequent patent prosecution process generally takes a
      number of years before any resulting patent will issue.





EarthWhere TM customers typically also have data storage needs, and we expect that sales
      of
      EarthWhere TM software may also lead in some cases to opportunities for storage solutions
      sales. We have found that sales of EarthWhere TM software also provide opportunities for additional revenue from implementation
      services and other GIS-related consulting services as described below. While sales of EarthWhere TM software have grown over the course of 2003 and 2004, with recorded license
      and
      software maintenance revenues of approximately $280,000 in 2004, up from
      $107,000 in 2003, these sales still represent less than 1% of our overall
      revenues and are therefore not separately reported in the financial statements
      included in this report. In 2004, in addition to software license sales, we
      also
      recorded sales of $404,000 of hardware and $390,000 of services related to
      EarthwhereTM projects. In late 2004 we devoted even greater resources to
      accelerating the growth in EarthWhere TM sales, and we expect these sales to grow in 2005.





*Geospatial
      Imagery-Related Consulting Services.* Because of the complexity of geospatial imagery data files and the systems
      used
      to manipulate them, end users often require specialized expertise to assist
      them. As a further outgrowth of our combined expertise in data storage and
      in
      the needs of the GIS vertical market, we also sell technical consulting services
      as an adjunct to our EarthWhere TM software offering.




**Markets
      for Our Products and Services**




*Storage
      Solutions, Services and Maintenance Clients.* We have always sought to serve both government and commercial markets, but
      until
      the acquisition of ITIS at the end of 2001 our sales were highly concentrated
      in
      the federal government sector. By acquiring ITIS, with its east -coast
      commercial client base, we achieved a more balanced mix of federal government
      and commercial business. We further augmented our client base in the commercial
      sector with our acquisition of Solunet Storage in 2003, which had a smaller
      concentration of federal government sales. As a consequence, our market sector
      mix today is approximately 2:1 commercial to government. Our government sector
      sales now also include sales
      to state and local governments, although the federal government continues to
      represent the substantial majority of our total government sales. Substantially
      all of our storage solutions sales are within the United States.






7





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 and software development
              
              ●
              
              financial
                services●
              
              telecommunications
                / wireless
              
              ●
              
              oil
                and gas●
              
              higher
                education
              
              ●
              
              utilities


Most
      of
      our federal government clients are
      agencies involved in national defense, homeland security and government
      logistics .
      To a lesser extent , we have government clients in diverse areas such as financial regulation and
      legislative operations. 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. Our sales in the government
      sector during 2004 represented approximately 33% of our total
      sales, of which approximately 22% consisted of sales directly to the federal
      government and the remaining 11% consisted of sales to third parties acting
      as
      prime contractors or sales to state or local governments.





*EarthWhereTM
      Software Customers.* EarthWhereTM provides users of geospatial data (principally satellite and aerial
      imagery and map data) an efficient way to retrieve, combine and otherwise
      manipulate their datasets. Applications for this product range from federal
      government uses such as defense surveillance and land-use management, to local
      government uses such as fire control and city planning, to commercial market
      uses such as oil and gas development.





Currently,
      we believe that the substantial majority of the potential market for
      EarthWhere TM is within the federal government, including a variety of defense agencies,
      intelligence agencies and civilian agencies. Our first major
      EarthWhere TM installation (in 2003) was for the U.S. Geological Survey, a civilian agency
      charged with providing mapping and similar information to other agencies within
      the federal government. Since that time we have completed installations (either
      completed sales or ongoing product trials) within all three types of agencies.
      We also believe that there exists a smaller but nonetheless significant
      commercial market for EarthWhere TM ,
      in part within companies that themselves produce geospatial imagery data or
      sell
      such data to end users, and in part to end users of imagery data such as
      companies in the natural resources and agriculture industries.




**Technology
      Partners and Sales Model**




*Storage
      Solutions Technology Partners.* SANZ
      is an independent storage solution provider, and is not under common ownership
      with any of the 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. While our choice of
      products changes from time to time based on a variety of factors, including
      our
      technological assessment of those products, the acceptance of those products
      in
      the marketplace, pricing, and our ability to maintain good relationships with
      those suppliers and/or their distributors, some of our current key suppliers
      are:




●
                StorageTek
              
              ●
                EMC
              
              ●
                Network Appliance
              
              ●
                ADIC●
                Veritas
              
              ●
                Sun Microsystems (including Sun-branded Hitachi Data Systems
                products)


In
      addition to these large manufacturers, we regularly test products offered both
      by smaller manufacturers and by other large manufacturers, and we establish
      new
      relationships when we believe those products would be beneficial to our
      clients.





We
      believe we have strong relationships with our technology partners. In many
      cases, our technology partners engage us for the expertise we bring to a
      technology team, in particular in heterogeneous technology environments, where
      individual manufacturers often lack the skills necessary to work with the full
      range of software and hardware components presented in a sophisticated solution.





*Storage
      Solutions Sales Model.* In our storage solutions business, we design and deliver storage solutions
      customized to each client’s situation by working with our clients to understand
      both their current and their projected data storage needs, and the business
      drivers that affect those needs. In some cases we are retained by clients in
      a
      consulting role to assist them in performing a comprehensive assessment of
      their
      existing infrastructure and to develop a roadmap for transition to meet their
      identified needs. In a majority of cases, however, our clients come to us with
      a
      narrower storage need, and we design a solution as a part of the sales process.
      In both types of engagement, we often are engaged to provide engineering
      services to implement the system, and at times we are also engaged to provide
      operational support of the system after implementation.






8






We
      employ a direct sales model but rely heavily on cooperative selling with our
      technology partners, nearly all of whom have sales personnel who are tasked
      to
      support channel partners such as SANZ. In many of the sales opportunities,
      we
      call upon our technology partners for direct support in the sales process,
      in
      the implementation process, or to provide lease financing for large projects.
      At
      times our technology partners also provide opportunity leads for us to execute
      directly, or include us as part of a large system solution delivery project
      that
      they are managing.





In
      a full storage solution implementation, our engineering staff designs a “best of
      breed” system to meet the client’s business and technology needs, selects and
      acquires the hardware and software components from our technology suppliers,
      and
      finally coordinates installation and testing of the system at the client’s
      facility. To support our ability to deliver complex technical solutions, we
      operate testing laboratories (of varying sizes) at our offices in Dallas, TX,
      Houston, TX, Englewood, CO and Washington, DC. These are used to test proposed
      solutions and to demonstrate those solutions to prospective clients. At times
      we
      augment our own engineering resources by engaging our vendors’ engineers or
      other subcontractors 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.





*EarthWhere* *TM* *Sales Model.* For sales of our EarthWhere TM software, we principally employ a direct sales model, although we have begun
      to
      engage third parties to sell our software in a “channel distribution” model. At
      this time our direct sales efforts are focused within the United States, but
      as
      part of our channel distribution model we have also entered into a distribution
      agreement with a third party for pursuit of EarthWhere TM sale opportunities in certain regions outside of the United States. To date,
      all
      of our EarthWhere TM sales have been within the United States.




**Significant
      Customers**




No
      single customer accounted for more than 10% of our total revenue in either
      2004
      or 2003. 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 17% of our total revenue
      in
      2004 and 15% of our total revenue in 2003. While we currently do not have any
      expectation that the U.S. Department of Defense as a whole will cease or
      significantly reduce its levels of business with us, if it were to do so, that
      cessation or reduction could have a material adverse effect on our
      business.




**Competition**





*Data
      Storage Solutions.* The 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. Some of these manufacturers are ADIC, EMC, Hitachi Data
      Systems, LSI Logic, Network Appliance, Qualstar, StorageTek, and Veritas.  Some
      product companies address the market with a direct sales model, some employ
      a
      channel partner-only strategy, while most use a hybrid strategy that includes
      both. As noted below under the
      section titled
      “— 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 (VARs) serve as sales and distribution outlets for the manufacturers
      listed above, and 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.






9






We
      compete with companies that characterize themselves as storage solution
      providers, in whole or in part, such as GTSI, MTI, Cranel and
      Datalink.  Some
      of these, such as GTSI, are large component and subsystem resellers who have
      moved into the market for complete solution delivery relatively recently.
      Others, such as Datalink, have applied the solution sale model for a longer
      time.





The
      methods of competition vary widely between accounts and between individual
      sales
      opportunities, but in general include a blend of product performance, service
      and price. We seek to provide a high level of expertise and service to our
      customers rather than merely reselling products at the lowest possible cost.
      We
      have found that a reasonable number, though clearly not all, customers for
      these
      types of products place significant value on the engineering expertise and
      service that we provide during and after the sales process, and accordingly
      will
      purchase from SANZ, as a full solution provider, rather than from a low-cost
      component reseller. In the federal government marketplace, we have sought to
      differentiate ourselves from other solution providers by maintaining General
      Services Administration (GSA) schedules for many of the products we sell, which
      facilitates the purchasing process for many government customers. In addition,
      we hold and maintain a Facility Clearance and certain personnel hold Secret
      and
      Top Secret Clearances, which enable us to provide services on projects that
      are
      restricted to holders of these clearances.





*EarthWhere* *TM* *.* While there are other software products in the marketplace that provide a
      limited portion of the overall functionality provided by EarthWhere TM , **** we
      are unaware of any other software application that is commercially available
      at
      this time that seeks to provide all or most of EarthWhere TM ’s
      functionalities. However, there are other software development companies with
      substantial expertise in the GIS field, some of whom have greater resources
      than
      SANZ. It is possible that one of them, or a company not currently active in
      the
      GIS field, could develop and release a product that competes directly with
      EarthWhere TM in the future.




**Research
      and Development**




Our
      research and development expenditures in 2004, 2003 and 2002 were approximately
      $589,000, $332,000 and $-0-, respectively. The full amount incurred in 2003
      and
      2004 relates to EarthWhere TM development efforts. We continually seek to enhance the functionality of
      EarthWhere TM through further development efforts. While it is also possible that we may
      seek
      to develop additional storage-related software tools for vertical markets
      outside of the GIS sector as we identify new opportunities, we do not have
      any
      development efforts unrelated to EarthWhere TM ongoing at this time.




**Employees**




As
      of December 31, 2004, we employed 101 full-time people. None of our employees
      are subject to collective bargaining agreements. We believe that our relations
      with our employees are good.








**Investment
      Considerations**





In
      addition to the other information in this 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 ’
      liquidity and
      operating results .
      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
      derived from the combination of SANZ and Solunet Storage and otherwise, 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.*** **






10






We
      incurred a net loss of $6.8 million in 2004. As of December 31, 2004 we had
      an
      accumulated deficit of $18.5 million. We have not had a profitable quarter
      since our inception as a publicly-reporting company. Our April 2003 acquisition
      of Solunet Storage has led to a substantial increase in our revenues, a
      narrowing of our net loss, and the achievement of positive earnings before
      interest, taxes, depreciation and amortization (“EBITDA”) in two of the last
      four quarters. However, EBITDA does not reflect all cash costs and positive
      EBITDA does not equate to a net profit. We hope to achieve full profitability
      in
      the near future; however, there can be no assurance whether or when we will
      achieve that goal.





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. The acquisition of Solunet Storage more than doubled our
      total workforce, even after staff reductions associated with the combination,
      to
      112 employees at December 31, 2003 and 101 employees at December 31, 2004.
      We
      have also made investments in various software packages, testing lab equipment
      and other fixed assets to support operations over recent periods. Either an
      increase in gross profits, or further reductions in our overhead, or a
      combination of the two, will be necessary to enable us to become profitable,
      and
      there can be no assurance that we will be successful in doing so.





***Our
      operations currently rely on continued access to bank debt and trade credit
      from
      suppliers. If we lose access to such debt, our operations may be significantly
      impaired.*** **





At
      December 31, 2004, we had $0.4 million of cash. For the year ended December
      31,
      2004, we had a net loss of $6.8 million. At December 31, 2004 we also had a
      working capital deficit (current liabilities greater than current assets) of
      $16.0 million.





We
      have a revolving credit line with Wells Fargo to borrow up to $12 million,
      subject to availability under its borrowing base.  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 does not achieve certain
      net income targets during each calendar quarter, or if the book net worth plus
      subordinated debt of our operating subsidiary falls below levels that we have
      agreed to maintain. We were not in compliance with certain of those covenants
      at
      December 31, 2004 ;
      however, Wells Fargo did not issue a formal, written notice of default. Under
      an
      amendment to the credit agreement executed in March 2005, Wells Fargo granted
      us a waiver of non-compliance on these covenants. In the past, we have periodically been in default under the covenants, and have
      required waivers from the lender. If we were to not be in compliance with
      financial covenants and were unable to obtain such a waiver, and the lender
      was
      to accelerate the loan, the company would need to obtain credit from other
      sources to repay the loan. These matters are discussed further in “ Item
      7. Management’s
      Discussion and Analysis of Financial Condition and Results of Operations —
      Liquidity and Capital Resources.”





Further,
      we purchase most of our products from our suppliers on open trade credit terms.
      Many of these suppliers set limits on the open trade credit they will afford
      us
      at any given time. If our significant suppliers were to cease to sell to us
      on
      open trade credit terms, or were to substantially lower the credit limits they
      have set on our accounts, we would need to accelerate our payments to those
      vendors, creating additional demands on our cash resources, or we would need
      to
      find other sources for those goods.





***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.*** **






11





The
      acquisition of Solunet Storage as well as actions taken by SANZ in 2004 were
      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 resulting from all of those actions were to personnel expense (our
      largest expense item). While total selling, general and administrative expense
      was reduced by more than $1.6 million per quarter from the second quarter of
      2003 (in which the combination of SANZ and Solunet Storage was closed) to the
      fourth quarter of 2004, fluctuations in sales and gross profit over the same
      period have prevented these actions from fully closing the gap between gross
      profits and expenses. Management believes, however, that continued focus on
      cost
      reductions coupled with 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 “ Item
      7. Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.”





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 continued uncertainty
      in the level of technology spending, 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 debt or equity capital, or both.
      If
      we do seek additional debt or equity capital, there is no assurance that it
      will
      be available on favorable terms or in an amount sufficient to avoid the
      need
      for further reductions
      in expenses .





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 existing shareholders, or result in our issuance of securities with rights, preferences
      or privileges which may be senior to those of shares
      of
      our common stock .





***We
      have a single controlling shareholder that owns*** ***approximately*** ***58.4%
      of our outstanding shares*** ***of
      common stock*** ***and
      that has the power to elect a majority of*** ***our
      board of directors*** ***and control the strategic direction of*** ***SANZ*** ***.***





In
      our acquisition of Solunet Storage, we issued shares of common stock and voting
      preferred stock representing approximately 58.4%
      of the aggregate voting stock of SANZ to Sun Solunet. These shares give Sun
      Solunet the power to elect a majority of our board of directors and, through that board control, set direction for the company. The ability
      of
      other shareholders to influence the direction of the company (for example,
      through the election of directors) is therefore limited.





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





Approximately
      58.4 %
      of our outstanding shares are held by Sun Solunet. These shares first became
      eligible for sale under Rule 144 in April 2004, subject to volume limitations
      restricting sales to just under one million shares per three-month period.
      (Due
      to the size of Sun Solunet’s holdings, those volume limitations are expected to
      remain in force indefinitely, and will not lapse when the shares have been
      held
      for two years.) Further, at the time we acquired Solunet Storage, we entered
      into an agreement granting Sun Solunet the right to require us to register
      its
      shares for public resale. If Sun Solunet were to begin selling shares in the
      market rather than hold all of those shares over a longer term, the added
      availability of shares could cause the market price of our shares to drop even
      if our business is doing well. Furthermore, in light of the large number of
      shares that it holds and its acquisition cost of those shares (derivative of
      the
      price at which Solunet Storage acquired StorNet’s assets out of foreclosure),
      Sun Solunet could be willing to sell it shares at a price lower than the
      currently-prevailing market price, thereby depressing that price.





***Future
      “debt guaranty” warrants issued to Sun Solunet could result in dilution of the
      other shareholders of the Company.***





In
      partial consideration for the guaranty provided by Sun Capital Partners II,
      LP
      (“Sun Capital II”), an affiliate of Sun Capital and Sun Solunet, on our two
      revolving Harris Trust credit facilities, if the guaranteed Harris Trust debt
      was not reduced to $3.0 million or less starting in November 2004 (18
      months after the effective date of the guaranty), the Company was obligated
      to
      issue stock purchase warrants at an exercise price of $0.001 to Sun Solunet
      based on the excess guaranteed debt over $3.0 million.






12






Pursuant
      to this agreement, in November 2004, the Company was obligated to issue, and
      on
      March 23, 2005, the Company issued to Sun Solunet a stock purchase warrant
      to
      purchase 7,715,545 shares of common stock at an exercise price of $0.001 per
      share. In March 2005, pursuant to the February 2005 revision of the credit
      agreement with Harris Trust, which increased the Company’s availability by $2.0
      million, the Company approved the issuance of an additional stock purchase
      warrant to Sun Solunet for the purchase of 3,086,218 shares of common stock
      at
      an exercise price of $0.001 per share. This warrant was issued on March 23,
      2005.





Until
      the Company reduces the guaranteed debt to $3.0 million or less, it will be
      required to issue additional warrants to Sun Solunet at six-month intervals
      in
      the future (each May and November), according to formulas applicable to each
      such date. The issuance of additional stock purchase warrants would result
      in
      dilution of the other shareholders of the Company.





***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, StorageTek,
      EMC/Legato, Hitachi Data Systems, and Network Appliance. 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
      are 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
      EarthWhere TM software product became “generally available” in 2003 and we achieved several
      sales during the course of 2003 and 2004. The resources that we expended over
      four years of development were several times the amount of the 2003 and 2004
      sales; the direct cost of EarthWhere development activities in 2004 alone was
      approximately $600,000. This amount includes both capitalized amounts and
      amounts expensed for research and development.





We
      will continue to evaluate opportunities to develop other product solutions,
      and
      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.





***Due
      to the significant change in our size, the “project based” nature of our
      business, the uncertain acceptance of our new products and the uncertain
      turn-around in technology spending in general, we may have difficulty 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 the significant growth and changes
      in our operations as a consequence of the Solunet Storage acquisition, the
      newness of our EarthWhereTM product to the market, uncertainties in the pace of
      technology spending in the market as a whole as the United States economy
      recovers from recession, 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.






13






***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 contribute to fluctuations in our revenue and operating
      results. Significant among these factors is the increasing size of individual
      orders received by the company: we now regularly receive orders of more than
      $1
      million in a single transaction. 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; and the rate at which new
      markets emerge for products we are currently developing. In addition to the
      forecasting difficulties posed by these fluctuations, our reported results
      from
      any one period may not be a reliable indicator to investors of the financial
      results to be expected in future periods.





***A
      material portion of our sales are to the U.S. Federal*** ***government*** ***,
      and if we lost the ability to sell to the government our sales would decline
      significantly.*** **





As
      discussed previously
      in this Item, approximately 33% of our current sales are to U.S. government
      customers or to support U.S. government projects. Moreover, various agencies
      and
      branches of the U.S. Department of Defense, taken together, accounted for
      approximately 17% of total sales in 2004. 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. SANZ’ GSA Schedule was
      most recently renewed in February 2003, and is valid through February
      2008.





***Acquisitions
      of other companies could disrupt our business and harm our financial condition,
      and we could fail to recognize synergies expected from any such
      acquisition.*** **





SANZ
      has grown over the past few years in significant part through acquiring other
      companies, and it is possible that we will seek opportunities to acquire other
      businesses or technologies. Acquisitions entail a number of risks,
      including but not
      limited to 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. While we believe
      we
      have been successful in integrating the businesses of SANZ and Solunet Storage,
      the change inherent in any integration inevitably results in some amount of
      dislocation. If we undertake any additional acquisitions, there can be no
      assurance that any anticipated synergies will be achieved even if we are able
      to
      integrate the acquired business’ operations and economic conditions remain
      stable.





***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.






14





***No
      dividends.***





SANZ
      has never paid cash dividends on its common stock. We 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 “ Item
      5. Market
      for Common Equity and Related Stockholder Matters — Dividend
      Policy.”





***Our*** ***articles*** ***of*** ***incorporation*** ***permit us to issue preferred stock with rights superior to the common
      stock.*** **





We
      are authorized under our articles
      of incorporation to issue up to 10,000 shares of preferred stock. Our
      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 our
      board
      of directors may issue additional shares of preferred stock having, if so designated by our
      board
      of directors at the time of issuance, dividend, liquidation, voting or other rights superior
      to those of the common stock. We used that power to complete the acquisition
      of
      Solunet Storage in 2003 (although the preferred stock issued in that transaction
      did not have rights superior to the common stock into which it was convertible).
      Such an issuance could cause the market price of our common stock to decrease.
      Preferred shares could also be issued as a device to prevent a change in control
      of SANZ.





***We
      may be unable to hire and retain key personnel*** ***.***





Our
      future success depends on our ability
      to attract qualified, storage technology personnel. We may be unable to attract these necessary personnel.
      If
      we fail to attract or retain skilled employees, or if a key employee fails
      to
      perform in his or her
      current position, we may be unable to generate sufficient revenues to offset
      our
      operating costs.






**Item
      2. Properties**





We do
      not
      own any real property. We occupy approximately 9,595 square feet of leased office and data center space in Englewood, Colorado.
      This facility serves as our headquarters, and it houses most of our financial,
      administration and order processing functions, regional sales functions, and
      EarthWhereTM development functions. We are currently leasing this facility under
      a sub-lease agreement, which expires on September 14, 2005. The monthly rent
      under this sub-lease is $10,395 plus the costs of utilities, property taxes,
      insurance, repair and maintenance expenses and common area
      utilities.  We
      are in the process of negotiating a renewal for this lease at its expiration.





We
      currently have five other regional engineering and sales offices (excluding
      one-person offices or home offices in more remote locations), all located in
      leased premises. The following table is a summary of the locations, functions,
      approximate square footage and estimated utilization of our leased
      properties:





**Location**
            **Function**
            
            **Square**
              **F****ootage**
            
            **Utilization**Englewood,
                CO
            Headquarters,
                executive and administrative offices, as well as data center and
                research
                and development
            
            9,595
            
            90%Richardson,
                TX
            Call
                center, data center, engineering management and regional sales
                office
            
            9,546
            
            90%Vienna,
                VA (1)
            Engineering
                management and regional sales office
            
            2,559
            
            100%Stafford,
                TX
            Regional
                sales office
            
            2,202
            
            90%Campbell,
                CA
            Regional
                sales office
            
            1,680
            
            75%Seattle,
                WA
            Regional
                sales office
            
            1,967
            
            100%




(1)
            We
              have entered into a three year lease agreement beginning in April 2005
              for
              an additional 2,142 square feet adjacent to the current office in Vienna,
              VA.






15






In
      2004, we closed three of our regional offices located in Waltham, Massachusetts;
      Norwalk, Connecticut; and Chadds Ford, Pennsylvania, for which we remain subject
      to leases expiring in 2005 and 2006. In 2001, we closed a regional office in
      Orlando, Florida, for which we remain subject to a lease through January 2006.
      We have accrued the remaining obligation on these leases, net of any sublease
      income, for the life of the leases.





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**





Prior
      to December 1999, we owned a minority interest (less than 5%) in an unrelated
      company, Alliance Medical Corporation. In December 1999, we placed those shares
      (the “Alliance Shares”) into an escrow account, to be distributed either to
      SANZ’ shareholders of record at December 31, 1999 or back to SANZ, based on the
      outcome of certain future events. We contended that the requirements for a
      distribution of the Alliance Shares to those record-date
      shareholders failed
      to occur, and that SANZ was therefore entitled to recover the Alliance Shares,
      but certain of the record-date shareholders disputed our contention. In late
      2002 the escrow agent deposited the Alliance Shares with the District Court
      of
      Arapahoe County, Colorado. Between 2002 and December 31, 2004, we either settled
      with or obtained default judgments against a substantial majority of the
      record-date shareholders, and in doing so obtained clear title to slightly
      more
      than half of the Alliance Shares. Under those settlement agreements we waived
      our claim to approximately 37% of the Alliance Shares. Approximately 10% of
      the
      original Alliance Shares remain the subject of the litigation.




**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 2004.






16






**PART
      II**





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





Our
      common stock is quoted on the over-the-counter
      bulletin board maintained by the National Association of Securities Dealers,
      Inc. under the symbol “SANZ.” The following table shows the high and low bid
      quotations for our common stock in 2004 and 2003. 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 dollar
      volume.





Common
                Stock$
                High
            
            $
                Low**2004**First
                Quarter
            
            
            0.66
            
            
            0.48Second
                Quarter
            
            
            0.54
            
            
            0.38Third
                Quarter
            
            
            0.44
            
            
            0.24Fourth
                Quarter
            
            
            0.43
            
            
            0.24**2003**First
                Quarter
            
            
            0.78
            
            
            0.42Second
                Quarter
            
            
            0.90
            
            
            0.41Third
                Quarter
            
            
            0.60
            
            
            0.38Fourth
                Quarter
            
            
            0.63
            
            
            0.40





On
      March 24, 2005, the last reported sale price for our common stock was $0.34.





**Holders**





As
      of March 10, 2005, there were 95,811,278 shares of SANZ common stock
      outstanding, held of record by approximately 370 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 .





**Equity
      Compensation Plan Information**





The
      following table sets forth information regarding compensation plans (including
      individual compensation arrangements) in effect at December 31, 2004, 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.








17







**Plan
                Category**
            **Number
                of securities to**
              **be
                issued upon exercise of outstanding options,**
              **warrants
                and rights**
            **Weighted-average**
              **exercise**
              **price
                of outstanding**
              **options,
                warrants and**
              **rights**
            **Number
                of securities**
              **remaining
                available for**
              **future
                issuance under**
              **equity
                compensation plans**
              **(excluding
                securities**
              **reflected
                in column (a))**(a)
            (b)
            (c)Equity
                compensation plans approved by security holders
            1,083,357
                (1)
            $ 2.32
            -0-Equity
                compensation plans not approved by security holders
            12,311,302
            $ 0.44
            7,598,337Total
            13,394,659
                (1)
            $ 0.59
            7,598,337





(1)
            Excludes
                600,000 options with an exercise price of $0.70 per share that failed
                to
                vest at accelerated dates when specified performance targets were
                not met
                at those dates, but that will vest if the holder is still employed
                by us
                on March 26, 2013.





**Description
      of Non-Shareholder Approved Plans**





On
      September 20, 2001, our board of directors adopted the 2001 Stock Option Plan. At December 31, 2004, 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 is
      required to 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
      at the date of grant.





On
      December 18, 2003, our board of directors adopted the 2003 Stock Option Plan. At December 31, 2004, the total number of shares of common stock reserved for options issuable under
      this plan was 15,000,000. Options granted under the plan generally vest over
      four years. The exercise price of options granted under this plan is
      equal
      to the
      fair market value per share on the date of option grant. All options granted
      to
      date under the plan have had an exercise price equal to fair market value at
      the
      date of grant.






18






**Item
      6. Selected Financial Data**





The
      fiscal year 2004, 2003 and 2002 statements of operations data, and the 2004
      and
      2003 balance sheet data, have been derived from our consolidated financial statements and notes appearing in Item 15 of this report .
      The following 2004 information has been restated to reflect adjustments to
      the
      Original Filing that are further discussed in the “Explanatory Note” included in
      the forepart of this Form 10−K/A and in Note 1A, “Restatement of Financial
      Statements” to our consolidated financial statements included in Part IV, Item
      15, “Exhibits and Financial Statement Schedules” of this Form 10−K/A. The
      statement of operations data for 2001 has been derived from our historical
      financial statements for that year. The balance sheet data for Solunet Storage
      Holding Corp. as of December 31, 2002 and for StorNet, Inc. as of September
      25,
      2002 and December 31, 2001 have been derived from our historical financial
      statements for those periods. The statement of operations and balance sheet
      data
      for 2000 are not available, as StorNet, Inc. was not a reporting
      company.





The
      following table (in thousands, except per share data) should be read in
      conjunction with the consolidated financial statements and associated notes
      found in Item 15 of this report.




**Consolidated
                    Statement of**
                  **Operations
                    Data**
                
                San
                    Holdings, Inc.
                
                Solunet
                    Storage
                  Holding
                    Corp. (1)
                
                StorNet,
                    Inc. (2)Years
                    Ended
                  December
                    31,
                
                Sept.
                    26, 2002
                  to
                
                Jan.
                    1, 2002
                  to
                
                Year
                    endedDecember 31,2004
                
                2003
                  (1)
                
                Dec.
                      31, 2002
                
                Sept.
                      25, 2002
                
                2001As
                    restatedTotal
                    Revenue
                
                $
                66,158
                
                $
                55,497
                
                $
                11,554
                
                $
                42,446
                
                $
                97,441Loss
                    from operations (3)
                
                
                (3,509
                )
                
                (5,225
                )
                
                (5,627
                )
                
                (9,556
                )
                
                (19,815
                )Net
                    loss (4)
                
                
                (6,750
                )
                
                (5,938
                )
                
                (5,813
                )
                
                (10,362
                )
                
                (22,012
                )Basic
                    and diluted loss per share
                
                $
                (0.08
                )
                $
                (0.12
                )
                $
                (0.29
                )
                $
                (0.52
                )
                $
                (1.24
                )**Balance
                    Sheet Data:**Working
                    capital (deficit)
                
                
                (16,029
                )
                
                (12,225
                )
                
                (2,038
                )
                
                (32,876
                )
                
                (24,873
                )Total
                    assets
                
                
                53,272
                
                
                60,469
                
                
                12,320
                
                
                10,997
                
                
                25,626Total
                    long-term debt
                
                
                --
                
                
                --
                
                
                4,000
                
                
                --
                
                
                63Total
                    stockholders’
                  equity (deficit)
                
                
                19,767
                
                
                24,048
                
                
                (4,813
                )
                
                (32,087
                )
                
                (21,726
                )




(1)
            Solunet
                Storage Holding Corp. is the accounting predecessor to SAN Holdings,
                Inc.
                Effective April 1, 2003, SANZ completed a business combination with
                Solunet Storage, which was accounted for as a reverse acquisition,
                with
                Solunet Storage treated as the acquirer for accounting purposes.
                As a
                result, for all periods prior to April 1, 2003, the financial statements
                of Solunet Storage have been adopted as SANZ’ historical financial
                statements. The financial statements presented here as the financial
                statements of SANZ consist of the accounts of Solunet Storage for
                all
                periods presented, together with the assets, liabilities and results
                of
                operations of SAN Holdings, Inc. and its subsidiaries from April
                1, 2003.
              
              Solunet
                Storage commenced operations on September 26, 2002, when it acquired
                certain assets of StorNet, Inc. (“StorNet”) from its secured lender in a
                private foreclosure sale. The results of Solunet Storage’s operations for
                2002 consist solely of operations conducted during a period of slightly
                more than three months, from September 26, 2002 to December 31,
                2002.(2)
            On
              September 26, 2002, Solunet Storage acquired the assets of an ongoing
              business (StorNet); therefore, StorNet is considered to be an accounting
              predecessor of Solunet Storage, and thus of SANZ. The results of
              operations of StorNet are presented as prior period financial statements.
              However, because StorNet went through a foreclosure and liquidation
              on
              September 26, 2002, its financial statements have been prepared on
              a
              liquidation basis of accounting for the period from January 1, 2002
              through September 25, 2002, and are therefore not fully comparable
              to
              those of SANZ for 2003 or 2004.(3)
            In
              2003, our loss from operations included $2.0 million of non-recurring
              costs related to the acquisition of Solunet Storage, and $1.2 million
              of
              depreciation and amortization expense. In 2004, our loss from operations
              included $1.2 million of severance and closed office expense, related
              to
              continuing cost reduction efforts. The 2004 loss from operations also
              included $1.4 million of depreciation and amortization.





19






(4)
            The
              2004 net loss included a $2.5 million charge related to the obligation
              to
              issue a stock purchase warrant to our majority shareholder, Sun Solunet,
              pursuant to a debt guaranty provided by Sun Capital II, an affiliate
              of
              Sun Solunet. See further discussion in “Item 7. Management’s Discussion
              and Analysis of Financial Condition and Results of
              Operations.”







**Supplementary
      Data - Quarterly Financial Information (Unaudited)**





The
      consolidated results of operations on a quarterly basis were as follows (in
      thousands, except per share amounts). The following 2004 information has been
      restated to reflect adjustments to the Original Filing that are further
      discussed in the “Explanatory Note” included in the forepart of this Form 10−K/A
      and in Note 1A, “Restatement of Financial Statements” to our consolidated
      financial statements included in Part IV, Item 15, “Exhibits and Financial
      Statement Schedules” of this Form 10−K/A.





For
                the three months ended**2004**
            
            March
                31
            
            June
                30
            
            Sept.
                30
            
            Dec.
                31Net
                sales
            
            $
            16,839
            
            $
            15,248
            
            $
            17,965
            
            $
            16,106Gross
                Profit
            
            
            4,122
            
            
            3,119
            
            
            4,064
            
            
            3,295Net
                loss - as restated
            
            
            (484
            )
            
            (1,572
            )
            
            (308
            )
            
            (4,386
            )
            
            (1)Net
                loss per share, basic and diluted
            
            
            (0.01
            )
            
            (0.02
            )
            
            --
            
            
            (0.04
            )**2003
                (2)**Net
                sales
            
            
            7,146
            
            
            17,382
            
            
            15,969
            
            
            15,000Gross
                Profit
            
            
            1,554
            
            
            4,299
            
            
            3,952
            
            
            3,686Net
                loss
            
            
            (1,440
            )
            
            (3,529
            )
            
            (373
            )
            
            (596
            )Net
                loss per share, basic and diluted
            
            
            (0.07
            )
            
            (0.06
            )
            
            (0.01
            )
            
            (0.01
            )




(1)
              The
                  fourth quarter of 2004 includes a charge of $2.5 million related
                  to a
                  stock purchase warrant issued to our majority shareholder, Sun
                  Solunet.
                  This warrant was issued to Sun Solunet in partial consideration
                  for a
                  guaranty provided by Sun Capital II on our two revolving credit
                  lines with
                  Harris Trust. See further discussion in “Item 7. Management’s Discussion
                  and Analysis of Financial Condition and Results of
                  Operations.”
                
                The
                  fourth quarter of 2004 also includes approximately $850,000 of
                  expenses
                  related to closed office and employee severance. Of this amount,
                  approximately $500,000 was an accrual for remaining lease and severance
                  agreements to be paid in 2005 and 2006.(2)
              The
                business combination between SAN Holdings and Solunet Storage was
                completed on April 1, 2003, and was accounted for as a reverse
                acquisition, with Solunet Storage being treated as the acquirer for
                accounting purposes. As a result, for all periods prior to April
                1, 2003,
                the financial statements of Solunet Storage have been adopted as
                SANZ’
                historical financial statements. The financial information presented
                in
                the above table include the results of operations of Solunet Storage
                only
                for the first quarter of 2003, and of SAN Holdings, Inc. and its
                subsidiaries (SANZ and Solunet Storage combined) from April 1,
                2003.




20






**Item
      7. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**








**Restatement**





We
      have
      restated our consolidated financial statements as of and for the year ended
      December 31, 2004. In addition, certain disclosures in Notes 2, 3, and 6 to
      the
      consolidated financial statements included in Part IV, Item 15 of this report
      have been restated to reflect the restatement adjustments.





As
      previously disclosed on our Current Report on Form 8-K filed on November 17,
      2005, during the September 2005 quarter, we initiated a project to prepare
      stand-alone financial statements for audit of our EarthWhere business. We
      believe that this is an important step in further supporting the growth
      opportunities of that business. Beginning in 2003, the Company capitalized
      certain software development costs related to its EarthWhere geospatial imaging
      software in accordance with SFAS
      86 .
      As all
      of the Company’s capitalized software costs pertain to the EarthWhere business,
      such costs are considered to be material to the total assets of that business
      unit, but were not considered material to the total assets of the Company as
      a
      whole as of December 31, 2003 or December 31, 2004. As we undertook this
      project, we determined that the assumptions and evidential matter that the
      Company had used in capitalization of software development costs during 2003
      and
      2004 did not provide sufficient “contemporaneous documentation” to support
      capitalization.





As
      a result, on November 14, 2005, the
      Board
      of Directors of the Company in consultation with management concluded that
      the
      Company’s financial statements as of and for the year ended December 31, 2004
      and the interim financial statements as of and for the quarter and six months
      ended June 30, 2004, as of and for the quarter and nine months ended September
      30, 2004, for the quarter ended December 31, 2004 and as of March 31, 2005
      and
      June 30, 2005 should not be relied upon.





The
      restatement reflects the expensing of certain software development costs in
      2004
      related to the Company’s proprietary software that were capitalized on the
      Company’s original filings for the 2004 periods referred to above. The Company
      is not restating its 2003 financial statements due to the immateriality of
      the
      impact to both 2003 and 2005.





The
      primary impact of the restatement on the consolidated balance sheet at December
      31, 2004 was to decrease the capitalized software asset and increase the
      accumulated deficit by $465,000. The impact on the statement of operations
      for
      the year ended December 31, 2004 was to increase selling, general and
      administrative (SG&A) expense and increase the net loss for the year by the
      same amount. The restatement had no impact on cash balances. The impact of
      the
      restatement on the consolidated statement of operations, balance sheet,
      statement of stockholders’ equity and statement of cash flows is shown in tables
      included in Note 1A to
      the
      consolidated financial statements contained in this report.




**Executive
      Summary**





SANZ’
      Storage Solutions Business :





SANZ provides sophisticated enterprise-level data storage and data management
      solutions to commercial and government clients. We design, deliver, service
      and
      sometimes manage 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.” Our client-specific solution designs may include a variety of storage
      elements or subsystems from a single technology partner, or may be comprised
      of
      a mix of elements from a broad range of component suppliers. Clients often
      choose to conduct business with SANZ because of our ability to offer solutions
      that are based on a comprehensive understanding of the wide range of storage
      technologies and products that are available, and our ability to select from
      among all of those sometimes competing offerings to provide an optimized
      price-performance combination for the client’s specific needs. This expertise is
      our primary differentiating factor.






21





Because
      of our need to have a broad, concurrent understanding of many data storage
      technologies, our business requires a significant continued investment in
      well-trained engineering personnel and a high level of experience and training
      in our sales and support staff. We also invest in testing new product offerings
      and operate testing laboratories (of varying sizes) at our offices in Dallas,
      TX, Houston, TX, Englewood, CO and Washington, DC. These facilities are used
      to
      test proposed solutions and to demonstrate those solutions to prospective
      clients.





In
      many cases, we provide solution design recommendations to our clients as part
      of
      the sales process, often yielding higher margins on products than those
      typically obtained from a simple resale of off-the-shelf products, but not
      resulting in a separately identifiable charge to the client. In other cases,
      clients engage us as consultants, using our specialized expertise in such
      projects as : assessing
      the adequacy of clients’ current data storage infrastructures; advising them on
      new data management systems design; providing implementation services and
      providing ongoing operational support.





As
      an important part of our general business strategy, we have focused on and have
      grown the technical professional services content of our business, from $2.7 million
      in 2003 to $3.3 million in 2004, a 22% increase. Sales of professional services
      generally provide higher gross margins than the re-sale of third party hardware
      and software. At the same time, building out and maintaining a professional
      services staff requires additional management systems for recruiting, retention,
      and utilization.





Because
      of the complexity of data storage hardware and software, clients generally
      purchase maintenance and support contracts on those products. We provide these
      services from our Dallas, TX based “technical services center,” a call center in
      which our own engineers field support calls from clients with respect to many,
      but not all, of the products that we sell. Depending on the nature of the
      client’s issue, our engineers may resolve the call remotely or may pass on the
      call to the product vendor to send a technician into the field to fix the issue.
      This process is referred to in the industry as taking “first call.” We generally
      receive higher gross margins on service contracts under which we take first
      call. The ongoing communication with the client associated with taking first
      call also helps us to maintain a closer relationship with the client as its
      “trusted advisor,” and helps us to identify new sales opportunities within the
      client. SANZ’ full complement of services, from initial consulting through
      post-installation technical support, creates a “full service” model for our
      clients.





We
      market our Storage Solution products and services primarily to Federal government and commercial enterprises. We view these two market segments as having distinct needs, and
      as
      a result, made
      changes in our organization in late 2004 to address these markets with
      specifically dedicated resources. The Federal market for SANZ is generally
      highly centralized in the Washington DC area; typically involves larger contract
      awards and longer sales cycles that can stretch to near 12 months; requires
      that
      we maintain presence on certain Federal procurement vehicles (i.e., GSA Schedules) that generally limit available margin on third
      party product re-sale; and typically provides greater opportunity for higher
      levels of professional services sales. The commercial market for SANZ is much more geographically diverse; normally involves smaller
      average project size with shorter sales cycles of generally 90 days; faces
      certain market access limitations from our technology partners as most reserve
      many of the Fortune 1000 accounts for direct instead of channel management;
      typically supports higher available margin on third party product re-sale;
      and
      generally provides less opportunity for sales of professional
      services.





It
      is our strategy to maintain and increase our market
      share in
      both of these markets. The sales cycles of Federal and commercial procurement are different and generally complementary; the commercial markets tend to provide more early adopters of new storage technologies; and,
      as
      we serve both markets from a similar portfolio of technology partners, it allows
      us to extract better financial leverage from our investment in training and
      vendor management efforts.





While we
      believe the
      market for data storage solutions is large (sources such as VARBusiness
      magazine estimated the 2004 global storage services market at
      $23.5 billion in an August, 2004 publication), robust and broad-based as a
      result of the fundamental need by all industries and government agencies to
      better manage ever increasing amounts of data, it is not immune to fluctuations
      in capital spending in general and in information technology (IT) spending
      in
      particular.






22





Capital
      investment in IT has been generally depressed since the expansion in
      2000. In addition, in the storage sector, a rapid pace of technological change has
      put
      additional pressure on new project revenues and product re-sale margins. Disk
      prices have continued to fall through the introduction of new technologies
      and
      improved manufacturing techniques. This has created margin pressures in the
      market for disk products and applied derivative pressure on tape and tape
      related product sales. The price per unit volume of general data storage
      capacity has continued to trend downward. IDC Corp.’s “Worldwide Disk Storage
      System Tracker” reported December quarter 2004 results as 1% revenue growth and
      57.7% capacity growth year on year. The software offerings for traditional
      functions such as backup and recovery have increased in number and improved
      in
      functionality, again increasing downward pricing
      pressure.





To
      counter these downward
      pricing pressures,
      we have focused on increasing unit volume capacity sales and growing our higher
      margin product and service offerings such as professional services.
      We believe
      that we have been generally successful on both counts, but have had to make major
      changes in our overall cost structure in the process, and re-direct our
      available resources to a tighter market focus. In 2004 these changes in
      structure resulted in $1.2 million of severance and office closure
      costs.





Our
      strategy for the Storage Solutions business is to continue to build on our
      reputation for providing highly cost effective, comprehensive data management
      solutions in a full service model .





To
      improve our financial performance, we are focused on organizational
      productivity. We are driving to increase the individual productivity of our
      sales staff and the billable utilization of our existing engineering staff.
      In
      parallel, we are moving to increase the mix of our higher margin services
      business, and continue to reduce the costs of our back office and support
      operations through ever improved application of systems and technology.





SANZ’
      EarthWhereTM software and services business :





As
      an outgrowth of our understanding of data management processes and requirements,
      we have developed and sell a proprietary data-management software application
      designed specifically for managing geospatial imagery data. ** EarthWhere TM is designed to facilitate a user’s provisioning and distribution of stored
      geospatial data (e.g., satellite and aerial imagery, map data, etc.).





We
      are currently marketing EarthWhere TM predominantly to government agencies that use geospatial digital imagery in
      their business or mission. These many uses may include:





●
            Intelligence
                operatives and planners who use images to monitor condition changes
                in
                their surveillance objectives;





●
            Environmental
                condition analysts who use hyper-spectral analysis of imagery to
                monitor
                changes in conditions;





●
            Agricultural
                scientists and planners who use imagery to monitor farm production
                compliance, soil conditions, and land
                contours;





●
            Borderpatrolenforcement teams who use imagery to plan for more effective “route”
                control and intercept;





●
            Oil
                and gas and minerals exploration
                analysts;





●
            Emergencymanagementteams who use imagery to address issues of evacuation route
                planning;





●
            Municipal
                planning, taxing and control organizations who use imagery to address
                zoning compliance and other real estate development
                issues.





While
      there are no specific market estimates for software products and services that
      provide the EarthWhereTM functionality, the market for geospatial imagery data is
      estimated by the American Society for Photogrammetry and Remote Sensing
      (“ASPRS”) to exceed $3 billion annually, and to be growing at approximately 9-14%
      per year . Another
      source, Cary & Associates, put the total Federal spending on “Geo
      Technology,” which includes imagery, IT delivery systems, and personnel involved
      in the management and use of imagery etc., at approximately $6
      billion.






23





The
      current business process that is used to deliver imagery to meet the needs
      of
      geospatial imagery users is complex. A critical element in that process, given
      the state of current technology, is the role of the highly trained imagery
      analyst, who must retrieve the correct imagery data and apply sophisticated
      software tools to create the exact image needed by the business user, no matter
      how simple or complex.





The process of
      delivering imagery to meet the needs of geospatial imagery users is slow, time intensive (therefore costly), and often fails to meet timing
      or
      general mission needs of the business
      user .
      The larger effect is that the cost and lack of timeliness of the process itself
      currently limits the growth rate of the market. In order to serve more business
      users, today’s process model requires an investment in more imagery
      analysts which, in many cases, is an unacceptable condition.





SANZ
      management believes that the introduction of EarthWhereTM as a data provisioning
      application offers dramatic improvement to the process for delivering data
      to
      the imagery analyst and making some of his/her tasks much easier. In actual
      process impact tests at the United States Geological Survey and other users,
      the
      application of EarthWhereTM improved productivity of some operations by as much
      as 20 to 1. Improving the productivity of the imagery analyst increases his/her
      ability to completely support the mission objectives of the business user and
      correspondingly support an expanding user market.





Our first real year of product introduction was
      2004. We made solid penetration in a number of Federal agencies that hold significant
      potential for broad application of the EarthWhereTM software product. The sales
      cycle for an “enterprise class” software product typically exceeds 12 months,
      from initial introduction to full deployment. We expect that the EarthWhereTM
      sales cycle will follow this pattern. A relatively small license sale that
      supports a typical “department” use is in the range of $100,000. Our business
      development efforts through 2004 have been primarily founded on a direct sales
      model, though we have taken steps to develop a channel sales model. We expect
      to
      increase revenue in 2005 as we continue to invest in building out our sales
      and
      distribution model and move some of our existing clients from department to
      “enterprise” use of the product.





As
      part of our software sale, we provide installation and support services. We
      have
      also found that some of our clients and prospective clients have a need for
      business process re-engineering and other consulting services, which we also
      provide.





At
      this stage we have no direct competition for the EarthWhereTM product. We
      sometimes face indirect competition where mature users of geospatial imagery
      have developed custom “in house” systems that perform some or all of the
      functions of our product.





We
      are investing at significant levels in continued product development, which
      we
      expect will be necessary to continue to maintain a
      competitive position. We
      capitalize software development costs according to accounting
      principles generally accepted in the United States (“US GAAP”). In 2004, we capitalized $53,000 of software costs related to the development and
      production of EarthWhereTM, and expensed $536,000 in research and development
      costs related thereto.





While
      we expect increases in sales of EarthWhereTM software and related services, this
      part of our business is still in
      the
      development stage and no assurance can be made that we will meet our sales
      objectives .
      If we fail to meet our sales objectives, the cash requirements for development
      will put a significant strain on the Company’s cash resources.





**General**





SANZ’
      current line of business operations commenced in 2000. Effective April 1, 2003,
      we completed the acquisition of Solunet Storage and, indirectly, its operating
      subsidiary Solunet Storage, Inc. (d/b/a “StorNet Solutions”). As further
      discussed in Note 1 and Note 4 to our consolidated financial
      statements included
      in this report ,
      the transaction was accounted for as a reverse acquisition, and as a result,
      the
      financial statements of Solunet Storage have been adopted as the historical
      financial statements of SANZ for all periods prior to April 1, 2003. For the
      period from April 1, 2003 through December 31, 2004, the consolidated financial
      statements consist of both the operations of Solunet Storage and
      SANZ.






24





In
      this report or in our other reports filed with the SEC, we at times make
      reference to “EBITDA,” which is a non-US GAAP measure. Unless otherwise defined
      in a specific report, “EBITDA” consists of net income computed in accordance
      with US GAAP excluding the effects of depreciation and amortization, interest
      and taxes. Management believes that EBITDA may be useful to investors in
      assessing SANZ’ near-term performance because it excludes the impact of
      depreciation, amortization and similar costs (or recoveries) related to prior
      investments, and because depreciation and amortization are not controllable
      in
      the current period. Although it is a widely recognized measure, EBITDA is not
      meant to be considered a substitute or replacement for net income as computed
      in
      accordance with US GAAP. In addition, our calculation of EBITDA may be different
      from the calculation used by other companies and, therefore, comparability
      may
      be limited.





**Critical
      Accounting Policies and Estimates**





We
      prepare our financial statements in accordance with US
      GAAP .
      The accounting policies most fundamental to understanding our financial
      statements are those relating to recognition of revenue, to our use of
      estimates, to the capitalization of software development costs and those
      relating to the impairment testing of goodwill and intangible assets.





***Revenue
      Recognition***





The
      Company recognizes revenue from the design, installation and support of data
      storage solutions, which may include hardware, software and services. The
      Company ’ s
      revenue recognition policies are based on the guidance in Staff Accounting
      Bulletin No. 104, “Revenue Recognition” (“SAB 104”), in conjunction with Emerging
      Issues Task Force
      (“EITF”) Issue Number 00 -21,
      “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). The Company
      recognizes revenue when:





●
      persuasive evidence of an arrangement exists,


●
      delivery has occurred or services have been rendered,


●
      the sales price is fixed or determinable, and


●
      collectibility of the resulting accounts receivable is reasonably assured.





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





Product
      Sales (Hardware/Software)





Revenue
      from the resale of data storage systems is recognized upon either (i) the
      shipment of goods for freight-on-board
      (“ FOB ”) origin shipments or (ii) the delivery of goods to the customer for FOB
      destination shipments, provided that no significant uncertainties regarding
      customer acceptance exist, and depending on the terms of the contract and
      applicable commercial law.





Service
      sales





Service
      revenue, including material installation services, is recognized as the related
      services are completed.





Maintenance
      Services





Revenue
      from maintenance agreements is recognized in one of two ways, based on whether
      or not the Company performs “first call” maintenance support. The Company
      operates a first call technical support center for certain of the hardware
      and
      software products that we sell. For first call maintenance services, we record
      the gross sale price of the applicable support or maintenance contract as
      deferred revenue, and recognize revenue on a straight-line basis over the
      contractual terms of the agreements. Likewise, the cost to acquire such
      maintenance agreements from the hardware and software vendors is also deferred
      and amortized on a straight-line basis over the contractual terms of the
      maintenance agreements. Revenue from these arrangements is set
      forth
      under the heading “Maintenance services” in the Consolidated Statement of
      Operations included
      in Item 15 to this report .






25





Maintenance
      contract fees, net





For
      products for which we do not perform first call maintenance, but resell the
      vendor’s maintenance contract for a fee, we recognize revenue from the resale of
      those maintenance agreements, net of the cost to acquire the maintenance
      agreements, at the beginning of the maintenance period. Revenue from these
      arrangements is set
      forth
      under the heading “Maintenance contract fees, net” in the Consolidated Statement of
      Operations included
      in Item 15 to this report .





Multiple
      deliverable arrangements





In
      accordance with EITF 00-21, for sales transactions that include the resale
      and
      installation of data storage systems and the resale of maintenance contracts
      denominated as a single, lump-sum price, we allocate the aggregate transaction
      revenue among the multiple elements based on their relative fair values. This
      process involves the application of management’s judgment and estimates
      regarding those relative fair values.





When
      some elements are delivered prior to others in a multiple element arrangement,
      revenue for the delivered elements is separately recognized, provided all of
      the
      following criteria are met:




●
            the
              delivered item has value to the customer on a standalone
              basis;●
            there
              is objective and reliable evidence of the fair value of the undelivered
              item(s); and●
            delivery
              or performance of the undelivered item(s) is considered probable and
              substantially in the control of the
              vendor.




Undelivered
      items typically include installation, training, and other professional services.





Deferred
      revenue, whether associated with maintenance contracts or undelivered elements,
      is included within deferred revenue on our balance sheet included
      in this report .





***Use
      of Estimates***





The
      preparation of our financial statements in conformity with US 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 assessment of the carrying
      value of goodwill, allowances for credit losses on accounts receivable,
      allowances for impairment in the value of inventory, recognition of revenue,
      and
      the useful lives of intangible assets.





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.






26





Goodwill
      and Intangible Assets





The
      Company reviews 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 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. Goodwill was subjected
      to
      fair value impairment tests in 2004 and 2003 and no impairments were
      recognized.





Generally,
      intangible assets other than goodwill are amortized over their useful lives.
      Determining the useful life of most such intangible assets requires an estimate
      by management. Our intangible assets that are subject to amortization include
      tradenames and customer lists. The usefulness of customer lists declines
      gradually due to customer turnover. In the case of tradenames, if a decline
      occurs, it is more likely to occur as a single event at an as-yet unknown time
      (e.g., as a consequence of a future rebranding). While it is not possible to
      know when such a change may occur in the future, we have estimated a median
      date
      based on our current business plans for such names and the general practices
      in
      the marketplace.





We
      evaluate the carrying value of long-lived assets, including intangibles subject
      to amortization, whenever events or changes in circumstances indicate the
      carrying amount may not be fully recoverable. If that analysis indicates that
      an
      impairment has occurred, we measure the impairment based on a comparison of
      undiscounted cash flows or fair values, whichever is more readily determinable,
      to the carrying value of the related asset.





Accounts
      Receivable





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 uncollectible. 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. 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.





Inventory





We
      also utilize a specific reserve methodology for our inventory, in which we
      periodically review our 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, we may have to reduce the carrying value of that
      inventory, and our future results of operations could be materially
      impacted.





Expense
      Classification





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 our
      operating expenses pertaining to employee compensation and related expenses
      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 revenue recognition when a particular
      services engagement has achieved completion and recognition of revenue is
      therefore appropriate.






27





***Software
      development costs***





We
      expense the costs of developing computer software to be sold, leased or
      otherwise marketed until technological feasibility is established and we
      capitalize all costs incurred from that time until the software is available
      for
      general customer release or ready for its intended use, at which time
      amortization of the capitalized costs begins. We determine technological
      feasibility for our computer software products based upon the earlier of the
      achievement of: (a) a detailed program design free of high-risk development
      issues; or (b) completion of a working model. Costs of major enhancements
      to existing products are capitalized while routine maintenance of existing
      products is charged to expense as incurred. We also contract with third parties
      to develop or test software that will be sold to customers and generally
      capitalize these third-party costs. The establishment of the technological
      feasibility and the ongoing assessment of the recoverability of capitalized
      computer software development costs require considerable judgment by management
      with respect to certain external factors, including, but not limited to,
      technological feasibility, anticipated future gross revenue, estimated economic
      life and changes in software and hardware technology.





We
      amortize capitalized software costs on a product-by-product basis over their
      expected useful life, which is generally three years. The annual amortization
      related to software to be sold is the greater of the amount computed using
      (a)
      the ratio that current gross revenue for a product compares to the total of
      current and anticipated future gross revenue for that product or (b) the
      straight-line method over the remaining estimated economic life of the
      product.





***Recent
      Accounting Pronouncements***





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard No. 123 (revised) (“SFAS 123R”),
“Share Based Payment,” which provides guidance on share-based payment
      transactions and requires fair value accounting for all share-based
      compensation. SFAS 123R requires the Company to measure the cost of employee
      services received in exchange for an award of equity instruments based on the
      grant-date fair value of the award (with limited exceptions). That cost will
      be
      recognized over the period during which an employee is required to provide
      service in exchange for the award, usually the vesting period. The Company
      is
      required to adopt SFAS 123R at the beginning of its third quarter of 2005.





We
      are
      currently evaluating the impact of SFAS 123R on our financial position
      and
      results of operations as well as alternative transition methods under
      SFAS 123R. In addition, we have not determined whether the adoption
      of
      SFAS 123R will result in amounts that are similar to the current pro
      forma
      disclosures under SFAS 123.





In
      2004, the FASB also issued the following Statements of Financial Accounting
      Standards:


●
              Statement
                No. 151, “*Inventory Costs—an amendment of ARB No. 43, Chapter 4,*”
                issued in November 2004;●
              Statement
                No. 152, “*Accounting for Real Estate Time-Sharing Transactions—an
                amendment of FASB Statements No. 66 and*67,”**issued in
                December 2004; and**●
              Statement
                No. 153, “*Exchanges of Nonmonetary Assets—an amendment of APB Opinion
                No.*29,” issued in December
                2004.




Management
      believes that adoption of these new standards will not have a material impact
      on
      the Company’s financial results.





**Results
      of Operations**





SANZ
      and Solunet Storage combined effective April 1, 2003. As discussed in Notes
      1
      and 4 to our consolidated financial statements included
      in this report ,
      this transaction has been accounted for as an acquisition of SANZ by Solunet
      Storage. As a result, for all periods prior to April 1, 2003, the financial
      statements of Solunet Storage have been adopted as SANZ’ historical financial
      statements. The results of operations of the acquired business and the assets
      of
      that acquired business are reflected in our consolidated financial statements
      only for the periods after the date of acquisition, April 1, 2003.






28





Solunet
      Storage, in turn, had acquired the net assets of StorNet, Inc. effective
      September 26, 2002, pursuant to a private foreclosure transaction. The 2002
      results of operations and cash flows refer to the combined operations of StorNet
      Inc. during the period January 1, 2002 through September 25, 2002 and the
      operations of Solunet Storage from September 26, 2002 through December 31,
      2002.
      In the discussion below, we refer to this combination as “StorNet/Solunet.” The
      statements of operations of StorNet, Inc. for the nine month period ended
      September 25, 2002 (the date of StorNet, Inc.’s liquidation) are included in
      this report ,
      but are not considered to be comparable to our 2004 or 2003 results of
      operations because, among other factors, the StorNet financial statements for
      2002 have been prepared on a liquidation basis of accounting. For this reason,
      the reader is cautioned in making comparisons between the 2003 and 2002 results
      of operations.





When
      we refer to the operations or net assets of only one of the constituent
      businesses, independent of the other, we use the term “legacy,” as in “legacy
      SANZ” or “legacy StorNet/Solunet.”





***Results
      of Operations for the Year Ended December 31, 2004***


***Compared
      to Results of Operations for the Year Ended December 31, 2003***





It
      is important to note that the 2003 consolidated financial statements do not
      include the operations of SANZ prior to April 1, 2003 (referred to as “legacy
      SANZ”). As such, we believe that a comparison of the results of operations of
      both Solunet Storage and legacy SANZ combined on a pro forma basis for the
      year
      ended December 31, 2003, giving effect to pro forma adjustments as if the
      companies had been combined as of January 1, 2003, and as reported in our
      Quarterly Report on Form 10-QSB for the quarterly period ended September 30,
      2003 (“pro forma”), is important to the understanding of our results for the
      year ended December 31, 2004. Accordingly, in our discussion and analysis below,
      we have included a discussion of 2004 reported results compared to both 2003
      reported results and 2003 pro forma combined results.





***Sales**.* Our sales during the year ended December 31, 2004 were $66.2 million. This
      represents an increase of $10.7 million, or 19%, over the $55.5 million
      recorded during the year ended December 31, 2003. The increase is primarily
      a
      result of the combination of sales of legacy SANZ and Solunet Storage for 2004,
      which accounts for $7.5 million of the increase.





Had
      the combination of SANZ and Solunet Storage been completed at January 1, 2003,
      the combined revenues of both organizations for 2003, on a pro forma basis,
      would have been $63.0 million. The additional $3.2 million increase in revenue
      from 2003 pro forma to 2004 was based on a combination of factors. Specifically,
      hardware and software sales increased by $1.3 million, or 2.2%, from 2003 pro
      forma to 2004. We believe that the modest increase in hardware and software
      sales was due to gains in market share in the Federal government sector,
      partially offset by soft general market conditions in the commercial sector, caused by reductions in capital spending in the U.S. markets as a whole.
      Revenue from maintenance services increased from $4.9 million in 2003 to $6.9
      million in 2004, a $2.0 million or 40% increase. This revenue increase
      is
      primarily the result of legacy SANZ’ shift from reselling supplier provided
      maintenance (i.e., maintenance contract fees) to providing “first call”
      maintenance services. Maintenance services revenue, as defined, generally
      provides the Company more predictable recurring future revenue streams based
      on
      maintenance service renewals, and generally, higher gross margins as compared
      to
      maintenance contract fees. Revenue from maintenance contract fees, which are
      shown on a “net basis” in the Statement of Operations included
      in this report ,
      increased marginally from $817,000 to $878,000 from 2003 to 2004, an 8%
      increase. On a gross revenue basis, this represents an approximate $0.6 million
      increase, which is consistent with the percentage increase in our hardware
      and
      software sales.





***Gross
      Margin*** .
      Gross profit for the year ended December 31, 2004 was $14.6 million, compared
      to
      a gross profit of $13.5 million recorded during the prior year. Of the $1.1
      million increase, approximately $2.6 million is attributable to the increase
      in
      total revenue, offset by a decline of approximately $1.5 million attributable
      to
      lower gross margin from product mix described below .






29






On
      a percentage basis, gross margin declined from 24.3% in 2003 to 22.1% in 2004.
      On a pro forma basis, gross margin declined from 23.0% in 2003 to 22.1% in
      2004.
      The decrease in overall gross margin is primarily related to gross margins
      of
      sales of hardware, software and services, which declined from 21.7% in 2003
      pro
      forma to 20.8% in 2004. This decrease is due to project and product mix shift
      and to market pricing pressures. Specifically, in 2004, tape system sales and
      disk sales were approximately $12.6 million and $15.3 million, respectively.
      This compares to tape system and disk sales of $18.3 million and $12.6 million,
      respectively, for the 2003 pro forma year. Tape systems typically carry higher
      margins as compared to disk margins. In addition, gross margins related to
      sales
      of hardware, software and services were further depressed in 2004 due to changes
      in supplier mix.





***Operating
      Expenses**.* Our operating expenses for 2004 were $18.1 million. Of this amount, $15.5
      million consists of selling, general and administrative expenses (“SG&A”)
      and $1.4 million consists of depreciation and amortization. The remaining
      $1.2 million of expense represents amounts paid in 2004 and charges
      for
      future payments required in 2005 and 2006 related to regional office closures
      and severance costs associated with the reduction in force during 2004 of
      various management personnel. Excluding the severance and closed office expense,
      operating expenses were $16.9 million.





The
      total operating expense of $18.1 million in 2004 represents a decrease of $0.6
      million from the $18.7 million of total operating expenses recorded in 2003.
      The
      2003 amount includes $15.5 million of SG&A expenses, $2.0 million of
      expense relating directly to the acquisition of Solunet Storage, and $1.2
      million of depreciation and amortization. Excluding the acquisition-related
      expense, 2003 operating expenses were $16.7 million.





On
      a pro forma basis, excluding all acquisition related expenses for both SANZ
      and
      Solunet Storage, operating expense in 2003 was $18.9 million. The 2004 operating
      expenses of $18.1 million represent a decrease of $0.8 million,
      or 4%,
      as compared to 2003 pro forma operating expenses. This decrease is a result
      of
      personnel reductions made after the combination of the two companies,
      particularly in areas such as finance, sales support, back-office
      administration, engineering and management, where we had duplicate and/or
      redundant positions. Total headcount at December 31, 2004 was 101, as compared
      to total headcount at December 31, 2003 of 112. In addition, in 2004 we closed
      three regional offices, concentrating our resources in regions where we believe
      we have greater sales potential.





***Interest
      Expense.*** During 2004, interest expense was $1.2 million, an increase of $400,000 from
      2003 interest expense of $817,000. This increase reflects higher borrowing
      levels, averaging approximately $16 million in 2004 as compared to an
      average debt outstanding of approximately $10 million the prior year. Interest
      expense in 2004 and 2003 included approximately $150,000 paid to an affiliate
      of
      Sun Solunet for loan guaranties issued on our behalf by Sun Capital
      II.





***Charge
      for Warrant issued to Related Party for Debt Guaranty**.* In November 2004 and in partial consideration for our Harris debt guaranty
      provided by Sun Capital II, an affiliate of our majority shareholder, we were
      obligated to issue to our majority shareholder, Sun Solunet, a stock purchase
      warrant for a total of 7,715,545 shares of our common stock with an exercise
      price of $0.001 per share. Based on the number of shares issued pursuant to
      the
      warrant, we recorded a charge of approximately $2.5 million, calculated as
      the
      number of shares issued multiplied by the closing market price of SANZ’ common
      stock as of November 16, 2004. This warrant was issued on March 23, 2005. See
      further discussion regarding the debt guaranty warrant issued in the discussion
      of Liquidity and Capital Resources below.





***Other
      Income and (Expense)**.* Other income and (expense) for 2004 was $121,000 as compared to ($11,000) for
      2003. The net increase in other income in 2004 is principally due to a
      settlement on litigation in the form of shares in a private company and
      resultant gains from sales of a portion of those shares during the third quarter
      of 2004, the combination of which totaled $229,000. Offsetting this income
      were
      losses of $113,000 on disposals of property, equipment and leasehold
      improvements related to the consolidation of two Colorado corporate offices
      into
      a single corporate headquarters in May 2004.





***Income
      Taxes**.* For the year ended 2004, we received and recorded a Federal income tax refund
      in
      the amount of $352,000. The refund was the result of the carryback of the net
      operating loss for 2002 for StorNet Inc., whose assets, including rights to
      tax
      refunds, we acquired in 2002 from the secured lender of StorNet Inc. in a
      foreclosure sale. We recorded the income tax refund as an income tax benefit
      in
      the Statement of Operations. In 2003, we received and recorded income tax
      refunds of $115,000 related to various states.






30





***Results
      of Operations for the Year Ended December 31, 2003***


***Compared
      to Results of Operations of Solunet Storage and StorNet for the Year Ended
      December 31, 2002***





***Sales**.* Our sales during the year ended December 31, 2003 were $55.5 million. This
      represents an increase of $1.5 million, or 3%, over the $54.0 million
      recorded during the year ended December 31, 2002. We estimate that this net
      increase consists of an increase of approximately $22 million attributable
      to
      the addition of sales by the legacy SANZ business over the nine-month period
      commencing April 1, 2003, offset by an almost equal ($20 million) decline
      in sales by the legacy StorNet/Solunet business from the significantly higher
      volumes that were recorded in the early portion of 2002. Of that decline, we
      estimate that approximately $8 million or 40% resulted from the effects of
      StorNet/Solunet’s deteriorating financial condition over the course of 2002,
      with the resulting losses in personnel and customer confidence that occurred
      until it was stabilized by Sun Solunet’s acquisition of the business in
      September 2002. We estimate that the other $12 million or 60% of the decline
      reflects the effects of the decline in capital spending on IT products in the U.S. economy as a whole, which began in 2001 and continued
      through 2003 and which affected both the legacy SANZ business and the legacy
      StorNet/Solunet business.





***Gross
      Margin*** .
      Gross profit for the year ended December 31, 2003 was $13.5 million, compared
      to
      a gross profit of $13.3 million recorded during the prior year. On a percentage
      basis, gross margin declined from 24.7% to 24.3% from 2002 to 2003. The $180,000
      increase in gross profit (in dollars) consists of an increase of approximately
      $370,000 attributable to the increase in total revenue, offset by a decline
      of
      approximately $190,000 attributable to the slight decline in percentage margin.
      The decline in percentage margin in turn results principally from the addition
      of the legacy SANZ business, which historically operated at percentage gross
      margins several points lower than the legacy StorNet/Solunet business. The
      higher margins of the legacy StorNet/Solunet business, and the higher margins
      recorded in 2002, reflect the fact that the legacy StorNet/Solunet business
      includes a smaller percentage of federal government business than the federal
      sales historically recorded by SANZ.





***Operating
      Expenses**.* Our operating expenses for 2003 were $18.7 million. Of this amount, $15.5
      million consists of SG &A , $2.0 million consists of expense relating directly to the acquisition of Solunet
      Storage, and $1.2 million consists of depreciation and amortization. Excluding
      only the acquisition-related expense, operating expenses were $16.7 million;
      excluding both acquisition-related expense and depreciation and amortization,
      operating expenses were $15.5 million.





The
      total operating expense of $18.7 million in 2003 represents a decrease of $9.8
      million from the $28.5 million of total operating expense recorded in 2002.
      The
      2002 amount includes a total of $11.9 million in charges for non-cancelable
      leases, for a loss on liquidation value of assets (both of which were recorded
      by StorNet in connection with its liquidation in September 2002), and for
      post-transaction business continuation expense (recorded by Solunet Storage
      in
      connection with commencing operation of the business acquired from StorNet)
      (these three items are referred to as the “special charges”). Excluding the
      special charges, 2002 operating expenses were $16.6 million; excluding both
      the
      special charges and depreciation and amortization, 2002 operating expenses
      were
      $15.4 million.





***Interest
      Expense**.* During 2003, interest expense (net) decreased by $500,000, from $1.3 million
      to
      $800,000. This decrease reflects a decline of approximately $650,000 due to
      decreased average borrowing levels and lower interest rates in 2003 as compared
      to 2002, offset by approximately $150,000 paid to an affiliate of Sun Solunet
      for loan guaranties issued on our behalf by Sun Capital II.






**Liquidity
      and Capital Resources**





**Liquidity**





Our
      consolidated financial statements as presented in “Item 15. Exhibits and
      Financial Statement Schedules — Financial Statements” have been prepared in
      conformity with US GAAP, which contemplate our continuation as a going concern.
      However, we have incurred substantial losses from operations since inception
      and
      have incurred a net loss of $6,750,000 for the year ended December 31, 2004.
      In
      addition, as of December 31, 2004, we have negative working
      capital(current liabilities in excess of current assets) of $16,029,000.
      Accordingly, the recoverability of a major portion of the recorded asset amounts
      as of December 31, 2004 is dependent on our continuing operations, which in
      turn
      is dependent on our ability to maintain our current financing arrangements
      and
      our ability to become profitable in our future operations. Our consolidated
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts or amounts and
      classification of liabilities that might be necessary if we were unable to
      continue as a going concern.






31






As
      of December 31, 2004, we had approximately $2.9 million of undrawn availability
      in the aggregate on our Wells Fargo and Harris Trust lines of credit. While
      availability on our lines of credit with Harris Trust is not subject to asset
      levels, borrowing under our line of credit with Wells Fargo is dependent at
      any
      time on our having adequate eligible accounts receivable to support borrowings.
      Although we generated positive earnings before interest, taxes, depreciation
      and
      amortization or EBITDA, during the first and third quarters of 2004, we recorded
      negative EBITDA for 2004. We must achieve either greater gross profits, or
      a
      continued reduction of operating expenses, or a combination of both, if we
      are
      to achieve true and sustained profitability.





While
      the cost reduction actions taken since the SANZ and Solunet merger and continued
      efforts to minimize expense, coupled with stabilization or modest increase
      in
      gross profit levels, are currently projected to enable the Company to reach
      positive cash flow in 2005, there can be no assurance that we will succeed
      in
      doing so. By generating positive operating cash flow in 2005, and assuming
      continuation of current business trends and supplier relations, we believe
      that
      our existing credit facilities are adequate in providing sufficient liquidity
      to
      fund our operations for 2005. However, given the additional uncertainty
      regarding the turnaround in the information technology market sector, there
      is a
      possibility that we will need either to undertake further cost-cutting measures
      (which could entail curtailing certain operations), or to raise additional
      debt
      or equity capital, or both. If we do seek to raise debt or equity 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 is raised, the
      issuance of those shares would also be dilutive to the ownership interests
      of
      all other stockholders.




**Cash
      and Cash Flows**




At
      December 31, 2004, we had $486,000 in cash and cash equivalents. In addition
      to
      cash, at that date we had undrawn availability of $2.9 million on our Wells
      Fargo and Harris Trust credit facilities, resulting in a total of $3.4 million
      of cash plus undrawn availability. Management believes this total represents
      a
      better measure of our liquidity than does our cash alone.




For
      the year ended December 31, 2004, our operating activities used $887,000 of
      cash, compared to $3.9 million of cash used in operating activities during
      2003.
      Significant uses of cash from operations for 2004 were: (1) the net loss
      incurred during the year of $6.8 million, of which nearly $4.0 million was
      non-cash expense, (2) a decrease in our accounts payable of $0.7 million, due
      to
      lower trade purchases related to lower invoicing in December 2004 as compared
      to
      December 2003, partially offset by increased lines of credit with significant
      vendors during the year. In addition, cash from operations in 2004 was increased
      by a reduction in our accounts receivable of $2.1 million, due to improved
      collection efforts in 2004 and lower invoicing in December 2004 as compared
      to
      December 2003. Cash from operations was also increased by a decrease in
      inventory of $0.6 million, primarily due to the timing of shipments of
      in-transit inventory.





Cash
      used in investing activities was $0.4 million in 2004, as compared to $0.5
      million in 2003. For 2004, we expended $372,000 for the purchase of property
      and
      equipment, and $53,000 for the capitalization of costs for software developed
      for resale, discussed further below under the section “Capital
      Expenditures.”





Cash
      used in financing activities totaled $2.0 million in 2004, consisting of net
      payments on our Wells Fargo line of credit of $0.5 million and net payments
      on
      our Harris Trust lines of credit of $1.5 million.






32





**Loan
      Facilities**




Wells
      Fargo Line of Credit





We
      have a revolving credit line with Wells Fargo to borrow up to $12 million,
      subject to availability based on a borrowing base calculation. Under this
      facility, 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. Funds available under the credit facility are limited to 85% of
      the
      amount of eligible accounts receivable and fluctuations in the timing of
      customer orders can adversely affect our ability to draw on the line when
      needed. 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 80% of the amount of eligible
      accounts receivable up to $500,000 in the aggregate unless we obtain 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.





This
      credit line expires in May 2007 and is secured by substantially all assets
      of
      SANZ Inc., a wholly-owned subsidiary of the Company. As of December 31, 2004,
      this credit line bore interest at prime plus 2% (7.25%), and based on our
      eligible collateral at that date, we had $9.4 million available for
      borrowing ,
      of which $6.8 million was drawn and $2.6 million remained
      available.





Wells
      Fargo may declare the loan in default if SANZ Inc. does not meet certain
      financial performance measures. At December 31, 2004, we were not in compliance
      with certain of those covenants; however, Wells Fargo did not issue a formal,
      written notice of default. Under an amendment to the credit agreement executed
      in March 2005, Wells Fargo granted us a waiver of non-compliance on these
      covenants ,
      and reset financial covenant requirements effective January 1, 2005 for: (1)
      minimum net income on a year to date basis, calculated quarterly; (2) minimum
      net worth plus “subordinated debt” (measured in the aggregate, with amounts
      loaned to SANZ Inc. from SAN Holdings being defined as subordinated debt),
      calculated on a monthly basis; (3) minimum availability, calculated monthly;
      (4)
      capital expenditure limit, calculated on an annual basis; and (5) a minimum
      cash
      infusion from SAN Holdings or an outside source if SANZ Inc. generates a net
      loss in a given quarter and has generated a net loss on a year to date basis
      at
      that time in an amount equal to the lesser of the quarterly net loss or the
      year
      to date net loss.





As
      part of the amendment and effective January 1, 2005, Wells Fargo increased
      our
      borrowing rate to prime plus 5.0%, an increase of three points. This rate is
      subject to potential decreases, as allowed by Wells Fargo, based on SANZ Inc.
      achieving certain net income levels during 2005.





Additionally,
      the amended credit agreement includes as an additional borrower, Solunet
      Storage, Inc., which in March 2005 became a wholly-owned subsidiary of SANZ
      Inc.
      As part of the co-borrowing arrangement with SANZ Inc. and Solunet Storage,
      Inc., each of the borrowers has a separate borrowing base; however, total
      borrowings under the facility shall not exceed $12,000,000. Additionally, each
      entity is required to guaranty each other’s debt under the borrowing facility.
      Cash transfers from SANZ Inc. to Solunet Storage, Inc. are limited to the
      funding of Solunet Storage, Inc.’s operating expenses, subject to an annual
      limit, and to a minimum availability on the date of any such
      transfer.





We
      believe that our ability to meet our covenant levels in the future has been
      strengthened by the cost reductions that we realized during 2004, and assuming
      continuation of current IT market trends, we expect that we will be able to
      meet
      the covenant levels in place for 2005. However, our continued availability
      on
      this line is dependent on our ability to maintain covenant
      compliance.





Harris
      Trust and Savings Bank





At
      December 31, 2004, the Company also maintained two revolving credit facilities
      with Harris Trust, which allowed for borrowings up to an aggregate of $8.0
      million. One of the facilities, with a maximum amount of $6.8 million at
      December 31, 2004, was maintained by SAN Holdings and was unsecured, not limited
      by availability under a borrowing base, and did not require the maintenance
      of
      specified financial covenants. The other facility, with a maximum amount of
      $1.2
      million at December 31, 2004, was maintained by our Solunet Storage subsidiary,
      and was secured by substantially all of the assets of Solunet Storage, but
      was
      not limited by availability under a borrowing base and did not require the
      maintenance of specified financial covenants. Sun Capital II, an affiliate
      of
      Sun Solunet, our majority shareholder, guaranteed these facilities, both of
      which were demand notes. At December 31, 2004, we had borrowed $7.7 million
      on
      these facilities, which bore interest at a rate of prime plus 0.75% (6.00%
      at
      December 31).






33






In
      partial consideration for the guaranty provided by Sun Capital on the revolving
      Harris Trust credit facilities, if the guaranteed Harris Trust debt was not
      reduced to $3.0 million or less starting in November 2004 (18 months
      after
      the effective date of the guaranty), the Company was required to issue stock
      purchase warrants at an exercise price of $0.001 to Sun Solunet based on the
      excess guaranteed debt over $3 million, calculated as follows:




Debt
                Guaranty Warrants
            =
            (Guaranteed
                Debt - $3,000,000)
            x
            fixed
                number of shares at particular date$2,000,000




The
      number of shares used in the calculation of debt guaranty warrants for a
      particular date are listed in the table below, pursuant to a Credit Support
      Agreement dated March 31, 2003:





Date
            Number
                of SharesNovember
                2004
            3,086,218May
                2005
            641,292November
                2005
            1,307,898May
                2006
            1,342,776November
                2006
            1,379,067May
                2007
            1,416,849November
                2007
            1,456,206May
                2008
            1,497,226Each
                six months thereafter*
            291,346*
                A number of shares equal to 0.5% of the shares outstanding upon the
                closing of the Solunet Storage business
                combination.




Until
      the Company reduces the guaranteed debt to $3.0 million or less, it will be
      required to issue additional warrants to Sun Solunet at six-month intervals
      in
      the future (each May and November), according to formulas applicable to each
      such date, shown in the table above.





On
      November 16, 2004, the Company became
      obligated under the Credit Support Agreement to issue ,
      and on
      March 23, 2005, the Company issued to Sun Solunet a stock purchase warrant to purchase 7,715,545 shares of the
      Company’s common stock, no par value per share, at an exercise price of $0.001
      per share. The number of shares was calculated according to the formula above,
      and was based on $8.0 million of guaranteed Harris Trust debt. The common
      stock issuable by the Company upon the exercise of the Guaranty Warrant represented
      approximately 8% of the Company’s outstanding common
      stock as of November 16, 2004. As of that date, giving effect to the issuance
      and exercise of the Guaranty Warrant (but not to the exercise of any other
      outstanding warrants or options), Sun Solunet directly held approximately 61.5%
      of the pro forma outstanding common stock of the Company.  The
      Company did
      not
      receive any cash proceeds from the issuance of the Guaranty Warrant.





On
      February 16, 2005, we entered into a revised credit agreement with Harris Trust, which
      increased our availability by $2.0 million, for a total of $10.0 million, and
      consolidated the credit lines into one facility maintained by SAN Holdings.
      This
      facility is unsecured, is not limited by availability under a borrowing base,
      does not require the maintenance of specified financial covenants, and as of
      February 16, 2005, bore interest at a rate of prime plus 0.75% (6.25%). While
      the Harris Trust facility is a demand note, under the revised agreement it
      has
      been extended to February 2006, unless called earlier by the lender. Sun
      Capital II has guaranteed the Harris Trust credit facility and has agreed that,
      upon the written request of SANZ, it will provide SANZ with sufficient funds
      to
      repay the debt outstanding under the credit facility in the event that Harris
      Trust requires repayment of such debt or, at Sun Capital II’s election, pay the
      outstanding debt directly to Harris Trust; provided that in no event will Sun
      Capital II’s obligation exceed the amount of Sun Capital II’s guaranty. This
      guaranty and all obligations expire on December 31, 2005.






34


Pursuant
        to the revised credit facility, on March 10, 2005, the Company approved the
        issuance of an additional stock purchase warrant to Sun Solunet for the purchase
        of 3,086,218 shares of common stock at an exercise price of $0.001 per share
        as
        consideration for the additional $2.0 million debt guaranty provided by Sun
        Capital II. This warrant was issued on March 23, 2005. The number of shares
        underlying the warrant was calculated based on the formula above as if the
        debt
        was outstanding as of November 16, 2004 .
        The issuance of these warrants will result in dilution of the other shareholders
        of the Company.





The
      Company is continually evaluating potential transactions to refinance a portion
      of the guaranteed debt with either other debt or equity, in conjunction with
      its
      existing availability on its Wells Fargo credit facility, as permitted under
      the
      financial covenants. However, there can be no assurance in being successful
      in
      obtaining additional debt or equity financing.





**Capital
      Expenditures**





During
      the years ended December 31, 2004 and 2003, we purchased approximately $372,000
      and $121,000, respectively, of property and equipment for cash. For 2005, we
      anticipate spending in the range of $200,000 - $300,000 on property and
      equipment. During 2004 and 2003 we also invested approximately $53,000 and
      $207,000, respectively, in capitalized software development costs. We expect
      to
      capitalize additional software development costs in 2005 of approximately $1.0
      million. We expect to fund these capital expenditures from cash, which in turn
      will be from our line of credit borrowings.





**Contractual
      Obligations**





We
      are committed to make payments on certain long-term obligations and accrued
      liabilities. Our cash payments due under contractual obligations as of December
      31, 2004 are as follows:





Cash
                payment obligations(due by period)
              (In
                thousands)
            
            Less
                than 1 Year
            
            1
                - 3 Years
            
            3
                - 5 Years
            
            TotalLine
                of credit obligations (1)
            
            $
            14,459
            
            $
            --
            
            $
            --
            
            $
            14,459Operating
                lease obligations
              (operating locations)
            
            
            419
            
            
            459
            
            
            4
            
            
            882Closed
                office obligations (2)
            
            
            241
            
            
            84
            
            
            --
            
            
            325Severance
                (3)
            
            
            285
            
            
            --
            
            
            --
            
            
            285$
            15,404
            
            $
            543
            
            $
            4
            
            $
            15,951




(1)
              The
                  line of credit obligations are comprised of $6.8 million due to
                  Wells
                  Fargo and $7.7 million due to Harris Trust. Effective October 2004,
                  the
                  Wells Fargo credit facility was renewed and extended through May
                  2007. The
                  Harris Trust credit facilities are demand obligations, but expire
                  in
                  February 2006 if not called by the lender prior to that date. We
                  have no
                  reason to believe that Harris Trust will not extend its facility
                  at the
                  expiration date. Further, we have no reason to believe that Harris
                  Trust
                  will call its facilities prior to that date.(2)
              In
                2004, we closed three of our regional offices located in Waltham,
                Massachusetts, Norwalk, Connecticut and Chadds Ford, Pennsylvania,
                for
                which we remain subject to leases expiring in 2005 and 2006. In 2001,
                we
                closed a regional office in Orlando, Florida, for which we remain
                subject
                to a lease through January 2006. We have accrued the remaining obligation
                on these leases, net of any sublease income, for the life of the
                leases,
                as well as estimated relocation costs.(3)
              In
                the fourth quarter of 2004, the Company entered into separation agreements
                with several key management personnel. In conjunction with these
                agreements, we recorded a liability in the amount of $216,000 for
                severance and other termination benefits to be paid out in 2005.
                A
                liability in the amount of $69,000 remains on our balance sheet at
                December 31, 2004, for a severance agreement concluded in 2003, the
                remainder of which will be paid out in
                2005.




35





**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 as
      described in “Item 1. Business — Investment Considerations.”





**Off-Balance
      Sheet Arrangements**





We
      do not maintain any off-balance sheet arrangements that have, or that are
      reasonably likely to have, a material current or future effect on our financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources.






**Item
      7A. Quantitative and Qualitative Disclosures about Market
      Risk**





We
      are exposed to market risk from changes in interest rates on our outstanding
      bank debt. At December 31, 2004, we had $14.5 million in variable, Prime rate
      based bank debt. At December 31, 2004, our Harris Trust debt of
      $7.7 million bore interest at the rate of Prime + 0.75%, or 6.00%, and
      our
      Wells Fargo line of credit of $6.8 million bore interest at the rate of Prime
      +
      2.0%, or 7.25%. At December 31, 2004, a hypothetical 50 basis point increase
      in
      the Prime rate would result in additional interest expense of $85,000 on an
      annualized basis, assuming estimated borrowing amounts of $10.0 million for
      Harris Trust and $7.0 million for Wells Fargo. Currently, we do not utilize
      interest rate swaps or other types of financial derivative
      instruments.






**Item
      8. Financial Statements and Supplementary Data**





The
      financial statements required pursuant to this item are included in Part IV
      of
      this report and begin on page F-1. The supplementary financial information required by
      this
      item is included in “Item 6. Selected Financial Data — Supplementary
      Data—Quarterly Financial Information (Unaudited).”






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





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







**Item** **9A.
      Controls and Procedures**





We
      have
      adopted and maintain disclosure controls and procedures (as such term is defined
      in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
      as
      amended (the “Exchange Act”)) that are designed to ensure that information
      required to be disclosed in our reports under the Exchange Act, is recorded,
      processed, summarized and reported within the time periods required under the
      SEC’s rules and forms and that the information is gathered and communicated to
      our management, including our Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow for timely decisions regarding required
      disclosure. In designing and evaluating the disclosure controls and procedures,
      management recognizes that any controls and procedures, no matter how well
      designed and operated, can provide only reasonable assurance of achieving the
      desired control objectives, and management is required to apply its judgment
      in
      evaluating the cost-benefit relationship of possible controls and
      procedures.





As
      required by SEC Rule 13a-15(b), the Company carried out an evaluation under
      the
      supervision and with the participation of our management, including the Chief
      Executive Officer (Principal Executive Officer) and Chief Financial Officer
      (Principal Financial Officer), of the effectiveness of the design and operation
      of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14
      as of the end of the period covered by this report. This evaluation included
      consideration of the restatements described in Note 1A to the Company’s audited
      consolidated financial statements included in Part IV, Item 15 of this report
      further described below. Based on the foregoing, our Chief Executive Officer
      and
      Chief Financial Officer have concluded that our disclosure controls and
      procedures are effective in timely alerting them to material information
      required to be included in our periodic SEC filings.






36





As
      previously disclosed on our Current Report on Form 8-K filed on November 17,
      2005, during the September 2005 quarter, we initiated a project to prepare
      stand-alone financial statements for audit of our EarthWhere business. As we
      undertook this project, we determined that the assumptions and evidential matter
      that the Company had used in capitalization of software development costs during
      2003 and 2004 did not provide sufficient “contemporaneous documentation” to
      support capitalization.





As
      disclosed in Note 1A to the Company’s audited consolidated financial statements
      included in Part IV, Item 15 of this report, the Company is restating its
      financial statements for December 31, 2004 and the interim financial statements
      as of and for the quarter and six months ended June 30, 2004, as of and for
      the
      quarter and nine months ended September 30, 2004, for the quarter ended December
      31, 2004 and as of March 31, 2005 and June 30, 2005. Management believes that
      the control deficiency of insufficient contemporaneous documentation to support
      capitalization of software development costs that led to this restatement is
      a
“significant deficiency,” as defined under standards established by the Public
      Companies Accounting Oversight Board. Management has reported this significant
      deficiency to the audit committee in accordance with Section 302 of the
      Sarbanes-Oxley Act of 2002. Management believes that it has corrected this
      significant deficiency by reviewing and revising our methodologies and
      assumptions for capitalizing software development costs and providing
      contemporaneous documentation for such costs.





Other
      than the corrective actions described above, we have not made any changes in
      our
      disclosure controls and procedures or in other factors that could have
      materially affected or are reasonably likely to materially affect those
      disclosure controls and procedures subsequent to the date of the evaluation
      described above.








**Item
      9B. Other** **Information**





None.








**PART
      III**





**Item
      10. Directors and Executive Officers of the Registrant**





The
      Company’s bylaws provide that each director is to hold office until the next Annual Meeting
      of
      Shareholders and until his successor is elected and qualified or until such
      director’s earlier death, resignation or removal. The Company’s directors and executive
      officers are as follows:





***John
      Jenkins*** *,
      Age 54, Chairman and CEO* since November 2000, President since November 2004. 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. Mr. Jenkins holds a B.S.
      from
      the University of Washington and a J.D. from the University of Denver.





***Marc
      J. Leder**,* *Age 43, 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,
      Inc. (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., and LOUD Technologies, Inc., all
      of
      which are publicly held companies, and as a director of a number of private
      companies.





37






***Rodger
      R. Krouse**,* *Age
      43, 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,
      Inc. (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., and LOUD Technologies,
      Inc., all of which are publicly held companies, and as a director of a number
      of
      private companies.





***Clarence
      E. Terry**,* *Age 58, Director* since April 2003, pursuant to our acquisition agreement with Solunet Storage.
      Mr. Terry also serves as Chairman of the Compensation Committee. 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,
      he
      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., and LOUD
      Technologies, Inc., all of which are publicly held companies, and as a director
      of a number of private companies.





***M.
      Steven Liff**,*  *Age
      33* , *Director* since April 2004. Mr. Liff has served as a principal of Sun Capital Partners,
      Inc. since March 2000. From 1994 until joining Sun Capital Partners, Inc.,
      he
      was employed by Bank of America Commercial Finance, most recently as senior
      marketing executive, focusing on marketing, underwriting and closing new
      leveraged and turnaround transactions.





***Benjamin
      S. Emmons**,*  *Age
      36* , *Director* from April 2004 to March 2005. Mr. Emmons has served as a vice president of
      Sun
      Capital Partners, Inc., a private investment firm, since 2002. Before joining
      Sun Capital Partners, Inc., Mr. Emmons spent four and one-half years with CIT
      Business Credit, most recently as marketing manager for the southeast region.
      Mr. Emmons resigned from the board of directors in March 2005.





***Stephen
      G. Marble**,*  *Age
      41, Director* since October 2004. Mr. Marble has served as a vice president of Sun Capital
      Partners, Inc. since February 2004. Prior to joining Sun Capital, he served
      as
      Chief Financial Officer of Catalina Lighting, Inc., a Sun Capital portfolio
      company.  Prior to being appointed CFO, he served as Catalina’s Corporate
      Controller.  Mr. Marble’s experience spans a broad variety of industries
      including banking, mortgage banking, specialty finance, equipment leasing and
      medical services.  Mr. Marble is a CPA and began his career with Deloitte
      and Touche most recently as an audit manager.





***Gary
      F. Holloway**,*  *Age
      53* , *Director
      and member of the Compensation Committee* since April 2004. Mr. Holloway is vice chairman of Five Mile Capital Partners,
      a
      privately held investment firm. Prior to joining Five Mile Capital Partners
      and
      Five Mile Ventures in 2000, Mr. Holloway served as the chairman of the board
      of
      Greenwich Capital Markets, Inc., where he previously held the position of
      president and CEO. He also served as co-CEO of Greenwich NatWest. Mr. Holloway
      currently serves on the Boards of Directors of Aviation Facilities Corporation,
      Bank of New Canaan, The Wireless Generation, Inc., and the boards of several
      educational and charitable organizations. Mr. Holloway holds a BA degree from
      Washington and Lee University and an MBA from the Colgate Darden School at
      the
      University of Virginia.





***C.
      Daryl Hollis**,*  *Age
      61,*  *Director
      and*  *Chairman
      of the Audit Committee* since April 2004. Mr. Hollis, a certified public accountant, has been a business
      consultant since 1998. He has served in the past as Executive Vice President
      and
      Chief Financial Officer of The Panda Project, Inc., a developer, manufacturer
      and marketer of proprietary semiconductor packaging and interconnect devices,
      and as Senior Vice President and Chief Financial Officer of Pointe Financial
      Corporation, a bank holding company. Mr. Hollis was also a partner with Ernst
      & Young LLP from 1977 through 1990. Additionally, he currently serves as a
      director and chairs the audit committee of four other publicly held companies:
      Medical Staffing Network Holdings, Inc.; Northland Cranberries, Inc.; Catalina
      Lighting, Inc.; and LOUD Technologies, Inc.





***George
      R. Rea**,*  *Age
      66,*  *Director
      and member of the Audit Committee* since April 2004. Mr. Rea is currently a business consultant. Mr. Rea has held
      various senior management positions in several high technology companies,
      retiring as executive vice president of Conner Peripherals (NYSE) in 1994.
      Since
      retiring, Mr. Rea has served as a business consultant and as a director of
      private and public companies in high technology and other industries. Currently
      he is a director of the following public companies: Catalina Lighting, Inc.;
      Northland Cranberries, Inc.; and LOUD Technologies, Inc.






38





***Robert
      C. Ogden*** *,
      Age 44, Vice President Finance, Treasurer, Secretary and Chief Financial Officer* since
      May 2004. From 2000 to 2004, Mr. Ogden was a financial consultant serving
      companies in a variety of industries, including software, computer hardware,
      on-line education and financial services. In 2003, he served as the Acting
      Controller for Exabyte Corporation, a computer tape drive manufacturer. From
      1997 to 2000, he served as Vice President, Corporate Controller and Chief
      Accounting Officer for TAVA Technologies, a systems integration and software
      firm, which was successfully sold in 1999. Prior to TAVA Technologies, Mr.
      Ogden
      held various senior management finance positions with several start-up
      companies. He began his career as a public accountant with Price Waterhouse,
      most recently as audit manager. Mr. Ogden holds a B.S. in Commerce from the
      University of Virginia, and is a certified public accountant.


******


***Board
      Committees***





Our
      board of directors has established a compensation committee, an audit committee and an independent
      committee .





*Compensation
      Committee.* The compensation
      committee currently consists of one independent director, Mr. Holloway ,
      as well
      as Mr. Jenkins and Mr. Terry, who serves as chairman.





*Audit
      Committee; Audit Committee Financial Expert.* The
      audit committee currently consists of two directors,  Messrs.
      Hollis and Rea .
      The
      chairman of the audit committee is Mr. Hollis. Our board of
      directors has determined that Mr. Hollis is an “audit committee financial expert” and that
      he is independent.





*Independent
      Committee.* The
      independent committee currently
      consists of four directors, Messrs. Jenkins, Holloway, Hollis and Rea, all
      of
      our directors that are not affiliated with Sun Solunet LLC, our majority
      stockholder, for purposes of approving certain transactions as may be submitted
      by our board of directors from time to time.






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





Section
      16(a) of the Securities Exchange Act of 1934 requires our officers and
      directors, and the persons who own more than 10% of our common stock, to file
      with the SEC initial
      reports of ownership and reports of changes in ownership of our common stock.
      Officers, directors and greater than 10% stockholders are required by regulation
      of the SEC to furnish us with copies of all Section 16(a) forms they
      file.





Based solely on
      a
      review of copies
      of
      Forms 3, 4 and 5, and the amendments thereto, received by us for the year ended
      December 31, 2004, or written representations from certain reporting persons
      that no Forms 5 were required to be filed by those persons, we believe
      that during
      the year ended December 31, 2004, all
      filing requirements were complied with by our executive officers, directors
      and
      beneficial owners of more than 10% of our stock, except with respect
      to the following: (1) Robert C. Ogden, an officer, was late in filing certain
      reports under Section 16 of the Securities Exchange Act. Mr. Ogden did not
      timely file a Form 3 - Initial Statement of Beneficial Ownership of Securities
      and did not timely file a Form 4 - Statement of Changes in Beneficial Ownership
      - to report the grant of options to him in October 2004; and (2)
      John
      Jenkins, an officer and director, filed an amended Form 4 on March 2, 2005
      for a
      correction of the amount of securities beneficially owned related to a purchase
      of SANZ common shares on August 19, 2004.





***Code
      of Ethics***





Our
      board
      of directors adopted a code of business conduct and ethics applicable to our
      directors, officers, including our principal executive officer, principal
      financial officer and principal accounting officer as well as our employees
      in
      accordance with applicable rules and regulations of the SEC. The code of ethics
      was previously filed with the SEC as Exhibit 14.1 to our Quarterly Report on
      Form 10-QSB for the fiscal quarter ended March 31, 2004, filed on May 11, 2004.
      We will provide to any person, without charge, upon request, a copy of such
      code
      of ethics. Requests should be made by calling (303)
      660-3933 or by submitting a request in writing to the company at 9800 Mount
      Pyramid Court, Suite 130, Englewood, CO 80112, Attention: Robert C.
      Ogden.






39





**Item
      11. Executive Compensation**





The
      following table sets forth the salary and other compensation paid to our Chief
      Executive Officer and each of our other three most highly compensated executive
      officers (“named executive officers”) for the
      fiscal years ended December 31, 2004, 2003 and 2002.





***Summary
      Compensation Table***





**Annual
                Compensation**
            
            **Long
                Term Compensation****Name
                and Principal**
              **Position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Securities**
              **Underlying**
              **Options/SARs(#)**
            
            **All
                Other**
              **Compensation
                ($)**John Jenkins
            
            
            2004
            
            $
            227,488
            
            
            
            
            $
            8,694
            
            
            -0-
            
            
            
            
            $
            -0-President and CEO (1)
            
            
            2003
            
            $
            227,867
            
            
            
            
            $
            6,600
            
            
            1,100,000
            
            
            (2)
            
            $
            5,500
            
            
            (4)2002
            
            $
            227,400
            
            
            
            
            $
            23,950
            
            
            500,000
            
            
            (3)
            
            $
            4,583
            
            
            (4)Robert C. Ogden
            
            
            2004
            
            $
            96,667
            
            
            (5)
            
            $
            2,134
            
            
            350,000
            
            
            (6)
            
            $
            -0-Vice President -
              Finance & CFO (5)Michael Phelan
            
            
            2004
            
            $
            200,000
            
            
            (8)
            
            $
            30,016
            
            
            -0-
            
            
            
            
            $
            -0-President and COO (8)
            
            
            2003
            
            $
            150,012
            
            
            (7)
            
            $
            -0-
            
            
            1,100,000
            
            
            (8)
            
            $
            -0-Chris Wilkes
            
            
            2004
            
            $
            172,519
            
            
            
            
            $
            10,000
            
            
            -0-
            
            
            
            
            $
            -0-Executive
                VicePresident
                (9)
            
            
            2003
            
            $
            123,750
            
            
            (7)
            
            $
            -0-
            
            
            450,000
            
            
            (2)
            
            $
            5,394
            
            
            (4)





(1)
            Mr.
                Jenkins has been employed as our Chief Executive Officer during the
                past
                three fiscal years, and during that period also served as President
                through April 4, 2003, and again effective November 1, 2004.(2)
            These
                options are exercisable at $0.40 per share. One fourth of the total
                options granted become exercisable each year over the next four years,
                commencing on April 1, 2004.(3)
            These
                options are exercisable at $0.29 per share.(4)
            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. Amounts earned in the stated year were paid in the
                following year.(5)
            Represents
                compensation paid since May 3, 2004, when Mr. Ogden became employed
                by
                SANZ as Vice President - Finance and Chief Financial Officer.(6)
            250,000
                of these options are exercisable at $0.42 per share; 100,000 of these
                options are exercisable at $0.38 per share.(7)
            Represents
                compensation paid since April 4, 2003, when these executive officers
                became employed by SANZ pursuant to our acquisition agreement with
                Solunet
                Storage.(8)
            Effective
                November 1, 2004, Mr. Phelan resigned as an employee anddirectorof the Company. Under his separation agreement, he received severance
                pay
                of $33,333 from November 1, 2004 through December 31, 2004, which
                is
                included in the base salary amount. Additionally 550,000 options
                became
                fully vested on November 1, 2004.(9)
            Effective
                August 26, 2004, Mr. Wilkes ceased being an executive officer of
                SANZ. He
                continued to be employed as President of our wholly-owned subsidiary,
                Solunet Storage, Inc.






40






***Option
      and Stock Appreciation Right Grants Table***




The
      following table sets forth information regarding the grant of options and stock
      appreciation rights during the year ended December 31, 2004 to each of our named executive
      officers .


**Name**
            **Number
                of Securities**
              **Underlying
                Options/ SARs**
              **granted
                (#)**
            **Percent
                of total options/**
              **SARs
                granted to**
              **employees**
              **in
                fiscal year (%)**
            **Exercise
                or**
              **base
                price**
              **($/Sh)**
            **Expiration**
              **date**John
                Jenkins
            -0-
            
            --%
            
            $        --
            --Robert
                C. Ogden
            250,000
            
            8.3%
            
            $    0.42
            06/23/2014100,000
            
            3.3%
            
            $    0.38
            10/11/2014Michael
                J. Phelan
            -0-
            
            --%
            
            $        --
            --Chris
                Wilkes
            -0-
            
            --%
            
            $        --
            --





***Aggregated
      Option/SAR Exercises in Last Fiscal Year***


***and
      FY-End Option/SAR Values*** **





The
      following table shows the number of shares underlying unexercised options held
      at December 31, 2004 by each of our
      named executive officers ,
      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 Securities Underlying**
              **Unexercised
                Options/SARs**
              **at
                FY-End (#)**
              **Exercisable/Unexercisable)
                (1)**
            **Value
                of unexercised**
              **in-the-money
                options**
              **at
                FY-end ($)**
              **Exercisable/Unexercisable
                (2)**John
                Jenkins
            1,075,000
                / 825,000
            $
                5,000 / $ -0-Robert
                C. Ogden
            -0-
                / 350,000
            $
                -0- /$ -0-Michael
                J. Phelan
            550,000
                / -0-
            $
                -0- /$ -0-Chris
                Wilkes
            112,500
                / 337,500
            $
                -0- /$ -0-





(1)
            Includes
                both “in-the-money” and “out-of-the-money” options. “In-the-money” options
                are options with exercise prices below the market price of SANZ’ common
                stock (as noted) on December 31, 2004.(2)
            Fair
                market value of SANZ’ common stock on December 31, 2004, the last trading
                day of fiscal 2004 ($0.30, based on the closing sales price reported
                on
                theover-the-counter
                bulletin board)
                less the exercise price of the
                option.





***Compensation
      of Directors***





As
      of December 31, 2004, we had no standing arrangement to compensate directors
      for
      their services. During the fiscal year ended December 31, 2004, we granted
      50,000 options, exercisable at $0.42 per share (the market value on the date
      of
      grant) to each of the following independent directors: Gary F. Holloway and
      George R. Rea, and 75,000 options, exercisable at $0.42 per share (the market
      value on the date of grant), to C. Daryl Hollis, who is also an independent
      director. No other compensation was paid to these individuals during 2004.
      Effective January 1, 2005, all of our independent directors are compensated
      in
      either cash or stock options (at each director’s discretion) in the amount of
      $25,000 per year, payable quarterly. In addition, the audit
      committee chairman is paid an additional $12,500 per year, payable quarterly.






41






***Employment
      Contracts and Termination of Employment and***


***Change
      in Control Arrangements***





We
      have a three year employment agreement with John Jenkins, our CEO, which
      requires us to continue paying his salary for a period of 12 months following
      termination of employment in the following cases:





●
            
            if
                he terminates his employment within 90 days following specified change
                of
                control events;●
            
            if
                he terminates his employment due to our material change of his employment
                conditions; or●
            
            if
                we terminate his employment agreement other than for cause.





On
      November 1, 2004, Michael Phelan resigned his position as a director of SANZ. Mr. Phelan’s resignation was not due to a disagreement with the Company
      known to any executive officer of the Company, and Mr. Phelan did not serve
      on
      any committees of our
      board of directors .
      Mr. Phelan also ceased to serve as our President and Chief Operating Officer, as an officer of each of the Company’s
      subsidiaries, and as an employee of the Company. Two agreements entered into
      with Mr. Phelan on November 1, 2004 in connection with the termination of his
      employment, provide for certain severance payments, non-competition obligations,
      and amendments to the terms of a stock option.





The
      options granted under the 2003 Stock Option Plan, including those granted to
      the
      executive officers named above, will vest in the event the company is sold
      for
      cash or for marketable securities meeting certain minimum liquidity standards.
      The options granted under that plan to John Jenkins, our CEO, will also vest
      if
      we terminate his employment without cause or demote him, in either case in
      connection with a change of control that does not meet the foregoing standards.





***Additional
      Information with Respect to Compensation Committee Interlocks and Insider
      Participation***





During
      2004, no executive officer served as a member of the board of directors
      or compensation committee of any entity that has one or more executive officers
      serving as a member of our board of directors or compensation
      committee.






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





Information
      regarding our securities authorized for issuance under equity compensation plans
      is
      set forth above under “Item 5. Market for Common Equity and Related Stockholder
      Matters—Equity Compensation Plan Information.”





The
      table below reflects the number of shares of our common
      stock beneficially owned as of March 25, 2005 by:





●
            
            each
                person or group we believe to be the beneficial owner of more than
                five
                percent of our voting securities;●
            
            each
                director;●
            
            eachnamedexecutive
                officer;and●
            
            all
                directors and executive officers, as a group.





Shares
      of our common
      stock subject to options and warrants currently exercisable or convertible,
      or
      exercisable or convertible within 60 days of March 25, 2005, are deemed
      outstanding for purposes of computing the percentage beneficially owned by
      the
      person or entity holding those securities, but are not deemed outstanding for
      purposes of computing the percentage beneficially owned by any other person
      or
      entity. Percentage of beneficial ownership is based on 95,811,278 shares of our common
      stock outstanding as of the close of business on March 25, 2005 :






42






Name
                  and address #
              **Amount
                  and Nature of Beneficial**
                **Ownership**
              **Percentage
                  of**
                **Common
                  Stock**John
                  Jenkins
              1,680,000
              (1)
              1.73%Marc
                  J. Leder
              68,205,416
              (2)
              63.97%Rodger
                  R. Krouse
              68,205,416
              (2)
              63.97%Clarence
                  E. Terry
              -0-
              
              -0-M.
                  Steven Liff
              -0-
              
              -0-Benjamin
                  S. Emmons (10)
              -0-
              
              -0-Stephen
                  G. Marble
              -0-
              
              -0-Gary
                  F. Holloway
              2,809,709
              (3)
              2.93%George
                  R. Rea
              32,500
              (4)
              *C.
                  Daryl Hollis
              18,750
              (5)
              *Robert
                  C. Ogden
              82,500
              (6)
              *Michael
                  J. Phelan
              1,985,091
              (7)
              2.06%Chris
                  Wilkes
              225,000
              (8)
              *All
                  directors and executive officers, as a group (13 persons)
              82,133,047
              
              69.08%Sun
                  Solunet LLC
              68,205,416
              (9)
              63.97%c/o
                  Sun Capital Partners II, LPc/o
                  Sun Capital Advisors II, LPc/o
                  Sun Capital Partners, LLC5200
                  Town Center Circle, Suite 470Boca
                  Raton, FL 33486
 
 *
              Less
                  than 1%#
              The
                  address for each listed director and executive officer unless otherwise
                  indicated is SANZ, Inc., 9800 Mt. Pyramid Court,Suite
                  130, Englewood, Colorado
                  80112.


(1)
                Includes
                    500,000 shares underlying an option currently exercisable at
                    $0.29 per
                    share, 300,000 shares underlying an option currently exercisable
                    at $2.25
                    per share, 275,000 shares underlying an option currently exercisable
                    at
                    $0.40 and 275,000 shares underlying an option that will become
                    exercisable
                    at $0.40 per share. Also includes 40,000 shares underlying a
                    warrant
                    currently exercisable at $0.625 per share, and 40,000 shares
                    underlying a
                    warrant currently exercisable at $1.25 per share.(2)
                Includes
                    10,801,763 shares underlying a warrant currently exercisable
                    at
                    $0.001
                    per share.Also, consists of shares held by Sun Solunet over which he may
                    be deemed
                    to have control. Marc J. Leder and Rodger R. Krouse may each
                    be deemed to
                    control Sun Solunet, Sun Capital Partners II, LP, Sun Capital
                    Advisors II,
                    LP, and Sun Capital Partners LLC, as Leder and Krouse each own
                    50% of the
                    membership interests in Sun Capital Partners LLC, which in turn
                    is the
                    general partner of Sun Capital Advisors II, LP, which in turn
                    is the
                    general partner of Sun Capital Partners II, LP, and Sun Capital
                    Partners
                    II, LP owns 99% of the membership interests of Sun Solunet. Therefore,
                    Messrs. Leder and Krouse may each be deemed to have voting and
                    dispositive
                    power over the shares held by Sun Solunet.(3)
                Includes
                    12,500 options currently exercisable at $0.42 per share and 2,797,209
                    shares held by Hollger LLC, a privately held investment firm,
                    over which
                    Mr. Holloway may be deemed to have control.(4)
                Includes
                    12,500 shares underlying an option currently exercisable at $0.42
                    per
                    share.(5)
                Consists
                    solely of 18,750 shares underlying an option currently exercisable
                    at
                    $0.42 per share.(6)
                Includes
                    62,500 shares underlying an option that will become exercisable
                    at $0.42
                    per share.(7)
                Includes
                    550,000 shares underlying an option currently exercisable at
                    $0.40 per
                    share. The outstanding shares beneficially owned by Mr. Phelan
                    are held of
                    record by Mr. Phelan jointly with his wife. All of Mr. Phelan's
                    shares are
                    subject to a Shareholder Agreement that, among other things,
                    (a) grants
                    Sun Solunet 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, if
                    so demanded by Sun Solunet, and (d) grants Mr. Phelan the right
                    to require
                    a purchaser of shares from Sun Solunet also to purchase a pro
                    rata number
                    of Mr. Phelan's shares on the same terms.
   43
   (8)
                Includes
                    112,500 shares underlying an option currently exercisable at
                    $0.40 per
                    share and 112,500 shares underlying an option that will become
                    exercisable
                    at $0.40 per share.(9)
                Consists
                    of 55,968,852 shares of common stock owned directly by Sun Solunet
                    and
                    1,435,091 shares of common stock owned by Mr. Phelan over which
                    Sun
                    Solunet has voting control. Marc J. Leder and Rodger R. Krouse
                    may each be
                    deemed to control Sun Solunet, Sun Capital Partners II, LP, Sun
                    Capital
                    Advisors II, LP, and Sun Capital Partners LLC, as Leder and Krouse
                    each
                    own 50% of the membership interests in Sun Capital Partners LLC,
                    which in
                    turn is the general partner of Sun Capital Advisors II, LP, which
                    in turn
                    is the general partner of Sun Capital Partners II, LP, and Sun
                    Capital
                    Partners II, LP owns 99% of the membership interests of Sun Solunet.
                    Therefore, Messrs. Leder and Krouse may each be deemed to have
                    voting and
                    dispositive power over the shares held by Sun Solunet.(10)
                Mr.
                    Emmons resigned from the Company’s board of directors in March
                    2005.








**Item
      13. Certain Relationships and Related Transactions**





Debt
      Guaranty





Pursuant
      to our acquisition agreement with Solunet Storage in 2003, Sun Solunet became
      our majority shareholder, and currently holds approximately 58.4%
      of our outstanding shares of common stock. Sun Capital Partners II and Sun
      Capital Partners Management LLC (“Sun Capital Management”) are both affiliates
      of Sun Solunet.  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 the debt of the combined company. As of December 31, 2004, this
      guaranty was 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. See
“Item 7. Management’s
      Discussion and Analysis of Financial Condition and Results of Operations—Loan
      Facilities—Harris Trust and Savings Bank.”





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. As of December 31, 2004 Sun Capital II had issued a guaranty of
      up to
      $8.0 million, or $5.0 million more than the minimum committed
      amount.





In
      exchange for the guaranty above the minimum committed amount and as stipulated
      under the Credit Support Agreement, the Company is required to issue to Sun
      Solunet a warrant to purchase shares at six-month intervals, beginning November
      16, 2004. The amount of the shares underlying the warrant is based on a formula,
      contained in the Credit Support Agreement for each six-month measurement date,
      which is disclosed in Note 10 of the Company’s consolidated financial statements
      for 2004 included
      in this report.





On
      November 16, 2004,
      we
      became obligated under the Credit Support Agreement to issue ,
      and on
      March 23, 2005, we issued to Sun Solunet a stock purchase warrant to purchase 7,715,545 shares of the Company’s common stock, at
      an exercise price of $0.001 per share as
      described above
      under “Item 7. Management’s Discussion and Analysis of Financial Condition and
      Results of Operations—Loan Facilities—Harris Trust and Savings
      Bank.”





On
      March
      10, 2005, we approved
      the issuance of an additional stock purchase warrant to Sun
      Solunet for the purchase of 3,086,218 shares of the Company’s common stock at an exercise price of $0.001
      per share as
      consideration for an additional $2.0 million debt guaranty provided by Sun
      Capital II on our Harris Trust credit facility. This warrant was issued on
      March
      23, 2005. See further discussion under “Item 7. Management’s Discussion and
      Analysis of Financial Condition and Results
      of Operations—Loan Facilities—Harris Trust and Savings Bank.”






44





Management
      and Consulting Services





Pursuant
      to the “Management Services Agreement” with Sun Capital Management, we pay a
      quarterly fee of $75,000 per calendar quarter (plus reimbursement of
      out-of-pocket expenses) to Sun Capital Management in exchange for financial
      and
      management consulting services. 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 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 terminate on April 4, 2013.






**Item
      14. Principal Accountant Fees and Services**





The
      following table shows the fees that the Company incurred for audit and other
      services provided by Grant Thornton LLP (“Grant Thornton”):





(In
                thousands)
            **2004**
            **2003**Audit
                Fees
            $
                160
            $
                470Audit-Related
                Fees
            --
            --Tax
                Fees
            44
            37All
                Other Fees
            --
            --Total
            $
                204
            $
                507





*Audit
      Fees* .
      This category includes the audit of the Company’s annual financial statements,
      review of financial statements included in our
      quarterly reports on Form 10-Q ,
      and services that are normally provided by the independent auditors in
      connection with statutory and regulatory filings or engagements for those fiscal
      years. This category also includes advice on audit and accounting matters that
      arose during, or as a result of, the audit or the review of interim financial
      statements, and the preparation of annual “management letter” on internal
      control matters. For 2004, the amount stated includes the audit and quarterly
      reviews of SAN Holdings, Inc. for the year ended December 31, 2004. For 2003,
      the amount stated includes (a) $365,000 for the audits of StorNet, Inc. for
      the
      year ended December 31, 2001 and the nine month period ended September 25,
      2002,
      and the audit of Solunet Storage Holding Corp. for the period from September
      26
      through December 31, 2002; and (b) $105,000 for the audit and quarterly reviews
      of SAN Holdings, Inc. for the year ended December 31, 2003.





*Tax
      Fees.* This category consists of professional services rendered by the Company’s
      auditors for tax compliance and tax advice. The services for the fees disclosed
      under this category include tax return preparation and technical tax
      advice.





*Pre-Approval
      of Audit and Permitted Non-Audit Services.* The audit
      committee charter requires the Company to have the audit
      committee approve in advance any and all audit services and all permitted non-audit
      services (unless de minimus) provided by the independent accountants, as well
      as
      the fees and other compensation to be paid to the independent accountants.
      The
      independent accountants submit requests to the audit
      committee for pre-approval of any such allowable services. In 2004, all of the audit
      and
      permitted non-audit services rendered by the Company’s  independent
      accountants were approved by the audit
      committee .






45






**Part
      IV**


**Item
      15.** **Exhibits
      and** **Financial Statement Schedules** ****





(a)
      The financial statements, financial statement schedules and exhibits listed below are filed as part of this Annual Report on Form
      10-K.





**(1)
      Financial Statements**





Report
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Balance Sheets, December 31, 2004 (as restated) and December 31,
                2003
            
            F-2Consolidated
                Statements of Operations for the Years ended December 31, 2004 (as
                restated)
              and
                December 31, 2003
            
            F-3Consolidated
                Statement of Operations for Solunet Storage Holding Corp. (accounting
                predecessor to SAN Holdings, Inc.) for the period from September
                26, 2002
                (inception) through December 31, 2002
            
            F-4Statement
                of Discontinued Operations - Liquidation Basis for StorNet, Inc.
                (accounting predecessor to Solunet Storage Holding Corp. and SAN
                Holdings,
                Inc.) for the period from January 1, 2002 though September 25,
                2002
            
            F-5Consolidated
                Statements of Stockholders’ Equity for San Holdings, Inc. for the Years
                ended December 31, 2004 (as restated) and December 31, 2003 and for
                Solunet Storage Holding Corp. (accounting predecessor to SAN Holdings,
                Inc.) for the period from September 26, 2002 (inception) through
                December
                31, 2002
            
            F-6Statement
                of Stockholders' Deficit - Liquidation Basis for StorNet, Inc. (accounting
                predecessor to Solunet Storage Holding Corp. and SAN Holdings, Inc.)
                for
                the period from January 1, 2002 through September 25, 2002
            
            F-7Consolidated
                Statements of Cash Flows for the Years ended December 31, 2004 (as
                restated)
              and
                December 31, 2003
            
            F-8Consolidated
                Statement of Cash Flows for Solunet Storage Holding Corp. (accounting
                predecessor to SAN Holdings, Inc.) for the period from September
                26, 2002
                (inception) through December 31, 2002
            
            F-10Statement
                of Cash Flows - Liquidation Basis for StorNet, Inc. (accounting
                predecessor to Solunet Storage Holding Corp. and SAN Holdings, Inc.)
                for
                the period from January 1, 2002 through September 25, 2002
            
            F-11Notes
                to Consolidated Financial Statements
            
            F-12





**(2)
      Financial Statement Schedules**





Financial
      statement schedules are omitted because they are not required or are not
      applicable, or the required information is provided in the consolidated
      financial statements or notes thereto described in Item 15(a)(1) above.





46






**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors and Stockholders


SAN
      Holdings, Inc.





We
      have
      audited the accompanying consolidated balance sheets of San Holdings, Inc.
      and
      subsidiaries as of December 31, 2004 and 2003, and the related consolidated
      statements of operations, stockholders’ equity and cash flows for the years then
      ended. Also, we have audited the accompanying consolidated statement of
      operations, stockholders’ equity and cash flows of Solunet Storage Holding Corp.
      (accounting predecessor of SAN Holdings, Inc.) for the period from September
      26,
      2002 (inception) through December 31, 2002. In addition, we have audited the
      accompanying statements of discontinued operations, stockholders’ deficit and
      cash flows on a liquidation basis of StorNet, Inc. (accounting predecessor
      to
      Solunet Storage Holding Corp.) for the period from January 1, 2002 through
      September 25, 2002. These financial statements are the responsibility
      of
      the Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.





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





SAN
      Holdings, Inc. completed a business combination with Solunet Storage Holding
      Corp. (Solunet Storage) effective April 1, 2003. The business combination
      was accounted for as a reverse acquisition, with Solunet Storage being treated
      as the acquirer for accounting purposes. As a result, for all periods prior
      to
      April 1, 2003, the financial statements of Solunet Storage have been
      adopted as SAN Holdings, Inc.’s historical financial statements. Solunet Storage
      commenced operations on September 26, 2002 when it acquired certain
      assets
      of StorNet, Inc. (StorNet) that had been foreclosed upon by StorNet’s lenders
      under Article 9 of the Uniform Commercial Code. The results of Solunet Storage’s
      operations for 2002 consist solely of operations conducted during the period
      from September 26, 2002 to December 31, 2002. Because the assets
      that
      Solunet Storage acquired were those of an ongoing business (i.e., StorNet),
      StorNet is considered to be an accounting predecessor of Solunet Storage and
      thus of SAN Holdings, Inc. The results of operations of StorNet are also
      presented as prior period financial statements. Because StorNet went through
      a
      foreclosure and liquidation on September 26, 2002, its financial statements
      have been prepared on a liquidation basis of accounting for the period
      presented.





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, 2004 and 2003, and the results of their
      operations and their cash flows for the year then ended, the results of Solunet
      Storage Holding Corp. and subsidiary’s operations and their cash flows for the
      period from September 26, 2002 (inception) through December 31,
      2002,
      and the results of StorNet, Inc.’s discontinued operations and their cash flows
      for the period from January 1, 2002 through September 25 ,
      2002, in conformity with accounting principles generally accepted in the United
      States of America. For StorNet, Inc. these principles have been applied on
      a
      liquidation basis.




As
      discussed in Note 1A, the financial statements as
      of and for the year ended December 31, 2004 have been restated to account for
      software costs in accordance with accounting principles generally accepted
      in the United States of America.








*/s/GRANT
      THORNTON, LLP*








Denver,
      Colorado


March
      30,
      2005 (except for Note 1A, as to which the date is December 19,
      2005)





F-1






**SAN
      Holdings, Inc.**


**Consolidated
      Balance Sheets**


(In
      thousands, except share data)





December
                31,ASSETS
            
            2004
            
            2003As
                restatedCurrent
                assetsCash
                and cash equivalents
            
            $
            486
            
            $
            3,792Accounts
                receivable, net of allowance for doubtful accounts of $140
              and $336, respectively
            
            
            13,097
            
            
            15,212Inventories,
                net of valuation allowance of $137 and $707,
              respectively
            
            
            467
            
            
            1,427Deferred
                maintenance contracts
            
            
            2,914
            
            
            2,629Prepaid
                expenses and other current assets
            
            
            512
            
            
            1,136Total current assets
            
            
            17,476
            
            
            24,196Property
                and equipment, net
            
            
            1,005
            
            
            1,014Capitalized
                software, net
            
            
            194
            
            
            241Goodwill
            
            
            32,008
            
            
            32,008Intangible
                assets, net
            
            
            2,205
            
            
            2,820Other
                assets
            
            
            384
            
            
            190Total long-term assets
            
            
            35,796
            
            
            36,273TOTAL
                ASSETS
            
            $
            53,272
            
            $
            60,469LIABILITIES
                AND STOCKHOLDERS’ EQUITYLines
                of creditWells Fargo Business Credit, Inc.
            
            $
            6,759
            
            $
            8,253Harris Trust and Savings Bank
            
            
            7,700
            
            
            8,200Accounts
                payable
            
            
            12,453
            
            
            13,145Accrued
                expenses
            
            
            2,651
            
            
            2,801Deferred
                revenue
            
            
            3,942
            
            
            4,022Total current liabilities
            
            
            33,505
            
            
            36,421Commitments
                and contingencies (Note 7)Stockholders’
                equityPreferred stock: Series A; no par value; 8,000 shares authorized;
              -0- shares issued and outstanding, respectively
            
            
            --
            
            
            --Preferred stock; Series B; no par value; 2,000 shares authorized;
              -0- and 748.07306 shares issued and outstanding, respectively
            
            
            --
            
            
            12,718Common
                stock; no par value, 200,000,000 and 75,000,000 shares
              authorized, respectively; 95,811,278 and 58,407,625 shares issued
              and outstanding, respectively
            
            
            32,577
            
            
            19,859Warrants
            
            
            5,691
            
            
            3,222Accumulated deficit
            
            
            (18,501
            )
            
            (11,751
            )Total stockholders’ equity
            
            
            19,767
            
            
            24,048TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            53,272
            
            $
            60,469




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




F-2






**SAN
      Holdings, Inc.**


**Consolidated
      Statements of Operations**


(In
      thousands, except share and per share data)








Years
                Ended December 31,2004
            
            2003As
                restatedRevenueSales of hardware, software and services
            
            $
            58,370
            
            $
            49,730Maintenance services
            
            
            6,910
            
            
            4,950Maintenance contract fees, net
            
            
            878
            
            
            817Total revenue
            
            
            66,158
            
            
            55,497Cost
                of revenue
            
            
            51,558
            
            
            42,006Gross
                profit
            
            
            14,600
            
            
            13,491Operating
                expensesSelling, general and administrative
            
            
            15,443
            
            
            15,511Severance and closed office expense
            
            
            1,226
            
            
            --Acquisition-related costs
            
            
            34
            
            
            1,987Depreciation and amortization
            
            
            1,406
            
            
            1,218Total operating expenses
            
            
            18,109
            
            
            18,716Loss
                from operations
            
            
            (3,509
            )
            
            (5,225
            )Other
                income (expense)Interest expense
            
            
            (1,221
            )
            
            (817
            )Charge for warrant issued to related party for debt
                guaranty
            
            
            (2,469
            )
            
            --Other income (expense)
            
            
            121
            
            
            (11
            )Loss
                before income taxes
            
            
            (7,078
            )
            
            (6,053
            )Income
                tax benefit
            
            
            328
            
            
            115Net
                loss
            
            $
            (6,750
            )
            $
            (5,938
            )Basic
                and diluted net loss per share
            
            $
            (0.08
            )
            $
            (0.12
            )Weighted
                average shares outstanding - basic and diluted
            
            
            86,254,827
            
            
            48,899,805


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






F-3






Solunet
      Storage Holding
      Corp.


**(accounting
      predecessor to SAN Holdings, Inc.)**


**Consolidated
      Statement of Operations**


**For
      the Period from September 26, 2002 (inception) through December 31,
      2002**


(In
      thousands, except share and per share data)








RevenueSales of hardware, software and services
            
            $
            10,856Maintenance services
            
            
            359Maintenance contract fees, net
            
            
            339Total revenue
            
            
            11,554Cost
                of revenue
            
            
            8,922Gross
                profit
            
            
            2,632Operating
                expensesSelling, general and administrative
            
            
            3,748Post-transaction business continuation expenses
            
            
            4,144Depreciation and amortization
            
            
            367Total operating expenses
            
            
            8,259Loss
                from operations
            
            
            (5,627
            )Other
                income (expense)Interest expense
            
            
            (208
            )Other income
            
            
            22Net
                loss
            
            $
            (5,813
            )Basic
                and diluted net loss per share
            
            $
            (0.29
            )Weighted
                average shares outstanding - basic and diluted
            
            
            20,000,000


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








F-4






StorNet,
      Inc.


**(accounting
      predecessor to Solunet Storage Holding Corp. and SAN Holdings,
      Inc.)**


**Statement
      of Discontinued Operations - Liquidation Basis**


**For
      the Period from January 1, 2002 through September 25, 2002**


(In
      thousands, except share and per share data)











RevenueSales of hardware, software and services
            
            $
            35,933Maintenance services
            
            
            6,038Maintenance contract fees, net
            
            
            475Total revenue
            
            
            42,446Cost
                of revenue
            
            
            31,765Gross
                profit
            
            
            10,681Operating
                expensesSelling, general and administrative
            
            
            11,687Impairment of assets
            
            
            5,824Provision for non-cancelable leases
            
            
            1,969Depreciation and amortization
            
            
            757Total operating expenses
            
            
            20,237Loss
                from operations
            
            
            (9,556
            )Other
                income (expense)Interest expense
            
            
            (1,115
            )Other income
            
            
            21Loss
                before income taxes
            
            
            (10,650
            )Income
                tax benefit
            
            
            288Net
                loss
            
            $
            (10,362
            )Basic
                and diluted net loss per share
            
            $
            (0.52
            )Weighted
                average shares outstanding - Basic and diluted
            
            
            20,000,000


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





F-5






**SAN
      Holdings, Inc.**


**Solunet
      Storage Holding Corp. (accounting predecessor to SAN Holdings,
      Inc.)**


**Consolidated
      Statements of Stockholders’ Equity**


**For
      the Period from September 26, 2002 (inception of Solunet Storage Holding Corp.)
      through December 31, 2004**


(In
      thousands, except share data)





Series
                B Preferred Stock
            
            Common
                Stock
            
            Warrants
            
            AccumulatedDeficit
            
            Total
                Stockholders’ EquityShares
            
            Amount
            
            Shares
            
            AmountBalances,
                September 26, 2002
            
            
            --
            
            $
            --
            
            
            20,000,000
            
            $
            1,000
            
            $
            --
            
            $
            --
            
            $
            1,000Net
                loss for the period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,813
            )
            
            (5,813
            )Balances,
                December 31, 2002
            
            
            
            
            
            --
            
            
            20,000,000
            
            
            1,000
            
            
            
            
            
            (5,813
            )
            
            (4,813
            )Reverse
                acquisition (Note 4)
            
            
            748.07306
            
            
            12,718
            
            
            38,269,102
            
            
            18,859
            
            
            3,222
            
            
            
            
            
            34,799Cash-less
                exercise of warrants
            
            
            
            
            
            
            
            
            138,523
            
            
            
            
            
            
            
            
            
            
            
            --Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,938
            )
            
            (5,938
            )Balances,
                December 31, 2003
            
            
            748.07306
            
            
            12,718
            
            
            58,407,625
            
            
            19,859
            
            
            3,222
            
            
            (11,751
            )
            
            24,048Conversion
                of Series B preferred
              stock
                to common stock
            
            
            (748.07306
            )
            
            (12,718
            )
            
            37,403,653
            
            
            12,718
            
            
            
            
            
            
            
            
            --Charge
                for warrant issued to
              related
                party for debt guaranty
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,469
            
            
            
            
            
            2,469Net
                loss for the year - as restated
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,750
            )
            
            (6,750
            )Balances,
                December 31, 2004 –
              as
                restated
            
            
            --
            
            $
            --
            
            
            95,811,278
            
            $
            32,577
            
            $
            5,691
            
            $
            (18,501
            )
            $
            19,767




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


F-6






**StorNet,
      Inc.**


**(accounting
      predecessor to Solunet Storage Holding Corp. and SAN Holdings,
      Inc.)**


**Statement
      of Stockholders’ Deficit - Liquidation Basis**


**For
      the Period from January 1, 2002 through September 25, 2002**


(In
      thousands except for share data)







Common
                Stock
            
            Accumulated
              Deficit
            
            TotalShares
            
            AmountBalance,
                January 1, 2002
            
            
            20,000,000
            
            $
            8,596
            
            $
            (30,322
            )
            $
            (21,726
            )Net
                loss for the nine month period ended
              September
                25, 2002
            
            
            
            
            
            
            
            
            (10,362
            )
            
            (10,362
            )Balance,
                September 25, 2002
            
            
            20,000,000
            
            $
            8,596
            
            $
            (40,684
            )
            $
            (32,088
            )


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





F-7


**SAN
        HOLDINGS, INC.**


**Consolidated
      Statements of Cash Flows**


(In
      thousands)








Years
                Ended December 31,2004
            
            2003As
                restatedCash
                flows from operating activities:Net loss
            
            $
            (6,750
            )
            $
            (5,938
            )Adjustments to reconcile net loss to net cash used in operating
                activities:Depreciation and amortization
            
            
            1,406
            
            
            1,218Charge for warrant issued to related party for debt
                guaranty
            
            
            2,469
            
            
            --Loss on disposal of property and equipment
            
            
            113
            
            
            --Changes in operating assets and liabilities:Accounts receivable
            
            
            2,115
            
            
            (1,246
            )Inventories
            
            
            608
            
            
            243Deferred maintenance contracts
            
            
            (285
            )
            
            (1,802
            )Prepaid expenses and other current assets
            
            
            624
            
            
            (807
            )Other assets
            
            
            (265
            )
            
            (17
            )Accounts payable
            
            
            (692
            )
            
            2,794Accrued expenses
            
            
            (150
            )
            
            463Deferred revenue
            
            
            (80
            )
            
            1,238Net
                cash used in operating activities
            
            
            (887
            )
            
            (3,854
            )Cash
                flows from investing activities:Purchase of property and equipment, net
            
            
            (372
            )
            
            (121
            )Acquisition costs, net of cash acquired
            
            
            --
            
            
            (188
            )Capitalized software costs
            
            
            (53
            )
            
            (207
            )Net
                cash used in investing activities
            
            
            (425
            )
            
            (516
            )Cash
                flows from financing activities:Net borrowings (payments) on line of credit - Harris Trust & Savings
            
            
            (500
            )
            
            8,200Net borrowings (payments) on line of credit - Wells Fargo Business
                Credit
            
            
            (1,494
            )
            
            6,633Net borrowings (payments) on other borrowings
            
            
            --
            
            
            (6,832
            )Decrease in restricted cash
            
            
            --
            
            
            148Net
                cash provided by (used in) financing activities
            
            
            (1,994
            )
            
            8,149Net
                increase (decrease) in cash and cash equivalents
            
            
            (3,306
            )
            
            3,779Cash
                and cash equivalents at beginning of year
            
            
            3,792
            
            
            13Cash
                and cash equivalents at end of year
            
            $
            486
            
            $
            3,792Supplemental
                disclosure of other cash flow information:Interest paid
            
            $
            1,193
            
            $
            879


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





F-8




SAN
      HOLDINGS, INC.


**Consolidated
      Statements of Cash Flows**


(In
      thousands)








Years
                Ended December 31,2004
            
            2003Supplemental
                disclosure of non-cash investing and financing activities:Transfer of inventory to property and equipment
            
            $
            352
            
            $
            --Conversion of note payable and accrued interest to common
                stock
            
            $
            --
            
            $
            4,100Significant acquisition:****Fair value of assets acquired
            
            $
            --
            
            $
            42,096****Purchase price transaction costs paid
            
            
            
            
            
            (505
            )****Purchase price transaction costs accrued
            
            
            
            
            
            (430
            )****Common stock exchanged
            
            
            
            
            
            (14,759
            )****Preferred stock issued
            
            
            
            
            
            (12,718
            )****Warrants issued
            
            
            
            
            
            (3,222
            )****Liabilities assumed
            
            $
            --
            
            $
            (10,462
            )




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





F-9




**Solunet
        Storage Holding Corp. (accounting predecessor to SAN Holdings,
        Inc.)**


**Consolidated
      Statement of Cash Flows**


**For
      the Period from September 26, 2002 (inception) through December 31,
      2002**


(In
      thousands)





Cash
                flows from operating activities:Net loss
            
            $
            (5,813
            )Adjustments to reconcile net loss to net cash provided by operating
                activities:Non-cash post-transaction business continuation expenses
            
            
            1,629Depreciation and amortization
            
            
            367Amortization of debt issuance cost
            
            
            19Changes in operating assets and liabilities:Accounts receivable
            
            
            1,193Inventories
            
            
            (1,104
            )Deferred maintenance contracts
            
            
            (827
            )Prepaid expenses
            
            
            (145
            )Other assets
            
            
            (94
            )Accounts payable
            
            
            1,790Unpresented checks
            
            
            506Accrued expenses
            
            
            (52
            )Deferred revenue
            
            
            2,725Net
                cash provided by operating activities
            
            
            194Cash
                flows from investing activities:Acquisition of business, net of cash acquired
            
            
            (10,169
            )Purchase of property and equipment
            
            
            (21
            )Net
                cash used in investing activities
            
            
            (10,190
            )Cash
                flows from financing activities:Net proceeds from current borrowings
            
            
            5,202Proceeds from notes payable
            
            
            4,000Proceeds from issuance of common stock
            
            
            1,000Payment for restricted cash
            
            
            (148
            )Loan origination fees paid
            
            
            (45
            )Net
                cash provided by financing activities
            
            
            10,009Net
                increase in cash and cash equivalents
            
            $
            13Cash
                and cash equivalents at beginning of period
            
            
            --Cash
                and cash equivalents at end of period
            
            $
            13Supplemental
                disclosure of other cash flow information:Interest paid
            
            $
            125Supplemental
                disclosure of non-cash investing and financing activities:Acquisition of businessTangible assets acquired
            
            $
            10,778Intangible assets acquired
            
            
            862Liabilities assumed
            
            
            (1,333
            )10,307Less: cash acquired
            
            
            (138
            )Net
                cash paid for acquisition
            
            $
            10,169




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





F-10






**StorNet,
      Inc.**


**(accounting
      predecessor to Solunet Storage Holding Corp. and SAN Holdings,
      Inc.)**


**Statement
      of Cash Flows - Liquidation Basis**


**For
      the Period from January 1, 2002 through September 25, 2002**


(in
      thousands)








Cash
                flows from operating activities:Net loss
            
            $
            (10,362
            )Adjustments to reconcile net loss to net cash provided by operating
                activities:Depreciation and amortization
            
            
            757Impairment of assets
            
            
            5,824Provision for non-cancelable leases
            
            
            1,969Other
            
            
            52Changes in operating assets and liabilities:Accounts receivable
            
            
            7,837Inventories
            
            
            235Deferred maintenance contracts
            
            
            413Prepaid expenses
            
            
            40Other assets
            
            
            48Accounts payable
            
            
            (370
            )Unpresented checks
            
            
            (3,667
            )Accrued expenses
            
            
            (245
            )Deferred revenue
            
            
            (849
            )Net cash provided by operating activities
            
            
            1,682Cash
                flows from investing activities:Purchase of property and equipment
            
            
            (67
            )Net cash used in investing activities
            
            
            (67
            )Cash
                flows from financing activities:Net proceeds from current borrowings
            
            
            (1,488
            )Proceeds from notes payable
            
            
            (163
            )Net
                cash used in financing activities
            
            
            (1,651
            )Net
                decrease in cash and cash equivalents
            
            
            (36
            )Cash
                and cash equivalents at beginning of period
            
            
            115Cash
                and cash equivalents at end of period
            
            $
            79Supplemental
                disclosure of other cash flow information:Interest paid
            
            $
            893Supplemental
                disclosure of non-cash investing and financing activities:Write-down of assets due to pending liquidation
            
            $
            5,824


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






F-11






**SAN
      Holdings, Inc.**




Notes
      to Consolidated Financial Statements







**NOTE
      1 - BASIS OF PRESENTATION**





SAN
      Holdings, Inc. (“SANZ,” the “Company,” or “we”), a Colorado corporation, was
      formed on July 1, 1983. SANZ includes the accounts of its wholly-owned
      subsidiaries, SANZ, Inc. (formerly known as Storage Area Networks, Inc.) and
      Solunet Storage Holding Corp. (“Solunet Storage”), and its wholly-owned
      subsidiary, Solunet Storage, Inc. (formerly known as StorNet, Inc.). The Company
      operates as a single business segment, which sells and installs computer data
      storage systems and provides related services throughout the United States.
      Effective April 1, 2003, SANZ completed a business combination with Solunet
      Storage, which was majority-owned by Sun Solunet LLC (“Sun Solunet”), an
      affiliate of a private equity fund. Upon the completion of the business
      combination, Sun Solunet became the majority stockholder of SANZ.





The
      business combination was accounted for as a reverse acquisition, with Solunet
      Storage treated as the acquirer for accounting purposes. As a result, for all
      periods prior to April 1, 2003, the financial statements of Solunet Storage
      have
      been adopted as SANZ’ historical financial statements. The financial statements
      presented in this report as the financial statements of SANZ consist of the accounts of Solunet Storage
      for all periods presented, together with the assets, liabilities and results
      of
      operations of SAN Holdings, Inc. and its subsidiary from April 1,
      2003.





Solunet
      Storage commenced operations on September 26, 2002, when it acquired certain
      assets of StorNet, Inc. (“StorNet”) from its secured lender in a foreclosure
      sale. The results of Solunet Storage’s operations for 2002 consist solely of
      operations conducted during a period of slightly more than three months, from
      September 26, 2002 to December 31, 2002.





Because
      the assets that Solunet Storage acquired were those of an ongoing business
      (i.e., StorNet), StorNet is considered to be an accounting predecessor of
      Solunet Storage, and thus of SANZ. The results of operations of StorNet are
      also
      presented as prior period financial statements. However, because StorNet went
      through a foreclosure and liquidation on September 26, 2002, its financial
      statements have been prepared on a liquidation basis of accounting for the
      period from January 1, 2002 through September 25, 2002, and are therefore not
      fully comparable to those of SANZ for the current period. We have therefore
      included in this report StorNet’s statements of operations, stockholders’ deficit and cash flows for the
      nine month period ended September 25, 2002 on separate pages from the
      corresponding statements of SANZ for the current period.








**NOTE
      1A - RESTATEMENT OF FINANCIAL STATEMENTS**





We
      have
      restated our consolidated financial statements as of and for the year ended
      December 31, 2004. In addition, certain disclosures in Notes 2, 3, and 6 to
      the
      consolidated financial statements contained in this report have been restated
      to
      reflect the restatement adjustments.





As
      previously disclosed on our Current Report on Form 8-K filed on November 17,
      2005, during the September 2005 quarter, we initiated a project to prepare
      stand-alone financial statements for audit of our EarthWhereTM (“EarthWhere”)
      business. We believe that this is an important step in further supporting the
      growth opportunities of that business. Beginning in 2003, the Company
      capitalized certain software development costs related to its EarthWhere
      geospatial imaging software in accordance with Statement
      of Financial Accounting Standard No. 86, “Accounting for the Costs of Computer
      Software to Be Sold, Leased, or Otherwise Marketed,” (“SFAS 86”) .
      As all
      of the Company’s capitalized software costs pertain to the EarthWhere business,
      such costs are considered to be material to the total assets of that business
      unit, but were not considered material to the total assets of the Company as
      a
      whole as of December 31, 2003 or December 31, 2004. As we undertook this
      project, we determined that the assumptions and evidential matter that the
      Company had used in capitalization of software development costs during 2003
      and
      2004 did not provide sufficient “contemporaneous documentation” to support
      capitalization.






F-12





As
      a result, on November 14, 2005, the
      Board
      of Directors of the Company in consultation with management concluded that
      the
      Company’s financial statements as of and for the year ended December 31, 2004
      and the interim financial statements as of and for the quarter and six months
      ended June 30, 2004, as of and for the quarter and nine months ended September
      30, 2004, for the quarter ended December 31, 2004 and as of March 31, 2005
      and
      June 30, 2005 should not be relied upon.





The
      restatement reflects the expensing of certain software development costs in
      2004
      related to the Company’s proprietary software that were capitalized on the
      Company’s original filings for the 2004 periods referred to above. The Company
      is not restating its 2003 financial statements due to the immateriality of
      the
      impact to both 2003 and 2005.





The
      primary impact of the restatement on the consolidated balance sheet at December
      31, 2004 was to decrease the capitalized software asset and increase the
      accumulated deficit by $465,000. The impact on the statement of operations
      for
      the year ended December 31, 2004 was to increase selling, general and
      administrative (“SG&A”) expense and increase the net loss for the year by
      the same amount. The restatement had no impact on cash balances. The impact
      of
      the restatement on the consolidated statement of operations, balance sheet,
      statement of stockholders’ equity and statement of cash flows is shown in the
      following tables:








**Balance
                Sheet Data**(in
                thousands)
            
            As
                reported
            
            Adjustment
            
            As
                restated**December
                31, 2004**Capitalized
                software, net
            
            $
            659
            
            $
            (465
            )
            $
            194Total
                long-term assets
            
            
            36,261
            
            
            (465
            )
            
            35,796Total
                stockholders' equity
            
            $
            20,232
            
            $
            (465
            )
            $
            19,767





**Statement
                of Operations Data**(in
                thousands, except per share data)
            
            As
                reported
            
            Adjustment
            
            As
                restated**For
                the year ended December 31, 2004**Selling,
                general and administrative expenses
            
            $
            14,987
            
            $
            456
            
            $
            15,443Depreciation
                and amortization
            
            
            1,397
            
            
            9
            
            
            1,406Loss
                from operations
            
            
            (3,044
            )
            
            (465
            )
            
            (3,509
            )Net
                loss
            
            
            (6,285
            )
            
            (465
            )
            
            (6,750
            )Basic
                and diluted net loss per share
            
            $
            (0.07
            )
            $
            (0.01
            )
            $
            (0.08
            )





**Statement
                of Stockholders’ Equity Data**(in
                thousands)
            
            As
                reported
            
            Adjustment
            
            As
                restated**December
                31, 2004**Net
                loss for the year
            
            $
            (6,285
            )
            $
            (465
            )
            $
            (6,750
            )Total
                accumulated deficit
            
            
            (18,036
            )
            
            (465
            )
            
            (18,501
            )Total
                stockholders’ equity
            
            $
            20,232
            
            
            (465
            )
            $
            19,767





F-13






**Statement
                of Cash Flows Data**(in
                thousands)
            
            As
                reported
            
            Adjustment
            
            As
                restated**December
                31, 2004**Net
                cash used in operating activities
            
            $
            (431
            )
            $
            (456
            )
            $
            (887
            )Net
                cash used in investing activities
            
            
            (881
            )
            
            456
            
            
            (425
            )Cash
                and cash equivalents at end of year
            
            $
            486
            
            
            --
            
            $
            486













**NOTE
      2 - FINANCIAL CONDITION**





The
      accompanying consolidated financial statements have been prepared in conformity
      with United States generally accepted accounting principles (“US GAAP”), which
      contemplate our continuation as a going concern. However, we have incurred
      substantial losses from operations since inception and have incurred a net
      loss
      of $6,750,000 for the year ended December 31, 2004. In addition, as of December
      31, 2004, we have negative working capital (current liabilities in excess of
      current assets) of $16,029,000. Accordingly, the recoverability of a major
      portion of the recorded asset amounts as of December 31, 2004 is dependent
      on
      our continuing operations, which in turn is dependent on our ability to maintain
      our current financing arrangements and our ability to become profitable in
      our
      future operations. Our consolidated financial statements do not include any
      adjustments relating to the recoverability and classification of recorded asset
      amounts or amounts and classification of liabilities that might be necessary
      if
      we were unable to continue as a going concern.





We
      completed the business combination with Solunet Storage on April 1, 2003,
      described in Notes 1 and 4, to achieve the economies that we believe are
      available by spreading our fixed cost base across a greater volume of sales.
      As
      anticipated, the cost reductions (personnel reductions and office closures)
      afforded by the combination have been phased in over 2003 and 2004. We continue
      to examine our operations for opportunities to extract additional costs at
      the
      same time as we seek to increase our sales and gross profits in order to achieve
      sustained profitability.





As
      a result of the business combination with Solunet Storage, the Company has
      substantially increased its accounts receivable, which is the borrowing base
      for
      its principal borrowing facility with Wells Fargo Business Credit, Inc. (“Wells
      Fargo”). At December 31, 2004, the Company had $2.6 million of undrawn
      availability on this line. The increased borrowing limit, the expanding supplier
      lines of credit and the Harris Trust debt facilities described below are
      anticipated to provide continued liquidity for the foreseeable future, or next
      12 months. However, our ability to borrow under the Wells Fargo facility is
      subject to maintaining our accounts receivable balance at current levels, as
      well as complying with the financial covenants we have made to the lender.
      If we
      are unable to comply with our financial covenants to the lender, the facility
      could cease to be available to us.





At
      December 31, 2004, the Company was not in compliance with certain financial
      covenants; however, Wells Fargo did not issue a formal, written notice of
      default. Under an amendment to the credit facility, Wells Fargo issued to the
      Company a waiver of non-compliance for these covenants and, effective January
      1,
      2005, increased our borrowing rate to Prime + 5.0%, an increase of three points,
      and set new covenants for 2005. See further discussion of the amended credit
      agreement in Note 5.





In
      2004, the Company also maintained two revolving credit facilities with Harris
      Trust and Savings Bank (“Harris Trust”),which in the aggregate were $8.0 million
      at December 31, 2004. In February 2005, we entered into a revised credit
      agreement with Harris Trust, which increased our availability by $2.0 million,
      for a total of $10.0 million, and consolidated the credit lines into one
      facility maintained by SAN Holdings. At December 31, the Company had borrowed
      $7.7 million and had $0.3 million of undrawn availability on this facility.
      While the Harris Trust facility is a demand note, under the revised agreement
      it
      has been extended to February 2006, unless called earlier by the
      lender. Sun
      Capital Partners II, LP (“Sun Capital II”), an affiliate of our majority
      shareholder, Sun Solunet, has guaranteed the Harris Trust credit facility and
      has agreed that, upon the written request of SANZ, it will provide SANZ with
      sufficient funds to repay the debt outstanding under the credit facility in
      the
      event that Harris Trust requires repayment of such debt or, at Sun Capital
      II’s
      election, pay the outstanding debt directly to Harris Trust; provided that
      in no
      event will Sun Capital II’s obligation exceed the amount of Sun Capital II’s
      guaranty. This guaranty and all obligations expire on December 31,
      2005. See further discussion of the Harris Trust facility in Note 5.






F-14






**NOTE
      3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Principles
      of Consolidation**





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





**Cash
      and Cash Equivalents**





Cash
      equivalents are short-term highly liquid investments that are both readily
      convertible to cash and have original maturities of three months or less at
      the
      date of purchase.





**Accounts
      Receivable and Concentration of Credit Risk**





The
      Company is subject to credit risk from accounts receivable with its customers.
      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 for doubtful accounts 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.





No
      single customer accounted for more than 10% of total revenue in 2004, 2003,
      or
      2002. Additionally, the Company had no customers that individually represented
      more than 10% of accounts receivable at December 31, 2004 or December 31,
      2003.





**Inventories**





Inventories
      are comprised of hardware and software supplied by original equipment
      manufacturers and are stated at the lower of cost or market. Cost is determined
      by the first-in, first-out method.





**Deferred
      Maintenance Contracts**





Consistent
      with the Company’s revenue recognition policy for resale of certain maintenance
      agreements acquired from hardware and software vendors where the Company
      performs a portion of the maintenance services, the Company defers the costs
      of
      maintenance contracts at the inception of the maintenance period. All such
      costs
      are amortized on a straight-line basis over the contractual terms of the
      maintenance agreements. See further discussion in Note 3 - Revenue
      Recognition.





**Property
      and equipment**





Property
      and equipment are recorded at cost. Depreciation is computed using the
      straight-line method over the estimated useful lives of the respective
      depreciable assets, which range from three to seven years. Leasehold
      improvements are amortized on a straight-line basis over the lesser of the
      useful life of the asset or the life of the lease. Maintenance and repairs
      are
      expensed as incurred and improvements are capitalized.






F-15






Property
      and equipment consist of the following:





(In
                thousands)
            
            December
                312004
            
            2003Computer
                equipment and software
            
            $
            1,649
            
            $
            960Office
                equipment and furniture
            
            
            221
            
            
            391Leasehold
                improvements
            
            
            23
            
            
            33Less:
                accumulated depreciation
            
            
            (888
            )
            
            (370
            )$
            1,005
            
            $
            1,014





Depreciation
      expense for the years ended December 31, 2004, 2003 and 2002 was $620,000,
      $330,000 and $572,000, respectively.





**Software
      development costs**





The
      Company expenses the costs of developing computer software to be sold, leased
      or
      otherwise marketed until technological feasibility is established and
      capitalizes all costs incurred from that time until the software is available
      for general customer release or ready for its intended use, at which time
      amortization of the capitalized costs begins. Technological feasibility for
      the
      Company's computer software products is based upon the earlier of the
      achievement of: (a) a detailed program design free of high-risk development
      issues; or (b) completion of a working model. Costs of major enhancements
      to existing products are capitalized while routine maintenance of existing
      products is charged to expense as incurred. The ongoing assessment of the
      recoverability of capitalized computer software development costs requires
      considerable judgment by management with respect to certain external factors,
      including, but not limited to, technological feasibility, anticipated future
      gross revenue, estimated economic life and changes in software and hardware
      technology. The Company also contracts with third parties to develop or test
      software that will be sold to customers and generally capitalizes these
      third-party costs.





For
      the years ended December 31, 2004, 2003 and 2002, the Company capitalized
      software development costs of $53,000, $207,000 and $-0-, respectively.
      Additionally, the Company expensed research and development costs related
      thereto of $536,000, $125,000, and $-0-, for the aforementioned years,
      respectively.





Capitalized
      software costs are amortized on a product-by-product basis over their expected
      useful life, which is generally three years. The annual amortization related
      to
      software to be sold is the greater of the amount computed using (a) the
      ratio that current gross revenue for a product compares to the total of current
      and anticipated future gross revenue for that product or (b) the
      straight-line method over the remaining estimated economic life of the product.
      Amortization expense related to capitalized software costs totaled $100,000,
      $64,000 and $-0- for the years ended December 31, 2004, 2003 and 2002,
      respectively.





(In
                thousands)
            
            December
                312004
            
            2003As
                restatedCapitalized
                software costs
            
            $
            358
            
            $
            305Less:
                accumulated amortization
            
            
            (164
            )
            
            (64
            )$
            194
            
            $
            241






F-16






**Goodwill
      and Other Intangible Assets**





Goodwill
      represents the excess of the purchase price over the fair value of identifiable
      tangible and intangible net assets relating to business acquisitions. The
      Company accounts for goodwill and intangible assets in accordance with Statement
      of Financial Accounting Standards No. 142, “Goodwill and Other Intangible
      Assets” (“SFAS 142”), which it adopted January 1, 2002. SFAS 142 requires that
      goodwill no longer be amortized but instead that it be tested for impairment
      at
      least annually. For purposes of testing for goodwill impairment, the Company
      has
      determined that it has one reporting unit.





The
      Company reviews 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 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. Goodwill was subjected
      to
      fair value impairment tests in 2004 and 2003 and no impairments were
      recognized.





Other
      intangible assets include tradenames, customer lists and software technologies,
      which were initially valued by independent appraisers and recorded as part
      of
      business acquisitions. The Company has identified all intangible assets with
      definite lives and subject to amortization as follows:








(In
                thousands)
            
            December
                31, 2004
            
            December
                31, 2003Asset
              (Estimated Life)
            
            Intangible
                Assets, Gross
            
            Accumulated
                Amortization
            
            Intangible
                Assets, Net
            
            Intangible
                Assets, Gross
            
            Accumulated
                Amortization
            
            Intangible
                Assets, NetTradenames
              (2.5 to 10 years)
            
            $
            2,799
            
            $
            (852
            )
            $
            1,947
            
            $
            2,799
            
            $
            (422
            )
            $
            2,377Customer
                lists
              (3 to 5 years)
            
            
            893
            
            
            (718
            )
            
            175
            
            
            893
            
            
            (600
            )
            
            293Software
                technologies
              (3 years)
            
            
            200
            
            
            (117
            )
            
            83
            
            
            200
            
            
            (50
            )
            
            150$
            3,892
            
            $
            (1,687
            )
            $
            2,205
            
            $
            3,892
            
            $
            (1,072
            )
            $
            2,820





Amortization
      expense for intangible assets subject to amortization for the years ended
      December 31, 2004, 2003 and 2002 was $615,000, $745,000 and $397,000,
      respectively. Estimated aggregate amortization expense for intangible assets
      subject to amortization for each of the five succeeding fiscal years is as
      follows:





(In
                thousands)2005
            
            $
            4652006
            
            
            2902007
            
            
            2442008
            
            
            2302009
            
            
            230Thereafter
            
            
            746$
            2,205






F-17






**Long-lived
      assets**





The
      Company evaluates the carrying value of long-lived assets, including
      identifiable intangible assets, whenever events or changes in circumstances
      indicate the carrying amount may not be fully recoverable. If that analysis
      indicates that an impairment has occurred, the Company measures the impairment
      based on a comparison of undiscounted cash flows or fair values, whichever
      is
      more readily determinable, to the carrying value of the related asset. For
      the
      nine months ended September 25, 2002, the Company recorded an impairment charge
      of $5,824,000 to reflect the liquidation value of its assets. For 2004 and
      2003,
      no events occurred that required the Company to consider an impairment
      charge.





**Fair
      Value of Financial Instruments**





The
      Company’s financial instruments consist principally of cash and cash
      equivalents, accounts receivable, accounts payable and borrowings under its
      lines of credit. The Company believes that all of the financial instruments’
      recoverable values approximate fair value because of their short-term
      nature.





**Revenue
      Recognition**





The
      Company recognizes revenue from the design, installation and support of data
      storage solutions, which may include hardware, software and services. . The
      Company’s revenue recognition policies are based on the guidance in Staff
      Accounting Bulletin No. 104, “Revenue Recognition,” (“SAB 104”) in conjunction
      with Emerging Issues Task Force (“EITF”) Issue Number 00-21, “Revenue
      Arrangements with Multiple Deliverables” (“EITF 00-21”). The Company recognizes
      revenue when:


●
      persuasive evidence of an arrangement exists,


●
      delivery has occurred or services have been rendered,


●
      the sales price is fixed or determinable, and


●
      collectibility of the resulting accounts receivable is reasonably assured.





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





Product
      Sales (Hardware/Software)





Revenue
      from the resale of data storage systems is recognized upon either (i) the
      shipment of goods for FOB origin shipments or (ii) the delivery of goods to
      the
      customer for FOB destination shipments, provided that no significant
      uncertainties regarding customer acceptance exist, and depending on the terms
      of
      the contract and applicable commercial law.





Service
      sales





Service
      revenue, including material installation services, is recognized as the related
      services are completed.





Maintenance
      Services





Revenue
      from maintenance agreements is recognized in one of two ways, based on whether
      or not the Company performs “first call” maintenance support. The Company
      operates a first call technical support center for certain of the hardware
      and
      software products that we sell. For first call maintenance services, we record
      the gross sale price of the applicable support or maintenance contract as
      deferred revenue, and recognize revenue on a straight-line basis over the
      contractual terms of the agreements. Likewise, the cost to acquire such
      maintenance agreements from the hardware and software vendors is also deferred
      and amortized on a straight-line basis over the contractual terms of the
      maintenance agreements. Revenue from these arrangements is included in the
      heading “Maintenance services” in the Consolidated Statement of
      Operations.







F-18





Maintenance
      contract fees, net





For
      products for which we do not perform first call maintenance, but resell the
      vendor’s maintenance contract for a fee, we recognize revenue from the resale of
      those maintenance agreements, net of the cost to acquire the maintenance
      agreements, at the beginning of the maintenance period. Revenue from these
      arrangements is included in the heading “Maintenance contract fees, net” in the
      Consolidated Statement of Operations.





Multiple
      deliverable arrangements





In
      accordance with EITF 00-21, for sales transactions that include the resale
      and
      installation of data storage systems and the resale of maintenance contracts
      denominated as a single, lump-sum price, we allocate the aggregate transaction
      revenue among the multiple elements based on their relative fair values. This
      process involves the application of management’s judgment and estimates
      regarding those relative fair values.





When
      some elements are delivered prior to others in a multiple element arrangement,
      revenue for the delivered elements is separately recognized, provided all of
      the
      following criteria are met:




●
            the
              delivered item has value to the customer on a standalone
              basis,●
            there
              is objective and reliable evidence of the fair value of the undelivered
              item(s), and●
            delivery
              or performance of the undelivered item(s) is considered probable and
              substantially in the control of the
              vendor.




Undelivered
      items typically include installation, training, and other professional services.





The
      amount allocated to delivered items is limited to the amount that is not
      contingent upon the delivery of additional items or meeting other specified
      performance conditions. If the undelivered element represents services, a
      residual method of allocating revenue is used. Under the residual method,
      revenue is deferred for the estimated fair value of the undelivered services.
      The Company estimates the fair value of the undelivered services based on
      separate service offerings with customers. For undelivered elements other than
      services, revenue is allocated to the separate elements based on their relative
      fair values.





Deferred
      revenue, whether associated with maintenance contracts or undelivered elements,
      is included within Deferred revenue on the balance sheet.





Shipping
      and Handling Costs





Shipping
      and handling costs are included in cost of revenue.




**Advertising
      Costs**





Advertising
      costs are expensed as incurred. Advertising expense was $607,000, $389,000
      and
      $279,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
      Reimbursements of advertising expense from product vendors are treated as
      reductions to cost of sales.





**Use
      of Estimates**




The
      Company has prepared these consolidated financial statements in conformity
      with
      US GAAP, which require the use of management’s 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.
      The
      Company periodically evaluates estimates and assumptions related to revenue
      recognition, allowances for credit losses on accounts receivable, allowances
      for
      impairment in the value of inventory, the useful lives of intangible assets
      and
      software development costs and related impairment tests, and litigation and
      other loss contingencies. 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. Accordingly, actual results could differ from those estimates.





F-19






**Loss
      Per Share**





Basic
      loss per share is calculated based on the weighted average number of common
      shares outstanding. Diluted loss per share is computed using the
      weighted-average number of common shares outstanding plus the number of common
      shares that would be issued assuming exercise or conversion of all potentially
      dilutive common shares had been issued. For 2004 and 2003, basic and diluted
      loss per share are equal, as the inclusion of potentially dilutive common shares
      is anti-dilutive based on the respective net losses incurred for those years.
      Options and warrants to purchase 33,473,008 and 41,083,076 shares of common
      stock were excluded from diluted share calculations for 2004 and 2003,
      respectively, as these options and warrants were anti-dilutive. On March 10,
      2005, the Company approved the issuance of a warrant to purchase 3,086,218
      of
      the Company’s common stock to its majority shareholder. See further discussion
      in Notes 5, 8, and 10.





As
      of December 31, 2002, Solunet Storage (accounting predecessor to SANZ) had
      no
      options outstanding. However, as of December 31, 2002, SANZ had 13,891,758
      options and warrants outstanding which carried over as potentially dilutive
      securities with the SANZ and Solunet Storage merger. These options and warrants
      would have been excluded from dilutive share calculations, as they were
      anti-dilutive.





**Stock-Based
      Compensation**





As
      permitted under Statement of Financial Accounting Standards No. 123, “Accounting
      for Stock-Based Compensation” (“FAS 123”), the Company accounts for stock-based
      compensation using the intrinsic value method in accordance with Accounting
      Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“ABP
      25”) and related interpretations. Accordingly, no compensation expense has been
      recognized for options granted to employees with an exercise price equal to
      the
      market value at the date of grant. The Company accounts for equity instruments
      issued to non-employees in accordance with the provisions of FAS 123 and related
      interpretations.





The
      following table illustrates the effect on net loss and net loss per share for
      the years ended December 31, 2004 and 2003 if the Company had applied the
      fair-value based method of FAS 123 to stock-based compensation:





(In
                thousands, except for per share data)
            
            Year
                ended December 31,2004
            
            2003As
                restatedNet
                loss, as reported
            
            $
            (6,750
            )
            $
            (5,938
            )Deduct,
                Total stock-based compensation
              expense
                determined under fair-value based
              method,
                net of related tax effects
            
            
            (889
            )
            
            (2,290
            )Pro
                forma net loss
            
            $
            (7,639
            )
            $
            (8,228
            )Basic
                and diluted net loss per share:As reported
            
            $
            (0.08
            )
            $
            (0.12
            )Pro
                forma
            
            $
            (0.09
            )
            $
            (0.17
            )








As
      of December 31, 2002, Solunet Storage had no options or warrants outstanding.
      As
      of September 25, 2002, the balance sheet date of StorNet (accounting predecessor
      to Solunet Storage), the Company determined that the outstanding options and
      warrants had no measurable value based on the liquidation event of the
      predecessor company. In addition, none of the outstanding options or warrants
      carried over to Solunet Storage. Accordingly, for the period ended September
      25,
      2002, the Company had no stock-based compensation expense.






F-20





For
      2004 and 2003, see Note 8 for the assumptions and methodology used to determine
      the fair value of stock-based compensation.





**Recent
      Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard No. 123 (revised) (“SFAS 123R”),
“Share Based Payment,” which provides guidance on share-based payment
      transactions and requires fair value accounting for all share-based
      compensation. SFAS 123R requires the Company to measure the cost of employee
      services received in exchange for an award of equity instruments based on the
      grant-date fair value of the award (with limited exceptions). That cost will
      be
      recognized over the period during which an employee is required to provide
      service in exchange for the award, usually the vesting period. The Company
      is
      required to adopt SFAS 123R at the beginning of its third quarter of 2005.





We
      are
      currently evaluating the impact of SFAS 123R on our financial position
      and
      results of operations as well as alternative transition methods under
      SFAS 123R. In addition, we have not determined whether the adoption
      of
      SFAS 123R will result in amounts that are similar to the current pro
      forma
      disclosures under SFAS 123. See “Stock-Based Compensation Plans” above for
      information related to the pro forma effects on our net income and earnings
      per
      share if we had applied the fair value recognition provisions of SFAS 123,
      “Accounting for Stock-Based Compensation,” to stock-based employee
      compensation.





In
      2004, the Financial Accounting Standards Board also issued the following
      Statements of Financial Accounting Standards:


●
            Statement
              No. 151, “Inventory Costs-an amendment of ARB No. 43, Chapter 4,” issued
              in November 2004;●
            Statement
              No. 152, “Accounting for Real Estate Time-Sharing Transactions-an
              amendment of FASB Statements No. 66 and 67,” issued in December 2004; and●
            Statement
              No. 153, “Exchanges of Nonmonetary Assets-an amendment of APB Opinion No.
              29,”**issued in December
              2004.




Management
      believes that adoption of these new standards will not have a material effect
      on
      the Company’s financial results.





**Reclassifications**





Certain
      reclassifications have been made to prior years’ balances to conform with
      current year presentations.








**NOTE
      4 - SANZ AND SOLUNET STORAGE BUSINESS COMBINATION**





Effective
      April 1, 2003, SANZ completed a business combination with Solunet Storage.
      The
      transaction was accounted for as a reverse acquisition, with Solunet Storage
      being treated as the acquirer for accounting purposes. As a result, for all
      periods prior to April 1, 2003, the financial statements of Solunet Storage
      have
      been adopted as SANZ’ historical financial statements.





Among
      the principal reasons for the acquisition were management’s belief that it would
      afford opportunities to spread the company’s fixed costs over a broader revenue
      base, thereby providing increased operating leverage, and its belief that SANZ’
      business would be strengthened by extending the company’s geographic presence to
      regions of the United States where the company did not previously have
      operations. This broader geographic scope was expected to reduce the company’s
      reliance on any one region, and to better enable the company to service its
      existing customers, many of whom have operations in multiple geographic regions.





The
      business combination was effected in an all-stock transaction in which SANZ
      issued 20,000,000 shares of common stock and 748.07306 shares of Series B
      convertible preferred stock (“preferred stock”) for all of the outstanding
      common stock of Solunet Storage. On April 12, 2004, the preferred stock
      automatically converted into 37,403,653 shares of common stock upon the
      amendment of our Articles of Incorporation, which increased the number of
      authorized shares of common stock to 200,000,000 shares. As part of the business
      combination, we issued to Sun Solunet, the principal stockholder of Solunet
      Storage, a warrant to purchase a maximum of 19,976,737 shares of common stock
      at
      various prices, ranging from $0.29 to $10.82, and over various terms.






F-21





In
      accordance with SFAS 141, the Company accounted for this transaction under
      the
      purchase method of accounting, in which the purchase price was allocated across
      all classes of tangible and intangible assets in accordance with their fair
      values, and any excess of the purchase price over the fair values of the
      identified assets was recorded as goodwill. Because of the reverse nature of
      the
      acquisition, the purchase price was computed as the sum (a) of the value of
      the
      SANZ shares outstanding before the transaction (valued at the market price
      over
      a range of trading days before and after the announcement of the definitive
      agreement), (b) the fair value of the SANZ warrants and options outstanding
      prior to the closing, and (c) capitalizable transaction costs incurred directly
      related to the business combination. The Company determined the fair value
      of
      the warrants and options to be $3,222,000 using a Black-Scholes option-pricing
      model with the following assumptions: dividend yield of 0%, volatility of 50%,
      risk-free interest rate of 3.0% and expected life equal to the remaining life
      for each tranche.





The
      purchase price is summarized as follows:





(In
                thousands)Common
                stock
            
            $
            27,477Warrants
                and options
            
            
            3,222Transaction
                costs
            
            
            935Purchase price
            
            $
            31,634








The
      purchase price, including all adjustments was allocated as follows:





(In
                thousands)Tangible
                assetsCash
            
            $
            317Other current assets
            
            
            5,858Property, equipment and other long-term assets
            
            
            883Identifiable
                intangible assets
            
            
            3,03010,088Less:
                liabilities assumed
            
            
            (10,462
            )Net
                liabilities assumed
            
            
            (374
            )Goodwill
                recorded
            
            
            32,008Purchase
                price
            
            $
            31,634





The
      Company does not expect that any of this goodwill will be deductible for federal
      income tax purposes.




The
      following unaudited pro forma information is presented as if the business
      combination had occurred as of the beginning of the years presented. The pro
      forma information is presented for illustrative purposes only and is not
      necessarily indicative of the operating results that would have occurred if
      the
      business combination had been consummated as of the beginning of the years
      presented, nor is it necessarily indicative of the future operating
      results:






F-22








(In
                thousands, except per share data)
            
            
            Years
                ended December 31,2003
            
            
            
            2002Pro
                forma results of operations:
            
            
            (Unaudited)
            
            
            
            (Unaudited)Revenue
            
            
            $
            63,029
            
            
            
            
            $
            87,003Net
                loss
            
            
            $
            (6,032
            )
            
            (1)
            
            $
            (19,056
            )
            
            (2)Net
                loss per share
            
            
            $
            (0.10
            )
            
            
            
            $
            (0.33
            )




(1)
                Includes
                    reduction in acquisition-related expenses in the amount of $1,127,000
                    for
                    fees paid to investment bankers and severance payments that were
                    contractually triggered by the business combination.(2)
                Includes
                  a net reduction of $150,000 in operating expenses for additional
                  expense
                  of $70,000 for amortization of intangibles and a reduction in depreciation
                  of $220,000.


**NOTE
      5 - DEBT**





**Wells
      Fargo Line of Credit**





The
      Company has a revolving credit line with Wells Fargo to borrow up to $12
      million, subject to availability under its borrowing base, and is secured by
      substantially all assets of SANZ Inc., a wholly-owned subsidiary of the Company.
      This credit line expires in May 2007, and at December 31, 2004, bore interest
      at
      prime plus 2% (7.25% at December 31). The funds available under the credit
      facility are limited to 85% of the amount of eligible accounts receivable,
      which
      consist of substantially all accounts receivable, subject to exclusions for
      invoices aged over 90 days, otherwise-current receivables from customers with
      material amounts outstanding over 90 days and subject to a percentage limit
      of
      accounts receivable from a single customer. Borrowings against receivables
      owed
      directly by federal government end-users are further limited to 80% of the
      eligible accounts receivable up 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, 2004, based
      on
      our eligible collateral at that date, we had $9.4 million available
      for
      borrowing on the Wells Fargo credit facility, of which $6.8 million was drawn
      and $2.6 million remained available.





Wells
      Fargo may declare the loan in default if SANZ Inc. does not meet certain
      financial performance measures. At December 31, 2004, we were not in compliance
      with certain of those covenants; however, Wells Fargo did not issue a formal,
      written notice of default. Under an amendment to the credit agreement executed
      in March 2005, Wells Fargo waived non-compliance on these covenants, and reset
      financial covenant requirements effective January 1, 2005 for: (1) minimum
      net
      income on a year to date basis, calculated quarterly; (2) minimum net
      worth
      plus “subordinated debt” (measured in the aggregate, with amounts loaned to SANZ
      Inc. from SAN Holdings being defined as subordinated debt), calculated on a
      monthly basis; (3) minimum availability, calculated monthly; (4) capital
      expenditure limit, calculated on an annual basis; and (5) a minimum cash
      infusion from SAN Holdings or an outside source if SANZ Inc. generates a net
      loss in a given quarter and has generated a net loss on a year to date basis
      at
      that time in an amount equal to the lesser of the quarterly net loss or the
      year
      to date net loss.





As
      part of the amended agreement and effective January 1, 2005, Wells Fargo
      increased our borrowing rate to prime plus 5.0%, an increase of three points.
      This rate is subject to potential decreases, as allowed by Wells Fargo, based
      on
      SANZ Inc. achieving certain net income levels during 2005.





Additionally,
      the amended credit agreement includes as an additional borrower, Solunet
      Storage, Inc., which in March 2005 became a wholly-owned subsidiary of SANZ
      Inc.
      As part of the co-borrowing arrangement with SANZ Inc. and Solunet Storage,
      Inc., each of the borrowers has a separate borrowing base; however, total
      borrowings under the facility shall not exceed $12,000,000. Additionally, each
      entity is required to guaranty each other’s debt under the borrowing facility.
      Cash transfers from SANZ Inc. to Solunet Storage, Inc. are limited to the
      funding of Solunet Storage, Inc.’s operating expenses, subject to an annual
      limit, and to a minimum availability on the date of any such
      transfer.






F-23





The
      Company’s revolving credit facility with Wells Fargo requires a lock-box
      arrangement, which provides for all receipts to be swept daily to reduce
      borrowings outstanding under the revolving credit facility. This arrangement,
      combined with the existence of a subjective acceleration clause in the revolving
      credit facility, requires the classification of outstanding borrowings under
      the
      revolving credit facility as a current liability in accordance with EITF Issue
      95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving
      Credit Agreements that Include Both a Subjective Acceleration Clause and a
      Lock-Box Arrangement.”





**Harris
      Trust and Savings Bank**





At
      December 31, 2004, the Company also maintained two revolving credit facilities
      with Harris Trust, which allowed for borrowings up to an aggregate of $8.0
      million. One of the facilities, with a maximum amount of $6.8 million at
      December 31, 2004, was maintained by SAN Holdings and was unsecured, not limited
      by availability under a borrowing base, and did not require the maintenance
      of
      specified financial covenants. The other facility, with a maximum amount of
      $1.2
      million at December 31, 2004, was maintained by our Solunet Storage subsidiary,
      and was secured by substantially all of the assets of Solunet Storage, but
      was
      not limited by availability under a borrowing base and did not require the
      maintenance of specified financial covenants. At December 31, 2004, we had
      borrowed $7.7 million on these facilities, which bore interest at a rate of
      prime plus 0.75% (6.00% at December 31).





On
      February 16, 2005, we entered into a revised credit agreement with Harris Trust,
      which increased our availability by $2.0 million, for a total of $10.0 million,
      and consolidated the credit lines into one facility maintained by SAN Holdings
      and guaranteed by an affiliate of our majority stockholder. This facility is
      unsecured, is not limited by availability under a borrowing base, does not
      require the maintenance of specified financial covenants, and as of February
      16,
      2005, bore interest at a rate of prime plus 0.75% (6.25% at February 16). While
      the Harris Trust facility is a demand note, under the revised agreement it
      has
      been extended to February 2006, unless called earlier by the lender. Sun
      Capital II has guaranteed the Harris Trust credit facility and has agreed that,
      upon the written request of SANZ, it will provide SANZ with sufficient funds
      to
      repay the debt outstanding under the credit facility in the event that Harris
      Trust requires repayment of such debt or, at Sun Capital II’s election, pay the
      outstanding debt directly to Harris Trust; provided that in no event will Sun
      Capital II’s obligation exceed the amount of Sun Capital II’s guaranty. This
      guaranty and all obligations expire on December 31, 2005.





In
      exchange for the guaranty by Sun Capital on the increased Harris Trust line
      of
      credit, on March 10, 2005, the Company approved the issuance of a warrant
      to purchase 3,086,218 shares of our common stock with an exercise price of
      $0.001 per share to our majority shareholder, Sun Solunet . The issuance of
      this
      warrant will result in dilution of the other shareholders of the Company. See
      further discussion in Note 10. Based on the number of shares issued pursuant
      to
      the warrant, the Company expects to record in the first quarter of 2005 a charge
      calculated as the number of shares issued under the warrant multiplied by the
      closing market price of SANZ’ common stock for this date. Based on the closing
      price of our common stock on March 10, 2005, we expect this charge to be
      approximately $1.4 million.





**Other
      Financing Arrangements**





In
      January 2003, the Company entered into a revolving credit facility with The
      CIT
      Group, supported by a limited guaranty by an affiliate of Sun Solunet, which
      replaced a Harris Trust credit facility. After the business combination of
      SANZ
      and Solunet Storage, the Company refinanced the CIT Group facility with a new
      facility with Harris Trust (the second of the two Harris Trust facilities
      described in the prior section). The Company had originally capitalized the
      costs incurred in establishing the CIT Group facility, and in June 2003, wrote
      off the full remaining amount of those capitalized costs of
      $232,000.





In
      the original capitalization of Solunet Storage in September 2002, Sun Solunet
      invested $1,000,000, as equity and $4,000,000 in the form of a promissory note,
      bearing interest at a rate of 5%. In March 2003, Sun Solunet sold a portion
      of
      both the common stock and the promissory note to an officer of Solunet Storage.
      Immediately prior to the SANZ and Solunet Storage business combination, Sun
      Solunet and the officer of Solunet Storage converted the foregoing $4,000,000
      promissory note plus accrued interest of $100,000 into common shares of stock
      in
      Solunet Storage. These shares were exchanged for SANZ shares in the SANZ and
      Solunet Storage business combination.






F-24





The
      following summarizes our debt outstanding:





(In
                thousands)
            
            December
                31, 2004
            
            December
                31, 2003Line
                of credit with Wells Fargo
            
            $
            6,759
            
            $
            8,253Lines
                of credit with Harris Trust
            
            
            7,700
            
            
            8,200$
            14,459
            
            $
            16,453









**NOTE
      6 - INCOME TAXES**





In
      June 2004, the Company received a Federal income tax refund in the amount of
      $352,000. The refund was the result of the carryback of the net operating loss
      for 2002 for StorNet Inc., whose assets, including rights to tax refunds, we
      acquired in 2002 from the secured lender of StorNet Inc. in a foreclosure sale.
      This net operating loss carryback was allowed under a recent law change, which
      increased the carryback period from two to five years for net operating losses
      generated in 2001 and 2002. The Company filed the amended income tax return
      in
      February 2004; however, because the Company carries a deferred tax valuation
      allowance equal to 100% of total deferred tax assets, the Company did not record
      the benefit until the cash refund was received.





During
      2003, the Company received a state income tax refund of $115,000. The Company
      recorded this refund as a benefit from income taxes.





For
      the years ended December 31, 2004 and 2003 and the period from September 26
      through December 31, 2002 (the period from Solunet Storage’s Inception through
      December 31, 2002), total income tax benefit differs from the amount computed
      by
      applying the U.S. federal income tax rate of 34% to loss before income taxes
      as
      follows:





(In
                thousands)
            
            Year
                ended
            
            Year
                ended
            
            Period
                from
              September
                26
              throughDecember
                31,
              2004
            
            December
                31,
              2003
            
            December
                31,
              2002As
                restatedIncome
                tax benefit at federal statutory rate
            
            $
            (2,407
            )
            $
            (2,119
            )
            $
            (1,975
            )State
                income tax benefit, net of federal benefit
            
            
            (75
            )
            
            (117
            )
            
            --Federal
                income tax refund
            
            
            (328
            )
            
            (115
            )
            
            --Warrant
                charge for debt guaranty
            
            
            839
            
            
            --
            
            
            --Nondeductible
                items
            
            
            19
            
            
            28
            
            
            6Valuation
                allowance
            
            
            1,624
            
            
            2,208
            
            
            1,969$
            (328
            )
            $
            (115
            )
            $
            -





Deferred
      tax assets and liabilities are recorded for the estimated future tax effects
      of
      temporary differences between the tax basis of assets and liabilities and their
      basis for financial reporting purposes, and for operating loss carryforwards.
      Temporary differences that give rise to deferred tax assets and liabilities
      are
      as follows:






F-25






(In
                thousands)
            
            December 31,2004
            
            2003As
                restatedDeferred
                tax assets:Current:Accounts receivable reserves
            
            $
            49
            
            $
            118Inventory reserves
            
            
            48
            
            
            247Accrued expenses
            
            
            316
            
            
            150Other
            
            
            (24
            )
            
            621Non-currentNet operating loss carryforwards
            
            
            13,124
            
            
            11,400Intangible assets
            
            
            421
            
            
            272Property and equipment
            
            
            (95
            )
            
            --Total deferred tax assets
            
            
            13,839
            
            
            12,808Deferred
                tax liabilities
            
            
            --
            
            
            (84
            )Valuation
                allowance
            
            
            (13,839
            )
            
            (12,724
            )Net
                deferred tax asset
            
            $
            --
            
            $
            --








The
      Company carries a deferred tax valuation allowance equal to 100% of total
      deferred assets. In recording this allowance, management has considered a number
      of factors, but chiefly, the Company’s recent history of sustained operating
      losses. Management has concluded that a valuation allowance is required for
      100%
      of the total deferred tax assets as it is more likely than not that the deferred
      tax assets will not be realized.





At
      December 31, 2004, the Company has net operating loss carryforwards available
      to
      offset future federal taxable income of approximately $37,000,000. Such
      carryforwards expire between 2010 and 2024. Under the Tax reform Act of 1986,
      the amount of and the benefit from net operating losses that can be carried
      forward may be limited in certain circumstances. Events that may cause changes
      in the Company’s tax carryovers include, but are not limited to, a cumulative
      ownership change of more than 50% over a three-year period. A portion of the
      Company’s operating loss carryforwards that can be utilized in any one taxable
      year for federal tax purposes has been limited by the ownership change resulting
      from the SANZ and Solunet Storage business combination. Future ownership changes
      could further limit the utilization of the Company’s net operating loss
      carryforwards.








**NOTE
      7 - COMMITMENTS AND CONTINGENCIES**





**Leases**





The
      Company leases office space and equipment under various non-cancelable operating
      leases. At December 31, 2004, the aggregate future minimum lease commitments
      were as follows (in thousands):








2005
            
            $
            5882006
            
            
            3432007
            
            
            1702008
            
            
            242009
            
            
            4$
            1,129





F-26






Rent
      expense totaled $977,000, $714,000 and $964,000 in the years ended December
      31,
      2004, 2003 and 2002, respectively. Rent expense for the year ended December
      31,
      2004 included a charge of $279,000 for three closed offices (see
      below).





**Closed
      Offices**





In
      accordance with SFAS no. 146, “Accounting for Costs Associated in Exit or
      Disposal Activities,” in the fourth quarter of 2004 the Company recorded a
      liability in the amount of $279,000 for expenses related to the closure of
      three
      regional offices. The accrued expenses include rent payments for the remaining
      lease terms, net of any sublease agreements.





**Severance
      agreements**





In
      the fourth quarter of 2004, the Company entered into separation agreements
      with
      several key management personnel. In conjunction with these agreements, we
      recorded a liability in the amount of $216,000 for severance and other
      termination benefits to be paid out in 2005.





The
      following table summarizes the accrued severance and closed office activity
      during 2004:





Accrued
                Liability
              (in
                thousands)
            Balance
                at
              12/31/03
            2004
              Payments
            2004
              Accruals
            Balance
                at
              12/31/04
            Scheduled Payments2005
            2006Severance
            $   286
            $   217
            $   216
            $   285
            $   285
            $     --Closed
                Offices
            105
            59
            279
            325
            241
            84TOTAL
            $   391
            $   276
            $   495
            $   610
            $   526
            $   84








**Litigation**





The
      Company is periodically 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
      8 - STOCKHOLDERS’ EQUITY**





**Preferred
      stock conversion**





At
      the Annual Meeting of Shareholders held on April 12, 2004, SANZ’ shareholders
      voted to amend the Company’s Articles of Incorporation to increase the
      authorized common stock from 75,000,000 shares to 200,000,000 shares. An
      amendment to the Company’s Articles of Incorporation implementing that increase
      was filed and became effective on April 13, 2004. The terms of the previously
      outstanding Series B Preferred Stock provided that all of those shares would
      convert into common stock — automatically and at a fixed conversion ratio — at
      such time as SANZ had sufficient authorized common shares to permit that
      conversion. Accordingly, the increase in the Company’s authorized shares of
      common stock on April 13, 2004 caused all of the Company’s previously
      outstanding Series B Preferred Stock to convert into a total of 37,403,653
      shares of common stock.





**Stock
      options**





The
      Company has in effect three Stock Option Plans, a 2000 Stock Option Plan, a
      2001
      Stock Option Plan and a 2003 Stock Option Plan. The 2003 Stock Option Plan
      was
      adopted on December 18, 2003. The total number of shares of common stock subject
      to options that may be granted under the 2003 Plan may not exceed 15,000,000
      shares. Options granted under the 2003 Plan vest generally over four years.
      All
      options and warrants discussed herein pertain to SAN Holdings, Inc. and not
      to
      Solunet Storage, as the accounting acquirer.






F-27






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.




For
      SFAS 123 disclosure purposes, 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:





Years
                ended December 31,2004
            2003
            2002Expected
                dividend yield
            0%
            0%
            0%Expected
                volatility
            142%
            80%
            105%Expected
                term
            5
                years
            5
                years
            5
                yearsRisk-free
                interest rate
            3.95%
            2.0%
            2.6%





The
      weighted average fair value of options granted were $0.36, $0.28 and $0.29
      per
      share for the years ended December 31, 2004, 2003 and 2002,
      respectively.





The
      following table summarizes option activity for the three stock option plans
      during the three years ended December 31, 2004, 2003 and 2002, respectively
      (in
      thousands, except per share data):





Number
                of Shares
            
            Weighted
                AverageUnderlying
                Options
            
            Exercise
                PriceOutstanding
                at January 1, 2002
            
            7,117
            
            $
            1.34Granted
            
            1,218
            
            
            0.43Forfeited
            
            (1,793
            )
            
            1.66Outstanding
                at December 31, 2002
            
            6,542
            
            
            1.08Granted
            
            8,310
            
            
            0.42Forfeited
            
            (794
            )
            
            1.28Exercised
            
            (150
            )
            
            0.33Outstanding
                at December 31, 2003
            
            13,908
            
            $
            .69Granted
            
            3,010
            
            
            0.40Forfeited
            
            (2,924
            )
            
            0.80Outstanding
                at December 31, 2004
            
            13,994
            
            
            0.61Exercisable
                at December 31, 2002
            
            4,192
            
            $
            1.09Exercisable
                at December 31, 2003
            
            4,662
            
            $
            0.99Exercisable
                at December 31, 2004
            
            6,928
            
            $
            0.79




F-28






Further
        information regarding options outstanding and options exercisable at December
        31, 2004 is summarized below (in thousands, except per share data):


Options
                Outstanding
            
            Options
                ExercisableRange
                of exercise
              prices
            Number
                of
              Shares
            Weighted
              Average
              Remaining
              Life
                (Years)
            Weighted
              Average
              Exercise
              Price
            
            Number
                of
              Shares
            Weighted
              Average
              Exercise
              Price$0.29
                to $0.49
            9,532
            8.7
            $    0.39
            
            3,152
            $    0.37$0.57
                to $1.00
            3,529
            3.4
            0.68
            
            2,843
            0.68$1.50
                to $2.25
            873
            2.5
            2.01
            
            873
            2.01$10.00
                to $10.32
            60
            0.2
            10.14
            
            60
            10.1413,994
            6.9
            $    0.61
            
            6,928
            $    0.79






**Stock
      warrants**





On
      November 16, 2004, the Company became obligated, under a letter agreement dated
      March 31, 2003 (“Credit Support Agreement”), to issue, and on March 23, 2005,
      the Company issued to Sun Solunet a stock purchase warrant (the “Guaranty
      Warrant”) to purchase 7,715,545 shares of the Company’s common stock, no par
      value per share at an exercise price of $0.001 per share. The Company was
      obligated to issue the Guaranty Warrant to Sun Solunet in partial consideration
      for a guaranty provided by Sun Capital II, an affiliate of Sun Solunet, (the
      “Guarantor”) on the two revolving credit lines of the Company with Harris Trust
      pursuant to the Credit Support Agreement.




The
      number of shares exercisable under the Guaranty was determined pursuant to
      a
      formula set forth in the Credit Support Agreement and was based on the amount
      that the outstanding guaranty provided on behalf of the Company by the Guarantor
      on the credit lines with Harris Trust exceeded $3.0 million as of the Issue
      Date
      (18 months after the effective date of the guarantee). Until the Company reduces
      the guaranteed debt to $3.0 million or less, it will be required to issue
      additional warrants to Sun Solunet at six-month intervals in the future (each
      May and November), according to formulas applicable to each such date, which
      are
      disclosed in Note 10. Pursuant to the obligation to issue the Guaranty Warrant,
      the Company recorded in November 2004 a charge of $2,469,000, calculated as
      the
      number of shares to be issued under the warrant multiplied by the closing market
      price of SANZ’ common stock ($0.32 per share) for this date.





On
      February 16, 2005, the Company, pursuant to a revised revolving credit facility
      agreement with Harris Trust, increased its borrowing availability from $8.0
      million to $10.0 million. Sun Capital II has guaranteed this facility, and,
      on
      March 10, 2005, as consideration for the guaranty, the Company approved the
      issuance of a warrant to purchase 3,086,218 shares of the Company’s common stock
      at an exercise price of $0.001 per share to this affiliate. This warrant was
      issued on March 23, 2005.





On
      April 1, 2003, as part of the SANZ and Solunet Storage business combination,
      the
      Company issued to Sun Solunet a warrant (“Schedule A warrants”) to purchase a
      maximum of 19,976,737 shares of common stock at various prices ranging from
      $0.29 to $10.82, and over various terms. The number of Schedule A warrants
      was
      based on a percentage of SANZ’ outstanding warrants and options at the date of
      the business combination. The exercise of the Schedule A warrants is contingent
      upon the prior exercise of 2,958,951 warrants and/or options issued to previous
      holders, and, therefore, it is not determinable which Schedule A warrants will
      become exercisable, if any. Correspondingly, it is not known which Schedule
      A
      warrants will expire because it is not determinable which corresponding warrants
      and/or options of those previously outstanding will comprise the first 2,958,951
      exercised. Based on these contingent exercise provisions, the stated
      weighted-average exercise prices in the table below denoted by the * are pro
      forma amounts with regards to the Schedule A warrants, and have been calculated
      without consideration that certain of these warrants will not become
      exercisable.






F-29





The
      following table summarizes warrant activity for the three years ended December
      31, 2004, 2003 and 2002, respectively (in thousands, except per share
      data):





Number
                of Shares Underlying Warrants
            
            Weighted
                Average Exercise PriceOutstanding
                at January 1, 2002
            
            
            6,993
            
            
            1.13Granted
            
            
            506
            
            
            0.69Forfeited
            
            
            (150
            )
            
            8.95Outstanding
                at December 31, 2002
            
            
            7,349
            
            $
            0.94Granted
            
            
            21,526
            
            
            0.90
            *Exercised
            
            
            (195
            )
            
            0.63Forfeited
            
            
            (1,506
            )
            
            1.25Outstanding
                at December 31, 2003
            
            
            27,174
            
            $
            0.91
            *Granted
            
            
            7,716
            
            
            --Forfeited
            
            
            (7,696
            )
            
            1.31Outstanding
                at December 31, 2004
            
            
            27,194
            
            $
            0.47
            *Exercisable
                at December 31, 2002
            
            
            7,349
            
            $
            0.94Exercisable
                at December 31, 2003
            
            
            8,644
            
            $
            0.91
            *Exercisable
                at December 31, 2004
            
            
            13,827
            
            $
            0.29
            *











**NOTE
      9 - DEFINED CONTRIBUTION PLAN**





The
      Company maintains a defined contribution plan under Section 401(k) of the
      Internal Revenue Code, covering all employees who have three months of service
      with the Company. The Plan allows participants to make voluntary pre-tax
      contributions of up to 100% of their pre-tax earnings, not to exceed the IRS
      annual limit. In addition, Company management, at its discretion, may partially
      match participant contributions. For the years ended December 31, 2004, 2003
      and
      2002, employer matching contributions were $-0-, $46,000 and $62,000,
      respectively.











**NOTE
      10 - RELATED PARTY TRANSACTIONS**





As
      discussed in Note 1, Sun Solunet is the majority shareholder of SANZ. The
      Company pays quarterly $75,000 for management and consulting services to Sun
      Capital Partners Management LLC (“Sun Capital Management”), an affiliate of Sun
      Solunet. In addition, Sun Capital II, who is also an affiliate of Sun Solunet,
      guarantees the Harris Trust debt, as described in Notes 5 and 8. While SANZ
      receives material benefits from this guaranty, the Company pays no specified
      cash consideration for the guaranty. The Company has allocated a portion of
      the
      management and consulting services fee paid to Sun Capital Management to
      interest expense, based on the financing-related benefits that it receives
      under
      the Sun Capital guaranty. The balance of the management and consulting services
      fee has been recorded as general and administrative expense.






F-30





If
      the guaranteed Harris Trust debt is not reduced to $3 million or less, the
      Company is obligated to issue stock purchase warrants at an exercise price
      of
      $0.001 to Sun Solunet based on the excess guaranteed debt over $3 million,
      calculated as follows:






Debt
                Guaranty Warrants
            =
            (Guaranteed
                Debt - $3,000,000)
            x
            fixed
                number of shares at particular date$2,000,000









The
      number of shares to be used in the calculation of debt guaranty warrants for
      a
      particular date are listed in the table below. As discussed in Note 8, the
      Company was obligated to issue to Sun Solunet a stock purchase warrant for
      the
      purchase of 7,715,545 shares of common stock on November 16, 2004 based on
      $8.0
      million of Harris Bank debt guaranteed by Sun Capital II.





Date
            Number
                of SharesMay
                2005
            641,292November
                2005
            1,307,898May
                2006
            1,342,776November
                2006
            1,379,067May
                2007
            1,416,849November
                2007
            1,456,206May
                2008
            1,497,226Each
                six months thereafter*
            291,346





*
      A number of shares equal to 0.5% of the shares outstanding upon the closing
      of
      the Solunet Storage business combination.





On
      March 10, 2005, the Company approved the issuance to Sun Solunet of an
      additional stock purchase warrant for the purchase of 3,086,218 shares of common
      stock as consideration for an additional $2.0 million debt guaranty provided
      by
      Sun Capital II on the Company’s Harris Trust credit facility. The number of
      shares underlying the warrant was calculated as if the $2.0 million debt
      guaranty was in place as of November 16, 2004. The Company is continually
      evaluating potential transactions to refinance a portion of the guaranteed
      debt
      with either other debt or equity, and, in conjunction with its existing
      availability on it Wells Fargo credit facility and cash from operations.
      However, there can be no assurance that we will be successful in obtaining
      additional debt or equity financing.





As
      of December 31, 2004 and 2003, the Company had $-0- and $91,000, respectively,
      due to Sun Capital Management for management fees and bank debt interest. For
      the years ended December 31, 2004, 2003 and 2002, the Company paid $323,000,
      $443,000 and $-0-, respectively, to Sun Capital Management for management fees,
      a portion of which has been recorded as interest expense due to guaranties
      on
      the Harris Trust debt as discussed above.






**NOTE
      11 -INVESTMENT IN ALLIANCE MEDICAL CORPORATION**





The
      Company has been in litigation since late 2002 seeking to recover approximately
      575,000 shares of common stock of a private company, Alliance Medical
      Corporation (“Alliance”), that were placed in an escrow account at the end of
      1999. The escrow agent deposited those shares with the court at the outset
      of
      the litigation. The opposing claimants to these shares were SANZ’ stockholders
      as of a December 31, 1999 record date to whom a “contingent dividend” was made,
      subject to conditions subsequent that the Company contends were not fulfilled.
      Certain of the opposing claimants contend principally that the deadline
      determining the satisfaction of the condition was extended to 2005. Prior to
      2004, the Company recorded no value on these shares due to the disputed
      title.





In
      November 2001, Alliance effected a 1 for 3.3297 reverse stock split.
      Accordingly, all share amounts discussed below are listed in duplicate as
      follows - pre-reverse split # and post-reverse split #. Through a series of
      default judgments and settlement agreements entered into between the
      commencement of the litigation and September 30, 2004, the Company obtained
      clear title to approximately 300,000/90,098 shares of the Alliance stock. Under
      these settlement agreements, the Company has also waived any claim to
      approximately 215,000/64,570 additional shares in Alliance. Approximately
      60,000/18,020 shares remain the subject of the litigation.






F-31





In
      September 2004, the Company sold an aggregate of 85,000/25,528 shares it had
      obtained to an employee and existing shareholder of SANZ and two other
      purchasers, who had no prior relationship to SANZ, for total cash proceeds
      of
      $212,500. Also in September 2004, in accordance with a Settlement Agreement
      discussed in our 2003 Annual Report on Form 10-KSB that resolved a separate
      litigation related to Alliance that had been brought against SANZ and
      approximately ten other defendants, the Company used $210,000 of these proceeds
      (in lieu of a transfer of Alliance shares) to satisfy its obligations under
      that
      Settlement Agreement. In the September quarter, the Company recorded the net
      of
      these transactions (the initial recording of the shares to which clear title
      had
      been obtained, the sale of a portion of those shares for cash, and the cash
      payment to the other litigant) as Other Income. The Company has not recorded
      any
      value with respect to the approximately 60,000/18,020 shares that remain the
      subject of the litigation.





As
      of December 31, 2004, SANZ held approximately 215,000/64,570 shares of Alliance
      stock, which are carried at $229,000 in Other Assets. The Company has recorded
      this investment at its best estimate of fair value, based on various factors
      including the following: (1) Alliance is a private company with no readily
      determinable market value; (2) because Alliance is private, SANZ has a limited
      market to liquidate any or all of its Alliance shares; (3) the price obtained
      in
      recent arms-length sales of Alliance stock by SANZ; (4) a review of Alliance’s
      most recent audited financial statements; and, (5) discussions with financial
      management of Alliance as to external valuations completed on Alliance.






F-32






**(3)
      Exhibits**





The
      exhibits filed as a part of this report are listed below and this list is intended to comprise the exhibit
      index:





**Exhibit**
                **Number**
              **Description**2.01
              Agreement
                  and Plan of Merger dated March 31, 2003 relating to the
                  acquisition
                  of Solunet Storage. Incorporated by reference to Exhibit 2.1
                  to the
                  Registrant’s Current Report on Form 8-K/A No. 1 dated
                  April 1, 2003, filed on April 3, 2003.3.01
              Second
                  Amended and Restated Articles of Incorporation, as filed with the
                  Colorado
                  Secretary of State on April 13, 2004. Incorporated by reference
                  to Exhibit
                  3.1 to the Registrant’s Quarterly Report on Form 10-QSB for the fiscal
                  quarter ended March 31, 2004, filed on May 11, 2004.3.02
              Second
                  Amended and Restated Bylaws, effective April 4, 2003. Incorporated
                  by
                  reference to Exhibit 2.9 to the Registrant’s Current Report on
                  Form 8-K/A No. 1 dated April 1, 2003, filed
                  on
                  April 3, 2003.4.01
              Designation
                  of Series A and Series B Preferred Stock - April 3,
                  2003.
                  Incorporated by reference to Exhibit 2.10 to the Registrant’s Current
                  Report on Form 8-K dated April 1, 2003, filed on
                  April 3,
                  2003.10.01
              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 Registrant’s Quarterly Report on
                  Form 10-QSB for the quarter ended June 30, 2001,
                  filed on
                  August 13, 2001.10.02
              First
                  Amendment, dated January 17, 2002, to Credit and Security Agreement
                  by and
                  between Storage Area Networks, Inc. and Wells Fargo Business Credit,
                  Inc.
                  Incorporated by reference to Exhibit 10.1 to the Registrant’s
                  Quarterly Report on Form 10-QSB for the quarter ended March 31,
                  2002, filed on May 14, 2002.10.03
              Subordination
                  Agreement, dated January 17, 2002 by and between SAN Holdings,
                  Inc. and
                  Wells Fargo Business Credit, Inc. Incorporated by reference to
                  Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-QSB
                  for the quarter ended March 31, 2002, filed on May 14,
                  2002.10.04
              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 Registrant’s
                  Registration Statement on Form SB-2/A No. 2, File No. 333-87196,
                  filed on November 4, 2002.10.05
              Fifth
                  Amendment, dated September 22, 2003, to Credit and Security
                  Agreement
                  by and between the Registrant (f/k/a Storage Area Networks, Inc.)
                  and
                  Wells Fargo Business Credit, Inc.. Incorporated by reference to
                  Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-QSB
                  for the quarter ended September 30, 2003, filed on November 13,
                  2003.10.06
              Eighth
                  Amendment, dated October 29, 2004, to Credit and Security Agreement
                  by and
                  between the Registrant (f/k/a Storage Area Networks, Inc.) and
                  Wells Fargo
                  Business Credit, Inc. Incorporated by reference to Exhibit 10.1
                  to the
                  Registrant’s Current Report on Form 8-K dated October 29, 2004 filedonNovember
                  4, 2004.10.07
              Ninth
                  Amendment, dated March 29, 2005, to Credit and Security Agreement
                  by and
                  between the Registrant (f/k/a Storage Area Networks, Inc.) and
                  Wells Fargo
                  Business Credit, Inc.Incorporated
                  by reference to Exhibit 10.07 to the Registrant’s Annual Report on
                  Form 10-K for the year ended December 31, 2004, filed on
                  March 31,
                  2005.10.08
              Patent
                  and Trademark Security Agreement, dated September 22, 2003, by
                  and between
                  the Registrant and Wells Fargo Business Credit, Inc. Incorporated
                  by
                  reference to Exhibit 10.2 to the Registrant’s Quarterly Report on
                  Form 10-QSB for the quarter ended September 30, 2003,
                  filed on
                  November 13, 2003.10.09
              Shareholders
                  Agreement dated April 4, 2003. Incorporated by reference
                  from
                  Exhibit 2.8 to the Registrant’s Current Report on Form 8-K dated
                  April 4, 2003, filed on April 21, 2003.10.10
              Credit
                  Support Document dated March 31, 2003. Incorporated by reference
                  to
                  Exhibit 2.3 to the Registrant’s Current Report on Form 8-K/A
                  dated April 1, 2003, filed on April 3, 2003.10.11
              Stock
                  Option Agreement dated March 31, 2003. Incorporated by reference
                  to
                  Exhibit 2.2 to the Registrant’s Current Report on Form 8-K/A
                  No. 1 dated April 1, 2003, filed on April 3,
                  2003.
   47
   **Exhibit**
                  **Number**
                **Description**10.12
                SANZ
                    Common Stock Purchase Warrant dated April 4, 2003. Incorporated
                    by
                    reference to Exhibit 2.4 to the Registrant’s Current Report on
                    Form 8-K/A No. 1 dated April 1, 2003, filed
                    on
                    April 3, 2003.10.13
                Management
                    Services Agreement dated April 4, 2003. Incorporated by
                    reference to
                    Exhibit 2.5 to the Registrant’s Current Report on Form 8-K/A
                    No. 1 dated April 1, 2003, filed on April 3,
                    2003.10.14
                Registration
                    Rights Agreement dated April 4, 2003. Incorporated by
                    reference to
                    Exhibit 2.6 to the Registrant’s Current Report on Form 8-K/A
                    No. 1 dated April 1, 2003, filed on April 3,
                    2003.10.15
                SAN
                    Holdings, Inc - Harris Trust and Savings Bank Loan dated May 16,
                    2003. Incorporated by reference to Exhibit 10.6 to the
                    Registrant’s
                    Quarterly Report on Form 10-QSB/A No. 1 for the
                    quarter ended
                    June 30, 2003, filed on October 2, 2003.10.16
                First
                    Amendment, dated June 13, 2003, to San Holdings, Inc.
                    - Harris Trust
                    and Savings Bank Loan Authorization Agreement. Incorporated by
                    reference
                    to Exhibit 10.7 to the Registrant’s Quarterly Report on
                    Form 10-QSB/A No. 1 for the quarter ended June 30,
                    2003,
                    filed on October 2, 2003.10.17
                Second
                    Amendment, dated June 20, 2003, to SAN Holdings Inc. -
                    Harris Trust
                    and Savings Bank Loan Authorization Agreement. Incorporated by
                    reference
                    to Exhibit 10.8 to the Registrant’s Quarterly Report on
                    Form 10-QSB/A No. 1 for the quarter ended June 30,
                    2003,
                    filed on October 2, 2003.10.18
                Third
                    Amendment, dated August 14, 2003, to SAN Holdings Inc.
                    - Harris Trust
                    and Savings Bank Loan Authorization Agreement. Incorporated by
                    reference
                    to Exhibit 10.9 to the Registrant’s Quarterly Report on
                    Form 10-QSB/A No. 1 for the quarter ended June 30,
                    2003,
                    filed on October 2, 2003.10.19
                Fourth
                    Amendment, dated November 26, 2003, to SAN Holdings Inc.
                    - Harris
                    Trust and Savings Bank Loan Authorization Agreement. Incorporated
                    by
                    reference to Exhibit 10.19 to the Registrant’s Annual Report on
                    Form 10-K for the year ended December 31, 2004, filed
                    on March 31,
                    2005.10.20
                Fifth
                    Amendment, dated February 27, 2004, to SAN Holdings Inc.
                    - Harris
                    Trust and Savings Bank Loan Authorization Agreement. Incorporated
                    by
                    reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
                    10-QSB for the fiscal quarter ended March 31, 2004, filed on
                    May 11, 2004.10.21
                Solunet
                    Storage Inc. - Harris Trust and Savings Bank Loan Authorization
                    Agreement
                    dated August 14, 2003, and Incorporated by reference to
                    Exhibit 10.1 - to the Registrant’s Quarterly Report on
                    Form 10-QSB/A No. 1 for the quarter ended June 30,
                    2003,
                    filed on October 2, 2003.10.22
                First
                    Amendment, dated November 22, 2004, to Solunet Storage Inc. -
                    Harris Trust
                    and Savings Bank Loan Authorization Agreement. Incorporated by
                    reference
                    to Exhibit 10.01 to the Registrant’s Current Report on Form 8-K dated
                    November 16, 2004, filed on November 22, 2004.10.23
                2000
                    Stock Option Plan. Incorporated by reference to Exhibit 99.1
                    to the
                    Registrant’s Registration Statement on Form S-8 (File
                    No. 333-81910), filed on January 31, 2002.10.24
                2001
                    Stock Option Plan. Incorporated by reference to Exhibit 99.2
                    to the
                    Registrant’s Registration Statement on Form S-8 (File No. 333-81910),
                    filed on January 31, 2002.10.25
                2003
                    Stock Option Plan. Incorporated by reference to Exhibit 10.22
                    to the
                    Registrant’s Annual Report on Form 10-KSB for the year ended
                    December 31, 2003, filed on April 22, 2003.10.26
                Executive
                    Employment Agreement dated February 1, 2001 - John Jenkins.
                    Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual
                    Report on Form 10-KSB for the year ended December 31,
                    2001,
                    filed on April 1, 2002.10.27
                Separation
                    Agreement and Release, dated November 1, 2004, between SAN Holdings,
                    Inc.
                    and Michael J. Phelan. Incorporated by reference to Exhibit 10.1
                    to the
                    Registrant’s Current Report on Form 8-K dated November 1, 2004 filedonNovember
                    4, 2004.10.28
                Amendment
                    to Grant Agreement, dated November 1, 2004, between SAN Holdings,
                    Inc. and
                    Michael J. Phelan. Incorporated by reference to Exhibit 10.2
                    to the
                    Registrant’s Current Report on Form 8-K dated November 1, 2004 filedonNovember
                    4, 2004.
   48
   **Exhibit**
                  **Number**
                **Description**10.29
                Sixth
                    Amendment, dated February 16, 2005, to SAN Holdings Inc. - Harris
                    Trust
                    and Savings Bank Loan Authorization Agreement. Incorporated by
                    reference
                    to Exhibit10.01
                    to the Registrant’s Current Report on Form 8-K dated March 10, 2005, filed
                    on March 11, 2005.14.01
                Code
                    of Ethics for Officers of SAN Holdings, Inc. and Subsidiaries,
                    adopted on
                    May 7, 2004. Incorporated by reference to Exhibit 14.1 to the
                    Registrant’s
                    Quarterly Report on Form 10-QSB for the fiscal quarter ended
                    March 31,
                    2004, filed on May 11, 2004.22.01
                List
                    of Subsidiaries. Incorporated by reference to Exhibit 22.01
                    to the
                    Registrant’s Annual Report on Form 10-K for the year ended December
                    31, 2004, filed on March 31, 2005.23.01
                Consent
                    of Grant Thornton LLP. #31.01
                CEO
                    Certification pursuant to Rule 13a-14(a)/15(d)-14(a).
                    #31.02
                CFO
                    Certification pursuant to Rule 13a-14(a)/15(d)-14(a).
                    #32.01
                CEO
                    Certification pursuant to Section 906 of the Sarbanes-Oxley
                    Act of
                    2002 (18 U.S.C. 1350).#32.02
                CFO
                    Certification pursuant to Section 906 of the Sarbanes-Oxley
                    Act of
                    2002 (18 U.S.C. 1350).#99.01
                Reconciliation
                    of EBITDA to Net Loss.#___________
                  #
                    Filed herewith








49






**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:
                December 16, 2005
            By:
            /s/ John
              JenkinsJohn
                Jenkins
              Chief
                Executive Officer


Date: December
              16, 2005
            By:
            /s/ Robert
              C. OgdenRobert
              C. Ogden
              Chief
                Financial Officer,
              Principal
                Financial and Accounting Officer




In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.


Date: 
              December
              16,
              2005
            
            /s/ John JenkinsJohn
              Jenkins, Chairman


Date: 
              December
              16,
              2005
            
            /s/ Rodger R. KrouseRodger
              R. Krouse, Director


Date: 
              December
              16,
              2005
            
            /s/ Marc J. LederMarc
              J. Leder, Director


Date: 
                December
                16,
                2005
              
              /s/ Clarence E. TerryClarence
                E. Terry, Director


Date: 
                December
                16,
                2005
              
              /s/ M. Steven LiffM.
                Steven Liff, Director


Date: 
                December
                16,
                2005
              
              /s/ Stephen G. MarbleStephen
                G. Marble, Director


Date: 
                December
                16,
                2005
              
              /s/ Gary F. HollowayGary
                F. Holloway, Director
 Date: 
                December
                16,
                2005
              
              /s/ C. Daryl HollisC.
                Daryl Hollis, Director


Date: 
                December
                16,
                2005
              
              /s/ George R. ReaGeorge
                R. Rea, Director


50