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# U.S.
SECURITIES AND EXCHANGE COMMISSION

# Washington, D.C. 20549

# FORM 10-KSB

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

For the fiscal year ended December 31,
2003

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

Commission File Number 0-16423

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

| | Colorado
(State of incorporation) | 84-0907969
(I.R.S. Employer File Number)
| | --------------------------------- | ----------------------------------------

900 West
Castleton Road, Suite 210, Castle Rock, CO 80109      (303) 660-3933(Address
including zip code, area code andtelephone number of Registrants
principal executive offices)

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

Securities registered pursuant to Section 12(g) of the Act:
              
              
Title of Each Class
              
              
        
              
Name of Each Exchange on Which Registered
              
     Common stock, no par value
              
              
              
              
OTC Bulletin Board

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

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

Issuers
revenues for its most recent fiscal year: $55,497,000.

As of
March 26, 2004, 58,407,625 shares of the Registrants common stock were
outstanding.

State
the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the Registrants most recently completed second fiscal
quarter (June 30, 2003): $29,741,805.

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

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# SAN
HOLDINGS, INC.FORM 10-KSB

# TABLE OF
CONTENTS

Part
I

|Item No. |  | Page                                               
|-------- |  | ---------------------------------------------------
|1.       |  | Description of Business                            
|2.       |  | Description of Property                            
|3.       |  | Legal Proceedings                                  
|4.       |  | Submission of Matters to a Vote of Security Holders

Part
II

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

Part
III

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

2

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PART I

Item 1.
Description of Business

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

Overview

SAN Holdings,
Inc. (we or 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. Because we typically design integrated solutions for
our clients rather than merely selling them  hardware, we are known in the industry as a
storage solution provider.

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

|° |  | Storage
solutionsthat we design and deliver as a customized project to meet a clients
specific needs.
|- |  | ------------------------------------------------------------------------------------------------------

|° |  | Storage-related
consulting services.
|- |  | ------------------------------------

|° |  | Maintenance
services on storage hardware and software.
|- |  | ------------------------------------------------------

|° |  | A
proprietary storage-related software productthat facilitates data access and management
for geospatial imagery users.
|- |  | -----------------------------------------------------------------------------------------------------------------------

Historically,
we have generated revenue from a mix of custom-designed projects consisting of
both goods and services, re-sale of data storage products without a significant
service element, and project-based and time-and-materials based consulting and
similar services. Approximately three years ago, we also began development of
integrated solution products to provide data storage and management solutions
tailored to deliver optimized performance for particular market segments. As
discussed in more detail below, that development effort has led to our
EarthWhereTM software product, which is designed to facilitate the provisioning
and distribution of stored geospatial data (e.g., map data, satellite and aerial
imagery, etc.). We recorded several early sales of an EarthWhereTM
appliance (integrating hardware and software) in 2002, and we
launched general availability of our EarthWhereTM software in April
2003.

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. A combination of business,
regulatory and geopolitical concerns have also caused businesses to recognize
the need for effective archiving of their data and recovery of that data in the
event of disaster or other failure. The common thread among these applications
is that data storage is an enabling element to most all businesses. In addition
to fundamental issues of data storage, data availability requirements also drive
infrastructure needs. Todays businesses depend on rapid response time in
many functions, both internally and with vendors and customers via the Internet,
making high availability essential for a wide variety of applications.
Consolidating data storage in networks at centralized data centers increases the
accessibility of data to multiple end-users and at the same time lowers costs
through increased utilization and more efficient management.

3

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Because
we have attempted to grow rapidly, and simultaneously have incurred substantial
expenses in our efforts to develop our integrated solution products, we have
generated significant losses over our operating history. Several of the
companies we have acquired (including ITIS Services, Inc., acquired in 2001 and
Solunet Storage, Inc., acquired in 2003) also generated significant losses as
independent companies prior to their acquisition by SANZ. While we have narrowed
these losses in recent periods, and we generated positive earnings before
interest, taxes, depreciation and amortization, and other non-operating income
or expense (EBITDA) in the third and fourth quarters of 2003, we
have yet to generate a net profit.

Our
Background

SANZ
was formed as a Colorado corporation in 1983. Our current business operations
commenced in 2000, when we acquired three companies with varying degrees of
presence in the storage products and solutions marketplace. In 2001, we acquired
(either by asset acquisition or subsidiary merger) two additional storage
solution providers, ECOSoftware Systems, Inc. and ITIS Services, Inc. The
acquisition of ITIS Services expanded our commercial client base and enabled us
to establish a more significant market presence in the eastern United States.

Effective
April 1, 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, Inc. 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 that transaction are included below in Note 4 to our
consolidated financial statements and under Item 12. 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.

As
further discussed in Note 1 to our consolidated financial statements, as a
transaction 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. For the period from
April 1, 2003 through December 31, 2003, the consolidated financial statements
consist of both the operations of Solunet Storage and SANZ.

From
the time that we commenced our current business operations in 2000 until August
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 August 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.

SANZ
principal executive offices are located at 900 West Castleton Road, Suite 100,
Castle Rock, CO 80109. Our telephone number is (303) 660-3933.

Our  Business

The
market for data storage solutions is generally robust and broad-based, though
not immune to the capital spending slump that began affecting the U.S. economy
from 2001 through 2003. We design, deliver and manage sophisticated data storage
solutions based on storage area network (SAN) and network attached
storage (NAS) architectures, as well as related data backup and
disaster recovery systems. SAN and NAS systems are secondary, high-speed
computer networks dedicated to data storage and backup functions. Industry
analyst International Data Corp. (IDC) and Business Week magazine estimate the
total data storage market at in excess of $20 billion annually. According to
IDC, within this overall market, sales of networked storage systems (the segment
of the market on which we focus) surpassed traditional
direct-attached storage systems for the first time in early 2003,
capturing 53% of the total.

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

4

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|° |  | The
high cost of server-based storage environments due to inefficient storage utilization and
high  maintenance costs in those environments;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|° |  | The
isolation and resulting performance degradation of server-based storage environments that
results  from restrictive server-to-storage connectivity and incompatible storage
protocols;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|° |  | Enhanced
ability to provide comprehensive data security, protection and disaster recovery
functionalities.
|- |  | ----------------------------------------------------------------------------------------------------------

By
centralizing data storage functions, storage networks create a reservoir of data
storage that can be shared by multiple servers and that is accessible over long
distances. Networked storage solutions permit large amounts of 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 even greater than the hardware and software costs, this
increased manageability provides significant cost savings over traditional
direct attached (server-based) storage. In addition, centralizing
and networking an organizations data storage provides superior system
performance, which is particularly important for applications that depend on
transfer of high volumes of data such as those found in complex financial
analysis, pharmaceutical development, 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
destruction of an entire data center. There now exists a variety of technologies
for building such backup and disaster recovery systems, including both tape and
disk systems, and part of our role is to advise clients on which technologies
best suit their requirements.

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, 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. 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 relating to products for which
we take first call than our margins on services contracts relating to products
for 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 client as its trusted advisor, and helps us to
identify new sale opportunities within the client.

In the
course of designing data storage systems for clients, we have developed specific
expertise in certain niche market segments and business environments. This
experience led us to undertake the development of integrated solution products
(referred to generally as storage appliances), in which we sought to
address extraordinary data storage and management requirements that were not
readily addressed by the conventional technologies and products available in the
marketplace. We sought to address these needs by developing proprietary software
and/or architectures and combining them with third party hardware and software
to create the integrated solution. While we ultimately concluded that producing
and selling full-scale storage appliances (including the integrated hardware)
under our own brand was not cost-justified, we also determined that the software
we had developed for the Geospatial Information Systems (GIS) market,
EarthWhereTM, presented substantial sales opportunities as a
stand-alone product. During 2003 we released EarthWhereTM on a generally
available basis. As a product that facilitates the storage and delivery
(or provisioning) of geospatial imagery, EarthWhereTM customers also
have substantial data storage needs and we expect that sales of EarthWhereTM
software will also lead in many cases to opportunities for storage solutions
sales. We expect sales of EarthWhereTM software will also provide opportunities
to obtain revenues from implementation services and other GIS-related consulting
services.

5

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We may
continue our efforts to develop additional storage-related software tools, or
fully integrated storage solutions, for vertical markets outside of the GIS
sector as we identify new opportunities, but we do not have any development
efforts (other than continual upgrades to our EarthWhereTM product) ongoing at
this time.

Our
Clients

Storage
Solutions, Services and Maintenance Clients. We have always sought to serve both
government and commercial markets, but until the acquisition of ITIS our sales
were highly concentrated in the federal government sector. By acquiring ITIS,
with its East-coast commercial client base, we 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, which had a
smaller concentration of federal government sales. As a consequence, our market
sector mix today is approximately 3:1 commercial to government. Our government
sector sales now also include a material amount of business done with state and
local governments, although the federal government continues to represent the
substantial majority of our total government sales.

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

|                      | 
|--------------------- | 
|° telecommunications/ | 
|wireless              | 
|° computer services   | 
|° technology          | 

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

Our
federal government clients include principally agencies involved in national
defense, homeland security and government logistics, and to a lesser extent in
diverse areas such as public health and high performance government computing.
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 2003 represented
approximately 20% of total sales, of which approximately 12% consisted of sales
directly to the federal government and the remaining 8% consisted of sales to
third parties acting as prime contractors or sales to state or local
governments.

In our
Storage Solutions business, we employ a direct sales model, but rely heavily on
cooperative selling with our technology partners, all of whom have sales
personnel who are tasked to support channel partners such as SANZ. Our
technology partners may provide opportunity leads for us to execute directly, or
include us as part of a large system solution delivery project that they manage.
In our own efforts, we often call upon our technology partners for direct
support in the sales process, in the implementation process, or to provide lease
financing for large projects.

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

EarthWhere
Software Customers. For sales of our EarthWhere software, we employ a
direct sales model, but we also intend to engage third parties to sell our software
in a channel
distribution model in parallel with our direct sales. We have also entered
into a distribution agreement with a third party enabling that third party to
act as a distributor and pursue EarthWhere sale opportunities in certain regions
outside of the United States.

We
believe that the substantial majority of the potential market for EarthWhereTM
is within the federal government, including defense agencies, intelligence
agencies and a variety of civilian agencies. Our first major EarthWhereTM
installation was for the U.S. Geological Survey, a civilian agency charged with
providing mapping and similar information to other agencies within the federal
government. We also believe that there exists a smaller but nonetheless
significant commercial market for EarthWhereTM, in part within companies that
themselves produce GIS data or sell GIS data to end users, and in part to end
users of data such as companies in the natural resources and agriculture
industries.

6

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Reflecting
the synergy between sales of EarthWhere software and sales of storage hardware,
two of the first three customers to purchase EarthWhere since the product became
generally available in 2003 also acquired storage hardware from us, either for
use with the EarthWhere system itself or to address other requirements.

Significant
Customers. In both 2002 and 2003, no single customer accounted for more than 10%
of our total revenue. However, various separate branches and agencies within the
U.S. Department of Defense (which undertake buying decisions independently of
one another) taken together accounted for approximately 15% of our total revenue
in 2003 and 35% of our total revenue in 2002 (including, in both years, both
direct sales and sales through prime contractors). We believe the decline in
concentration from 2002 to 2003 is principally attributable to the larger volume
of total sales in 2003 and the enhancement of our commercial market presence,
both resulting principally from the acquisition of Solunet Storage.

SANZ
Products and Services

Our
products can be broken into two broad categories, Storage Solutions and
Services, and EarthWhere Software and GIS-related Services. Recorded revenues
from our EarthWhere Software and GIS-related Services were approximately
$107,000 for 2003, but are expected to grow significantly in 2004.

Within
the Storage Solutions and Services category are sales of third-party hardware
and/or software alone; sales of systems consisting of a combination of hardware,
software and integration services; sales of consulting or other types of
engineering services without a simultaneous sale of hardware or software
(although often to the same customers); and sales of maintenance contracts on
storage hardware and software. Revenues from maintenance services are separately
reported, in two categories: maintenance services from contracts
that obligate us to take first call, and maintenance contract fees
from reselling manufacturers contracts where the manufacturer provides all
of the service. In 2002 and 2003, revenues from consulting and integration
services combined aggregated less than 5% of our total revenues, and are
therefore not separately reported. As noted above, our EarthWhere software
product only became generally available in 2003, and we recorded just over
$100,000 in revenues from EarthWhere and related services during 2003. For that
reason, EarthWhere sales are not separately reported in the financial statements
included in this report.

Storage
Solutions and Services

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

EarthWhere
Software and GIS-Related Services

As a
logical extension of our storage solution business and vertical market focus,
several years ago we began investing in designing integrated solutions to
address identified niche market opportunities. As we worked with clients in a
particular industry and determined common requirements, our product development
staff identified opportunities to address those common requirements with a
standard design or configuration. For some industries, a relatively simple
standard configuration can address these requirements; for others, the solution
includes a more complex package of products and services.

7

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Our
EarthWhereTM software product began as an effort to develop an integrated
hardware and software appliance providing data storage and data
provisioning functionality that were tuned specifically for the needs of
geospatial information services (GIS) industry. The product was initially
envisioned as a proprietary software product developed by us, integrated with
third party hardware and software. In the course of that development, we
determined that it was preferable to sell the software as a stand-alone product
rather than as part of an integrated appliance, and as an adjunct to sell
storage systems to those customers that did not already have an adequate storage
system.

EarthWhereTM
provides users of geospatial imagery data (digital images of the earths
surface captured by satellite or aerial observation) a much more efficient way
to retrieve, combine and otherwise manipulate datasets in a client-server and
web-enabled environment. Applications for this product range from defense
surveillance to city planning functions to commercial markets such as oil and
gas development. EarthWhereTM is designed to provide a broad range of potential
users with more efficient and more effective provisioning and manipulation of
the massive amounts of digital mapping information that is available.

Because
of the complexity of these 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 software offering.

During
2001 and early 2002, we discontinued our efforts to develop and bring to market
two other products, SANZGuard and SANZStream, after we reassessed the forecasted
product development and market development costs versus the near-term potential
market interest for each of those products.

Our
Technology Partners

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

° StorageTek          
° Sun Microsystems          ° Hitachi Data Systems     
     ° EMC / Legato          ° Applied Digital      ° Veritas                   
          ° Network Appliance

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

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

Competition

The
rapidly evolving and highly competitive market for data storage is served by
many manufacturers, value added resellers, storage solution providers, and
storage service providers. Major computer system firms all offer storage devices
along with their server, workstation and desktop computer systems. To some
extent, our products compete with those systems.

8

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We
face more direct competition from manufacturers specializing in storage
technology products. These include ADIC, EMC / Legato, 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, and some use a hybrid strategy that includes both. As
noted below under Investment Considerations, many or all of these manufacturers
have greater financial and other resources than we have.

A
number of these competitors also are key technology suppliers of SANZ. Those
that are not provide competition in our accounts and markets. In some cases, in
large legacy accounts of our technology partners, we will face competition
directly from those suppliers. A large number of private company value added
resellers serve as sales and distribution outlets for the manufacturers listed
above, 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.

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

Employees

As of
December 31, 2003, we employed 112 people, all but two in full-time positions.
None of our employees are subject to collective bargaining agreements. We
believe that our relations with our employees are good.

Item  2.
Description of Property

We
occupy 6,725 square feet of leased office and data center space in Castle Rock,
Colorado. This facility serves as our headquarters, and it houses most of our
financial, administration and order processing functions, regional sales
functions, and EarthWhere development functions. The lease for the Castle Rock
facility expires on May 31, 2004. The monthly rent under this lease is $12,644
plus the costs of utilities, property taxes, insurance, repair and maintenance
expenses and common area utilities. We are in the process of negotiating a lease
for a different facility in a nearby location, to commence upon the expiration
of the existing Castle Rock lease. We expect that the total rent under the new
lease will be comparable to the rent under the existing Castle Rock lease.

We
also occupy 9,546 square feet of leased office, call center and data center
space in Richardson, Texas. We obtained this leased facility through our
acquisition of Solunet Storage in April 2003. This facility houses the call
center from which we provide maintenance services, certain engineering
management functions, and regional sales functions. The lease for the Richardson
facility expires on February 29, 2008. The monthly rent under this lease is
$8,353 plus the costs of utilities, property taxes, insurance, repair and
maintenance expenses and common area utilities in excess of base-year costs.

We
currently have eight other regional sales offices (excluding one-person offices
or home offices in more remote locations). The following are the only such
facilities that require lease payments of $5,000 or more per month, and that we
therefore consider to be potentially material to our operations:

|Office Location | Current Lease Expiration | Monthly Rent     | SquareFootage
|--------------- | ------------------------ | ---------------- | -------------
|Norwalk, CT     |                          | June 30, 2006    |              
|Vienna, VA      |                          | October 31, 2006 |              
|                |                          |                  |              

In
2001, our predecessor ITIS Services closed a regional office in Orlando,
Florida, for which we remain subject to a lease through January 2006. That
office has been subleased to a third party for the remaining term of the prime
lease, but at sublease rent rate $3,166 lower than the rent that we are paying
to the landlord. We have accrued the remaining obligation on this lease, net of
the sublease income, for the life of the lease.

9

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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.

We do not own
any real property.

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 on December 31, 1999 or back to
SANZ, based on the outcome of certain future events. We believe that the
requirements for a distribution of the Alliance Shares to those record-date
shareholders failed to occur, and that SANZ is therefore entitled to recover the
Alliance Shares. Because certain of those record-date shareholders objected to
our demand for the return of the Alliance Shares, in late 2002 the escrow agent
deposited the Alliance Shares with the District Court of Arapahoe County,
Colorado. Since that date we have pursued obtaining a release of the Alliance
Shares from the Court, to obtain clear title to those shares.

Prior
to the time that SANZ obtained its investment in a predecessor of Alliance
Medical Corporation, there occurred a business transaction between several
parties unrelated to SANZ. Several of these parties, Wade Hill (an individual),
Dan Page (an individual), and Applied Medical Technologies Inc. sued a total of
nine other parties in the District Court of Salt Lake County, Utah, for wrongful
acts allegedly committed in those transactions. Notwithstanding that the events
the plaintiffs allege occurred date to a period prior to the time of SANZs
investment, SANZ was named a defendant in the action. The case against SANZ lay
dormant for several years and the risk of loss associated with it was considered
to be remote and immaterial, but in the past year the legal discovery process
has become more active and we have needed to incur legal fees and expend
management time to defend the action. As a consequence, while we considered the
claims against us to be baseless, in December 2003 we entered into a Settlement
Agreement under which we paid approximately $33,000 of cash and agreed to
transfer to the plaintiffs a portion of the Alliance Shares that are recovered
in the separate litigation described above, in return for the plaintiffs
release of all claims against us and a dismissal of the action against us.

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 2003.

PART
II

Item 5.
Market for Common Equity and Related Stockholder Matters

Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
SANZ. The following table shows the high and low bid quotations for
our common stock in 2003 and 2002. 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 |  
|-------------- | ------------ | -
|
|2003           |              |  
|First Quarter  |              |  
|Second Quarter |              |  
|Third Quarter  |              |  
|Fourth Quarter |              |  
|2002           |             
|First Quarter  |              | 1
|Second Quarter |              |  
|Third Quarter  |              |  
|Fourth Quarter |              |  

10

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On
March 26, 2004, the last reported sale price for our common stock was $0.53.

Holders

As of
March 26, 2004, there were 58,407,625 shares of SANZ common stock outstanding,
held of record by approximately 380 registered holders, and there were 748.07306
shares of Series B Preferred Stock outstanding, held of record by two holders.
The outstanding shares of Series B Preferred Stock are convertible into, in the
aggregate, 37,403,653 shares of common stock, and are expected to convert at our
shareholders meeting currently scheduled for April 12, 2004. Upon that
conversion, there will be a total of 95,811,278 shares of common stock
outstanding. 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, 2003, under
which equity securities are authorized for issuance, aggregated as follows: (i)
all compensation plans previously approved by shareholders; and (ii) all
compensation plans not previously approved by shareholders.

|Plan Category                | Number of securities tobe issued upon exercise ofoutstanding options,warrants and rights | Weighted-averageexerciseprice of outstandingoptions, warrants andrights | Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in column (a))
|---------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------
|
|Equity compensation plans    |                                                                                          | 1,122,983                                                               | (1)                                                                                                                                   
|approved by security holders |                                                                                         
|Equity compensation plans    |                                                                                         
|not approved by security     |                                                                                          | 11,985,333                                                              |                                                                                                                                       
|Holders                      |                                                                                         
|Total                        |                                                                                          | 13,108,316                                                              | (1)                                                                                                                                   

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(1)
Excludes 400,000 options with an exercise price of $1.50 per share and 400,000
options with an exercise price of $2.00 per share, all of which 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 June 30,
2012.

Description
of Non-Shareholder Approved Plans.

On
September 20, 2001, our Board of Directors adopted the 2001 Stock Option
Plan. At December 31, 2003 the total number of shares of common stock reserved
for options issuable under this plan was 5,000,000.  Options granted under
the plan vest generally over three to ten years. The exercise price of
options granted under this plan shall be not less than 80% of the fair
market value per share on the date of option grant  With the exception of
roll-over options that were included in the plan upon our
acquisition of ITIS Services (i.e., options previously issued by ITIS Services
that we assumed in that acquisition), all options granted to date under the plan
have had an exercise price equal to, or in excess of, fair market value at the
date of grant.

On December
18, 2003, our Board of Directors adopted the 2003 Stock Option Plan. At  December 31,
2003 the total number of shares of common stock reserved for  options issuable under this
plan was 15,000,000.  Options granted under the  plan vest generally over four years. The
exercise price of options granted under this plan shall be 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.

Item 6.
Managements Discussion and Analysis of Financial Condition and Results of Operations

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,
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, 2003, the consolidated financial
statements consist of both the operations of Solunet Storage and SANZ.

It is
important to note that the consolidated financial statements do not include the
operations of SANZ prior to April 1, 2003 (referred to as legacy
SANZ). Because we believe that a comparison of the results of operations
of the three constituent companies combined on a pro forma basis for the
relevant periods is important to understanding our current-period performance,
we have also included summary pro forma financial statements in Note 4 to our
consolidated financial statements, and have discussed those results below.

All
significant intercompany balances have been eliminated.

Critical
Accounting Policies and Estimates

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

Revenue
Recognition

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

Revenue
from the resale and installation of data storage systems is recognized upon
completion of delivery and, where applicable, any material service obligations,
provided that no significant uncertainties regarding client acceptance exist and
collection is probable. Service revenue is recognized as the related services
are completed.

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Prior
to our acquisition of Solunet Storage, we did not perform a material portion of
the maintenance services when we resold maintenance agreements on computer
hardware and software. In contrast, Solunet Storage has historically operated,
and today we continue to operate, a call center from which we now perform a
substantial portion of the technical support and maintenance services on some of
the products that we sell. Revenue from the sale of technical support or
maintenance agreements is recognized in one of two ways, depending upon whether
the underlying product is one on which we perform support and/or maintenance
services. For product lines on which we do perform a portion of the services, we
recognize the gross sale price of the applicable support or maintenance
contracts as deferred revenue, and recognize such revenue on a straight-line
basis over the contractual terms of the agreements. There are no defined
patterns of usage in our maintenance contracts. Where applicable, the cost to
acquire such maintenance agreements from the hardware and software vendors is
likewise deferred and amortized on a straight-line basis over the contractual
terms of the maintenance agreements.

For
product lines on which we do not perform a material portion of the
maintenance services, we recognize revenue from the resale of those maintenance
agreements net of the cost to acquire the maintenance agreements from the
hardware and software vendors, at the beginning of the maintenance period.

Revenue
from technical support or maintenance contracts that is recognized on a gross
basis (i.e., on product lines on which we perform a material portion of the
services) is included under the heading of Maintenance Services.
Revenue from maintenance contracts that is recognized on a net basis (i.e., on
product lines on which we do not perform a portion of the services) is included
under the heading of Maintenance Contract Fees.

On
occasion, our sales transactions for the resale and installation of data storage
systems and the resale of maintenance and technical support contracts are
denominated as a single, lump-sum price. In these instances, we allocate the
aggregate transaction revenue among the multiple elements in accordance with
their relative fair values. This process involves the application of
managements judgment and estimates regarding those relative fair values.

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.

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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.

We
review the carrying value of goodwill annually, or more often in certain
circumstances. The performance of the test involves a two-step process. The
first step of the impairment test involves comparing the fair value of the
Companys reporting unit with the reporting units carrying amount,
including goodwill. If the carrying amount of the 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.

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.

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, a reduction in the carrying value of that
inventory may become needed and the future results of operations could be
materially affected.

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

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, customer lists and internally-developed software. In certain cases,
the usefulness declines gradually as the asset is gradually replaced through
subsequent events (e.g., newly developed code in the case of software, or
customer turnover in the case of customer lists), and we have estimated the time
over which that will occur. 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
discounted cash flows or fair values, whichever is more readily determinable, to
the carrying value of the related asset.

Recent
Accounting Pronouncements

The
Financial Accounting Standards Board has recently issued certain accounting
pronouncements that may impact our business. For a complete discussion of these
accounting pronouncements, see Note 3 to our consolidated financial statements
in Item 7 to this Annual Report.

Results of
Operations

SANZ
and Solunet Storage combined effective April 1, 2003. As discussed in Notes 1
and 4 to our consolidated financial statements, this transaction has been
accounted for as an acquisition of SANZ by Solunet Storage. Solunet Storage, in
turn, had acquired the net assets of StorNet, Inc. effective September 26, 2002,
pursuant to a private foreclosure transaction. 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. In particular, for 2003, our consolidated financial
statements in this Report include twelve months of operations for Solunet
Storage but only nine months of operations (i.e., April 1, 2003  December
31, 2003) for SANZ.

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Furthermore,
while 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, they are not considered to be comparable to our 2003
results of operations because, among other factors, the StorNet financial
statements for 2002 have been prepared on a liquidation basis of accounting. For
the same reason, while this discussion includes a comparison of current period
operations to the results of operations of StorNet, Inc. during the
corresponding periods of 2002, the reader is cautioned that the differences in
accounting treatment may make the comparison less meaningful than is typically
the case.

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. Also, when we seek to 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.

For
the foregoing reasons, in addition to the discussion of the actual results of
operations during the year ended December 31, 2003 as compared to the actual
results of operations during the year ended December 31, 2002, we have also
provided a comparison of (a) the pro forma combined results of the operations of
SANZ and Solunet Storage during 2003 as though SANZ acquisition of Solunet
Storage had occurred on January 1, 2003 rather than April 1, 2003, with (b) the
pro forma combined results of the operations of SANZ for the twelve months ended
December 31, 2002, of StorNet, Inc. for the period January 1, 2002 through
September 25, 2002, and of Solunet Storage for the period September 26, 2002
through December 31, 2002, as though both the Solunet Storage acquisition of the
StorNet assets and the SANZ acquisition of Solunet Storage had occurred on
January 1, 2002. These are referred to throughout as the Pro Forma
Combined Operations. However, because these figures compare the current
combined operations with formerly separate operations, and the financial
statements for the 2002 period were prepared on a different basis of accounting,
these pro forma results may not be indicative of the results that would have
been obtained had the combination been effected prior to that date, and for that
reason only general comments are made to explain the differences between these
pro forma results in the prior period and the actual results in the current
period.

Use
Of Non-GAAP Financial Measures. 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 other
non-operating income or expense, and taxes. Management believes that EBITDA may
be useful to investors in assessing SANZs 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 generally accepted
accounting principles. In addition, our calculation of EBITDA may be different
from the calculation used by other companies and, therefore, comparability may
be limited.

Results
of Operations for the Year Ended December 31, 2003Compared 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 information
technology (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.

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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. The federal government sector is our lower margin sector.

Operating
Expenses. Our operating expenses for 2003 were $18.7 million. Of
this amount, $15.5 million consists of selling, general and administrative
expenses (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 expenses of $18.7 million in 2003 represents a decrease of $9.8
million from the $28.5 million of total operating expenses 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 below 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 $150,000 paid to an
affiliate of Sun Solunet that has been recorded as payment for the loan
guarantees that a Sun Solunet affiliate has issued on our behalf.

Pro Forma
Results of Operations for the Year Ended December 31, 2003Compared to Pro Forma
Results of Operations for the Year Ended December 31, 2002

Sales.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. This represents a $24.0 million
decline (or 28%) from the 2002 pro forma combined results of operations had SANZ
and StorNet/Solunet Storage been combined throughout 2002. As stated above, that
decline in sales volume represents a combination of declines in
StorNet/Solunets business from the significantly higher levels recorded in
the early part of 2002, resulting from StorNets deteriorating financial
condition during that period, and declines in both StorNet/Solunets sales
volume and SANZ sales volume that were caused by reductions in capital spending
in the U.S. markets as a whole.

Gross
Margin. Had the combination of SANZ and Solunet Storage been
completed at January 1, 2003, the combined gross profit of both organizations
for 2003 (on a pro forma basis) would have been $14.5 million. This represents a
$6.1 million decline (or 30%) from the 2002 pro forma combined results of
operations had SANZ and StorNet/Solunet Storage been combined throughout 2002.
On a percentage basis, pro forma gross margin declined from 23.7% to 23.0% from
2002 to 2003. The decline in gross profit (in dollars) consists of a decline of
approximately $5.7 million attributable to the decline in overall sales volume,
together with approximately $400,000 attributable to the decline in percentage
margin. Percentage margins for 2003 were approximately 1.3 percentage points
lower on a pro forma basis than on an actual basis, due to the unusually low
margins (14%) recorded by legacy SANZ in the first quarter of 2003. The low
margins recorded in that period were primarily the result of a higher proportion
of government sales. These margins proved to be an aberration, as margins
returned to historical norms in the second and subsequent quarters of the year.

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Operating
Expenses . Had the combination of SANZ and Solunet Storage been
completed at January 1, 2003, the combined operating expenses of both
organizations for 2003 (on a pro forma basis) would have been $20.9 million,
including all acquisition related expenses. This represents a $17.9 million
decline (or 46%) from the 2002 pro forma combined results of operations had SANZ
and StorNet/Solunet Storage been combined throughout 2002. Excluding the effects
of SANZs acquisition-related expense in 2003 and StorNet/Solunets
special charges in 2002, operating expenses declined $8.0 million or 30% from
2002 to 2003. In comparison, the total operating expenses in 2002 for the legacy
SANZ business was $10.3 million. Thus, the $8.0 million reduction in
core SG&A expense equates to over 75% of the total SG&A
expense recorded by SANZ on a standalone basis in 2002.

Approximately
$2.8 million, or 35%, of the reduction in core SG&A expense since 2002 is a
direct consequence of the expense reductions realized in the third and fourth
quarters of 2003 through elimination of overlapping functions and operations.
More specifically, operating expenses (excluding acquisition expense, and
excluding depreciation and amortization which also included certain one-time
acquisition-related items) was $5.2 million in the second quarter of 2003, the
quarter in which SANZ and Solunet Storages operations were first combined.
Operating expenses (again excluding those items) was reduced by $1.3 million to
$3.9 million in the third quarter, and by a further $0.25 million to $3.65
million in the fourth quarter. These synergies were one of the primary reasons
for undertaking the combination of Solunet Storage and SANZ. The balance is the
result of expense reductions commenced by SANZ and StorNet/Solunet separately at
various points during the course of 2002, but that were therefore not in effect
throughout the entire year for 2002.

Interest
Expense. Had the combination of SANZ and Solunet Storage been
completed at January 1, 2003, the interest expense of both organizations for
2003 (on a pro forma basis) would have been $900,000. This represents a $600,000
decline (or 41%) from the 2002 pro forma combined interest expense of both
organizations had SANZ and StorNet/Solunet Storage been combined throughout
2002. This decrease reflects a decline of approximately $750,000 due to
decreased average borrowing levels and lower interest rates in 2003 as compared
to 2002, offset by the $150,000 paid to an affiliate of Sun Capital Partners
that has been recorded as payment for the loan guarantees, as discussed above.

Liquidity
and Capital Resources

Cash.
At December 31, 2003, the Company had $3.8 million in cash and cash equivalents.
In addition to cash, at that date we had undrawn availability of $1.7 million on
our several lines of credit (which are discussed in greater detail below), for a
total of $5.5 million of cash plus undrawn availability at that date. Management
believes this sum represents a better measure of our liquidity than does our
cash alone.

At
December 31, 2002, cash and cash equivalents were $13,000. In addition, we held
$148,000 of cash in a restricted account securing a letter of credit. At
December 31, 2002, cash, cash equivalents, restricted cash and undrawn
availability was $4.5 million. At December 31, 2002, our loan facility had a
fixed availability of $10 million, regardless of receivables levels. Legacy SANZ
had $2.2 million of cash and cash equivalents at December 31, 2002.

For
the year ended December 31, 2003, our operating activities used $3.9 million of
cash, compared to the $1.9 million of cash generated in operating activities
during 2002. The net generation of cash from operating activities in the prior
year period was heavily influenced by a $7.8 million decline in accounts
receivable during the nine months ended September 25, 2002, when StorNet Inc.
underwent its liquidation. Excluding the changes in account balances that are
attributable to the combination of SANZ and Solunet Storage at April 1, 2003
(which are reported as non-cash investing activities), the largest factors
affecting this years cash use were an increase in deferred maintenance
contracts by $1.8 million, an increase in accounts receivable by $1.2 million
and an increase in prepaid expenses by $0.8 million. These amounts were offset
by an increase in accounts payable by $2.8 million, an increase in deferred
revenue by $1.2 million and an increase in accrued expenses by $0.5 million. The
significant increase in accounts payable results principally from the fact that
we had very limited trade credit from our vendors at December 31, 2002, and at
that time, we were required to purchase most product on a pay-in-advance basis.
Following the acquisition, we negotiated credit terms with most vendors,
augmenting the significant trade credit that legacy SANZ already had available
at the time of the combination.

Cash
used in investing activities was $0.5 million in 2003, while cash used in
investing activities was $10.3 million in 2002. For 2002, Solunet Storage
expended $10.2 million, net of cash acquired, for the acquisition of
StorNets net assets. For 2003, we expended $.2 million, net of cash
acquired, for capitalized acquisition costs related to the SANZ and Solunet
Storage merger and $.3 million in capital expenditures, including $.2 million
related to software development costs for resale.

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Cash
flows from financing activities shifted dramatically during 2002, and between
2002 and 2003. In 2002, during the first nine months of the year, StorNet used
$1.7 million of cash in financing activities as its lender forced a pay-down of
the loan to the extent possible during the period prior to the foreclosure. In
the last three months of 2002, Solunet Storage generated $10.0 million of cash
in financing activities, as it financed the commencement of its operations
through borrowings from its lender and from an affiliate of Sun Solunet. In
2003, we generated $8.1 million from financing activities, as we increased our
total borrowings on our lines of credit. The 2003 amount excludes the effects of
the combination of SANZ and Solunet Storage at April 1, 2003, which are reported
as non-cash investing activities, and the conversion of a $4.1 million note
payable to an affiliate of Sun Solunet (including accrued interest) into equity
in conjunction with the combination of SANZ and Solunet Storage, which is
reported as a non-cash acquisition financing activity.

We had
$16.5 million of short term debt at December 31, 2003, an increase of $5.7
million from the short term debt of $10.8 million at December 31, 2002 and an
increase of $1.4 million from the short term debt of $15.1 million for Solunet
Storage and SANZ on a pro forma combined basis at December 31, 2002. Short term
debt at December 31, 2003 consisted of two principal components: an asset-based
revolving loan facility with Wells Fargo Business Credit, Inc.; and two loan
facilities with Harris Trust and Savings Bank that are guaranteed by an
affiliate of our principal shareholder. At December 31, 2002, short term debt
also included several notes payable to vendors; those notes were paid off over
the course of 2003.

Loan
Facilities

Wells
Fargo Line of Credit. During 2001, legacy SANZ established a $2.5 million
line of credit agreement with Wells Fargo Business Credit, Inc. Wells Fargo
agreed to increases in the maximum amount of the line three times, to $5.0
million in 2002, to $7.0 million in April 2003, and to $12.0 million in
September 2003. The line of credit agreement expires in May 2005.

The
Wells Fargo credit facility is a revolving facility under which we
routinely draw and repay funds on a daily or near-daily basis to address timing
differences between our collections from clients and our payments to vendors. It
should be noted, however, that the funds available under the credit facility are
limited to 80% of the amount of eligible accounts receivable we hold at any
given time, and fluctuations in the timing of customer orders can adversely
affect our ability to draw on the line when required. Eligible accounts consist
of substantially all accounts receivable, subject to customary exceptions
(including those aged over 90 days, otherwise-current receivables from customers
with material amounts outstanding over 90 days, and more than a pre-set
percentage of total receivables from a single customer). Borrowings against
receivables owed directly by federal government end-users are further limited to
$500,000 in the aggregate unless we have obtained an assignment of
claim executed by the government agency. (Receivables from commercial
entities acting as prime contractors for federal government end-users are not
subject to this sub-limit.) As of December 31, 2003, based on our eligible
collateral at that date, we had $9.2 million available for borrowing on the
Wells Fargo credit facility, of which $8.3 million was drawn and $0.9 million
remained available and undrawn.

Covenants
permit Wells Fargo to declare the loan in default if SANZ Inc., an operating
subsidiary of SANZ, does not meet certain financial performance measures. We
were in compliance with those covenants at December 31, 2003. At various dates
from September 2002 through August 2003 we were not in compliance with one or
more of those covenants; each of those prior periods of non-compliance was
ultimately waived by Wells Fargo. We believe that our ability to meet our
covenant levels in the future has been strengthened by the cost reductions that
we have realized through the integration of the SANZ and Solunet Storage
businesses, and assuming continuation of current business trends, we
expect that we will be able to meet the covenant levels that are
now required of us.

More
specifically, under the loan agreement as now in effect, SANZ Inc. must meet
specified minimum net income levels during each calendar quarter, and must
maintain minimum levels of book net worth plus subordinated debt (measured in
the aggregate, with amounts loaned to SANZ Inc. from SAN Holdings being
classified as subordinated debt). All of these levels were determined based on
our discussions with the lender and are periodically reset following negotiation
with the lender to reflect changes in our business. In addition, under another
covenant, if SANZ Inc. generates a net loss in a given calendar quarter
and has also generated a net loss on a year-to-date basis at that time,
we are obligated to make an infusion of either equity or subordinated debt into
SANZ Inc. (which can come from the holding company, if funds are available
there, or from an outside source) in an amount at least equal to the amount of
the quarterly net loss or the year-to-date net loss, whichever is less.

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Our
covenants levels committed to Wells Fargo Business Credit for 2004 are as
follows:

|Period                                 | Minimum Net Income(OperatingSubsidiary Only)
|-------------------------------------- | --------------------------------------------
|Three months ending March 31, 2004     |                                             
|Six months ending June 30, 2004        |                                             
|Nine months ending September 30, 2004  |                                             
|Twelve months ending December 31, 2004 |                                             
|
|March 31, 2004                         |                                             
|April 30, 2004                         |                                             
|May 31, 2004                           |                                             
|June 30, 2004                          |                                             
|July 31, 2004                          |                                             
|August 31, 2004                        |                                             
|September 30, 2004                     |                                             
|October 31, 2004                       |                                             
|November 30, 2004                      |                                             
|December 31, 2004 and                  |                                             
|each month thereafter                  |                                             

Either
in conjunction with a demand for repayment, or as a lesser step without
demanding repayment of the loan, the lender may also increase our rate of
interest. Wells Fargo exercised this power to increase our rate of interest, by
2% (to Prime + 5%), in June 2003 until such time as we came into compliance with
our covenants. In connection with the amendment of the line in September 2003,
Wells Fargo increased our non-default rate to the level then in effect, Prime +
5%, with provisions that enable us to reduce that rate back to Prime + 3% (or to
an intermediate rate) if we achieve certain net income targets during the course
of 2004.

Harris
Trust Lines of Credit. We also have two revolving credit facilities with
Harris Trust and Savings Bank. The first of these facilities, established in May
2003, currently permits us to borrow up to $6.8 million. Sun Capital Partners
II, L.P., an affiliate of our majority shareholder, has guaranteed this
facility. At December 31, 2003, $4,387,000 was outstanding on this facility. The
facility currently bears interest at a rate of prime plus 1⁄4% and expires
in May 2005. That facility is unsecured, is not limited by availability under a
borrowing base, and does not require the maintenance of specified financial
covenants.

At the
time of the acquisition, Solunet Storage maintained a revolving loan facility
with The CIT Group, with a limit of $10 million. Borrowing was subject to
availability under a borrowing base, and required the maintenance of certain
financial and non-financial covenants. In June 2003, it became apparent that
certain of these covenants were impeding our ability to integrate the operations
of Solunet Storage and SANZ. In order to alleviate these impediments, we entered
into an additional loan facility with Harris Trust and Savings Bank in the
amount of $4.2 million and used proceeds of that facility to pay off and retire
the CIT Group loan facility. At December 31, 2003, $3.8 million was outstanding
on this facility. Sun Capital Partners II, L.P., has also guaranteed this
facility. This second Harris Trust facility bears interest at a rate of prime
plus 1⁄4% and expires in August 2004. The facility is secured by certain
assets of Solunet Storage but is not subject to any material financial
covenants.

19

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The
guaranties of Sun Capital Partners II, L.P. reflect a commitment made by Sun
Capital in conjunction with the acquisition of Solunet Storage that Sun Capital
would maintain a guarantee of a minimum of $3.0 million of debt on behalf of the
combined company, whether applied to the CIT Group loan facility or to a
substitute facility in the future. Sun Capital Partners II, L.P also undertook
at that time to provide up to an additional $2.0 million in guarantees, at its
discretion and subject to our obligation to compensate it with warrants if the
additional guaranty was not released within 18 months, and with additional
warrants at each 6-month interval thereafter if the guaranty is not released by
the end of each such interval. Details of this obligation are included in Note
11 to our consolidated financial statements. At December 31, 2003, Sun Capital
Partners II, L.P. had guaranteed lines of credit in the maximum amount of $9.0
million, on which approximately $8.2 million was drawn. Management believes that
over the course of 2004 the Company will be able to pay down the debt guaranteed
by Sun Capital Partners II, L.P. to an amount equal to or less than the $5.0
million originally agreed upon in connection with the Solunet Storage
acquisition. We intend to do this through the consolidation of operations in the
Companys SANZ Inc subsidiary that was commenced during the quarter ended
September 30, 2003, thereby increasing the accounts receivable of SANZ Inc. that
are eligible for borrowing under the Wells Fargo line of credit and thus
enabling us to replace a portion of our borrowings on the Harris Trust facility
with borrowings on the Wells Fargo facility. The Company is also evaluating the
possibility of refinancing a portion of the guaranteed debt with either other
debt or equity. The Company and Sun Capital Partners II, L.P. have not yet
determined whether Sun Capital Partners II, L.P. is to be compensated for
issuing guarantees in excess of the $5.0 million originally agreed upon, but
there is a possibility that the Company will agree to compensate Sun Capital
Partners II, L.P. (whether with shares, warrants, cash guarantee fees, or
otherwise) for issuing the guarantees in an aggregate amount greater than its
original commitment.

Liquidity

As of
December 31, 2003, we had approximately $1.7 million of undrawn availability in
the aggregate on our Wells Fargo and Harris Trust lines of credit. As noted
above, 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. In addition, at various times prior to September 2003, we
were not in compliance with our financial covenants under our Wells Fargo loan
facility. While the lender agreed to waive that non-compliance in conjunction
with the loan amendment executed in September 2003 and to re-set the covenants
to new levels, and we have been able to maintain compliance with those covenants
since the re-set and believe we will be able to do so in the future, our
availability on the Wells Fargo line of credit is also dependent our ability to
maintain compliance with those covenants or, if we again fall out of compliance,
on the lenders willingness to permit us to continue to draw on the line
while we remain out of compliance.

Although
we generated positive earnings before interest, taxes, depreciation and
amortization, or EBITDA, during the third and fourth quarters of 2003, we
recorded a net loss during that six month period of more than $800,000. While
this net loss represents a significant reduction from the losses in most prior
reported periods, it nonetheless is a loss and reflects the fact that 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.

The
cost reductions made to date, coupled with modest anticipated growth in sales
and gross profits (both through internal efforts and as a result of the
strengthening in the larger economy) are expected to enable us to turn the
corner from the modest profit before interest, taxes, depreciation and
amortization recorded in both the September quarter and the December quarter, to
a sustainable profit on an absolute, US GAAP basis. Coupled with this shift to
profitability, and assuming continuation of current business trends and supplier relations,
our existing credit facilities are expected to provide sufficient
liquidity to fund operations over the next twelve months.

While,
as stated above, the cost reduction actions taken to date 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
profitability and positive cash flow without raising additional capital, there
can be no assurance that we will succeed in doing so. For this reason, as well
uncertainty regarding the turnaround in the larger economy, 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 were raised, the
issuance of those shares would also be dilutive to the ownership interests of
all other stockholders.

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Capital
Expenditures

During
the year ended December 31, 2003, we purchased approximately $121,000 of
property and equipment for cash. We anticipate a modest increase in the level of
spending on property and equipment during 2004, to levels in the range of
$400,000  $500,000. During 2003 we also invested approximately $200,000 in
external software development costs that were capitalized. We do not currently
expect to capitalize additional software development costs in 2004.

Seasonality

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

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.

Investment
Considerations

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

We
may not be successful in generating revenues and gross profits at a level
sufficient to support the investment we have made in infrastructure and
technical resources. Even after recent cost reductions and revenue increases
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.

We
incurred a net loss of $5.9 million in 2003. Even excluding acquisition-related
expense in 2003, we incurred a net loss of $3.9 million. As of December 31, 2003
we had an accumulated deficit of $11.8 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 EBITDA in
each of the last two 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. 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.

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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, 2003, we had $3.8 million of cash. For the year ended December 31,
2003, we had a net loss of $5.9 million, and a net loss excluding
acquisition-related charges of $4.0 million. At December 31, 2003 we also had a
working capital deficit (current liabilities are greater than current assets) of
$12.2 million.

We
executed our bank line of credit with Wells Fargo in 2001, and began drawing on
this line early in 2002. Following several increases, the borrowing limit under
that line is currently $12 million. It should be noted, however, that the funds
available under the credit line are limited by the amount of eligible accounts
receivable we hold at any given time, and fluctuations in the timing of customer
orders can adversely affect our ability to draw on the line when required.
Covenants also permit the lender to declare the loan in default if our operating
subsidiary 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. Although we were
in compliance with those covenants at December 31, 2003, in the past we have
periodically been in default under those covenants and have required waivers
from the lender. If we were to fall out of compliance with those covenants and
are unable to obtain such a waiver, and the lender were to accelerate the loan,
the company would need to obtain credit from other sources to repay the loan.
These matters are discussed further in 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.

The
acquisition of Solunet Storage as well as actions taken by both SANZ and Solunet
Storage in 2002 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 operating expense
(excluding acquisition-related expense) was reduced by more than almost $1.5
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 2003, declines 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 scrutiny of expenses coupled with anticipated and modest
increases in gross profits will be sufficient to enable SANZ to operate with its
existing capital base for at least the next twelve months. These actions and
their effects are discussed in Managements Discussion and Analysis
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 continuing slow pace of
the economy in general and of technology spending in particular, there is a
possibility that we will need either to take further action to reduce expenses
(which could entail curtailing certain operations), or to seek additional 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 further cost cutting.

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

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We
have a single controlling shareholder that owns 58.5% of our outstanding shares
and that has the power to elect a majority of the Directors and control the
strategic direction of the company.

In our
acquisition of Solunet Storage, we issued shares of common stock and voting
preferred stock representing 58.5% of the aggregate voting stock of SANZ to Sun
Solunet LLC (Sun Solunet). Sun Solunet is an affiliate of Sun Capital
Partners, Inc., a private equity fund located in Boca Raton, Florida. These
shares give Sun Solunet the power to elect a majority of the board of directors
of SANZ 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.

Over 58% of our
outstanding shares are held by Sun Solunet (including shares of preferred stock that are
anticipated to convert into common stock in April 2004). These shares will first become
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.

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

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

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

Our
EarthWhereTM software product became generally available
in 2003 and we achieved several sales during the course of the year. The
resources that we expended over three years of development prior to achieving
this goal were several times the amount of the 2003 sales; the direct cost of
EarthWhere development activities in 2003 alone was approximately $500,000. This
amount includes capitalized amounts and includes amounts incurred during the
first quarter of 2003, which due to the accounting treatment of the SANZ and
Solunet Storage business combination, are not reflected in our 2003 operating
expenses or cash flows. We also expended considerable resources on a second
product, SANZstreamTM, before determining in 2002 that the near-term
market opportunity for that product was not sufficient to warrant further
investment. 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 uncertain acceptance of our new
products, and the uncertain turn-around in technology spending in general, we
may have difficulty accurately predicting revenue for future periods and
appropriately budgeting for expenses, resulting in expense levels unjustified by
actual revenues.

A
variety of factors coincide to reduce our ability to accurately forecast our
quarterly and annual revenue. These include the significant growth and changes
in our operations as a consequence of the Solunet Storage acquisition, the
newness of our EarthWhere 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.

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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
budgeting difficulties posed by these fluctuations, these fluctuations may cause
our reported results from any one period not to be a reliable indicator to
investors of the financial results that may be expected in future periods.

A
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 further under the heading SANZ and Its Business  Our
Clients, approximately 20% 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 15% of total sales in 2003. While it is not legally necessary to
be an approved vendor in order to sell to the government, we have established
GSA Schedules with the U.S. General Services Administration (GSA)
with respect to many of the products we sell. GSA schedules are product and
price lists that are periodically reviewed and approved by the GSA as the basis
for purchases by federal government agencies. Those GSA Schedules greatly
facilitate our sales to government end-users. If the GSA were to refuse to renew
those GSA Schedules, we could lose much of our government revenue base and our
business and results of operations would be materially and adversely affected.
Our GSA Schedules were most recently renewed in February 2003.

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:
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.

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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 Market for Our Shares and Related Shareholder Matters 
Dividends.

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

We are
authorized under our Articles to issue up to 10,000 shares of preferred stock.
The board of directors has the power to establish the dividend rates,
liquidation preferences, voting rights, redemption and conversion terms and
privileges with respect to any series of preferred stock. At any time the board
may issue additional shares of preferred stock having, if so designated by the
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.

25

---

Item 7.
Financial Statements.

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

|                                                                                                   | 
|-------------------------------------------------------------------------------------------------- | 
|Report of Independent Certified Public Accountant                                                  | 
|                                                                                                   | 
|Consolidated Balance Sheets, December 31, 2003 and December 31, 2002 for Solunet Storage           | 
|Holding Corp. (accounting predecessor to SAN Holdings, Inc.)                                       | 
|                                                                                                   | 
|Consolidated Statement of Operations for the Year ended December 31, 2003                          | 
|                                                                                                   | 
|Consolidated 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   | 
|                                                                                                   | 
|Statement 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                                                                          | 
|                                                                                                   | 
|Consolidated Statements of Stockholders Equity for the Year ended 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                                           | 
|                                                                                                   | 
|Statement of Stockholders' Deficit - Liquidation Basis for StorNet, Inc. (accounting predecessor   | 
|to Solunet Storage Holding Corp. and SAN Holdings, Inc.) for the period from December 31, 2001     | 
|through September 25, 2002                                                                         | 
|                                                                                                   | 
|Consolidated Statement of Cash Flows for the Year ended December 31, 2003                          | 
|                                                                                                   | 
|Consolidated 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   | 
|                                                                                                   | 
|Statement 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                                                                                 | 
|                                                                                                   | 
|Notes to Consolidated Financial Statements                                                         | 

26

---

REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The  Board
of Directors and StockholdersSAN Holdings, Inc.

We
have audited the accompanying consolidated balance sheet of SAN Holdings, Inc.
and subsidiaries as of December 31, 2003, and the related consolidated
statements of operations, stockholders equity and cash flows for the year
then ended. Also, we have audited the accompanying consolidated balance sheet of
Solunet Storage Holding Corp. (accounting predecessor of SAN Holdings, Inc.) as
of December 31, 2002 and the related consolidated statements of operations,
stockholders equity and cash flows 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. and SAN Holdings, Inc.) for the period from
January 1, 2002 through September 25, 2002. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

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, 2003, and the results of their operations and
their cash flows for the year then ended, the financial position of Solunet
Storage Holding Corp. and subsidiary as of December 31, 2002 and the results of
their 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.

GRANT THORNTON
LLP

Denver,
ColoradoMarch 26, 2004

F-1

---

# SAN
Holdings, Inc.Solunet Storage Holding Corp. (accounting predecessor to SAN Holdings,
Inc.)Consolidated Balance Sheets

|                                                                         | December 31 |              
|------------------------------------------------------------------------ | ----------- | -------------
|
|ASSETS                                                                   |             |              
|Current assets                                                           |            
|Cash and cash equivalents                                                |             | $   3,792,000
|Restricted cash                                                          |             | --           
|Accounts receivable, net of allowance for doubtful accounts of           |            
|$336,000 and $746,000, respectively                                      |             | 15,212,000   
|Inventories, net of valuation allowance of $707,000 and                  |            
|$675,000, respectively                                                   |             | 1,427,000    
|Deferred maintenance contracts                                           |             | 2,629,000    
|Prepaid expenses and other current assets                                |             | 1,136,000    
|                                                                         |             |              
|Total current assets                                                     |             | 24,196,000   
|                                                                         |             |              
|Property and equipment, net                                              |             | 1,014,000    
|Capitalized software, net                                                |             | 241,000      
|Goodwill                                                                 |             | 32,008,000   
|Intangible assets, net                                                   |             | 2,820,000    
|Other assets                                                             |             | 190,000      
|                                                                         |             |              
|Total long-term assets                                                   |             | 36,273,000   
|TOTAL ASSETS                                                             |             | $ 60,469,000 
|                                                                         |             |              
|                                                                         |             |              
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                           |            
|Lines of credit                                                          |             | $ 16,453,000 
|Accounts payable                                                         |             | 13,145,000   
|Accrued expenses                                                         |             | 2,801,000    
|Deferred revenue                                                         |             | 4,022,000    
|                                                                         |             |              
|Total current liabilities                                                |             | 36,421,000   
|Commitments and contingencies (Note 8)                                   |            
|Stockholders equity (deficit)                                           |            
|Preferred 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;        |            
|748.07306 and -0- shares issued and outstanding, respectively            |             | 12,718,000   
|Common stock; no par value, 75,000,000 shares authorized; 58,407,625 and |            
|20,000,000 shares issued and outstanding, respectively                   |             | 19,859,000   
|Warrants                                                                 |             | 3,222,000    
|Accumulated deficit                                                      |             | (11,751,000  
|                                                                         |             |              
|Total stockholders' equity (deficit)                                     |             | 24,048,000   
|                                                                         |             |              
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               |             | $ 60,469,000 
|                                                                         |             |              
|                                                                         |             |              

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

F-2

---

# SAN
Holdings, Inc.Consolidated Statement of OperationsFor the Year Ended December 31, 2003

|                                                        | 
|------------------------------------------------------- | 
|Revenue                                                 | 
|Sales of hardware, software and services                | 
|Maintenance services                                    | 
|Maintenance contract fees, net                          | 
|                                                        | 
|Total revenue                                           | 
|Cost of revenue                                         | 
|                                                        | 
|Gross profit                                            | 
|                                                        | 
|Operating expenses                                      | 
|Selling, general and administrative                     | 
|Acquisition-related costs                               | 
|Depreciation and amortization                           | 
|                                                        | 
|Total operating expenses                                | 
|Loss from operations                                    | 
|Other income (expense)                                  | 
|Interest expense                                        | 
|Other income (expense)                                  | 
|                                                        | 
|Loss before income taxes                                | 
|Income tax benefit                                      | 
|                                                        | 
|Net loss                                                | 
|                                                        | 
|                                                        | 
|Basic and diluted net loss per share                    | 
|                                                        | 
|Weighted average shares outstanding - basic and diluted | 
|                                                        | 
|                                                        | 

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

|                                                        | 
|------------------------------------------------------- | 
|Revenue                                                 | 
|Sales of hardware, software and services                | 
|Maintenance services                                    | 
|Maintenance contract fees, net                          | 
|                                                        | 
|Total revenue                                           | 
|Cost of revenue                                         | 
|                                                        | 
|Gross profit                                            | 
|                                                        | 
|Operating expenses                                      | 
|Selling, general and administrative                     | 
|Post-transaction business continuation expenses         | 
|Depreciation and amortization                           | 
|                                                        | 
|Total operating expenses                                | 
|Loss from operations                                    | 
|Other income (expense)                                  | 
|Interest expense                                        | 
|Other income                                            | 
|                                                        | 
|Net loss                                                | 
|                                                        | 
|                                                        | 
|Basic and diluted net loss per share                    | 
|                                                        | 
|Weighted average shares outstanding - basic and diluted | 
|                                                        | 
|                                                        | 

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 BasisFor the Period from January 1,
2002 through September 25, 2002

|                                                        | 
|------------------------------------------------------- | 
|Revenue                                                 | 
|Sales of hardware, software and services                | 
|Maintenance services                                    | 
|Maintenance contract fees, net                          | 
|                                                        | 
|Total revenue                                           | 
|Cost of revenue                                         | 
|                                                        | 
|Gross profit                                            | 
|Operating expenses                                      | 
|Selling, general and administrative                     | 
|Impairment of assets                                    | 
|Provision for non-cancelable leases                     | 
|Depreciation and amortization                           | 
|                                                        | 
|Total operating expenses                                | 
|Loss from operations                                    | 
|Other income (expense)                                  | 
|Interest expense                                        | 
|Other income                                            | 
|                                                        | 
|Loss before income taxes                                | 
|Income tax benefit                                      | 
|                                                        | 
|Net loss                                                | 
|                                                        | 
|                                                        | 
|Basic and diluted net loss per share                    | 
|                                                        | 
|Weighted average shares outstanding - Basic and diluted | 
|                                                        | 
|                                                        | 

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

F-5

---

# SAN
Holdings, Inc.Solunet Holding Corp. (accounting predecessor to SAN Holdings, Inc.)
Consolidated Statements of Stockholders EquityFor the Period from September 26, 2002
(inception of Solunet Storage Holding Corp.) through December 31, 2003

|                               | Series B Preferred Stock | Common Stock |  | Accumulated       |  |            | 
|------------------------------ | ------------------------ | ------------ |  | ----------------- |  | ---------- | 
|
|Balance, September 26, 2002    |                          | --           |  | $              -- |  | 20,000,000 | 
|Net loss for the period        |                          | --           |  | --                |  | --         | 
|                               |                          |              |  |                   |  |            | 
|Balance, December 31, 2002     |                          | --           |  | --                |  | 20,000,000 | 
|Conversion of note payable to  |                          | --           |  | --                |  | --         | 
|common stock                   |                         
|Reverse acquisition (Note 4)   |                          | 748.07306    |  | 12,718,000        |  | 38,269,102 | 
|Cash-less exercise of warrants |                          | --           |  | --                |  | 138,523    | 
|Net loss for the year          |                          | --           |  | --                |  | --         | 
|                               |                          |              |  |                   |  |            | 
|Balance, December 31, 2003     |                          | 748.07306    |  | $12,718,000       |  | 58,407,625 | 
|                               |                          |              |  |                   |  |            | 
|                               |                          |              |  |                   |  |            | 

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 December 31,
2001 through September 25, 2002

|                                         | Common Stock | Accumulated |  |           
|---------------------------------------- | ------------ | ----------- |  | ----------
|
|Balance, December 31, 2001               |              | 20,000,000  |  | $8,596,000
|Net loss for the nine month period ended |             
|September 25, 2002                       |              | --          |  | --        
|                                         |              |             |  |           
|Balance, September 25, 2002              |              | 20,000,000  |  | $8,596,000
|                                         |              |             |  |           
|                                         |              |             |  |           

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

F-7

---

# San
Holdings, Inc.Consolidated Statement of Cash FlowsFor the Year Ended December 31, 2003

|                                                                            | 
|--------------------------------------------------------------------------- | 
|Cash flows from operating activities:                                       | 
|Net loss                                                                    | 
|Adjustments to reconcile net loss to net cash used in operating activities: | 
|Depreciation and amortization                                               | 
|Changes in operating assets and liabilities:                                | 
|Accounts receivable                                                         | 
|Inventories                                                                 | 
|Deferred maintenance contracts                                              | 
|Prepaid expenses                                                            | 
|Other assets                                                                | 
|Accounts payable                                                            | 
|Accrued expenses                                                            | 
|Deferred revenue                                                            | 
|                                                                            | 
|Net cash used in operating activities                                       | 
|                                                                            | 
|Cash flows from investing activities:                                       | 
|Acquisition costs, net of cash acquired                                     | 
|Purchase of property and equipment, net                                     | 
|Capitalized software costs                                                  | 
|                                                                            | 
|Net cash used in investing activities                                       | 
|Cash flows from financing activities:                                       | 
|Net proceeds from current borrowings                                        | 
|Decrease in restricted cash                                                 | 
|                                                                            | 
|Net cash provided by financing activities                                   | 
|Net increase in cash and cash equivalents                                   | 
|                                                                            | 
|Cash and cash equivalents at beginning of year                              | 
|                                                                            | 
|Cash and cash equivalents at end of year                                    | 
|                                                                            | 
|                                                                            | 
|Supplemental disclosure of other cash flow information:                     | 
|Interest paid                                                               | 
|                                                                            | 
|                                                                            | 

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

F-8

---

# San
Holdings, Inc.Consolidated Statement of Cash FlowsFor the Year Ended December 31, 2003

|                                                                        | 
|----------------------------------------------------------------------- | 
|Supplemental disclosure of non-cash investing and financing activities: | 
|Conversion of note payable and accrued interest to common stock         | 
|                                                                        | 
|                                                                        | 
|Significant acquisition:                                                | 
|Fair value of assets acquired                                           | 
|Purchase price transaction costs paid                                   | 
|Purchase price transaction costs accrued                                | 
|Common stock exchanged                                                  | 
|Preferred stock issued                                                  | 
|Warrants issued                                                         | 
|                                                                        | 
|Liabilities assumed                                                     | 
|                                                                        | 
|                                                                        | 

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

|                                                                                | 
|------------------------------------------------------------------------------- | 
|Cash flows from operating activities:                                           | 
|Net loss                                                                        | 
|Adjustments to reconcile net loss to net cash provided by operating activities: | 
|Non-cash post-transaction business continuation expenses                        | 
|Depreciation and amortization                                                   | 
|Amortization of debt issuance cost                                              | 
|Changes in operating assets and liabilities:                                    | 
|Accounts receivable                                                             | 
|Inventories                                                                     | 
|Deferred maintenance contracts                                                  | 
|Prepaid expenses                                                                | 
|Other assets                                                                    | 
|Accounts payable                                                                | 
|Unpresented checks                                                              | 
|Accrued expenses                                                                | 
|Deferred revenue                                                                | 
|                                                                                | 
|Net cash provided by operating activities                                       | 
|Cash flows from investing activities:                                           | 
|Acquisition of business, net of cash acquired                                   | 
|Purchase of property and equipment                                              | 
|                                                                                | 
|Net cash used in investing activities                                           | 
|                                                                                | 
|Cash flows from financing activities:                                           | 
|Net proceeds from current borrowings                                            | 
|Proceeds from notes payable                                                     | 
|Proceeds from issuance of common stock                                          | 
|Payment for restricted cash                                                     | 
|Loan origination fees paid                                                      | 
|                                                                                | 
|Net cash provided by financing activities                                       | 
|                                                                                | 
|Net increase in cash and cash equivalents                                       | 
|                                                                                | 
|Cash and cash equivalents at beginning of period                                | 
|                                                                                | 
|                                                                                | 
|Cash and cash equivalents at end of period                                      | 
|                                                                                | 
|                                                                                | 
|                                                                                | 
|Supplemental disclosure of other cash flow information:                         | 
|Interest paid                                                                   | 
|                                                                                | 
|                                                                                | 
|                                                                                | 
|Supplemental disclosure of non-cash investing and financing activities:         | 
|Acquisition of business                                                         | 
|Tangible assets acquired                                                        | 
|Intangible assets acquired                                                      | 
|Liabilities assumed                                                             | 
|                                                                                | 
|                                                                                | 
|Less: cash acquired                                                             | 
|Net cash paid for acquisition                                                   | 
|                                                                                | 
|                                                                                | 

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 BasisFor the Period from January 1, 2002 through
September 25, 2002

|                                                                                | 
|------------------------------------------------------------------------------- | 
|Cash flows from operating activities:                                           | 
|Net loss                                                                        | 
|Adjustments to reconcile net loss to net cash provided by operating activities: | 
|Depreciation and amortization                                                   | 
|Impairment of assets                                                            | 
|Provision for non-cancelable leases                                             | 
|Other                                                                           | 
|Changes in operating assets and liabilities:                                    | 
|Accounts receivable                                                             | 
|Inventories                                                                     | 
|Deferred maintenance contracts                                                  | 
|Prepaid expenses                                                                | 
|Other assets                                                                    | 
|Accounts payable                                                                | 
|Unpresented checks                                                              | 
|Accrued expenses                                                                | 
|Deferred revenue                                                                | 
|                                                                                | 
|Net cash provided by operating activities                                       | 
|                                                                                | 
|Cash flows from investing activities:                                           | 
|Purchase of property and equipment                                              | 
|                                                                                | 
|Net cash used in investing activities                                           | 
|                                                                                | 
|Cash flows from financing activities:                                           | 
|Net proceeds from current borrowings                                            | 
|Proceeds from notes payable                                                     | 
|                                                                                | 
|Net cash used in financing activities                                           | 
|                                                                                | 
|Net decrease in cash and cash equivalents                                       | 
|                                                                                | 
|Cash and cash equivalents at beginning of period                                | 
|                                                                                | 
|                                                                                | 
|Cash and cash equivalents at end of period                                      | 
|                                                                                | 
|                                                                                | 
|                                                                                | 
|Supplemental disclosure of other cash flow information:                         | 
|Interest paid                                                                   | 
|                                                                                | 
|                                                                                | 
|                                                                                | 
|Supplemental disclosure of non-cash investing and financing activities:         | 
|Write-down of assets due to pending liquidation                                 | 
|                                                                                | 
|                                                                                | 
|                                                                                | 
|                                                                                | 

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 or the Company), 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), which has
a 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 Holding Corp. (Solunet Storage).
Solunet Storage was majority-owned by Sun Solunet LLC (Sun Solunet),
an affiliate of Sun Capital Partners II, LP (Sun Capital), a private
equity fund. Upon the completion of the business combination, Sun Solunet is the
majority stockholder of SANZ.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
business combination has been 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s 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) that had been foreclosed upon by
StorNet, Inc.s lender under Article 9 of the Uniform Commercial Code. As a
consequence, Solunet Storage had no operations during the three or nine month
periods ended September 30, 2002. The results of Solunet Storages own
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 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 $5,938,000 for the year ended December 31, 2003. In
addition, as of December 31, 2003, we have negative working capital (current
liabilities in excess of current assets) of $12,225,000. Accordingly, the
recoverability of a major portion of the recorded asset amounts as of December
31, 2003 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
afforded by the combination were phased in over a period of time and were therefore not
realized throughout the full nine months of 2003 during which the companies were
combined.  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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

---

| | 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. In September 2003, the Company
executed an  amendment to increase the maximum borrowing under this facility from $7
million to $12  million. See further discussion in Note 6. The increased borrowing limit
is anticipated to  provide continued liquidity until we reach profitability. However, our
ability to borrow  under this 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2003, the Company also enhanced its liquidity through two additional revolving credit
lines with Harris Trust and Savings Bank. Sun Capital Partners II, L.P., an affiliate of
the Companys majority stockholder, has guaranteed both of these credit lines. In
March 2004, we amended the facility maintained by SAN Holdings to increase the maximum
aggregate borrowings by $2.0 million, to $11.0 million. Of this increased amount,
$1.0 million is a short-term increase that expires in June 2004. The other $1.0 million
of  the increase will remain available until the end of the loan term in May 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2002, the Company had $148,000 of cash that was restricted, and
secured a letter of credit issued in the Companys favor, as required by
the terms of a note payable to a third party. Subsequent to December 31, 2002,
the restriction on the cash was lifted.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 either 2003 or
2002. Additionally, the Company had no customers that individually represented
more than 10% of accounts receivable at December 31, 2003 or December 31, 2002.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13

---

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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Property
and equipment consist of the following:

|                                                | December 31 |             
|----------------------------------------------- | ----------- | ------------
|
|Computer equipment and software                 |             | $    960,000
|Office equipment and furniture                  |             | 391,000     
|Leasehold improvements                          |             | 33,000      
|Less: accumulated depreciation and amortization |             | (370,000    
|                                                |             |             
|                                                |             | $ 1,014,000 
|                                                |             |             
|                                                |             |             

| | Depreciation
expense for the years ended December 31, 2003 and 2002 was $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 establishment of the
technological feasibility and 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14

---

| | 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 $64,000 and
$-0- for the years ended December 31, 2003 and 2002, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. Goodwill was
subjected to fair value impairment tests in 2003 and 2002 and no impairments
were recognized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
intangible assets include tradenames, customer lists and software technologies,
which were 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:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | December 31, 2003 | December 31, 2002 |  |             |   |           
|------------------------------- | ----------------- | ----------------- |  | ----------- | - | ----------
|
|Tradenames (2.5 to 10 years)    |                   | $ 2,799,000       |  | $  (422,000 | ) | $2,377,000
|Customer lists (3 to 5 years)   |                   | 893,000           |  | (600,000    | ) | 293,000   
|Software technologies (3 years) |                   | 200,000           |  | (50,000     | ) | 150,000   
|                                |                   |                   |  |             |   |           
|                                |                   | $ 3,892,000       |  | $(1,072,000 | ) | $2,820,000
|                                |                   |                   |  |             |   |           
|                                |                   |                   |  |             |   |           

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

|                    |  | 
|------------------- |  | 
|2004                |  | 
|2005                |  | 
|2006                |  | 
|2007                |  | 
|2008 and thereafter |  | 
|                    |  | 
|                    |  | 
|                    |  | 
|                    |  | 

F-15

---

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 discounted 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 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
instruments recoverable values approximate fair value because of their
short-term nature.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenue
Recognition

| | The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, 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 and
software, and data storage related services, and (ii) the resale of maintenance
and technical support agreements on data storage devices.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Revenue
from the resale of maintenance agreements on data storage devices is recognized
in one of two ways, based on whether the underlying product is one on which the
Company performs support or maintenance services. For products that we perform a
material portion of the 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.
There are no defined patterns of usage in our maintenance contracts. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
products that we do not perform a material portion of the support or maintenance
services, 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16

---

| | On
occasion, our sales transactions for the resale and installation of data storage
systems and the resale of maintenance and technical supports contracts are
denominated as a single, lump-sum price. In these instances, we allocate the
aggregate transaction revenue among the multiple elements in accordance with
their relative fair values. This process involves the application of
managements judgment and estimates regarding those relative fair values.
In November 2002, the Emerging Issues Task Force (EITF) issued EITF Issue No.
00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 addresses how to determine whether a
revenue arrangement involving multiple deliverables contains more than one unit
of accounting for the purposes of revenue recognition and how the revenue
arrangement consideration should be measured and allocated to the separate units
of accounting. EITF Issue No. 00-21 applies to all revenue arrangements that the
Company enters into after June 28, 2003 and that involve multiple deliverables
containing multiple units of accounting. The adoption of this statement did not
have a material impact on the Companys financial condition or results of
operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 $389,000 and $279,000 in
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
accounting principles generally accepted in the United States of America, 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 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Earnings
(Loss) Per Share

| | Basic
earnings (loss) per share is based on the weighted average number of common
shares outstanding. Diluted earnings (loss) per share is computed using the
weighted-average number of common shares outstanding plus the number of common
shares that would be issued assuming exercise or conversion of all potentially
dilutive common shares had been issued. At December 31, 2003, the Company has
748.07306 shares of Series B convertible preferred stock, which are convertible
into an aggregate of 37,403,653 shares of common stock. These convertible
preferred shares together with warrants and options to purchase an aggregate of
41,083,076 and 13,891,758 shares of common stock as of December 31, 2003 and
2002, respectively, have been excluded from the diluted share calculations, as
they were anti-dilutive as a result of the net losses incurred.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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). 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17

---

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

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

| | 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, had the Company applied the fair value based method of FAS 123, there
would have been no stock-based compensation expense for that period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
2003, see  Note 9 for the assumptions and methodology used to determine the fair  value
of  stock-based compensation.
| | -------------------------------------------------------------------------------------------------------------------------

Recent
Accounting Pronouncements

| | In
May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS
149 provides for certain changes in the accounting treatment of derivative
contracts. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, except for certain provisions that relate to SFAS No. 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, which should continue to be applied in accordance with
their respective effective dates. The requirements of SFAS No. 149 should be
applied prospectively. The adoption of SFAS No. 149 did not have a material
impact on the Companys consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity
(SFAS 150) This statement changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. It requires that those instruments be classified as liabilities in
balance sheets. SFAS 150 is effective for all financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the Companys third quarter of 2003. The adoption of SFAS 150 did not have
a material impact on the Companys consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2003, the Staff of the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition, which supersedes SAB 101, Revenue Recognition in
Financial Statements. SAB 104s primary purpose is to rescind
accounting guidance contained in SAB 101 related to multiple-element revenue
arrangements and to rescind the SECs Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers
(FAQ) issued with SAB 101. SAB 104 has incorporated selected
portions of the FAQ. The adoption of SAB 104 did not have a material impact on
the Companys revenue recognition policies.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Reclassifications

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

F-18

---

NOTE 4
 SANZ AND SOLUNET STORAGE BUSINESS COMBINATION

| | Effective
April 1, 2003, SANZ completed a business combination with Solunet Storage. The
transaction has been 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s 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s 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. The preferred stock will
automatically convert into 37,403,653 shares of common stock upon the amendment
of our Articles of Incorporation to increase the number of authorized shares of
common stock. A meeting of shareholders is scheduled for April 12, 2004 at which
we anticipate that our Articles of Incorporation will be amended to increase our
authorized common stock to 200,000,000 shares. Sun Solunet has agreed to vote
its shares in favor of the increase. The number of shares of common stock into
which the preferred stock will convert is fixed, and is not dependent on the
market value of the common stock or any similar factor. The preferred stock
contains no obligatory dividends and no preferences over the common stock with
respect to dividends, liquidation or other matters, other than the power to vote
with the common stock on an as-converted basis. In addition, 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with SFAS 141, the Company has accounted for this transaction under
the purchase method of accounting, in which the purchase price is 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 recorded as goodwill. Because of the reverse nature of the
acquisition, the purchase price has been 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. At December 31, 2003, this amount is disclosed as
Warrants under stockholders equity in our Consolidated Balance
Sheet.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
purchase price is summarized as follows:
| | --------------------------------------------

|                     | 
|-------------------- | 
|Common stock         | 
|Warrants and options | 
|Transaction costs    | 
|                     | 
|Purchase price       | 
|                     | 
|                     | 

F-19

---

| | The
purchase price, including all adjustments as of
December 31, 2003, has been allocated as follows:
| | -----------------------------------------------------------------------------------------------------

|Tangible assets                                | 
|---------------------------------------------- | 
|Cash                                           | 
|Other current assets                           | 
|Property, equipment and other long-term assets | 
|Identifiable intangible assets                 | 
|                                               | 
|                                               | 
|Less: liabilities assumed                      | 
|                                               | 
|                                               | 
|Net liabilities assumed                        | 
|                                               | 
|Goodwill recorded                              | 
|                                               | 
|                                               | 
|                                               | 
|Purchase price                                 | 
|                                               | 
|                                               | 

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:

| | Pro
forma results of operations:
| | --------------------------------

|                   | Year EndedDecember 31, 2003 | Year endedDecember 31, 2002 |      
|------------------ | --------------------------- | --------------------------- | -----
|
|Revenue            |                             | $   63,029,000              |      
|Net loss           |                             | $    (6,032,000             | ) (1)
|Net loss per share |                             | $             (0.10         | )    

| | (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-
ACQUISTION OF ASSETS OF STORNET, INC

| | On
September 26, 2002, Solunet Storage purchased certain assets of StorNet from  StorNets
secured creditors. Those creditors had foreclosed upon the assets  of StorNet pursuant to
Article 9 of the Uniform Commercial Code. The aggregate  cash purchase price paid by
Solunet to the creditors for the assets was  $9,464,000, net of cash acquired. In
connection with the acquisition, Solunet  Storage also incurred acquisition costs of
$705,000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
purchase price was allocated as follows:
| | --------------------------------------------

|                                               | 
|---------------------------------------------- | 
|Tangible assets                                | 
|Cash                                           | 
|Other current assets                           | 
|Property, equipment and other long-term assets | 
|Identifiable intangible assets                 | 
|                                               | 
|                                               | 
|Less: liabilities assumed                      | 
|Less: cash acquired                            | 
|                                               | 
|Net cash paid for acquisition                  | 
|                                               | 
|                                               | 

F-20

---

| | Post-transaction
business continuation expenses incurred in connection with the incorporation of  Solunet
Storage, commencement of its business operations, and its acquisition of  the assets of
StorNet, Inc., were expensed as a period cost during 2002. A  portion of these costs
consist of obligations (either financial obligations, or  non-financial performance
obligations) that were originally incurred by StorNet,  Inc. and were not assumed by
Solunet Storage, but that Solunet Storage  determined, subsequent to the transaction,
that it would satisfy in order to  enhance its ability to maintain the value of the
assets that it had acquired.  Solunet Storage recorded total post-transaction business
continuation expenses  of $4,144,000, including notes payable to unrelated parties in the
aggregate  amount of $1,629,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 6
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. This credit line  bears interest at
prime plus 5%, expires in May 2005 and is secured by  substantially all assets of SANZ
Inc., a wholly-owned subsidiary of the Company.  The funds available under the credit
facility are limited to 80% 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 $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, 2003, based on our eligible collateral at that date, we
had $9.2 million  available for borrowing on the Wells Fargo credit facility, of which
$8.3  million was drawn and $.9 million remained available.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with financial covenants contained in the line of credit agreement,  the
Company must meet specified minimum net income levels during each calendar  quarter, and
must maintain minimum levels of book net worth plus subordinated  debt (measured in the
aggregate, with amounts loaned to SANZ Inc. from SAN  Holdings being classified as
subordinated debt). In addition, under another  covenant, if SANZ Inc. generates a net
loss in a given calendar quarter and has  also generated a net loss on a year-to-date
basis at that time, we are obligated  to make an infusion of either equity or
subordinated debt into SANZ Inc. (which  can come from the holding company, if funds are
available there, or from an  outside source) in an amount at least equal to the amount of
the quarterly net  loss or the year-to-date net loss, whichever is less. At December 31,
2003, the  Company was in compliance with those covenants. At various dates from
September  2002 through August 2003, we were not in compliance with one or more of those
covenants; and received waivers from Wells Fargo for each of those prior  periods.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Harris Trust
and Savings Bank

| | SANZ
also has two revolving credit facilities with Harris Trust and Savings Bank,  (Harris
Trust) established in May 2003 and June 2003 respectively.  At December 31, 2003,
these facilities allowed for borrowings up to an aggregate  of $9.0 million. Sun Capital
Partners II, L.P., an affiliate of Sun Solunet, our  majority shareholder, has guaranteed
these facilities. At December 31, 2003, we  had borrowed $8.2 million on these
facilities. Both facilities currently bear  interest at a rate of prime plus 1⁄4%
(i.e., currently 4.25%) and expire in  May 2005 and August 2004, respectively. The
facility expiring in May 2005, with  a maximum amount of $4.8 million, is maintained by
SAN Holdings, Inc. and is  unsecured, is not limited by availability under a borrowing
base, and does not  require the maintenance of specified financial covenants. The
facility expiring  in August 2004, with a maximum amount of $4.2 million, is maintained
by our  Solunet Storage subsidiary, and is secured by substantially all of the assets of
Solunet Storage, but is not limited by availability under a borrowing base and  does not
require the maintenance of specified financial covenants.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-21

---

| | In
March 2004, we amended the facility maintained by SAN Holdings to increase the  maximum
aggregate borrowings by $2.0 million, to $11.0 million. Of this  increased amount,
$1.0 million is a short-term increase that expires in June  2004. The other $1.0 million
of the increase will remain available until the end  of the loan term in May 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other
Financing Arrangements

| | In
conjunction with the purchase of StorNets net assets, the Company entered  into a
$10 million revolving credit facility with Harris Trust. At December 31,  2002,
$5,614,000 was outstanding on this line. The facility bore interest at a  rate of prime
plus 1⁄4%, or 4.5%, and was guaranteed by an affiliate of Sun  Solunet.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 the
Harris Trust credit facility. After the business combination of  SANZ and Solunet
Storage, we 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 during the quarter  ended June 30, 2003, we wrote off the full remaining amount of
those capitalized  costs of $232,000. This amount is reflected in the Statement of
Operations under  Acquisition-related costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | When
Solunet Storage purchased the assets of StorNet, it incurred substantial costs  intended
to enhance its ability to maintain the value of the assets it had  acquired. Those costs
are reflected in the financial statements of Solunet  Storage for the three months ended
December 31, 2002 as Post-transaction  business continuation expenses. As
part of those post-transaction business  continuation expenses, Solunet Storage entered
into notes payable with certain  vendors. As of December 31, 2003, the Company has fully
paid-off these notes.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 Michael Phelan, the President  and CEO of Solunet Storage.
Currently, Mr. Phelan is the President and COO of  SANZ. Immediately prior to the SANZ
and Solunet Storage business combination,  Sun Solunet and Mr. Phelan contributed the
foregoing $4,000,000 promissory note  plus accrued interest of $100,000 to the equity of
Solunet Storage, effectively  converting that debt to equity. The shares of Solunet
Storage received by Sun  Solunet and Mr. Phelan in that transaction are part of the
shares that were  exchanged for SANZ shares in the SANZ and Solunet Storage business
combination.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following summarizes our debt outstanding:
| | ----------------------------------------------

|                                  | December 31, 2003 | December 31, 2002
|--------------------------------- | ----------------- | -----------------
|Line of credit with Wells Fargo   |                   | $  8,253,000     
|Lines of credit with Harris Trust |                   | 8,200,000        
|Note payable to stockholder       |                   | --               
|Notes payable to vendors          |                   | --               
|                                  |                   |                  
|                                  |                   | $16,453,000      
|                                  |                   |                  
|                                  |                   |                  

NOTE 7 -
INCOME TAXES

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

| | For
the year ended December 31, 2003 and the period from September 26 through  December 31,
2002,  total income tax benefit differs  from the amount computed by applying the U.S.
federal income tax rate of 35% to loss before income taxes as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-22

---

|                                                 | Year ended | Period fromSeptember 26 through
|------------------------------------------------ | ---------- | -------------------------------
|
|Income tax benefit at federal statutory rate     |            | $(2,119,000                    
|State income tax benefit, net of federal benefit |            | (117,000                       
|State income tax refund                          |            | (115,000                       
|Nondeductible items                              |            | 28,000                         
|Valuation allowance                              |            | 2,208,000                      
|                                                 |            |                                
|                                                 |            |                                
|                                                 |            | $  (115,000                    
|                                                 |            |                                
|                                                 |            |                                

| | 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:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 | December 31 |                   
|-------------------------------- | ----------- | ------------------
|
|Deferred tax assets:             |             |                   
|Current:                         |            
|Accounts receivable reserves     |             | $      118,000    
|Inventory reserves               |             | 247,000           
|Accrued expenses                 |             | 150,000           
|Deferred revenue                 |             | 621,000           
|Non-current                      |            
|Net operating loss carryforwards |             | 11,400,000        
|Intangible assets                |             | 272,000           
|Property and equipment           |             | --                
|                                 |             |                   
|Total deferred tax assets        |             | 12,808,000        
|                                 |             |                   
|Deferred tax liabilities         |             | (84,000           
|Valuation allowance              |             | (12,724,000       
|                                 |             |                   
|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, 2003, the Company has net operating loss carryforwards available to
offset future federal taxable income of approximately $32,500,000. Such
carryforwards expire between 2010 and 2023. 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-23

---

NOTE 8
 COMMITMENTS AND CONTINGENCIES

| | As
of December 31, 2003, the Company had long-term noncancelable lease agreements
for office equipment and office space with the following minimum commitments:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|     | 
|---- | 
|2004 | 
|2005 | 
|2006 | 
|2007 | 
|2008 | 
|    
|    
|     | 
|    

| | Rent
expense aggregated $714,000 and $964,000 in 2003 and 2002, respectively.
| | -----------------------------------------------------------------------------

| | During
2003, SANZ was a defendant in a litigation in the District Court of Salt Lake
County, Utah. The litigation related to a business transaction that occurred in
1996 and that was unrelated to our current line of business. The case against
SANZ lay dormant for several years and the risk of loss associated with it was
considered to be immaterial, but in the past year the legal discovery process
became more active and we were required to incur greater legal fees and expend
greater management time to defend the action. As a consequence, while we
considered the claims against us to be baseless, in December 2003 we entered
into a Settlement Agreement under which we paid approximately $33,000 of cash
and agreed to transfer to the plaintiffs certain other assets (to which no value
had previously been ascribed in our financial statements) in return for a
release of all claims against us and a dismissal of the action against us.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 9
 STOCKHOLDERS EQUITY

Stock
options and warrants

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 2003 and 2002, respectively: dividend
yield of 0% for all periods; volatility of 80% and 105%; risk-free interest
rates of 2.0% and 2.6%, and expected lives of five years in 2003, and one to
five years in 2002. The weighted average fair value of options granted were
$0.28 and $0.29 per share during fiscal 2003 and 2002, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24

---

| | Option
activity for the two years ended December 31, 2003 is summarized as follows:
| | -----------------------------------------------------------------------------------

|                                 | Number of SharesUnderlying Options | Weighted AverageExercise Price
|-------------------------------- | ---------------------------------- | ------------------------------
|Outstanding at December 31, 2001 |                                    | 7,116,945                     
|Granted                          |                                    | 1,218,000                     
|Forfeited                        |                                    | (1,793,065                    
|                                 |                                    |                               
|Outstanding at December 31, 2002 |                                    | 6,541,880                     
|Granted                          |                                    | 8,310,000                     
|Forfeited                        |                                    | (793,564                      
|Exercised                        |                                    | (150,000                      
|                                 |                                    |                               
|Outstanding at December 31, 2003 |                                    | 13,908,316                    
|                                 |                                    |                               
|                                 |                                    |                               
|Exercisable at December 31, 2002 |                                    | 4,192,548                     
|                                 |                                    |                               
|                                 |                                    |                               
|Exercisable at December 31, 2003 |                                    | 4,661,832                     
|                                 |                                    |                               
|                                 |                                    |                               

| | Further
information regarding options outstanding and options exercisable at December  31, 2003
is summarized below:
| | --------------------------------------------------------------------------------------------------------------------

|                 | Options Outstanding | Options Exercisable |  |     | 
|---------------- | ------------------- | ------------------- |  | --- | 
|
|$.29 to $.50     |                     | 8,545,000           |  | 9.8 | 
|$.51 to $1.00    |                     | 3,588,246           |  | 5.7 | 
|$1.01 to $1.50   |                     | 652,413             |  | 6.9 | 
|$1.51 to $2.00   |                     | 500,000             |  | 7.7 | 
|$2.01 to $2.50   |                     | 562,657             |  | 3.7 | 
|$10.00 to $11.00 |                     | 60,000              |  | 1.2 | 
|                 |                     |                     |  |     | 
|                 |                     | 13,908,316          |  | 8.2 | 
|                 |                     |                     |  |     | 
|                 |                     |                     |  |     | 

| | Warrant
activity for the two years ended December 31, 2003 is summarized as follows:
| | ------------------------------------------------------------------------------------

F-25

---

|                                 | Number of SharesUnderlying Warrants | Weighted AverageExercise Price
|-------------------------------- | ----------------------------------- | ------------------------------
|Outstanding at December 31, 2001 |                                     | 6,993,436                     
|Granted                          |                                     | 506,442                       
|Forfeited                        |                                     | (150,000                      
|                                 |                                     |                               
|Outstanding at December 31, 2002 |                                     | 7,349,878                     
|Granted                          |                                     | 21,526,140                    
|Exercised                        |                                     | (195,000                      
|Forfeited                        |                                     | (1,506,258                    
|                                 |                                     |                               
|Outstanding at December 31, 2003 |                                     | 27,174,760                    
|                                 |                                     |                               
|                                 |                                     |                               
|Exercisable at December 31, 2002 |                                     | 7,349,878                     
|                                 |                                     |                               
|                                 |                                     |                               
|Exercisable at December 31, 2003 |                                     | 8,644,282                     
|                                 |                                     |                               
|                                 |                                     |                               

|* |  | The stated average exercise prices are pro forma amounts, calculated without
regard to the fact that certain currently unidentifiable tranches will not
become exercisable, because Sun Solunets ability to exercise its warrants
is contingent upon the prior exercise of warrants and/or options issued to
previous holders totaling 2,958,951 shares of common stock. As such, it is not
known which tranches of Sun Solunets warrants will expire because it is
unknown which corresponding warrants or option of those previously outstanding
will comprise the first 2,958,951 exercised. As a consequence of this
contingency, it is also not possible to determine at this time the weighted
average exercise price of the warrants issued in 2003. See Note 4 for more
information regarding the warrants issued in 2003.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 10
 DEFINED CONTRIBUTION PLAN

| | The
Company maintains two qualified 401(k) Savings Plans covering all employees who
have three months of service with the Company. The Plans allow participants to
make voluntary pre-tax contributions up to 15% of their pre-tax earnings, which
are partially matched by the Company. For the years ended December 31, 2003 and
2002, employer contributions were approximately $46,000 and $62,000,
respectively. Effective January 1, 2004, the Plans were converted to one Plan
for all eligible employees.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 11
 RELATED PARTY TRANSACTIONS

| | As
discussed in Note 1, Sun Solunet, an affiliate of Sun Capital, is the majority
shareholder of SANZ. The Company pays quarterly $75,000 for management and
consulting services to another affiliate of Sun Capital. As described in Note 9,
a portion of our debt has been guaranteed by Sun Capital Partners II, L.P..
While we receive material benefits from this guaranty, we pay no specified cash
consideration for the guaranty. If the guaranteed debt is not reduced to $3
million or less by December 2004, the Company will be obligated to issue
warrants to Sun Capital Partners II, L.P. to purchase additional stock. The
Company has allocated a portion of the management and consulting services fee
paid to an affiliate of Sun Capital to interest expense, based on the
financing-related benefits that it receives under Sun Capital Partners II,
L.P.s guaranty. The balance of the management and consulting services fee is
recorded as general and administrative expense.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-26

---

| | If
the guaranty is not reduced to $3 million or less by December 2004, the Company
is obligated to issue warrants to Sun Capital Partners II, L.P., with an
exercise price of $.01, for the following number of shares at the dates set
forth in the table below. The warrants as currently agreed upon are based upon a
total guaranty of $5 million. Our loan facilities guaranteed by Sun Capital
Partners II, L.P currently have an aggregate maximum amount of $11 million. The
Company and Sun Capital Partners II, L.P have not yet determined whether Sun
Capital Partners II, L.P. is to be compensated for issuing guarantees in excess
of the $5 million originally agreed upon, but there is a possibility that the
Company will agree to compensate Sun Capital Partners II, L.P (whether with
shares, warrants, cash guarantee fees, or otherwise) for issuing the guarantees
in an aggregate amount greater than its original commitment. We are currently
evaluating potential transactions to refinance a portion of the guaranteed debt
with either other debt or with equity that, in conjunction with reductions in
this debt through additional draws on our Wells Fargo facility and cash from
operations, would be used to reduce the guaranteed debt to $3 million or less by
no later than December 2004. However, there can be no assurance in being
successful in obtaining additional debt or equity financing.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date                        | Number of Shares
|--------------------------- | ----------------
|December 2004               |                 
|June 2005                   |                 
|December 2005               |                 
|June 2006                   |                 
|December 2006               |                 
|June 2007                   |                 
|December 2007               |                 
|June 2008                   |                 
|Each six months thereafter* |                 

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

| | As
of December 31, 2003 and 2002, the Company had $91,000 and $169,000,
respectively, due to an affiliate of Sun Capital for management fees and bank
debt interest. For the years ended December 31, 2003 and 2002, the Company paid
$443,000 and $-0-, respectively, to an affiliate of Sun Capital for management
fees, a portion of which has been recorded as interest expense due to guaranties
by Sun Capital Partners II, L.P on certain bank debt.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-27

---

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

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

Item 8.A.
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 and 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.
That evaluation has provided our Chief Executive Officer and Principal Financial
Officer with reasonable assurance that our disclosure controls and procedures
are effective in timely alerting them to material information required to be
included in our periodic SEC filings. We have not made any significant changes
in our disclosure controls and procedures or in other factors that could
significantly affect those disclosure controls and procedures subsequent to the
date of the evaluation described above.

PART
III

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

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

Pursuant
to the agreements under which we acquired Solunet Storage, in April 2003 two of
our prior directors (Fred Busk and William Hipp) resigned and three other
individuals (Messrs. Leder, Krouse and Terry) were elected as Directors.
Pursuant to those agreements, we agreed to nominate as a director, for election
at the next annual meeting and thereafter through December 31, 2004, the
designee of one shareholder, Hollger LLC, and shareholder Sun Solunet LLC agreed
to vote for that designee. Mr. Gary Holloway was designated by Hollger LLC, and
he has been nominated for election at our shareholders meeting scheduled for
April 12, 2004. Pursuant to those agreements, we also agreed to nominate the
following additional persons as directors: Benjamin Emmons, C. Daryl Hollis,
David Kreilein, M. Steven Liff, Michael Phelan and George Rae. Each of Messrs.
Emmons, Kreilein, Krouse, Leder, Liff and Terry is an officer and employee of
Sun Capital Partners, Inc., an affiliate of Sun Solunet LLC, the principal
shareholder of Solunet Storage prior to our acquisition of that entity. Mr.
Phelan was the president of Solunet Storage prior to the acquisition. Messrs.
Hollis and Rea are not officers or employees of Sun Capital Partners or any of
its affiliates, but each serves on the board of directors of one or more other
companies (i.e., other than SANZ) in which an affiliate of Sun Capital is a
majority investor. Each of the foregoing persons has also been nominated for
election at our shareholders meeting scheduled for April 12, 2004. Except as
described above, there are no other arrangements or understandings between any
officer or director and any other person pursuant to which anyone was or is to
be selected as an officer or director.

Directors
Brendan Reilly and Robert Brooks have not been re-nominated for election at the
shareholders meeting scheduled for April 12, 2004, and each is expected to
conclude his term as a director as of that meeting.

Our
current directors and executive officers are as follows:

John
Jenkins,Age 54, Chairman and CEO since November 2000. From January 1995 through June 2000, Mr.
Jenkins was CEO, president and a director of TAVA Technologies, Inc., where he led the
build-out of a national systems integration business. In 1999, all outstanding TAVA
shares were sold in a cash transaction approved by TAVA shareholders. From 1990 until he
joined TAVA in 1995, he had served as president of Morgan Technical Ceramics, Inc., a
wholly-owned subsidiary of Morgan Crucible plc, a diversified industrial products
company based in England and publicly-traded on the London stock exchange. Mr. Jenkins
holds a B.S. from the University of Washington and a J.D. from the University of Denver.

Brendan
T. Reilly, Age 38, Chief Technology Officer and Director since
December 2001, pursuant to our acquisition agreement with ITIS Services, Inc. In
1998, Mr. Reilly co-founded ITIS Services, a data storage solutions provider,
and served as its Executive Vice President and Chief Technology Officer until
our acquisition of ITIS in 2001. Prior to founding ITIS, Mr. Reilly spent seven
years with EMC Corporation in various capacities, most recently as senior
territory manager. During the two years before joining EMC, he co-founded and
operated Veritas International Trading Company, an import-export company
conducting East Asian trade for companies such as LL Bean, Starter and Redman.
Mr. Reilly earned his undergraduate degree in Business Marketing from Providence
College.

27

---

Robert
K. Brooks, Age 60, Director since June 2000. Mr. Brooks has over
30 years of experience in the information technology industry, having held
positions in recruiting, sales and management. In June 1993, he became chairman
and managing partner of The Systems Group and Technical Directions, Inc., after
it merged with his contract programming, consulting and project management firm.
In January 1995, The Systems Group was acquired by ACS Technology Solutions, a
wholly owned subsidiary of Affiliated Computer Services, an international IT
services company (NYSE:ACS). From June 1995 through December 1999, Mr. Brooks
served as senior vice president of Affiliated Computer Services and as executive
vice president of ACS Technology Solutions, Inc. Currently, he is a director of
Cornus Corporation of Medford, Oregon, a privately held desktop software
products company. He received a Bachelor of Science Degree in Psychology from
the University of New Mexico.

Marc J. Leder,
Age 42, 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., Celebrity, Inc., LOUD Technologies, Inc., and One Price Clothing
Stores, Inc., all of which are publicly held companies, and as a director of a number of
private companies.

Rodger R.
Krouse, Age 42, 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., Celebrity, Inc., LOUD Technologies, Inc. and One Price
Clothing Stores, Inc., all of which are publicly  held companies, and as a director of a
number of private companies.

Clarence
Terry, Age 57, Director since April 2003, pursuant to our acquisition agreement
with Solunet Storage. Mr. Terry has served  as a managing director of Sun Capital
Partners, Inc., a private investment firm, since September 1999. From October 1973 to
September  1999, Mr. Terry was principally employed as vice president of Rain Bird
Sprinkler Manufacturing Corporation, a leading irrigation  manufacturer. Currently, he
also serves as a director of Catalina Lighting, Inc., Northland Cranberries, Inc.,
Celebrity, Inc., LOUD  Technologies, Inc., and One Price Clothing Stores, Inc., all of
which are publicly held companies, and as a director of a number of  private companies.

Michael
J. Phelan, Age 47, President and Chief Operating Officer, and nominee
for Director,joined SANZ in April 2003 pursuant to our acquisition
agreement with Solunet Storage, where he had served as President and Chief
Executive Officer since the formation of Solunet Storage in September 2002. Mr.
Phelan has been involved in sales and management in the computer and UNIX
marketplace since 1980, and entered the data storage business in 1990 when he
founded StorNet, Inc. He served as President and Chairman of the Board of
StorNet until the merger of that company with Vanguard Technologies in 2000.
Following the merger with Vanguard, Mr. Phelan became a consultant to resulting
company but ceased participation in daily operations for a period to pursue
personal interests. In late 2001, at the request of the then-current management
of StorNet, Mr. Phelan re-joined the company as its Acting Chief Executive
Officer, a position he held until the sale of StorNets assets to Solunet
Storage by StorNets secured lender. Mr. Phelan serves on the advisory
boards of a variety of academic and philanthropic organizations. Mr. Phelan
holds a B.S. from West Chester University.

Chris
M. Wilkes, Age 39, Executive Vice President,joined SANZ in April
2003 pursuant to our acquisition agreement with Solunet Storage, where he served
as Executive Vice President since the formation of Solunet Storage in September
2002. From December 2001 until Solunet Storages acquisition of the assets
of StorNet, Inc. in September 2002, Mr. Wilkes served as Vice President of
Managed Services for StorNet, Inc. Prior to joining StorNet, Inc., Mr. Wilkes
was the Director of Sales of Managed Storage International, a storage services
provider, which he joined in 2000. From 1996 until he joined Managed Storage
International, Mr. Wilkes was General Manager  South/Central District for
Pioneer Standard Electronics, a computer equipment reseller and
distributor.  Mr. Wilkes holds an MBA from Texas A & M University, and
BBA in Marketing from Texas Tech University.

Additional
nominees for director are as follows:

David
L. Kreilein, Age 46, Nominee for Director pursuant to our acquisition agreement
with Solunet Storage.  Mr. Kreilein has served  as a vice president of Sun Capital
Partners, Inc., a private investment firm, since 2001. Prior to joining Sun Capital
Partners,  Inc., Mr. Kreilein served as chief financial officer for Olan Mills, Inc., a
photography company, from 1999 to 2001; chief financial  officer of Gateway
Communications Inc., a value added reseller of technology products, from April 1999
through August 1999; and chief  financial officer for Hamilton Sorter Company Inc., a
manufacturer of office furniture, from 1993 to April 1999. Gateway  Communications Inc.
filed for protection under the federal bankruptcy laws in 1999. Currently, Mr. Kreilein
is a director of a number  of private companies.

28

---

Benjamin
S. Emmons, Age 35, Nominee for Director pursuant to our acquisition agreement
with Solunet Storage.  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.

M. Steven
Liff, Age 32, Nominee for Director pursuant to our acquisition agreement with
Solunet Storage.  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.

C. Darryl
Hollis, Age 59, Nominee for Director pursuant to our acquisition agreement with
Solunet Storage.  Mr. Hollis, a certified  public accountant, has been an independent
business consultant since 1998. He currently serves as a director of three publicly held
companies: Catalina Lighting, Inc.; Northland Cranberries, Inc.; and LOUD Technologies,
Inc.

Gary F.
Holloway, Age 52, Nominee for Director as designee of Hollger LLC pursuant to a
shareholders agreement entered into in  connection with our acquisition of Solunet
Storage.  Mr. Holloway is vice chairman of Five Mile Capital Partners, a privately held
investment firm. Prior to joining Five Mile Capital Partners and its affiliate, 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.

George R.
Rea, Age 65, Nominee for Director pursuant to our acquisition agreement with
Solunet Storage.  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.

Board
Committees

The
Board of Directors has established a compensation committee and an audit
committee. Until the resignation of William Hipp in April 2003 pursuant to the
agreements under which we acquired Solunet Storage, each of these committees
consisted of Mr. Hipp and Mr. Brooks. A replacement for Mr. Hipp has yet to be
named; furthermore, Mr. Brooks is expected to conclude his term as a director at
our shareholders meeting scheduled for April 12, 2004. We intend to name new
members of the compensation committee and audit committee immediately following
that shareholders meeting. The prior audit committee members were independent,
and when the new audit committee members are named in April 2004 those audit
committee members will be independent, as defined by the National Association of
Securities Dealers listing standards.

We do
not currently have an audit committee financial expert serving on
our audit committee following the resignation of Mr. Hipp. However, we expect
that we will have at least one such expert serving on the audit when that
committee is reconstituted in April 2004.

29

---

Section
16(a) Beneficial Reporting Compliance

Based
on a review of filings with the SEC, as well as copies of the reports and
written representations we received from directors and officers required to file
and their written representations, we believe that during the year ended
December 31, 2003, certain of our directors and officers did not file, or were
late in filing, certain reports under Section 16 of the Securities Exchange Act.

Former
directors Hipp and Brooks did not timely file a Form 4  Statement of
Changes in Beneficial Ownership, to report the grant of options to them in
March, 2003. Michael J. Phelan and Chris M. Wilkes did not timely file Form 3
 Initial Statement of Beneficial Ownership, to report their April 2003
election as executive officers effective upon the closing of the Solunet Storage
acquisition. Messrs. Phelan, Wilkes, director Brendan T. Reilly, and John
Jenkins, director and CEO, filed late Form 4s reporting the grant of options to
them in December 2003.

Item 10.
Executive Compensation.

Summary
Compensation Table

|                            | Annual Compensation |      |  |          |  |        
|--------------------------- | ------------------- | ---- |  | -------- |  | -------
|
|John Jenkins,               |                     | 2003 |  | $227,867 |  | $6,600 
|President and CEO(1)        |                     | 2002 |  | $227,400 |  | $23,950
|                            |                     | 2001 |  | $188,469 |  | -0-    
|                           
|Michael J. Phelan(5)        |                     | 2003 |  | $150,012 |  | -0-    
|President and COO(5)        |                    
|                           
|Chris M. Wilkes             |                     | 2003 |  | $123,750 |  | -0-    
|Executive Vice President(5) |                    
|                           
|Hugh A. OReilly,           |                     | 2003 |  | $195,000 |  | $16,000
|Senior Vice President       |                     | 2002 |  | $192,500 |  | -0-    
|CFO and General Counsel(6)  |                     |      | 
|                           

|(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 until April
4, 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | These options are exercisable at $.40 per share. One fourth of the total options
granted to each employee become exercisable each year over the next four years,
commencing on April 1, 2004.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | These options are exercisable at $.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 April 4, 2003, when these officers became
employed by SANZ pursuant to our acquisition agreement with Solunet Storage.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Mr. OReilly has served as General Counsel since 2002. During 2002 and
until December 2003 he also served as Chief Financial Officer and Senior Vice
President. Amounts shown represent compensation in all capacities.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30

---

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, 2003 to each of our
executive officers required to be named in the Summary Compensation Table.

|Name              | Number of SecuritiesUnderlying Options/ SARsgranted (#) | Percent of total options/SARs granted to employeesin fiscal year (%) | Exercise orbase price($/Sh) | Expiration      date
|----------------- | ------------------------------------------------------- | -------------------------------------------------------------------- | --------------------------- | --------------------
|                 
|John Jenkins      |                                                         | 1,100,000                                                            |                             | 13                  
|                 
|Michael J. Phelan |                                                         | 1,100,000                                                            |                             | 13                  
|                 
|Chris M. Wilkes   |                                                         | 450,000                                                              |                             | 5                   
|                 
|Hugh A. OReilly  |                                                         | -0-                                                                  |                             | --                  
|                 

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

The
following table shows the number of shares underlying unexercised options held
at December 31, 2003 by each of the executive officers required to be named in
the Summary Compensation Table, and the aggregate dollar value of in-the-money,
unexercised options held at the end of the fiscal year. SANZ has not granted any
stock appreciation rights.

|Name              | Number of unexercised options at FY-end (#)                exercisable/unexercisable | Value of unexercised in-the-moneyoptions at FY-end ($)
|----------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------
|                 
|John Jenkins      |                                                                                      | 800,000 / 1,100,000                                   
|Michael J. Phelan |                                                                                      | -0- / 1,100,000                                       
|Chris M. Wilkes   |                                                                                      | -0- / 450,000                                         
|Hugh A. OReilly  |                                                                                      | 1,063,982 /  -0-                                      
|                 

|(1) |  | 300,000
of these options are exercisable at $2.25 per share, which is in excess of the market
price of the shares at  December 31, 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | 576,871
of these options are exercisable at $.625 per share, and 287,111 of these options are
exercisable at $.70 per share,  both of which prices are in excess of the market price of
the shares at December 31, 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31

---

Compensation
of Directors

We
have no standing arrangement to compensate directors for their services. During
the fiscal year ended December 31, 2003, we granted 50,000 options, exercisable
at $.70 per share (the market value on the date of grant), and a $5,000
directors fee, to each of our independent directors, Robert K. Brooks and
William Hipp.

Employment
Contracts and Termination of Employment andChange
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:

|o |  | if
he terminates his employment within 90 days following specified change of control events,
|- |  | --------------------------------------------------------------------------------------------

|o |  | if
he terminates his employment due to our material change of his employment conditions; or
|- |  | -------------------------------------------------------------------------------------------

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

Our
similar agreement with Hugh OReilly was triggered by his resignation as
Vice President and Chief Financial Officer during 2003. By mutual agreement, we
modified and reduced the severance obligations that are being paid under that
agreement, and Mr. OReilly continues to serve as our General Counsel in a
part-time capacity.

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.

Ethics Policy

We
have a shareholders meeting scheduled for April 12, 2004, at which we expect
that seven new Directors will be elected. We have determined that we should
defer the adoption of a new Code of Ethics, applicable to our Chief Executive
Officer, Chief Financial Officer, Controller and other members of senior
management, until those new Directors are seated because at that time members of
senior management will constitute a significantly smaller proportion of our
Board than they do today. We anticipate that our Board of Directors will adopt
such a Code of Ethics at or shortly following its meeting in April 2004.

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

The
table below reflects the number of shares of common stock and preferred stock
beneficially owned as of March 15, 2004 by:

|o |  | each
person or group we believe to be the beneficial owner of more than five percent of our
voting  securities,
|- |  | ---------------------------------------------------------------------------------------------------------------

|o |  | each
director and director nominee,
|- |  | -----------------------------------

|o |  | each
executive officer required to be named in the Summary Compensation Table; and
|- |  | ----------------------------------------------------------------------------------

|o |  | all
directors, director nominees, and executive officers, as a group, as of March 15, 2004.
|- |  | -------------------------------------------------------------------------------------------

Shares
of common stock subject to options, warrants and convertible preferred stock
currently exercisable or convertible, or exercisable or convertible within 60
days of March 15, 2004, 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 58,407,625 shares of common stock and 748.07306 shares of
preferred stock outstanding as of the close of business on March 15, 2004.

32

---

Unless
otherwise indicated below, the address for each listed director and executive officer is
SANZ, Inc., 900 W. Castleton Road,  Suite 100, Castle Rock, Colorado 80109.

|                        | Amount and Nature of Beneficial Ownership of Common Stock |            |     |     |     
|----------------------- | --------------------------------------------------------- | ---------- | --- | --- | ----
|
|John Jenkins            |                                                           | 1,390,000  | (2) | 2   | .33%
|Marc J. Leder           |                                                           | 20,000,000 | (3) | 34  | .24%
|Rodger R. Krouse        |                                                           | 20,000,000 | (3) | 34  | .24%
|Clarence E. Terry       |                                                           | -0-        |     | -0- |     
|Michael J. Phelan       |                                                           | 775,000    | (4) | 1   | .32%
|David Kreilein          |                                                           | -0-        |     | -0- |     
|Ben Emmons              |                                                           | -0-        |     | -0- |     
|M. Steven Liff          |                                                           | -0-        |     | -0- |     
|Gary F. Holloway        |                                                           | 2,797,209  | (5) | 4   | .79%
|George R. Rea           |                                                           | 20,000     |     | *   |     
|C. Daryl Hollis         |                                                           | -0-        |     | -0- |     
|Chris Wilkes            |                                                           | 112,500    | (6) | *   |     
|Brendan T. Reilly       |                                                           | 4,586,492  | (7) | 7   | .83%
|Robert K. Brooks        |                                                           | 150,000    | (8) | *   |     
|All directors, director |                                                           | 29,331,201 |     | 48  | .73%
|nominees and executive  |                                                          
|officers, as a group    |                                                          
|(14 persons)            |                                                          
|Sun Solunet LLC         |                                                           | 20,000,000 | (9) | 34  | .24%
|Andrew K. Reilly        |                                                           | 4,079,367  |     | 6   | .98%
|7 Extension Street      |                                                          
|Newport, RI             |                                                          

_______________

|* |  | Less
than 1%
|- |  | ------------

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

33

---

|(2) |  | Includes
500,000 shares underlying an option currently exercisable at $.29 per share, 300,000
shares underlying an option  currently exercisable at $2.25 per share, and 275,000 shares
underlying an option that will become exercisable at $.40 per  share.  Also includes
40,000 shares underlying a warrant currently exercisable at $.625 per share, and 40,000
shares underlying  a warrant currently exercisable at $1.25 per share.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Consists
solely of shares held by Sun Solunet (further described in Note 9 and Note 10), 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, L.P., Sun Capital Advisors II,
L.P., 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, L.P., which in turn is the general partner of Sun Capital Partners
II, L.P., and Sun Capital Partners II, L.P. 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes
275,000 shares underlying an option that will become exercisable at $.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 LLC sole power to vote those shares, (b)
grants Sun  Solunet a right of first refusal on those shares, (c) obligates Mr. Phelan to
sell his shares to a party that intends to  purchase shares from Sun Solunet LLC, if so
demanded by Sun Solunet LLC, and (d) grants Mr. Phelan the right to require a  purchaser
of shares from Sun Solunet LLC also to purchase a pro rata number of Mr. Phelan's shares
on the same terms.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Consists
solely of shares held by Hollger LLC, a privately held investment firm, over which Mr.
Holloway may be deemed to  have control.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Consists
solely of 112,500 shares underlying an option that will become exercisable at $.40 per
share.
|--- |  | ------------------------------------------------------------------------------------------------------

|(7) |  | Includes
156,250 shares underlying an option that will become exercisable at $.40 per share.
|--- |  | --------------------------------------------------------------------------------------------

|(8) |  | Includes
50,000 shares underlying an option currently exercisable at $.70 per share, 15,000 shares
underlying an option  currently exercisable at $.81 per share, 5,000 shares underlying an
option currently exercisable at $10.82 per share, 10,000  shares underlying a warrant
currently exercisable at $.625 per share and 10,000 shares underlying a warrant currently
exercisable at $1.25 per share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Consists
of 19,500,000 shares of common stock owned directly by Sun Solunet and 500,000 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,
L.P., Sun Capital Advisors II, L.P., 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, L.P., which in turn is the general
partner of Sun Capital Partners II, L.P., and Sun Capital Partners II, L.P. 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) |  | Consists
of 729.371 shares of preferred stock owned directly by Sun Solunet, which are convertible
into 36,468,562 shares of common stock, and 18.702 shares of preferred stock owned by Mr.
Phelan over which Sun Solunet has voting control, which are convertible into 935,091
shares of common stock. Marc J. Leder and Rodger R. Krouse may each be deemed to control
Sun Solunet, Sun Capital Partners II, L.P., Sun Capital Advisors II, L.P., 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,
L.P., which in turn is the general partner of Sun Capital Partners II, L.P., and Sun
Capital Partners II, L.P. 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.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

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Item 12.
Certain Relationships and Related Transactions.

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

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

In
addition, under the Credit Support Agreement we may request at any time that Sun
Capital II guaranty up to an additional $2 million of our debt. However, Sun
Capital II has the discretion whether or not to issue such a guaranty if so
requested. If it does issue such a guaranty and we do not discharge the debt or
otherwise obtain a release of the guaranty within eighteen months after its
issuance, we will issue warrants to Sun Capital II in payment for that guaranty,
and we will be obligated to issue additional warrants to Sun Capital II as
further payment at the end of each six-month period that the guaranty is not
released. Sun Capital II has in fact issued a guaranty of up to $11 million, or
$8 million more than the minimum committed amount. The Company and Sun Capital
have not yet determined whether Sun Capital II is to be compensated for issuing
guarantees in excess of the $5 million originally agreed upon, but there is a
possibility that the Company will agree to compensate Sun Capital II (whether
with shares, warrants, cash guarantee fees, or otherwise) for issuing the
guarantees in an aggregate amount greater than its original commitment.

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

35

---

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

|              |  |            
|------------- |  | -----------
|ExhibitNumber |  | Description

---

|2.1 |  | Agreement and Plan of Merger dated March 31, relating to the acquisition of
Solunet Storage. Incorporated by reference to Exhibit 2.1 to our Current Report
on Form 8-K/A No. 1 dated April 1, 2003, filed on April 3, 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.1 |  | Amended and Restated Articles of Incorporation, Incorporated by reference to
Exhibit 3.1 to our Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2001, filed on November 14, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  | Designation of Series A and Series B Preferred Stock  April 3, 2003. Incorporated by reference to Exhibit 2.10
to our  Current Report on Form 8-K dated
April 1, 2003, filed on April 3, 2003
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.3 |  | Second Amended and Restated Bylaws, effective April 4, 2003. Incorporated by reference to
Exhibit 2.9 to our Current Report on Form 8-K/A No. 1 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 our Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2001, filed on August 13, 2001
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.02 |  | First
Amendment to Credit and Security Agreement by and between Storage Area
Networks, Inc. and Wells Fargo Business Credit, Inc. Incorporated by reference
to Exhibit 10.1 to our Quarterly Report on Form 10-QSB for the quarter ended
March 31, 2002, filed on May 14, 2002.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.03 |  | Subordination
Agreement by and between SAN Holdings, Inc. and Wells Fargo Business
Credit, Inc. Incorporated by reference to Exhibit 10.2 to our 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 our Registration Statement on Form
SB-2/A No. 2, File No. 333-87196, filed on November 4, 2002.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.05 |  | Fifth
Amendment to Credit and Security to  Agreement with Wells Fargo Business Credit, Inc.
dated September 22, 2003. Incorporated by reference to Exhibit 10.1 to our Form 10-QSB
for the quarter  ended September  30, 2003, filed on  November 13,2003
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.06 |  | Patent and Trademark Security Agreement with Wells Fargo Business Credit,
Inc., dated September 22, 2003. Incorporated by reference to Exhibit 10.2 to
our Form 10-QSB for the quarter ended September 30, 2003, filed on November
13,2003
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.07 |  | Shareholders Agreement dated April 4, 2003. Incorporated by reference from
Exhibit 2.8 to our Current Report on Form 8-K dated April 4, 2003, filed on
April 21, 2003
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.08 |  | Credit Support Document dated March 31, 2003. Incorporated by reference to
Exhibit 2.3 to our Current Report on Form 8-K/A dated April 1, 2003, filed on
April 3, 2003
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.09 |  | Stock Option Agreement dated March 31, 2003. Incorporated by reference to
Exhibit 2.2 to our Current Report on Form 8-K/A No. 1 dated April 1, 2003, filed
on April 3, 2003
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | SANZ Common Stock Purchase Warrant dated April 4, 2003. Incorporated by
reference to Exhibit 2.4 to our Current Report on Form 8-K/A No. 1 dated April
1, 2003, filed on April 3, 2003
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Management Services Agreement dated April 4, 2003. Incorporated by reference to
Exhibit 2.5 to our Current Report on Form 8-K/A No. 1 dated April 1, 2003, filed on April 3, 2003
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Registration Rights Agreement dated April 4, 2003. Incorporated by reference to to
Exhibit 2.6 to our Current Report on Form 8-K/A No. 1 dated April 1, 2003, filed on April 3, 2003
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | SAN Holdings, Inc  Harris Trust and Savings Bank Loan dated May 16,
2003. Incorporated by reference to Exhibit 10.6 to our Form 10-QSB/A No. 1 for
the quarter ended June 30, 2003, filed on October 2, 2003
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

---

|              |  |            
|------------- |  | -----------
|ExhibitNumber |  | Description

---

|10.14 |  | 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 our Form 10-QSB/A No. 1 for the quarter ended June 30, 2003,
filed on October 2, 2003
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | 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 our Form 10-QSB/A No. 1 for the quarter ended June 30, 2003,
filed on October 2, 2003
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | 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 our Form 10-QSB/A No. 1 for the quarter ended June 30,
2003, filed on October 2, 2003
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | Fourth Amendment, dated November 26, 2003, to San Holdings, Inc. 
Harris Trust and Savings Bank Loan Authorization Agreement. To be filed by
amendment.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | Fifth Amendment, dated February 27, 2004, to San Holdings, Inc. 
Harris Trust and Savings Bank Loan Authorization Agreement. To be filed by
amendment.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Solunet Storage Inc.  Harris Trust and Savings Bank Loan
Authorization Agreement dated August 14, 2003. and Incorporated by reference
to Exhibit 10.1- to our Form 10-QSB/A No. 1 for the quarter ended June 30,
2003, filed on October 2, 2003
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | 2000
Stock Option Plan.  Incorporated by reference to Exhibit 99.1 in the  Form S-8 (File No.
333-81910), filed on January  31, 2002
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | 2001
Stock Option Plan.  Incorporated by reference to Exhibit 99.2 in the  Form S-8 (File No.
333-81910), filed on January  31, 2002.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | 2003
Stock Option Plan.  Filed herewith.
|----- |  | ----------------------------------------

|10.23 |  | Executive
Employment Agreement dated February 1, 2001 - John Jenkins. Incorporated by
reference to Exhibit 10.7 to the Annual Report on Form 10-KSB for the year ended
December 31, 2001, filed on April 1, 2002.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | Executive
Employment Agreement dated December 19, 2001- Brendan T. Reilly.
Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-KSB
for the year ended December 31, 2001, filed on April 1, 2002.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Executive
     Employment Agreement dated December 19, 2001- Hugh A. O'Reilly.
by reference to Exhibit 10.10 to the Annual Report on Form 10-KSB
for the year ended December 31, 2001, filed on April 1, 2002.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | Amended
and Restated Employment Agreement dated August 19, 2002 - Fred T. Busk,
III. Incorporated by reference to Exhibit 10.17 to our Registration Statement on
Form SB-2/A No. 2, File No. 333-87196, filed on November 4, 2002.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22.01 |  | List of
Subsidiaries.  Filed herewith.
|----- |  | --------------------------------------

|23.01 |  | Consent
of Grant Thornton LLP.  Filed herewith
|----- |  | ----------------------------------------------

|31.01 |  | CEO
and CFO Certification pursuant to Rule 13a-14(a)/15(d)-14(a). Filed herewith
|----- |  | --------------------------------------------------------------------------------

|32.01 |  | CEO and CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).  Filed herewith
|----- |  | ---------------------------------------------------------------------------------------------------------------------

|99.01 |  | Reconciliation of EBITDA to Net Loss.  Filed herewith
|----- |  | -----------------------------------------------------

(b) Reports
filed on Form 8-K.On November 20, 2003 we filed a Report on Form 8-K, filing with the
Commission a press release disseminated on November 13, 2003 relating to our financial
condition and results of operations for the period ended September 30, 2003

37

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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):

|                   | 2003 | 2002    
|------------------ | ---- | --------
|Audit Fees         |      | $470,000
|Audit-Related Fees |      | --      
|Tax Fees           |      | 37,000  
|All Other Fees     |      | --      
|                   |      |         
|Total              |      | $507,000
|                   |      |         
|                   |      |         

38

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Audit
Fees. This category includes the audit of the Companys annual
financial statements, review of financial statements included the Companys
Form 10-QSB Reports and services that 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 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.

Audit-Related
Fees. This category consists of assurance and related services by the
Companys auditors that reasonably related to the performance of the audit
or review of the Companys financial statements and are not reported above
under Audit Fees. For 2002, the services for the fees disclosed
under this category include accounting advice and due diligence services in
connection with an acquisition and assistance with our preparation of a selling
shareholder registration statement.

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.

# 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: March 30, 2004 | By: /s/ John Jenkins
        John Jenkins
        
Chief Executive Officer and Acting Chief Financial
        
Officer (Principal Financial Officer)
|-------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|Date: March 30, 2004 | By: /s/ Daniel B. Hemphill
        Daniel B. Hemphill
        
Controller (Principal 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: March 30, 2004 | /s/ Robert K. Brooks
        Robert K. Brooks,
Director
|-------------------- | -------------------------------------------------------

|Date: March 30, 2004 | /s/ John Jenkins
        John Jenkins,
Director
|-------------------- | -----------------------------------------------

|Date:________________ | Rodger
Krouse, Director
|--------------------- | -----------------------

|Date: March 30, 2004 | /s/ Marc Leder
        Marc Leder, Director
|-------------------- | -------------------------------------------

|Date: March 30, 2004 | /s/ Brendan T. Reilly
        Brendan T. Reilly,
Director
|-------------------- | ---------------------------------------------------------

|Date: March 30, 2004 | /s/ Clarence Terry
        Clarence Terry, Director
|-------------------- | ---------------------------------------------------

39

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