UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ~~SECURITIES EXCHANGE ACT OF 1934~~

~~For~~SECURITIES ~~the~~EXCHANGE ~~quarterly~~ACT ~~period~~OF ~~ended September 30, 2005~~1934

For the quarterly period ended June 30, 2006

o¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ~~SECURITIES EXCHANGE ACT OF 1934~~

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission File Number 0-16423

SAN Holdings, Inc.

(Exact name of registrant as specified in its charter)

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

9800 Pyramid Ct., Suite 130, Englewood, CO 80112-2694

(Address of principal executive offices)

(303) 660-3933

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 ~~during~~ during the preceding 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~~ requirements for the past 90ninety days. ~~Yes x No~~ o

~~Indicate~~Yes ~~by check mark whether the registrant is an accelerated filer (as defined in~~x ~~Rule 12b-2 of the Exchange Act). Yes o~~ No x ¨

AsIndicate ofby check mark whether the registrant is a large accelerated filer, an ~~November~~accelerated ~~18,~~filer ~~2005,~~or ~~95,811,278~~a ~~shares~~non-accelerated filer. See definition of ~~the~~“accelerated filer” ~~registrant’s~~and ~~common~~“large ~~stock,~~accelerated nofiler” ~~par~~in Rule 12b-2 of the Exchange Act ~~value~~(check ~~per~~one): Large accelerated ~~share,~~filer ~~were~~¨ Accelerated filer ~~outstanding.~~¨ Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 14, 2006, 95,811,278 shares of the registrant’s common stock, no par value per share, were outstanding.

SAN Holdings, Inc.

TABLE OF CONTENTS

Part I: FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets (unaudited)	3
	Consolidated Statements of Operations (unaudited)	4
	Consolidated Statements of Cash Flows (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24

Part I: FINANCIAL INFORMATION

Part II: OTHER INFORMATION
Item 1.	Financial Statements
Item 6.	Exhibits	25
	Consolidated Balance Sheets (unaudited)	2
Signatures		26
	Consolidated Statements of Operations (unaudited)	4
	Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited)	5
	Consolidated Statements of Cash Flows (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29

2Part II: OTHER INFORMATION

Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	31
Item 6.	Exhibits	31

Signatures		32

Part I. Financial Information

Item 1. Financial Statements

SAN Holdings, Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except for share data)

	September 30,			December 31,
	June 30,			December 31,
	2005			2004
	2006			2005
ASSETS				~~As restated~~
Current assets:
Cash and cash equivalents	$	--		$	~~486~~6
Accounts receivable, net of allowance for doubtful accounts of $138 and $140, respectively		11,484			13,097
Accounts receivable, net of allowance for doubtful accounts of $132 and $168, respectively		7,704			11,832
Inventories, net of valuation allowance of $52 and $137, respectively		398			467
Inventories, net of valuation allowance of $9 and $29, respectively		21			176
Deferred maintenance contracts		21,~~434~~886			2,~~914~~060
Prepaid expenses and other current assets		~~634~~1,050			~~512~~676
Total current assets		1410,~~950~~661			1714,~~476~~750
Property and equipment, net		~~757~~592			~~1,005~~673
Capitalized software, net		~~670~~1,125			~~194~~872
Goodwill		3222,~~008~~808			3222,~~008~~808
Intangible assets, net		1,~~841~~598			21,~~205~~736
Other assets		~~404~~368			~~384~~378
Total long-term assets		3526,~~680~~491			3526,~~796~~467
TOTAL ASSETS	$	5037,~~630~~152		$	5341,~~272~~217
LIABILITIES AND STOCKHOLDERS’ EQUITY
Lines of credit:
Wells Fargo Business Credit, Inc.	$	3,373		$	6,759
Harris N.A.		11,500			7,700
Accounts payable		12,532			12,453
Accrued expenses		2,175			2,651
Deferred revenue		3,293			3,942
Total current liabilities		32,873			33,505
Commitments and contingencies (Note 6)
Stockholders’ equity
Preferred stock; Series A; no par value; 8,000 shares authorized; -0- shares issued and outstanding		--			--
Preferred stock; Series B; no par value; 2,000 shares authorized; -0- shares issued and outstanding		--			--
Common stock; no par value, 200,000,000 shares authorized; 95,811,278 shares issued and outstanding		32,577			32,577
Warrants		7,260			5,691
Accumulated deficit		(22,080	)		(18,501	)
Total stockholders’ equity		17,757			19,767
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	50,630		$	53,272

SAN Holdings, Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except for share data)

	June 30,			December 31,
	2006			2005
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Line of credit - Wells Fargo Bank, National Association	$	2,124		$	7,292
Line of credit - Sun Solunet, LLC - related party		--			13,109
Accounts payable		9,046			8,610
Accrued expenses		2,313			2,560
Deferred revenue		2,670			2,805
Total current liabilities		16,153			34,376

Long-term debt - Sun Solunet, LLC - related party		5,443			--
Derivative financial instruments, at estimated fair value (Note 3):
Warrants issued to Sun Solunet, LLC and management - related parties		6,251			--
Warrants issued to outside investors		3,722			--
Total liabilities		31,569			34,376

Commitments and contingencies (Note 6)

Temporary equity
Series A, 3% cumulative convertible preferred stock, 400 shares designated and 277.6 and -0- shares issued and outstanding, respectively, (liquidation preference of $13,055) (Note 3)		9,078			--


Stockholders’ equity (deficit)
Preferred stock; no par value; 10,000,000 shares authorized; 400 shares designated		--			--
Common stock; no par value, 200,000,000 shares authorized; 95,811,278 shares issued and outstanding		32,577			32,577
Warrants and stock options		8,722			8,568
Accumulated deficit		(44,794	)		(34,304	)
Total stockholders’ equity (deficit)		(3,495	)		6,841

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	37,152		$	41,217

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

SAN Holdings, Inc.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	2006			2005			2006			2005
				As restated						As restated
Revenue
Product sales and vendor supplied services	$	1411,~~062~~037		$	159,~~209~~549		$	3522,~~846~~195		$	4121,~~536~~784
Consulting and engineering services		1,~~658~~164			~~895~~1,187			42,~~102~~474			2,~~897~~444
Maintenance services and maintenance contract fees		21,~~319~~705			12,~~861~~537			63,~~880~~509			54,~~619~~561
Total revenue		1813,~~039~~906			1713,~~965~~273			4628,~~828~~178			5028,~~052~~789
Cost of revenue
Product sales and vendor supplied services		108,~~834~~813			127,~~307~~534			2717,~~940~~609			3317,~~714~~148
Consulting and engineering services		~~1,057~~727			~~487~~726			21,~~529~~554			1,~~621~~472
Maintenance services and maintenance contract fees		1,~~569~~121			1,~~321~~827			42,~~795~~263			3,~~905~~226
Total cost of revenue		1310,~~460~~661			1410,~~115~~087			3521,~~264~~426			3921,~~240~~846
Gross profit		43,~~579~~245			3,~~850~~186			116,~~564~~752			106,~~812~~943
Operating expenses
Selling, general and administrative		4,338			3,709			11,425			11,721
Selling, engineering, general and administrative		4,839			3,544			9,197			7,105
Amortization of capitalized software		19			25			78			75
Depreciation and amortization of intangibles		226			278			486			586
Depreciation and amortization of intangibles		281			341			868			959
Total operating expenses		5,065			3,822			9,683			7,691
Total operating expenses		4,638			4,075			12,371			12,755
Loss from operations		(1,820	)		(636	)		(2,931	)		(748	)
Loss from operations		(59	)		(225	)		(807	)		(1,943	)
Other income (expense)
Interest expense		~~(412~~	)		~~(304~~	)		~~(1,164~~	)		~~(878~~	)
Charge for warrants issued to related party for debt guaranty		--			--			(1,569	)		--
Sun Solunet, LLC - related party		(146	)		(38	)		(409	)		(76	)
Other income (expense)		--			229			(4	)		121
Bank		(145	)		(367	)		(356	)		(676	)
Loss before income taxes		(471	)		(300	)		(3,544	)		(2,700	)
Total interest expense		(291	)		(405	)		(765	)		(752	)
Income tax benefit (expense)		(35	)		(8	)		(35	)		336
Charge for warrants issued to related party for debt guaranty		--			(520	)		--			(1,569	)
Net loss	$	(506	)	$	(308	)	$	(3,579	)	$	(2,364	)
Benefit (charge) for change in estimated fair value of derivative financial instruments - Warrants - related parties (Note 3)		1,191			--			(1,786	)		--
Basic and diluted net loss per share	$	(0.00	)	$	(0.00	)	$	(0.03	)	$	(0.03	)
Benefit for change in estimated fair value of derivative financial instruments - Warrants - outside investors (Note 3)		1,510			--			469			--
Weighted average shares outstanding - basic and diluted		109,338,532			95,811,278			107,043,358			81,750,781
Charge for fair value of Warrants in excess of net cash proceeds (Note 3)		(924	)		--			(924	)		--
Other income (expense)		--			1			(14	)		(4	)
Net loss	$	(334	)	$	(1,560	)	$	(5,951	)	$	(3,073	)
Deemed dividend related to beneficial conversion feature of convertible Series A Preferred Stock (Note 3)		--			--			(4,539	)		--
Net loss available to common stockholders	$	(334	)	$	(1,560	)	$	(10,490	)	$	(3,073	)
Basic and diluted net loss per share	$	(0.00	)	$	(0.01	)	$	(0.09	)	$	(0.03	)
Weighted average shares outstanding - basic and diluted		115,878,022			107,895,625			115,878,022			105,876,751

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

SAN Holdings, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

(In thousands, except share data)

	Common Stock				Warrants and options		Accumulated Deficit			Total Stockholders’ Equity (Deficit)
	Shares		Amount

Balances, January 1, 2006		95,811,278	$	32,577	$	8,568	$	(34,304	)	$	6,841

Beneficial conversion feature of convertible Series A Preferred Stock								(4,539	)		(4,539	)

Share-based compensation expense						72					72

Net loss for the period								(5,617	)		(5,617	)

Balances, March 31, 2006		95,811,278		32,577		8,640		(44,460	)		(3,243	)

Share-based compensation expense						82					82

Net loss for the period								(334	)		(334	)

Balances, June 30, 2006		95,811,278	$	32,577	$	8,722	$	(44,794	)	$	(3,495	)

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

SAN Holdings, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine months ended September 30,
	Six months ended June 30,
	2005			2004
	2006			2005
				As restated
Cash flows from operating activities:
Net loss	$	(35,~~579~~951	)	$	(23,~~364~~073	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		~~946~~649			~~1,034~~628
Write off of capitalized software development costs		99			--
Write-off of capitalized software development costs		--			52
Charge for warrants issued to related party for debt guaranty		1,569			--
Share-based compensation		154			--
Loss on disposals of property and equipment		--			113
Charge for warrants issued to related party for debt guaranty		--			1,569
Charge for change in estimated fair value of derivative financial instruments - Warrants - related parties (Note 3)		1,786			--
Benefit for change in estimated fair value of derivative financial instruments - Warrants - outside investors (Note 3)		(469	)		--
Charge for fair value of Warrants in excess of net cash proceeds		924			--
Changes in operating assets and liabilities:
Accounts receivable		14,~~613~~128			(12,~~732~~471	)
Inventories		88155			~~605~~113
Deferred maintenance contracts		~~480~~174			~~157~~243
Prepaid expenses and other current assets		(~~122~~374	)		~~282~~(535	)
Other assets		(2024	)		(~~253~~19	)
Accounts payable		79436			(701,384	)
Accrued expenses		(~~476~~247	)		(~~539~~559	)
Deferred revenue		(~~649~~135	)		~~(225~~91	)
Net cash provided by (used in) operating activities		281,206			(~~2,992~~403	)
Cash flows from investing activities:
Purchase of property and equipment, net		(~~275~~233	)		(~~303~~142	)
Capitalized software costs		(~~653~~416	)		--(497	)
Net cash used in investing activities		(~~928~~649	)		(~~303~~639	)
Cash flows from financing activities:
Net borrowings on line of credit - Harris N.A.		3,800			1,500
Issuance of convertible Series A Preferred Stock, net of issuance costs		4,271			--
Net payments on line of credit - Wells Fargo Business Credit		(3,386	)		(1,442	)
Net payments on line of credit - Wells Fargo Bank, National Association		(5,168	)		(3,171	)
Net cash provided by financing activities		414			58
Net borrowings on line of credit - Sun Solunet, LLC - related party		334			--
Net decrease in cash and cash equivalents		(486	)		(3,237	)
Net borrowings on line of credit - Harris N.A.		--			3,800
Cash and cash equivalents at beginning of period		486			3,792
Net cash provided by (used in) financing activities		(563	)		629
Cash and cash equivalents at end of period	$	--		$	555
Net decrease in cash and cash equivalents		(6	)		(413	)
Cash and cash equivalents at beginning of period		6			486
Cash and cash equivalents at end of period	$	--		$	73
Supplemental disclosure of other cash flow information:
Interest paid	$	~~1,125~~441		$	~~818~~684
Supplemental disclosure of non-cash investing and financing activities:
Transfer of inventory to property and equipment	$	19		$	296
Conversion of Sun Solunet, LLC debt to convertible Series A Preferred Stock	$	8,000		$	--
Allocation of proceeds from Series A Preferred Stock to Warrants issued to:
- Sun Solunet, LLC and management - related parties		4,465			--
- outside investors		4,191			--

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

SAN Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying consolidated financial statements of SAN Holdings, Inc. (“SANZ,” the “Company” or “we”) and its wholly-owned subsidiary, SANZ Inc., and its wholly-owned subsidiary, Solunet Storage, Inc. (“Solunet Storage”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements, and reflect all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation in accordance with US GAAP. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full year. These consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2004~~ 2005, as amended (the “~~2004~~2005 Annual Report on Form 10-K”)~~, except as regards to certain financial information that is being restated for the year ended December 31, 2004, as discussed below~~. As a result of the restatement, the Company has determined that the previously issued 2004 and 2005 financial statements should no longer be relied upon until amendments thereof are filed with the SEC.

The financial statements and other financial information reported in this Form 10-Q reflect the effects of the 2004 restatements.

Restatement

During the September 2005 quarter, we initiated a project to prepare stand-alone financial statements for audit of our EarthWhere™ (“EarthWhere”) business. We believe that this is an important step in further supporting the growth opportunities of that business. Beginning in 2003 and as further discussed in Note 7, the Company capitalized certain software development costs related to its EarthWhere geospatial imaging software in accordance with Statement of Financial Accounting Standard No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,” (“SFAS 86”). As all of the Company’s capitalized software costs pertain to the EarthWhere business, such costs are considered to be material to the total assets of that business unit, but were not considered material to the total assets of the Company as a whole as of December 31, 2003 or December 31, 2004. As we undertook this project, we determined that the assumptions and evidential matter that the Company had used in capitalization of software development costs during 2003 and 2004 did not provide sufficient “contemporaneous documentation” to support capitalization as required in this context.

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

The Company intends to file restated financial statements on Form 10-K/A for the year ended December 31, 2004 and restated 2004 and 2005 interim financial statements on Form 10-Q/A for each of the quarters ended March 31, 2005 and June 30, 2005 to correctly report comparative 2004 financial information and the effects of this restatement on the March 31, 2005 and June 30, 2005 balance sheets.

The restatement is expected to reflect the expensing of certain software development costs in 2004 related to the Company’s proprietary software that were capitalized on the Company’s previously reported financial statements for the 2004 periods referred to above. The Company does not expect to restate its 2003 financial statements due to the immateriality of the impact to both 2003 and 2005. An (unaudited) table presenting the effects of the expected restatements to the Company’s financial statements is set forth below:

Statements of Operations Data
(in thousands, except per share data)	As reported			Adjustment			As restated
For the year ended December 31, 2004
Selling, general and administrative expenses	$	14,987		$	456		$	15,443
Amortization of capitalized software		91			9			100
Loss from operations		(3,044	)		(465	)		(3,509	)
Net loss		(6,285	)		(465	)		(6,750	)
Basic and diluted net loss per share	$	(0.07	)	$	(0.01	)	$	(0.08	)
For the nine months ended September 30, 2004
Selling, general and administrative expenses	$	11,467		$	254		$	11,721
Amortization of capitalized software		110			(35	)		75
Loss from operations		(1,724	)		(219	)		(1,943	)
Net loss		(2,145	)		(219	)		(2,364	)
Basic and diluted net loss per share	$	(0.03	)	$	(0.00	)	$	(0.03	)
For the three months ended September 30, 2004
Selling, general and administrative expenses	$	3,607		$	102		$	3,709
Amortization of capitalized software		17			8			25
Loss from operations		(115	)		(110	)		(225	)
Net loss		(198	)		(110	)		(308	)
Basic and diluted net loss per share	$	(0.00	)	$	(0.00	)	$	(0.00	)

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

See further discussion of the restatement impact in Note 7.

Reclassifications

Certain reclassifications have been made to the prior periods’ balances to conform to current period presentations.

Significant Accounting Policies

The Company prepares its financial statements in accordance with US GAAP. The accounting policies most fundamental to understanding our financial statements are those relating to recognition of revenue, to the Company’s use of estimates, to the capitalization of software development costs and those relating to the impairment testing of goodwill and intangible assets. We describe these significant accounting policies in Note 4 to our 2005 Annual Report on Form 10-K.

As a result of the Company’s private placement transaction that took place in three closings in March, April and May 2006 (“Private Placement”), the Company has determined that the accounting for and valuation of financial instruments, including preferred stock, warrants, derivative financial instruments and other potential derivatives, which relate to the issuance of the Company’s Series A Preferred Stock and Warrants (as defined in Note 3 below) issued in the Private Placement, should be included in the Company’s critical accounting policies. As further described in Note 3, the Company evaluates its equity instruments as potential derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,” Emerging Issues Task Force (“EITF”) No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” EITF 05-4, “The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to Issue No. 00-19,” EITF Topic D-98, “Classification and Measurement of Redeemable Securities,” EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” and the SEC Staff comments in its “Current Accounting and Disclosure Issues,” dated December 1, 2005.

NOTE 2 - FINANCIAL CONDITION

The accompanying consolidated financial statements have been prepared in conformity with US GAAP (except with regard to omission of certain disclosures within interim financial statements, as permitted by the SEC), which contemplate our continuation as a going concern. However, we have incurred substantial losses from operations since inception, including a net loss of $615.8 million,~~750,000~~ which included a $9.2 million charge for ~~the~~goodwill impairment, for ~~year~~the year ended December 31, ~~2004~~2005, and a net loss of $~~3,579,000~~6.0 million for the ~~nine~~six months ~~ended~~ ~~September~~ended June 30, ~~2005~~2006, which included non-cash charges totaling $2.2 million for the change in estimated fair value of derivative financial instruments (the Warrants issued in the March, April and May closings of the Private Placement), and for the fair value of derivative financial instruments (Warrants) issued in excess of net cash proceeds. In addition, as of ~~September~~June 30, ~~2005~~2006, we have negative working capital (current liabilities in excess of current assets) of $5.5 ~~$17,923,000~~million. Accordingly, as of ~~September~~June 30, ~~2005~~2006, the recoverability of a major portion of the recorded asset amounts, including “Goodwill,” is dependent on our continuing operations, which in turn is dependent on our ability to maintain ~~maintain~~ our current financing arrangements and our ability to become profitable in our future operations. Our consolidated financial statements do not include any ~~any~~ adjustments relating to the recoverability and classification of recorded asset ~~asset~~ amounts or amounts and classification of liabilities that might be necessary ~~necessary~~ if we were unable to continue as a going concern.

As of ~~September~~June 30, ~~2005~~2006, the Company had $12.48 million of undrawn availability on its borrowing facility with Wells Fargo ~~Business Credit~~Bank, ~~Inc.~~National Association (“Wells Fargo”). ~~The~~ ~~Wells~~This ~~Fargo credit~~ facility, combined with ~~the~~open ~~Harris N.A. (formerly known as Harris Trust and Savings Bank) (“Harris”) subordinated~~ credit facility and the guaranty on the Harris facility provided by Sun Capital Partners II, LP (“Sun Capital II”), an affiliate of the Company’s majority shareholder, Sun Solunet LLC (“Sun Solunet”) as well as credit lines with suppliers, ~~are~~is anticipated to provide continued liquidity. ~~However,~~Our ~~our~~ ability to borrow under the Wells Fargo ~~Fargo~~ facility is subject to maintaining our accounts receivable balance at current ~~current~~ levels, as well as complying with the financial covenants we have made to ~~the lender, and our ability~~ to ~~borrow under~~ the ~~Harris credit facility is~~ ~~dependent on the continued Sun Capital II guaranty~~lender. If we are unable to comply with our financial covenants to Wells Fargo, the facility could cease to be available to us. During the June and the September 2005 quarters, the Company was not in compliance with a minimum availability covenant required for cash transfers from Sanz Inc. to Solunet Storage. This violation occurred on one such transfer each in June and in September 2005. Subsequent to the June and September 2005 quarters, the Company received a waiver from Wells Fargo for each of these periods. As of September 30, 2005, the Company was in compliance with all of the other financial covenants under the Wells Fargo credit agreement. See further discussion of the Wells Fargo credit facility in Note 5.

AsAt ofJune ~~September~~ 30, ~~2005~~2006, the Company ~~had~~also anheld a $~~11.~~5 ~~million credit facility with Harris which is unsecured but guaranteed by Sun Capital II~~. ~~In June 2005, this facility was increased from $10.~~0 million tothree-year ~~$11.5~~term ~~million,~~loan and in October 2005, was increased from $11.5 million to $13 million. While this credit facility is in the form of a demand note, it expires in February 2006, unless called earlier by the lender. The (“Sun ~~Capital~~ ~~II guaranty also expires in February 2006. Additionally, Sun Capital~~Term ~~II has~~Loan”) ~~agreed that, upon the written request of SANZ, it will provide SANZ~~ with ~~sufficient~~ ~~funds~~its tomajority ~~repay the debt outstanding under the credit facility in the event that Harris requires repayment of such debt or~~shareholder, at Sun ~~Capital II’s election~~Solunet, ~~pay~~LLC ~~the outstanding debt directly to Harris; provided that in no event will~~ (“Sun ~~Capital II’s obligation exceed the amount of Sun Capital II’s guaranty; this agreement expires on December 31, 2005~~Solunet”). See further discussion of the ~~Harris~~Sun ~~credit~~Term ~~facility~~Loan inborrowing ~~Note~~terms 5.in Note 6.

InNOTE ~~October~~3 ~~2005, SANZ Inc., the Company’s wholly~~-~~owned~~ ~~subsidiary,~~PRIVATE executed a security agreement with Avnet Partner Solutions, a division of AVNET, Inc. (“Avnet”), its largest supplier, granting a security interest in all of its assets. Pursuant to the security agreement, the Company’s indebtedness with Avnet is secured, except for $1,000,000. The security interest granted to Avnet is subordinate to the security interest granted to Wells Fargo by the Company in connection with the Company’s principal borrowing facility with Wells Fargo and to evidence the subordination, Avnet and Wells Fargo entered into an intercreditor agreement. PLACEMENT

~~NOTE~~On 3March 2, -2006, ~~STOCK~~on April 18, 2006 and on May 4, 2006 (the “Closing Dates”), the Company completed three closings of the Private Placement, dated and effective as of February 28, 2006, April 18, 2006 and May 4, 2006, respectively, with third-~~BASED~~party ~~COMPENSATION~~investors, Company executive management (collectively, the “Purchasers”) and Sun Solunet, its majority shareholder. In consideration for net proceeds of approximately $12.3 million, comprised of $4.3 million of cash, net of placement agent and legal fees of approximately $784,000, and the conversion of $8.0 million of $14.0 million in debt owed by the Company under its credit facility with Sun Solunet (the “Sun Loan”), as assignee of Harris N.A. (formerly known as Harris Trust and Savings Bank) (“Harris”), the Company issued a total of 277.6 units (“Units”), each Unit consisting of:

~~As permitted~~(a) ~~under~~one ~~Statement~~share of ~~Financial~~the ~~Accounting~~Company’s ~~Standards~~newly ~~No.~~designated ~~123,~~convertible ~~“Accounting for~~series ~~Stock-Based~~A ~~Compensation”~~preferred ~~(“SFAS 123”)~~stock, ~~the~~no ~~Company~~par ~~accounts for stock-based compensation using the intrinsic~~ value ~~method~~per inshare ~~accordance with Accounting Principles Board Opinion No. 25,~~ (“~~Accounting~~Series ~~for~~A ~~Stock~~Preferred ~~Issued to Employees~~Stock” ~~(“APB 25”~~) ~~and~~initially ~~related~~convertible ~~interpretations.~~into ~~Accordingly~~333,333 noshares ~~compensation~~of ~~expense has been recognized in connection with~~ the ~~grant~~Company’s ofcommon stock ~~options~~at ~~to employees and directors during the periods presented, as all options granted had~~ an exercise price ~~equal to the market value~~ of ~~the underlying stock at the date of grant~~$0. ~~The~~15 ~~following table illustrates the effect on net loss and loss~~ per share, ~~if the Company~~no ~~had~~par ~~applied the fair~~ value ~~recognition~~per ~~provisions of SFAS 123:~~share;

	Three Months Ended September 30,						Nine months Ended September 30,
(In thousands, except for per share data)	2005			2004			2005			2004
				As restated						As restated
Net loss, as reported	$	(506	)	$	(308	)	$	(3,579	)	$	(2,364	)
Deduct, total stock-based compensation expense determined under fair-value based method, net of related tax effects		--			(99	)		(183	)		(330	)
Pro forma net loss	$	(506	)	$	(407	)	$	(3,762	)	$	(2,694	)
Basic and diluted net loss per share:
As reported	$	(0.00	)	$	(0.00	)	$	(0.03	)	$	(0.03	)
Pro forma	$	(0.00	)	$	(0.00	)	$	(0.04	)	$	(0.03	)

(b)

a warrant to purchase 166,667 shares of common stock exercisable for five years from the Closing Date at an initial exercise price of $0.30 per share;

(c)

a warrant to purchase 166,667 shares of common stock exercisable for five years from the Closing Date at an initial exercise price of $0.50 per share (together with the warrants described in clause (b) above, the “Warrants”).

The Company has used the cash proceeds from the Private Placement for general working capital needs and funding the EarthWhere segment’s losses for the six months ended June 30, 2006.

In connection with the Units issued by the Company on the Closing Dates in the Private Placement, and as part of the consideration paid by the Company to the placement agent, the Company issued to the placement agent a warrant to purchase approximately 1,685,000 shares of its common stock at an exercise price of $0.15 per share, on substantially the same terms as the Warrants.

Also on March 2, 2006, the Company paid down approximately $1.0 million of the outstanding debt owed under the Sun Loan, resulting in total outstanding debt owed by the Company under the Sun Loan of $5.0 million plus accrued interest of $296,000 from November 23, 2005, the inception of the Sun Loan. As a result thereof, on March 2, 2006, the Company and Sun Capital Partners II, LP (“Sun Capital II”), an affiliate of Sun Solunet, entered into a termination letter (the “Credit Support Termination Agreement”) to the letter agreement, dated as of March 31, 2003, as amended on November 23, 2005, by and between Sun Capital II and the Company, acknowledged and agreed to by Sun Solunet (the “Credit Support Agreement”). The Credit Support Termination Agreement includes the following provisions, among others:

~~NOTE 4~~(a) The Company and Sun Solunet agreed to decrease the Company’s borrowing availability under the Sun Loan from $14.0 million to $5.0 million and to modify the Sun Loan from a revolving line of credit to a three-year ~~EARNINGS~~term loan (~~LOSS~~without a demand note stipulation), ~~PER~~which ~~SHARE~~will be due in March 2009.

~~Basic earnings~~ (~~loss~~b) ~~per~~The ~~share~~parties isagreed based on the weighted average number of common shares outstanding. In addition to common shares outstanding, and in accordance with Statement of Financial Standards No. 128, “Earnings per Share” (“SFAS 128”), any shares issuable for little or no cash consideration are considered outstanding shares and included in the calculation of weighted average number of common shares. Accordingly, for the three and nine months ended September 30, 2005, the weighted average number of common shares outstanding included 13,527,254 shares issuable under outstanding debt guaranty warrants that ~~were immediately~~Sun ~~exercisable~~Solunet ~~at $0.001 per share,~~ and ~~held by our majority shareholder,~~ Sun ~~Solunet.~~Capital ~~See~~II ~~Note~~have 5no ~~below~~additional ~~for~~lending ~~additional~~obligation ~~information~~to ~~regarding~~ the ~~debt guaranty warrants issued~~Company.

~~Diluted earnings~~ (~~loss~~c) ~~per~~The ~~share~~parties isterminated ~~computed using~~ the ~~weighted~~Credit ~~average~~Support ~~number~~Agreement ~~of common~~and ~~shares outstanding plus~~ the ~~number~~obligations of ~~common shares that would be issued assuming exercise or conversion of~~ all ~~potentially dilutive common shares. Warrants and options outstanding to purchase an aggregate of 43~~parties,~~053,685~~ ~~and 35,120,080~~including ~~shares of common stock as of September 30, 2005 and 2004, respectively, have been excluded from~~ the ~~diluted~~requirement ~~share calculations for the three-month and nine-month periods ending September 30, 2005 and 2004, respectively, as they were antidilutive as a result~~ of the ~~net~~Company ~~losses~~to ~~incurred for~~issue ~~those~~additional ~~periods.~~debt ~~Accordingly,~~guaranty ~~basic~~warrants ~~shares~~to ~~equal~~Sun ~~diluted shares for all periods presented~~Solunet.

~~NOTE~~On 5April 19, -2006, ~~DEBT~~the Company and Sun Solunet executed an amendment to the Sun Loan agreement, which formalized the agreement with respect to the Sun Loan that had been previously made in the Credit Support Termination Agreement on March 2, 2006.

~~Wells~~Pursuant ~~Fargo~~to ~~Line~~the ofPrivate ~~Credit~~Placement, Sun Solunet agreed in a letter to third-party investors to the following:

~~In March 2005,~~• ~~the~~To ~~Company~~cause ~~amended~~each ~~its $12.0 million credit facility with Wells Fargo. As part~~ of the ~~amendment,~~directors ~~Wells~~of ~~Fargo waived~~ the Company’s ~~non-compliance~~who ~~on certain~~is ~~financial~~employed ~~covenants~~by asor ofwho ~~December~~is ~~31,~~an ~~2004.~~officer Inof ~~addition,~~Sun ~~Wells~~Solunet ~~Fargo reset~~ (the ~~following~~“Sun ~~financial covenant requirements effective January 1, 2005: (1~~Directors”) ~~minimum net income (loss) on a year~~ to ~~date basis~~, ~~calculated~~as ~~quarterly; (2) minimum~~soon ~~net~~as ~~worth~~reasonably ~~plus~~practicable ~~“subordinated~~after ~~debt” (measured in~~ the ~~aggregate, with~~Company ~~amounts~~files ~~loaned~~its toAnnual ~~SANZ~~Report ~~Inc.~~on ~~and~~Form ~~its wholly~~10-~~owned~~K ~~subsidiary,~~for ~~Solunet Storage, (~~the ~~Company’s~~fiscal ~~borrowers)~~year ~~from~~ended ~~SANZ~~December ~~being defined as subordinated debt)~~31, ~~calculated on a monthly basis; (3) minimum availability~~2005, ~~calculated monthly;~~take ~~(4)~~steps ~~capital~~reasonably ~~expenditure~~necessary ~~limit,~~to ~~calculated~~call ~~on an annual basis; and (5)~~ a ~~minimum~~ ~~cash~~shareholder ~~infusion~~meeting ~~from~~to ~~SANZ~~vote ~~or an outside source if SANZ Inc. and its subsidiary, Solunet Storage, generate a net loss in a given quarter and have generated a net loss~~ on ~~a year to date basis at that time, in an amount equal to~~ the ~~lesser~~measures ofdescribed ~~the quarterly net loss or the year to date net loss.~~below;

~~Additionally, the~~• ~~amended~~To ~~credit~~vote ~~agreement~~all ~~with~~of ~~Wells~~its ~~Fargo~~shares ~~includes~~of asthe anCompany’s ~~additional borrower,~~common ~~Solunet Storage~~stock, ~~which~~no inpar ~~March 2005 became a wholly-owned subsidiary of SANZ Inc.~~value, ~~itself~~entitled ato ~~wholly-owned~~vote ~~subsidiary~~at ~~of SANZ. As part of~~ the ~~co-borrowing~~ ~~arrangement~~shareholder ~~with~~meeting ~~SANZ~~in ~~Inc.~~favor ~~and Solunet Storage, each~~ of ~~the borrowers has~~ a ~~separate~~reverse ~~borrowing~~stock ~~base;~~split ~~however,~~of ~~total borrowings under~~ the ~~facility~~ ~~may~~Company’s ~~not~~common ~~exceed~~stock ~~$12,000,000.~~on ~~Additionally,~~whatever ~~each~~basis ~~entity~~ is ~~required to guaranty~~determined ~~each~~by ~~other’s debt under~~ the ~~borrowing~~board ~~facility.~~of ~~Cash~~directors ~~transfers~~of ~~from SANZ~~the ~~Inc.~~Company toand ~~Solunet~~an ~~Storage~~increase ~~are~~in ~~limited to~~ the ~~funding of Solunet Storage~~Company’s ~~operating~~ ~~expenses,~~authorized ~~subject~~capital toin an ~~annual~~amount ~~limit,~~determined ~~and~~by ~~to a minimum availability on~~ the ~~date~~board of ~~any~~directors, ~~such~~to ~~transfer. During the~~increase ~~June and~~ the ~~September~~authorized ~~2005~~capital ~~quarters,~~of the Company ~~was not~~ in ~~compliance with the~~an ~~minimum~~amount ~~availability~~sufficient ~~covenant~~to ~~required~~provide for ~~such~~the ~~cash~~issuance ~~transfers.~~of ~~This violation~~all ~~occurred~~of onthe ~~one~~shares ~~cash~~of ~~transfer~~the ~~each in June and in September 2005. The~~ Company’s ~~subsequently~~common ~~received~~stock athat ~~waiver~~is ~~from~~issuable ~~Wells~~upon ~~Fargo~~exercise ~~for each~~ of ~~these periods. As of September 30,~~ the ~~Company~~Warrants ~~was~~and inconversion ~~compliance with all~~ of the ~~other financial~~ ~~covenants~~Series ~~under~~A ~~the~~Preferred ~~Wells Fargo credit agreement.~~Stock;

~~Also as part~~• ofTo ~~the~~cause ~~amended agreement and effective January 1, 2005, Wells Fargo increased~~ the ~~interest~~Sun ~~rate~~Directors ~~on our borrowings~~ to ~~prime~~take ~~plus~~steps ~~5.0%,~~reasonably annecessary ~~increase of three~~to ~~points.~~cause ~~This~~certain ~~rate~~governance ischanges ~~subject~~ to ~~potential~~the ~~decreases~~Company, asincluding ~~permitted~~but ~~by Wells Fargo,~~not ~~based~~limited onto ~~SANZ~~(i) ~~Inc.~~reducing ~~and~~the ~~its~~size ~~subsidiary,~~of ~~Solunet~~the ~~Storage,~~board ~~achieving~~of ~~certain net~~directors ~~income~~of ~~(loss) levels during 2005. For~~ the ~~March~~Company ~~2005~~to ~~quarter,~~a ~~SANZ~~number ~~Inc. and Solunet~~equal ~~Storage~~to ~~achieved~~or aless ~~minimum~~than ~~net~~9 ~~loss~~directors; ~~threshold~~(ii) ~~and~~increasing the ~~borrowing~~size ~~rate on~~ of the ~~facility~~Audit ~~was~~Committee ~~reduced~~ to ~~prime~~include ~~plus~~at ~~4.0%,~~least ~~effective~~three ~~May~~members 1,that ~~2005.~~must ~~SANZ Inc. and~~all ~~Solunet~~be ~~Storage~~independent ~~did~~(but ~~not~~permitting ~~achieve~~an aadditional ~~minimum~~member ~~net~~that ~~loss~~is ~~threshold~~not ~~for~~independent); ~~the~~(iii) ~~six months~~to ~~ended~~require ~~June~~that ~~30,~~future ~~2005~~decisions orrelating ~~for~~to the ~~nine~~compensation ~~months~~of ~~ended~~the ~~September~~executive ~~30,~~officers ~~2005, and as~~of ~~such,~~the ~~effective~~Company ~~July~~be 1,recommended ~~2005,~~to the ~~interest~~board ~~rate~~of ondirectors ~~the~~for ~~Company’s~~determination ~~borrowings increased~~by toeither ~~prime~~a ~~plus~~majority ~~5.0%~~of ~~from~~the ~~prime~~independent ~~plus~~directors ~~4.0%.~~of ~~Our borrowing~~the ~~rate~~Company, onor ~~this~~a ~~facility~~compensation atcommittee ~~September~~comprised ~~30,~~solely ~~2005~~of ~~was~~independent ~~prime plus 5~~directors.~~0%, or 11.75%.~~

Sun Solunet’s obligations under the letter terminate on the earliest to occur of (a) a written agreement of at least 66% of Purchasers other than Sun Solunet, (b) the five year anniversary of the letter, (c) the date on which the Purchasers other than Sun Solunet collectively own less than 25% of the securities they purchased on the Closing Date and (d) the date on which the Sun Directors no longer constitute a majority of the directors of the Company.

At our annual meeting of shareholders held on July 28, 2006 (the “Annual Meeting”), subsequent to the period covered by this Quarterly Report, our shareholders voted and approved the following proposals:

•

An increase in the authorized capital of the Company from 200,000,000 to 400,000,000 shares. An amendment to our Articles of Incorporation implementing this increase was filed and became effective on July 31, 2006.

•

A reverse stock split of the outstanding common stock within the range of 1 for 10 shares and 1 for 25 shares, to be determined by the board of directors.

Further details of this vote and other matters approved at the Annual Meeting are included below in Part II—Item 4, “Submission of Matters to a Vote of Security Holders.”

Preferred Stock

Also in connection with the Private Placement, the Company designated 400 shares of previously undesignated authorized preferred stock as a new series of Series A Preferred Stock. On March 2, 2006, the Company filed Articles of Amendment that included the Designation of Series A Preferred Stock (the “Certificate”) with the Secretary of State of the State of Colorado. Upon filing, the Certificate became a part of the Company’s Articles of Incorporation, as amended. The Certificate sets forth the voting powers, designation, conversion rights, preferences, limitations, restrictions and relative rights of the Series A Preferred Stock and the holders thereof.

~~Harris~~The Series ~~Credit~~A ~~Facility~~Preferred Stock has limited voting rights, including those required by Colorado law and in circumstances in which the Company proposes to: (a) alter or change the designations, powers, preferences or rights, or the qualifications, limitations or restrictions of the Series A Preferred Stock; (b) authorize, create or issue any class or series of capital stock (or securities convertible into or exchangeable for such capital stock) ranking senior to or pari passu with the Series A Preferred Stock; (c) pay dividends on capital stock ranking junior to the Series A Preferred Stock to the extent that all accrued but unpaid dividends have not been paid or are not contemporaneously paid to the holders of the Series A Preferred Stock; (d) take other actions, including but not limited to amending the Company’s charter documents that would adversely affect the holders of the Series A Preferred Stock; or (e) reclassify shares of the Company’s capital stock that is junior to the Series A Preferred Stock that would adversely affect the holders of Series A Preferred Stock or that would rank senior to or pari passu with the Series A Preferred Stock.

OnThe ~~February~~Series ~~16,~~A ~~2005,~~Preferred weStock ~~entered~~is ~~into~~perpetual aand ~~revised~~carries ~~credit~~a ~~agreement~~3% ~~with~~cumulative ~~Harris~~dividend, ~~which increased~~payable ~~our~~in ~~availability~~shares ~~by $2.0 million, for a total~~ of ~~$10.0~~the ~~million, and~~Company’s ~~consolidated~~common ~~two~~stock ~~credit~~based ~~lines~~on ~~(one maintained by Solunet Storage and one maintained by SANZ) into one facility with SANZ as~~ the ~~sole~~market ~~borrower~~price ~~and guaranteed by Sun Capital II, an affiliate~~ of ~~our majority shareholder, Sun Solunet. On June 3, 2005, we entered into a revised credit agreement with Harris, which increased~~ the ~~facility from $10.0 million to $11.5 million. On~~ ~~October~~Company’s 4,common ~~2005,~~stock wecalculated ~~executed~~as anset ~~additional~~forth ~~amendment~~in to the ~~Harris credit agreement, which increased the facility from $11~~Certificate.5 ~~million~~At toJune $13.0 million. This facility is unsecured, is not limited by availability under a borrowing base, does not require the maintenance of specified financial covenants, and as of September 30, ~~2005, bore interest at a rate of prime plus 1.0%, or 7.75%.~~ ~~While the Harris facility is a demand note, under the revised agreement it has been extended to February 16,~~ 2006, ~~unless called earlier by~~ the ~~lender. The~~ ~~Sun Capital~~Company IIhad ~~guaranty also expires in February 2006. Additionally~~accumulated, ~~Sun~~but ~~Capital II has~~had ~~agreed~~not ~~that,~~declared ~~upon~~or ~~the written request of SANZ~~paid, ~~it will provide SANZ with sufficient funds to repay the debt outstanding under the credit facility in the event that Harris requires repayment of such debt or~~$153, ~~at Sun Capital II’s~~000 ~~election,~~related ~~pay the outstanding debt directly~~ to ~~Harris; provided that in no event will Sun Capital II’s obligation exceed the amount of Sun Capital II’s guaranty;~~ this ~~agreement expires on December 31, 2005~~dividend.

~~Other~~The ~~financing~~Series A Preferred Stock does not contain a mandatory redemption feature, but carries registration rights that require the Company to remunerate liquidated damages (2% per month in the form of cash) to the investors in the event of failing to register the shares of common stock that the Company is required to issue upon conversion of the Series A Preferred Stock (and as dividends) within 150 days of the Closing Dates (with respect to the shares of Series A Preferred Stock issued on such date) and, with certain exceptions, to maintain said registration of the shares of the Company’s common stock underlying the Series A Preferred Stock for so long as the Series A Preferred Stock remains outstanding.

InBecause ~~October~~the ~~2005,~~Series ~~SANZ~~A ~~Inc.~~Preferred ~~executed~~Stock adoes ~~security~~not ~~agreement~~have ~~with~~a ~~Avnet,~~mandatory ~~its~~redemption ~~largest~~feature, ~~supplier,~~and because ~~granting~~there ais ~~security~~no ~~interest~~redemption infeature ~~all~~that ofis ~~its~~not ~~assets.~~solely ~~Pursuant~~within to the ~~security~~ ~~agreement, the~~ Company’s control, ~~indebtedness~~in accordance with ~~Avnet~~EITF isTopic ~~secured~~D-98, ~~except~~we ~~for~~determined that the Series ~~$1,000,000.~~A Preferred ~~The~~Stock ~~security~~was ~~agreement~~more ~~specifies~~akin ~~events~~to ofequity ~~default~~than debt. However, ~~including~~based ~~but~~on the ~~not~~beneficial ~~limited~~conversion tofeature, ~~any~~as ~~failure~~described bybelow, and in accordance with EITF 00-27, we determined that the ~~Company~~Series toA ~~maintain~~Preferred ~~total~~Stock ~~cash~~should ~~and~~be ~~customer~~classified ~~receivables~~as temporary ~~(less~~equity ~~indebtedness~~because, at the time of its issuance, the Company todid ~~Wells~~not have sufficient ~~Fargo)~~authorized inshares anof ~~amount~~its common stock, and therefore the Series ~~that~~A isPreferred atStock ~~least~~did ~~equal~~not tomeet all of the ~~amount~~requirements for equity classification under EITF 00-19. Based on the increase of ~~outstanding~~our ~~trade~~authorized ~~accounts~~shares ~~payable~~at toour ~~Avnet,~~Annual ~~less~~Meeting ~~$2,000,000.~~on ~~The~~July ~~security~~28, ~~interest~~2006, ~~granted~~we toconcluded ~~Avnet~~that isthe ~~subordinate~~criteria tofor ~~the~~equity ~~security~~classification ~~interest~~of ~~granted~~the toSeries ~~Wells~~A ~~Fargo~~Preferred byStock ~~the~~as ~~Company~~stipulated in ~~connection~~EITF ~~with~~00-19 ~~the Company’s~~(sufficient ~~principal~~authorized ~~borrowing~~shares ~~facility~~in ~~with~~order ~~Wells~~to ~~Fargo~~net-share ~~and~~or tophysically ~~evidence~~settle ~~the~~all ~~subordination~~issued and outstanding convertible preferred stock, ~~Avnet~~warrants and ~~Wells~~other commitments) ~~Fargo~~was ~~entered~~met ~~into~~as anof ~~intercreditor~~that ~~agreement~~date.

~~NOTE~~Accordingly, 6effective -July ~~COMMITMENTS~~28, ~~AND~~2006, ~~CONTINGENCIES~~we concluded that the Series A Preferred Stock should be reclassified from temporary to permanent equity.

~~Debt~~Beneficial ~~Guaranty~~Conversion ~~Warrants~~Feature

AsEach ~~discussed~~share inof ~~Notes~~the 2Series ~~and~~A 5Preferred ~~above~~Stock is initially convertible into 333,333 shares of the ~~Harris~~Company’s ~~credit~~common ~~facility~~stock, ~~term~~and ~~extends~~the ~~until February~~conversion ~~2006.~~ratio ~~Pursuant~~with torespect ato ~~letter agreement~~the ~~dated~~securities ~~March~~issued ~~31,~~in ~~2003~~the ~~(“Credit~~Private ~~Support~~Placement ~~Agreement”)~~is ~~provided~~based on a common stock price byof ~~Sun~~$0.15 ~~Capital~~per IIshare, anwhich ~~affiliate~~was ofless than the ~~Company’s~~closing ~~majority~~common ~~shareholder,~~stock ~~until~~price ~~the~~on each ~~Company~~of ~~reduces~~ the ~~guaranteed~~Closing ~~debt~~Dates. toWe ~~$3.0~~considered ~~million~~this orconversion ~~less,~~feature itto isbe ~~required~~a potential ~~to issue~~“embedded” derivative and the preferred stock ~~purchase~~to ~~warrants~~be ata an“host ~~exercise~~contract” ~~price~~as defined in SFAS 133, but concluded that the economic characteristics and risks of ~~$0.001 to~~ ~~Sun~~the ~~Solunet~~conversion ~~beginning~~feature onare ~~November~~clearly ~~16, 2004~~ and ~~continuing~~closely atrelated ~~six-month~~to ~~intervals~~the economic in characteristics and risks of the ~~future~~Series ~~(each~~A ~~May~~Preferred Stock, and ~~November).~~that ~~The~~the conversion ~~number~~feature ofshould ~~warrants~~not to be ~~issued~~separated isfrom the Series A Preferred Stock ~~dependent~~(host oncontract) ~~the~~and ~~amount~~should bynot ~~which~~be ~~the~~accounted ~~remaining~~for ~~guaranteed~~as ~~debt~~a ~~exceeds~~derivative ~~$3.0~~instrument ~~million,~~pursuant ~~according~~ to ~~formulas~~SFAS ~~applicable~~133. toWe ~~each~~accounted ~~such~~for ~~date,~~the asconversion ~~disclosed~~feature in accordance ~~our~~with ~~2004~~EITF ~~Annual~~98-5, ~~Report~~“Accounting onfor ~~Form~~Convertible ~~10-K.~~Securities ~~The~~With ~~issuance~~Beneficial ofConversion Features ~~these~~or ~~warrants~~Contingently ~~will~~Adjustable ~~result~~Conversion Features” and EITF 00-27, ~~in dilution~~“Application of ~~the~~Issue ~~other~~No. ~~shareholders~~98-5 ofto ~~the~~Certain ~~Company~~Convertible Instruments.”

AsFor ~~consideration for~~ the ~~Sun Capital II guaranty on the $2.0 million increase~~ ~~in the~~March ~~Harris~~2006 ~~credit~~closing ~~facility~~of inthe ~~February~~Private ~~2005,~~Placement (the ~~Company issued on~~ “March 23Closing”), ~~2005~~ awe ~~warrant to purchase 3,086,218 shares of our common stock with an exercise~~calculated ~~price of $0.001 per share to our majority shareholder, Sun Solunet. The number of shares underlying~~ the ~~warrant~~conversion ~~was~~feature ~~calculated~~in ~~using~~ the ~~formula~~amount ~~applicable to the~~of ~~November~~approximately ~~16, 2004 measurement (as if the~~ $210.0 million, ~~debt~~but ~~guaranty was~~under ~~in place~~EITF ~~as of November 16~~00-27, ~~2004).~~this ~~This~~amount ~~warrant~~ was ~~immediately~~limited ~~exercisable~~to ~~and resulted in approximately 3% dilution of~~ the ~~other~~net ~~shareholders~~proceeds of the ~~Company.~~March Closing ~~Based~~allocated onto the ~~number~~Series ofA ~~underlying~~Preferred ~~shares~~Stock ~~issued~~of ~~pursuant~~$4.5 tomillion ~~the~~as ~~warrant,~~calculated ~~the~~below. ~~Company~~Accordingly, we recorded in the ~~March~~conversion ~~2005~~feature ~~quarter~~as a ~~charge~~deemed ofdividend ~~$1.1 million, calculated~~to aspreferred ~~the~~stockholders ~~number~~in ~~of shares issued under~~ the ~~warrant~~amount ~~multiplied by the closing market price~~ of ~~SANZ’~~$4.5 ~~common stock on the issuance date~~million.

Pursuant to the Credit Support Agreement, on May 16, 2005, the Company became obligated to issue and issued to Sun Solunet a stock purchase warrant to purchase 2,244,522 shares of the Company’s common stock at an exercise price of $0.001 per share. This warrant was immediately exercisable upon issuance. The number of shares underlying this warrant represented approximately 2% of the Company’s outstanding common stock as of the issuance date and was calculated in accordance with the formula set forth in the Credit Support Agreement. Pursuant to the warrant issuance, the Company recorded in May 2005 a charge of $405,000, calculated as the number of shares issued under the warrant multiplied by the closing market price of SANZ’ common stock on May 16, 2005.

OnSimilarly, ~~June 27,~~for ~~2005~~the April and inMay ~~consideration~~closings of anthe ~~additional~~Private ~~$1.5~~Placement ~~million~~(the ~~guaranty~~“April byand ~~Sun~~May ~~Capital~~Closings”), IIwe oncalculated the ~~Company’s~~conversion ~~increased~~feature ~~Harris~~in ~~facility,~~ the ~~Company~~amount ~~issued a warrant to purchase 480,969 shares~~ of ~~our common stock with an exercise price~~approximately of $03.~~001~~1 ~~per~~million, ~~share~~but tounder ~~our~~EITF ~~majority shareholder~~00-27, ~~Sun~~this ~~Solunet.~~amount ~~The Company~~was ~~and~~limited ~~Sun~~to ~~Solunet agreed that~~ the ~~number~~net ~~of shares exercisable under~~cash ~~this warrant~~proceeds ~~would~~of ~~be calculated pursuant to~~ the ~~same~~April ~~formula~~and ~~set~~May ~~forth~~Closings inallocated ~~the~~to ~~Credit Support Agreement, based on~~ the ~~amount~~Series ~~that~~A ~~the outstanding guaranty provided~~Preferred onStock ~~behalf~~ of ~~the Company by Sun Capital II on the Harris Facility exceeded~~ $3.-0 ~~million~~- as ofcalculated ~~May~~below. ~~16,~~Because ~~2005~~we ~~(as~~did ifnot ~~the~~allocate ~~additional~~any ~~$1.5 million guaranty was in place as~~ of ~~May 16, 2005). This warrant was immediately exercisable upon issuance and~~ the ~~number~~net ~~of shares~~cash ~~underlying~~proceeds ~~this~~to ~~warrant represented approximately 0.5% of~~ the ~~Company’s outstanding~~Series ~~common~~A ~~stock~~Preferred ~~as of the issuance date. Pursuant to the warrant issuance~~Stock, ~~the~~we ~~Company~~did ~~recorded~~not inrecord ~~June 2005~~ a ~~charge~~deemed ~~of $115,000, calculated~~dividend asto ~~the~~preferred ~~number~~stockholders ofin ~~shares issued under~~ the ~~warrant~~second ~~multiplied~~quarter ~~by the closing market price~~ of ~~SANZ’ common stock on June 3, 2005, the effective date of the revised Harris credit facility and Sun Capital II guaranty~~2006.

On October 4, 2005, we amended our credit facility with Harris, increasing the available line by $1.5 million to $13.0 million. Sun Capital II has provided a guaranty on this additional amount. The Company was not required to issue stock purchase warrants as consideration for this additional guaranty; however, the increase in borrowings was included in the warrant issued on November 16, 2005, as described below.Warrants

~~Pursuant~~The toWarrants ~~the~~issued ~~Credit~~in ~~Support~~the ~~Agreement,~~Private onPlacement ~~November~~(which ~~16,~~include ~~2005,~~Warrants ~~the Company~~ issued to Sun Solunet, aLLC, ~~stock~~outside ~~purchase~~investors, ~~warrant~~management toand ~~purchase 6,539,490 shares of~~ the ~~Company’s~~placement ~~common~~agent) ~~stock~~require physical atsettlement anor ~~exercise~~net-share ~~price~~settlement, ofand ~~$0.001~~also ~~per~~carry ~~share.~~registration ~~This~~rights ~~warrant~~that ~~was~~require ~~immediately~~the ~~exercisable~~Company ~~upon~~to ~~issuance.~~remunerate ~~The~~liquidated ~~number~~damages (in the form of ~~shares~~cash) ~~underlying~~to ~~this~~the ~~warrant~~investors ~~represented~~in ~~approximately~~the 7%Private ofPlacement in the ~~Company’s~~event of failing to register ~~outstanding~~the shares of common stock asthat of the ~~issuance~~Company ~~date~~is ~~and~~required ~~was~~to ~~calculated~~issue inupon exercise ~~accordance~~of ~~with~~ the ~~formula~~Warrants ~~set~~within ~~forth~~150 indays of the ~~Credit~~Closing ~~Support~~Dates ~~Agreement. Pursuant to~~(with ~~the~~respect ~~warrant~~to ~~issuance,~~ the ~~Company~~Warrants ~~recorded~~issued inon ~~November~~such ~~2005~~date) aand, ~~charge~~with ofcertain ~~$1.3 million~~exceptions, ~~calculated~~to asmaintain ~~the~~said ~~number~~registration of the shares ~~issued~~of ~~under~~our ~~the~~common ~~warrant~~stock ~~multiplied~~underlying by the ~~closing~~Warrants ~~market~~for ~~price~~so oflong ~~SANZ’~~as ~~common~~the ~~stock~~Warrants onremain ~~November 16, 2005~~outstanding.

~~NOTE~~We 7evaluated the Warrants as a potential derivative under the criteria in paragraph 11(a) of SFAS 133, which require that a contract (Warrants) issued by a reporting entity be accounted for as a derivative unless it is both (1) indexed to its own stock and (2) classified in stockholders’ equity in its statement of financial position. We concluded that the Warrants were indexed to the Company’s own stock, but should not be classified in stockholders’ equity because they do not comply with all of the requirements as stipulated in EITF 00-19. Accordingly, ~~SOFTWARE~~we ~~DEVELOPMENT~~determined ~~COSTS~~that the Warrants should be classified as a liability and accounted for as a derivative financial instrument at estimated fair value in accordance with SFAS 133.

AsBased ~~discussed~~on the inincrease of our ~~2004~~authorized shares at our Annual ~~Report~~Meeting on ~~Form~~July ~~10-K~~28, ~~“Note~~2006, we concluded ~~3—Summary~~that one of ~~Significant~~the criteria for equity classification of the Warrants ~~Accounting~~as stipulated ~~Policies~~in EITF 00-19 (sufficient authorized shares in order to net-share or physically settle all issued and outstanding Warrants and other commitments) was met as of that date. In addition,” ~~the~~we ~~Company~~further ~~accounts~~considered another requirement for equity classification of the ~~costs~~Warrants ofunder ~~developing~~EITF ~~computer~~00-19 regarding liquidated ~~software~~damages related to bethe ~~sold~~registration rights agreement associated with the Warrants. We considered EITF 05-4, ~~leased~~from orwhich ~~otherwise~~we ~~marketed~~adopted in“View ~~accordance~~C” of the three alternative views with ~~SFAS~~regard ~~86.~~to the registration rights agreement, which stipulates that, “the registration rights agreement and the warrant agreement are separate agreements and the liquidated damages penalty under the registration rights agreement [does] not affect the Issue 00-19 analysis,” (EITF Agenda Committee Meeting (Potential New Issues), dated February 1, 2005). The Financial ~~Company~~Accounting ~~expenses~~Standards Board (“FASB”) further confirmed this position in its June 20, 2006 meeting regarding “Registration Rights Agreements,” during which the ~~costs~~majority of ~~developing~~the ~~computer~~Board ~~software~~members ~~until~~present “supported separately ~~technological~~recognizing ~~feasibility~~registration isrights ~~established~~agreements… and ~~capitalizes~~excluding ~~all~~those ~~costs~~agreements ~~incurred~~ from ~~that~~the ~~time~~scope ~~until~~of ~~the~~SFAS ~~software~~133,” is(“Minutes ~~available~~of ~~for~~6/20/06 ~~general~~Registration ~~customer~~Rights ~~release~~Agreements Board orMeeting,” ~~ready~~dated July 7, 2006). Since we accounted for ~~its~~the ~~intended~~registration ~~use~~rights agreement separately from the Warrants, we atdetermined ~~which~~that ~~time~~the ~~amortization~~Warrants met all of the ~~capitalized~~requirements ~~costs~~for equity ~~begins.~~classification under EITF 00-19 as of July 28, 2006.

~~Capitalized~~Accordingly, ~~software~~effective ~~costs~~July ~~are~~28, ~~amortized on a product-by-product basis over their expected useful life~~2006, ~~which~~we isconcluded ~~generally~~that ~~three~~the ~~years.~~Warrants ~~The~~should ~~annual~~be ~~amortization related~~reclassified ~~to software~~from ~~to be sold is the greater of the amount computed using (~~a) ~~the~~derivative ~~ratio that~~financial ~~current~~instrument ~~gross~~liability ~~revenue for a product compares~~ to ~~the~~“Warrants ~~total of current~~ and ~~anticipated~~ ~~future~~options” ~~gross revenue for that product or (b) the straight-line~~under ~~method~~stockholders’ ~~over the remaining estimated economic life of the product~~equity.

As ~~discussed~~of inthe March ~~Note 1~~Closing, we recorded the ~~Company~~Warrants isissued ~~restating~~in ~~its~~the ~~2004~~March ~~consolidated~~Closing ~~financial~~at an ~~statements~~initial tofair ~~reflect~~value ~~the~~of ~~expensing~~approximately of$6.0 ~~certain~~million. ~~software~~The ~~development~~balance ~~costs~~of ~~that~~the net ~~were~~proceeds ~~capitalized~~of in$4.5 ~~2004,~~million ~~that~~($10.5 ~~did~~million ~~not~~total ~~have~~net ~~sufficient~~proceeds ~~contemporaneous~~raised in the March ~~documentation~~Closing toless ~~support~~the ~~capitalization~~$6.0 ~~The~~million ~~financial~~fair ~~impact~~value of the ~~2004~~Warrants issued in the March ~~restatement~~Closing) iswas ~~shown~~allocated into ~~Note~~the 1.Series A Preferred Stock.

~~The~~As ~~Company~~of isthe April ~~not~~and ~~restating~~May ~~its 2003 financial statements~~Closings, ~~due~~we torecorded the ~~immateriality of~~Warrants ~~the~~at ~~impact~~an toinitial ~~both~~fair ~~2003~~value ~~and~~of approximately ~~2005~~$2.6 ~~Accordingly,~~million. ~~during~~Because the ~~September~~estimated ~~2005 quarter,~~fair value of the Warrants ~~Company~~exceeded ~~wrote off~~ the ~~remaining~~ net ~~book~~cash ~~value~~proceeds of $1.7 million raised in the ~~software~~April ~~development~~and May ~~costs that~~Closings, itwe ~~had~~recorded ~~capitalized~~a charge in ~~2003,~~the ~~since~~statement ~~such~~of ~~costs~~operations ~~were~~of ~~deemed~~$924,000 ~~to have~~for ~~insufficient~~the ~~contemporaneous~~difference ~~documentation~~between tothe ~~support~~estimated ~~capitalization.~~fair ~~This charge~~value ~~was~~of ~~$65,000~~the ~~and~~Warrants ~~expensed as research~~ and ~~development~~the ~~costs (“R&D”),~~net ~~which~~cash proceeds israised. ~~included~~As ina ~~selling~~result, ~~general~~no ~~and~~value ~~administrative~~was ~~expense~~allocated ~~for~~to the ~~September~~ ~~2005~~Series ~~quarter~~A Preferred Stock.

In addition, during the September 2005 quarter, the Company released version 4.0 of its EarthWhere geospatial imaging software (“version 4.0”), and revised its estimate of the economic life of its prior EarthWhere versions 3.0 through 3.6 (“version 3”), costs of which the Company had capitalized in 2003 and which were independently valued by a third party valuation firm. With the release of version 4, the Company ceased selling version 3, and deemed it to be “end of life.” As a result of the change in the economic life of version 3 and in accordance with SFAS 86, during the September 2005 quarter, the Company assessed the net realizable value of version 3 to be $-0- and recorded a charge of $26,000 to amortization expense. In addition, during this quarter, the Company recorded amortization expense of $36,000 for EarthWhere version 4.0. Total amortization expense for the September 2005 quarter was $19,000, which included the effect of $43,000 that was charged to amortization expense in the first and second quarters of 2005 related to amounts capitalized in 2004.

~~NOTE~~The 8estimated -fair ~~RECENT~~value ~~ACCOUNTING~~of ~~PRONOUNCEMENTS~~the Warrants issued in the Private Placement at inception (the Closing Dates) and at June 30, 2006 is as follows (in thousands):

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 123 (revised) (“SFAS 123R”), “Share-Based Payment,” which provides guidance on share-based payment transactions and requires fair value accounting for all share-based compensation. SFAS 123R requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. Under SFAS 123R, the Company was required to adopt SFAS 123R at the beginning of its third quarter of 2005. In April 2005, the SEC postponed the required adoption of SFAS 123R until the beginning of fiscal years starting after June 15, 2005, which for SANZ will be effective beginning January 1, 2006.


	Warrants issued to Sun Solunet, LLC and management - related parties			Warrants issued to outside investors			Total

Issuance of Warrants in March Closing	$	4,465		$	1,575		$	6,040
Change in estimated fair value of Warrants		2,977			1,041			4,018
March 31, 2006		7,442			2,616			10,058

Issuance of Warrants in April and May Closings		--			2,616			2,616
Change in estimated fair value of Warrants		(1,191	)		(1,510	)		(2,701	)
June 30, 2006	$	6,251		$	3,722		$	9,973

WeThe ~~are~~net ~~currently~~change ~~evaluating~~in ~~the~~estimated ~~impact~~fair ofvalue ~~SFAS 123R~~for oneach ~~our~~period ~~financial~~is ~~position and results~~included ~~of operations~~ as ~~well~~a asbenefit ~~alternative transition methods under~~(charge) ~~SFAS 123R.~~in Inthe ~~addition,~~statement weof ~~have~~operations ~~not~~and ~~determined~~totaled ~~whether~~$2,701,000 ~~the~~and ~~adoption~~($1,317,000) for ofthe ~~SFAS 123R~~three ~~will~~and ~~result~~six inmonths ~~amounts~~ended ~~that~~June ~~are~~30, ~~similar~~2006, ~~to the current pro forma disclosures under SFAS 123~~respectively.

InWe ~~June 2005,~~estimated the ~~FASB~~fair ~~issued~~value ~~SFAS~~of 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 supersedes APB Opinion No. 20, “Accounting Changes,” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the ~~requirements~~Warrants ~~for~~issued ~~the accounting for and reporting of a change~~ in ~~accounting~~ ~~principle. SFAS 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement in~~ the ~~unusual instance~~Private ~~that~~Placement ~~the pronouncement does not include specific transition provisions.~~using SFAS 154 must be adopted for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the ~~date~~Black-Scholes ~~SFAS~~option ~~154~~pricing ismodel ~~issued.~~with ~~The Company does not expect~~ the ~~adoption~~ ~~of SFAS No. 154 to have a material impact on its financial~~following ~~results.~~assumptions:

NOTE 9 - CUSTOMER CONCENTRATION AND CREDIT RISK


	Closing Dates		March 31, 2006		June 30, 2006

Expected dividend yield		0%		0%		0%
Expected volatility		62 - 64.8%		62%		64.8%
Expected term		5 years		4.91 years		4.66 - 4.83 years
Risk-free interest rate		4.66 - 5.00%		4.78%		5.18%

~~The~~We ~~following~~estimated ~~table~~volatility ~~shows~~primarily ~~significant~~based ~~customers~~on ashistorical avolatility ~~percentage~~rates offor ~~accounts~~the ~~receivable~~years at2001 ~~September~~through ~~30,~~June ~~2005~~2006. ~~and~~The ~~2004~~Warrants ~~and~~have as a ~~percentage~~transferability ~~of revenue for~~provision ~~the~~and ~~three~~based ~~months~~on ~~and~~guidance ~~nine~~provided ~~months~~in ~~ended~~the ~~September~~SEC’s ~~2005~~Staff ~~and~~Accounting ~~2004,~~Bulletin ~~respectively~~No. 107 (“SAB ~~Customer~~107”), Afor ~~represents~~options ~~the~~issued ~~aggregate~~with ofsuch ~~all~~a ~~Federal~~provision, ~~government~~we ~~agencies~~used ~~to which~~ the ~~Company~~full, ~~sells directly. The associated credit risk from Customer B’s~~five-year ~~concentration~~contractual isterm ~~limited,~~ as ~~all~~the ~~orders~~expected ~~from~~term ~~this~~of ~~customer~~the inWarrants. ~~excess~~For ofthe risk-free ~~$1.0 million~~interest ~~are~~rate, ~~processed~~we ~~under~~used anthe ~~escrow~~five ~~agreement,~~year ~~which~~U.S. ~~guarantees payment~~Treasury tozero ~~SANZ~~coupon ~~upon~~rate ~~the~~as ~~customer’s receipt~~ of ~~payment from~~ the measurement ~~end user~~dates.

	Accounts receivable				Revenue
					For the three months ended				For the nine months ended
	September 30,				September 30,				September 30,
	2005		2004		2005		2004		2005		2004
Customer A		20.7%		38.1%		11.0%		35.2%		17.6%		20.3%
Customer B		13.6		--		33.8		--		14.6		--

Registration Rights Agreement

As discussed above under the heading, “Warrants,” we have accounted for the registration rights agreement associated with the Private Placement separately from the Series A Preferred Stock and Warrants. In accordance with the guidance issued by the FASB in the minutes of its June 20, 2006 meeting regarding registration rights agreements, we have chosen to measure the registration payment arrangements using a model consistent with the accrual of loss contingencies under FASB Statement No. 5, “Accounting for Contingencies.” As of the date of this filing, the Company had not filed an effective registration statement to register the shares of common stock that the Company is required to issue upon conversion of the Series A Preferred Stock.

Liquidated damages became due on August 1, 2006, 150 days after the March Closing, and are payable on each monthly anniversary until the registration statement has been declared effective by the SEC. In addition, interest accrues on the liquidated damages at a rate of 12% per annum, if the payments are not made within seven days after the date payable. It is our reasonable expectation that we will have effective registration of said shares within sixty to ninety days from the date of this filing. Based on this expectation, our current estimate as to the liquidated damages that we will be required to pay is in the range of $700,000 to $970,000. As of June 30, 2006, the Company had not accrued any amounts related to the liquidated damages, as no liability had been incurred as of the end of the reporting period.

~~Item~~NOTE 2.4 ~~Management’s~~- ~~Discussion~~SHARE-BASED ~~and~~COMPENSATION ~~Analysis of Financial Condition and Results of Operations~~

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

~~This~~On ~~report~~January ~~contains~~1, “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 “anticipate2006,~~” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will”~~ ~~and “would” or~~ the ~~negative~~Company ofadopted ~~these terms or other similar expressions. These forward-looking statements include statements regarding our expectations, beliefs, or intentions about~~ the ~~future,~~provisions ~~and are based on information available to us at this time. We assume no obligation to update any~~ of ~~these~~SFAS ~~statements~~123R ~~and~~using ~~specifically decline any obligation to update or correct any forward-looking statements to reflect events or circumstances after~~ the ~~date of~~modified ~~such~~prospective ~~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~~method, ~~including~~which ~~those~~requires identified in this Report. We urge you to review and consider those factors, and those identified from time to time in our reports and filings with the SEC, for information about risks and uncertainties that ~~may~~compensation ~~affect~~expense ~~our future results. All forward-looking statements~~be werecorded make after the date of this filing are also qualified by this cautionary statement and identified risks. Additional factors are discussed in the Company’s 2004 Annual Report on Form 10-K, except as regards to certain financial information that is being restated for ~~the~~all ~~year~~unvested ~~ended~~stock ~~December~~options ~~31, 2004, as discussed below. As a result of the restatement, the Company has determined that the previously issued 2004~~ and ~~2005~~restricted ~~financial~~stock ~~statements~~over ~~should no longer be relied upon until amendments thereof are filed with~~ the ~~SEC, and~~remaining ~~its~~award ~~other~~service ~~reports filed with the SEC, to which reference should be made~~period.

~~Overview~~On May 3, 2006, the compensation committee of the board of directors approved the grant of 4,740,000 stock options to certain of the Company’s officers and employees with an exercise price of $0.35 per share and an expiration date of 10 years from the date of grant under the 2003 Stock Option Plan, vesting 25% per year over four years.

~~SANZ~~For ~~provides~~the three ~~sophisticated~~and ~~enterprise-level~~six ~~data~~months ~~storage~~ended June 30, 2006, the Company recorded $82,000 and $154,000, ~~data~~respectively, ~~management~~of share-based compensation expense. The expense ~~solutions~~recorded during the period related to ~~commercial~~the current period compensation expense for stock options granted in the second quarter and ~~government~~for ~~clients.~~unvested Westock ~~focus~~options granted onin prior years as calculated under the ~~design~~provisions of Statement of Financial Accounting Standard No. 123 (“SFAS 123”), ~~delivery~~“Accounting for Stock-Based ~~and~~Compensation.” ~~management~~In ofaccordance ~~data~~with ~~storage~~SFAS ~~systems~~123R, ~~especially~~we ~~those~~accounted ~~that~~for ~~are~~options ~~built~~granted in prior years using the fair value pricing model used at the grant date to calculate the pro-forma compensation expense required for disclosure under SFAS 123, adjusted to include a provision for estimated forfeitures. We have ~~network~~estimated ~~architecture~~forfeitures at 20% annually, based on historical trends related to employee turnover and the market price of the Company’s common stock. ~~Because~~The Company weconsiders ~~typically~~revisions ~~design~~to ~~integrated~~its ~~solutions~~assumptions ~~for~~in estimating forfeitures on ~~our~~an ~~clients~~ongoing ~~rather~~basis. ~~than~~For ~~merely~~the ~~selling~~options ~~them~~granted ~~hardware~~in 2006, we ~~are~~estimated ~~known~~the expected term of the options using the “simplified method” as discussed in SAB 107, that is, the ~~industry~~arithmetic mean of the weighted vesting period and contractual life, or 6.25 years. We used the Black-Scholes option pricing model, as awe ~~“storage~~believe ~~solution~~this ~~provider.”~~model best reflects the Company’s historical option exercise patterns, with the following weighted average assumptions:

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

	Six months ended June 30,		Years ended December 31,
	2006		2005		2004		2003

Expected dividend yield		0%		0%		0%		0%
Expected volatility		64.85%		64%		68%		80%
Expected term		6.25 years		5 years		5 years		5 years
Risk-free interest rate		5.00%		4.00%		3.95%		2.00%

·The weighted ~~Data~~average ~~storage~~grant ~~solutions~~date ~~that~~fair wevalue ~~design~~of ~~and~~options ~~deliver~~granted aswas a$0.23 ~~customized~~per ~~project~~share for tothe ~~meet~~six amonths ~~client’s~~ended ~~specific~~June ~~needs~~30, ~~including~~2006 ~~both~~and ~~data~~$0.16, ~~storage~~$0.24 ~~networks~~ and ~~data~~$0.28 ~~backup/recovery~~per ~~systems;~~share for the years ended December 31, 2005, 2004 and 2003, respectively.

·Stock Option ~~Storage-related engineering and consulting services;~~Plans

·The Company ~~Maintenance~~has ~~services~~in oneffect ~~storage~~three ~~hardware~~Stock ~~and~~Option ~~software;~~Plans, a 2000 Stock Option Plan, a 2001 Stock Option Plan and a 2003 Stock Option Plan.

·On March 1, A2000, ~~proprietary~~shareholders ~~data~~of ~~management~~the ~~software~~Company ~~product~~approved ~~known~~the as2000 ~~“EarthWhereTM~~Stock Option Plan. The total number of shares of common stock reserved for options issuable under this plan may not exceed 1,”500,000 ~~which~~shares. ~~facilitates~~The ~~imagery~~2001 ~~data~~Stock ~~access~~Option ~~and~~Plan ~~provisioning~~was adopted on September 20, 2001. At June 30, 2006, the total number of shares of common stock reserved for ~~geospatial~~options ~~digital~~issuable ~~imagery~~under ~~users~~this plan was 5,000,000. Options granted under these plans vest generally over three to ten years. The exercise price of options granted under both plans is required to be not less than 80% of the fair market value per share on the date of option grant. With the exception of “roll-over” options that were included in the 2001 Stock Option Plan upon our acquisition of ITIS Services (~~principally~~i.e., ~~satellite~~options ~~and~~previously ~~aerial~~issued ~~imagery~~by ~~and~~ITIS ~~map~~Services that ~~data~~we assumed in that acquisition), ~~together~~all ~~with~~options ~~associated~~granted ~~support~~to ~~and~~date ~~consulting~~under ~~services~~both plans have had an exercise price equal to, or in excess of, fair market value at the date of grant.

We refer to these first three products and services as our “storage solutions” business and the fourth item as our “geospatial” or “EarthWhere” business.

Restatement

During the September 2005 quarter, we initiated a project to prepare stand-alone financial statements for audit of our EarthWhere business. We believe that this is an important step in further supporting the growth opportunities of that business. Beginning in 2003 and as more fully described in Note 1 and Note 7, the Company capitalized certain software development costs related to its EarthWhere geospatial imaging software in accordance with SFAS 86. As all of the Company’s capitalized software costs pertain to the EarthWhere business, such costs are considered to be material to the total assets of that business unit, but were not considered material to the total assets of the Company as a whole as of December 31, 2003 or December 31, 2004. As we undertook this project, we determined that the assumptions and evidential matter that we had used in capitalization of software development costs during 2003 and 2004 did not provide sufficient “contemporaneous documentation” to support capitalization as required in this context.

AsThe a2003 ~~result,~~Stock onOption ~~November~~Plan ~~14,~~was ~~2005,~~adopted ~~the Board of~~on ~~Directors~~December of18, ~~the~~2003. ~~Company~~The intotal ~~consultation~~number ~~with~~of ~~management concluded that~~shares ~~the Company’s~~of ~~financial~~common ~~statements~~stock assubject ofto ~~and~~options ~~for~~that ~~the~~may ~~year~~be ~~ended~~granted ~~December~~under ~~31,~~the ~~2004~~2003 Plan ~~and~~may not ~~the~~exceed ~~interim~~25,000,000 ~~financial~~shares ~~statements~~(increased asfrom of15,000,000 ~~and~~shares ~~for~~in ~~the~~May ~~quarter and six months~~2006). ~~ended~~Options ~~June~~granted ~~30,~~to ~~2004,~~date asunder ofthe ~~and~~2003 ~~for~~Plan ~~the~~have ~~quarter~~had ~~and~~an ~~nine~~exercise ~~months~~price ~~ended September~~equal ~~30,~~to fair ~~2004,~~market ~~for~~value at the ~~quarter~~date ~~ended December 31, 2004 and as~~ of ~~March 31~~grant, ~~2005~~ and ~~June~~ ~~30,~~vest ~~2005~~generally ~~should~~over ~~not~~four ~~be relied upon~~years.

The Company’s ~~intends~~policy is to ~~file~~issue ~~restated~~new ~~financial~~shares ~~statements~~upon ~~on Form 10-K/A for~~ the ~~year~~ ~~ended~~exercise ~~December 31, 2004 and restated 2004 and 2005 interim financial statements on Form 10-Q/A for each~~ of ~~the quarters ended March 31, 2005 and~~stock ~~June 30, 2005 to correctly report comparative 2004 financial information and the effects of this restatement on the March 31, 2005 and June 30, 2005 balance sheets~~options.

The ~~financial~~following ~~statements~~table ~~and~~summarizes ~~other~~option ~~financial~~activity ~~information~~for ~~reported~~the inthree ~~this~~stock ~~Form~~option plans ~~10-Q reflect~~during the ~~effects~~three ofmonths ~~the~~and ~~2004~~six ~~restatements.~~months ended June 30, 2006 (in thousands, except per share data):

	# of Shares Underlying Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
For the six months ended June 30, 2006
Outstanding at January 1, 2006		11,131		$	0.51
Granted		4,740			0.35
Exercised		--			--
Forfeited or expired		(930	)		0.33
Outstanding at June 30, 2006		14,941		$	0.47		7.5 years	$	7
Exercisable at June 30, 2006		7,179		$	0.57		5.8 years	$	--

For the three months ended June 30, 2006
Outstanding at March 31, 2006		10,666		$	0.52
Granted		4,740			0.35
Exercised		--			--
Forfeited or expired		(465	)		0.27
Outstanding at June 30, 2006		14,941		$	0.47		7.5 years	$	7
Exercisable at June 30, 2006		7,179		$	0.57		5.8 years	$	--

Statements of Operations Data
(in thousands, except per share data)	As reported			Adjustment			As restated
For the year ended December 31, 2004
Selling, general and administrative expenses	$	14,987		$	456		$	15,443
Amortization of capitalized software		91			9			100
Loss from operations		(3,044	)		(465	)		(3,509	)
Net loss		(6,285	)		(465	)		(6,750	)
Basic and diluted net loss per share	$	(0.07	)	$	(0.01	)	$	(0.08	)
For the nine months ended September 30, 2004
Selling, general and administrative expenses	$	11,467		$	254		$	11,721
Amortization of capitalized software		110			(35	)		75
Loss from operations		(1,724	)		(219	)		(1,943	)
Net loss		(2,145	)		(219	)		(2,364	)
Basic and diluted net loss per share	$	(0.03	)	$	(0.00	)	$	(0.03	)
For the three months ended September 30, 2004
Selling, general and administrative expenses	$	3,607		$	102		$	3,709
Amortization of capitalized software		17			8			25
Loss from operations		(115	)		(110	)		(225	)
Net loss		(198	)		(110	)		(308	)
Basic and diluted net loss per share	$	(0.00	)	$	(0.00	)	$	(0.00	)

The total fair value of options vested during the three and six months ended June 30, 2006 was $291,000 and $320,000, respectively. The total compensation cost related to nonvested options not yet recognized at June 30, 2006 was $1.6 million and the weighted-average period over which this expense is expected to be recognized is approximately 3.5 years.

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

Prior to the adoption of SFAS 123R, as permitted under SFAS 123, the Company accounted for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Accordingly, no compensation expense was recognized in connection with the grant of stock options to employees and directors prior to the adoption of SFAS 123R on January 1, 2006, as all options granted had an exercise price equal to the market value of the underlying stock at the date of grant. Under the modified prospective method, the Company did not restate its operating results related to share-based compensation expense for the three months and six months ended June 30, 2005, but continues to disclose the pro forma effect for that period as if the Company had applied the fair value recognition provisions of SFAS 123.

(In thousands, except for per share data)	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005

Net loss, as reported	$	(1,560	)	$	(3,073	)
Deduct, total stock-based compensation expense determined under fair-value based method, net of related tax effects		(60	)		(185	)

Pro forma net loss	$	(1,620	)	$	(3,258	)
Basic and diluted net loss per share:
As reported	$	(0.01	)	$	(0.03	)
Pro forma	$	(0.02	)	$	(0.03	)

~~Third~~NOTE ~~Quarter~~5 ~~2005~~- ~~Financial~~EARNINGS ~~Overview~~(LOSS) PER SHARE

InBasic ~~evaluating~~earnings ~~our~~(loss) ~~current~~per ~~financial~~share ~~operating~~is ~~performance,~~based weon ~~believe,~~the ~~based~~weighted onaverage number of common ~~feedback~~shares ~~from~~outstanding. ~~investors,~~In ~~analysts~~addition ~~and~~to ~~other~~common ~~users~~shares ofoutstanding, ~~the~~and ~~Company’s~~in ~~financial~~accordance ~~information,~~with ~~that~~Statement ~~earnings~~of ~~before~~Financial ~~interest,~~Accounting ~~taxes~~Standard No. 128, ~~depreciation~~“Earnings ~~and~~per ~~amortization~~Share” (“~~EBITDA~~SFAS 128”), isany anshares ~~appropriate~~issuable ~~and~~for ~~important~~little ~~financial~~or ~~measure.~~no ~~Since~~cash ~~EBITDA~~consideration ~~is a~~are ~~non-GAAP~~considered ~~measure,~~outstanding ~~reconciliations~~shares and included in the calculation of ~~EBITDA~~weighted average ornumber ~~EBITDA~~of ~~loss~~common toshares. ~~our~~Accordingly, ~~reported~~for the three and six months ~~net~~ended ~~losses~~June ~~for~~30, 2006 the ~~September~~weighted ~~2005~~average ~~and~~number ~~2004~~of ~~quarters~~common shares outstanding included 20,066,744 shares, and for the ~~nine~~three and six months ended ~~September~~ June 30, 2005, the weighted average number of common shares outstanding included 12,084,347 and 10,065,473 ~~2004~~shares, ~~are~~respectively, ~~provided~~issuable ~~below~~under outstanding debt guaranty warrants that were immediately exercisable at $0.001 per share, and held by our majority shareholder, Sun Solunet.

~~Reconciliation~~Diluted earnings (loss) per share is computed using the weighted average number of common ~~Net~~shares ~~loss~~outstanding plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares. Convertible Series A Preferred Stock, warrants and options outstanding to purchase ~~EBITDA~~an ~~(EBITDA~~aggregate of 209,036,999 and 32,182,947 shares of common stock ~~loss)~~as of June 30, 2006 and 2005, respectively, have been excluded from the diluted share calculations for the three and six-month periods ending June 30, 2006 and 2005, respectively, as they were antidilutive as a result of the net losses incurred for those periods. Accordingly, basic shares equal diluted shares for all periods presented.

(In thousands)	Three Months Ended September 30						Nine months Ended September 30
	2005			2004			2005			2004
				As restated						As restated
Net loss	$	(506	)	$	(308	)	$	(3,579	)	$	(2,364	)
Interest expense and related charges
Interest expense		412			304			1,164			878
Charge for warrants issued to related party for debt guaranty		--			--			1,569			--
Depreciation and amortization		300			366			946			1,034
Income tax expense (benefit)		35			8			35			(336	)
EBITDA (EBITDA loss)	$	241		$	370		$	135		$	(788	)

NOTE 6 - DEBT

~~For~~Wells ~~the quarter~~Fargo ~~ended~~Line ~~September 30, 2005, our net loss was $506,000 as compared to $308,000 for the quarter ended September 30, 2004. This increased net loss is primarily a result~~ of ~~the increases in investment in expanding our EarthWhere business.~~ Credit

~~For~~As ~~the~~of ~~September~~June ~~2005~~30, ~~quarter~~2006, ~~revenue~~the ~~from~~Company ~~our~~had ~~storage~~$2.8 ~~solutions~~million ~~consulting~~of ~~and~~undrawn availability on its ~~engineering~~borrowing ~~services~~facility ~~(“professional~~with ~~services”)~~Wells ~~increased~~Fargo. ~~substantially~~In April 2006, atthe ~~70%~~Company and Wells Fargo executed an amendment to the Company’s $12.0 ~~over~~million ~~the~~credit ~~September~~facility ~~2004~~credit ~~quarter~~agreement. ~~The~~This ~~majority~~amendment reset financial covenants for 2006 and waived a covenant violation that occurred as of March 31, 2006. Our borrowing rate on this ~~increase~~facility at June 30, 2006 was inprime ~~the~~plus 5.0%, or ~~Federal~~13.25%. This rate is ~~government~~subject ~~sector,~~to ~~where~~potential wedecreases, ~~continue~~as topermitted ~~see~~by ~~most~~Wells ofFargo, ~~our~~based ~~new~~on ~~significant~~SANZ ~~professional~~Inc. ~~services~~and ~~opportunities~~its subsidiary, Solunet Storage, achieving certain financial thresholds during 2006. ~~Additionally~~For the June 2006 quarter, ~~our~~SANZ ~~storage~~Inc. ~~solutions~~and Solunet Storage did not ~~maintenance~~achieve ~~services~~the ~~revenue~~minimum ~~(our~~financial ~~“first~~threshold ~~call”~~and ~~maintenance~~the ~~service~~borrowing ~~agreements)~~rate on the facility ~~grew~~remained ~~15%~~at ~~quarter~~prime ~~over~~plus ~~quarter~~5.0% ~~Growing~~for ~~both~~the ~~professional~~Company’s ~~and~~fiscal ~~maintenance~~third quarter of 2006. As ~~services~~of weJune ~~believe~~30, ~~are~~2006, ~~critical~~the ~~elements~~Company was in ~~our~~compliance ~~drive~~with toall ~~improve~~of ~~overall~~the ~~gross~~financial ~~margin~~covenants ~~performance~~under inthe ~~our~~Wells ~~storage~~Fargo ~~solutions~~credit ~~business~~agreement.

~~For~~Sun ~~the nine~~Solunet ~~months~~Credit ~~ended~~Facility ~~September 30, 2005, revenue from software license sales~~ and ~~related~~ ~~services~~Term from our EarthWhere software business unit was $1,270,000, an increase of approximately $770,000 or 154% from the comparable nine-month period of 2004. For the September 2005 quarter, revenue from our EarthWhere business was $413,000; software license sales and related services revenue totaled $374,000 for this quarter, which was a marginal increase from the comparable 2004 quarter. During the September 2005 quarter, we continued to expand our business development activity and make significant progress in several accounts at large Federal agencies, most of which we expect will provide revenue in 2005 and the first part of 2006. Additionally, in October 2005, we received our largest single EarthWhere license order to date of over $400,000. Our product and service offering continues to be well received and we expect to invest further resources to take advantage of the emerging market opportunities.Loan

At December 31, 2005, the Company had borrowed $13.1 million on its credit facility with Harris (now Sun Solunet as assignee of Harris). On February 6, 2006, the Sun Loan was amended in order to increase the borrowing availability from $13.0 million to $14.0 million. In addition to increasing the Company’s borrowing availability, this amendment changed the maturity date to December 31, 2006 and permitted accrual of interest to the principal amount of the loan until maturity.

Effective March 2, 2006, as part of the March 2006 closing of the Private Placement, Sun Solunet converted $8.0 million of its loan to the Company into Units as described in Note 3, and the Company paid down $1.0 million of the Sun Loan. On April 19, 2006, the Company and Sun Solunet executed an amendment to the Sun Loan agreement, which reduced the loan balance from $13.0 million to $5.0 million and modified the loan from a revolving line of credit to a term loan maturing on March 2, 2009. The parties agreed that Sun Solunet has no additional lending obligation to the Company under the credit facility. Also as part of the new agreement, the Company is no longer obligated to issue debt guaranty warrants to Sun Solunet. This amendment formalized the agreement with respect to the Sun Loan that had been previously made in the Credit Support Termination Agreement on March 2, 2006. This loan bears interest at prime plus 1.0% (9.25% at June 30, 2006) and all interest accrues and is payable on the maturity date. As of June 30, 2006, the Company had $5.0 million in principal and $443,000 of accrued interest due to Sun Solunet on the Sun Term Loan. See further discussion of the Sun Term Loan in Note 3.

~~Results~~NOTE of7 ~~Operations~~- RECENT ACCOUNTING PRONOUNCEMENTS

~~Selected~~In ~~Consolidated~~February 2006, the FASB issued Statement of Financial Accounting Standard No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments—An Amendment of FASB Statements No. 133 and 140,” to simplify and make more consistent the accounting for certain financial instruments. Specifically, SFAS 155 amends SFAS 133 to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. Prior to fair value measurement, however, interests in securitized financial assets must be evaluated to identify interests containing embedded derivatives requiring bifurcation. The amendments to SFAS 133 also clarify that interest-only and principal-only strips are not subject to the requirements of SFAS ~~Operations~~133, ~~Data~~and that concentrations of credit risk in the form of subordination are not embedded derivatives. Finally, SFAS 155 amends Statement of Financial Accounting Standards No. 140, “Accounting for the Impairment or Disposal of Long-lived Assets,” to allow a qualifying special-purpose entity (SPE) to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 applies to all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, with earlier application allowed.

~~The~~In ~~following~~June 2006, ~~tables~~the ~~present~~FASB ~~Consolidated~~issued ~~Statements~~Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of ~~Operations~~FASB ~~data~~Statement No. 109, ‘Accounting for Income Taxes’” (“FIN 48”), which clarifies the accounting for uncertainty in income ~~three~~taxes ~~months~~recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold and ~~nine~~measurement ~~months~~attribute ~~ended~~for ~~September~~the ~~30,~~financial ~~2005~~statement recognition and ~~September~~measurement ~~30,~~of ~~2004~~a tax position taken or expected to be taken in a tax return. The Interpretation gives guidance regarding the recognition of a tax position based on a “more likely than not” recognition threshold; that is, evaluating whether the ~~percentage~~position is more likely than not of ~~revenue~~being ~~for~~sustained upon examination ~~each~~by ~~line~~the ~~item~~appropriate taxing authorities, asbased ~~well~~on asthe technical merits of the ~~dollar~~position. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and ~~percentage~~disclosure. ~~change~~The provisions of ~~each~~FIN 48 are effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the ~~items~~change in accounting principle recorded as an adjustment to opening retained earnings.

~~Results~~The ofCompany ~~Operations~~believes ~~for~~that the ~~Three~~adoption ~~Months~~of ~~Ended~~these ~~September~~and ~~30,~~other ~~2005~~recent accounting pronouncements will not have a material impact on its financial results.

~~Compared~~NOTE to8 ~~the~~- ~~Three~~SEGMENT ~~Months~~INFORMATION ~~Ended September 30, 2004~~

(In thousands, except for percentages)	For the three months ended September 30,												$ Change			% Change
	2005			% of rev			2004			% of rev			2004 - 2005			2004 - 2005
							As restated
Revenue
Product sales and vendor supplied services	$	14,062			78.0	%	$	15,209			84.7	%	$	(1,147	)		(7.5	)%
Consulting and engineering services		1,658			9.2			895			5.0			763			85.3
Maintenance services and contract fees		2,319			12.8			1,861			10.3			458			24.6
Total Revenue		18,039			100.0			17,965			100.0			74			0.4
Gross Profit (% of respective revenue)
Product sales and vendor supplied services		3,228			23.0			2,902			19.1			326			11.2
Consulting and engineering services		601			36.2			408			45.6			193			47.3
Maintenance services and contract fees		750			32.3			540			29.0			210			38.9
Total Gross Profit		4,579			25.4			3,850			21.4			729			18.9
Operating expenses
Selling, general and administrative		4,338			24.0			3,709			20.6			629			17.0
Amortization of capitalized software		19			0.1			25			0.1			(6	)		(24.0	)
Depreciation and amortization of intangibles		281			1.6			341			1.9			(60	)		(17.6	)
Total operating expenses		4,638			25.7			4,075			22.6			563			13.8
Loss from operations		(59	)		(0.3	)		(225	)		(1.3	)		166			(73.8	)
Other income (expense)
Interest expense		(412	)		(2.3	)		(304	)		(1.7	)		(108	)		35.5
Charge for warrants issued to related party for debt guaranty		--			--			--			--			--			--
Other income (expense)		(35	)		(0.2	)		221			1.2			(256	)		(115.8	)
Net loss	$	(506	)		(2.8	)%	$	(308	)		(1.8	)%	$	(198	)		64.3	%

Description of Segments

~~Revenue. Revenue for the third quarter of 2005 was over $18 million - the highest level in our Company~~SANZ’~~s history. Revenue for this quarter increased slightly from the~~ ~~comparable~~current ~~2004~~business ~~quarter,~~is ~~but~~comprised ~~the revenue components as percentages~~ of ~~total revenue were noticeably different for the~~ two ~~periods.~~reporting ~~For~~segments: ~~the~~(1) ~~September~~a ~~2005 quarter~~data ~~as compared to the September 2004 quarter, an increase in consulting~~storage ~~and engineering~~systems ~~services~~integrator (“~~professional~~Storage ~~services~~Solutions” ~~or “PS”~~) ~~revenue~~ and ~~maintenance revenue~~(2) ~~was offset by~~ a ~~decrease~~spatial indata ~~sales of hardware and software. The quarter~~management ~~over quarter decrease in hardware/~~software ~~sales reflects continued downward market trends on price per unit capacity~~ and ~~some~~services ~~September~~provider ~~2005 quarter Federal and commercial sector project delays resulting from the impact of Hurricane Katrina primarily on our Southern Texas/Gulf Coast commercial business~~(“EarthWhere”). ~~It is important to note that a significant percentage of our revenue continues to be project-based, and as such quarterly results may vary significantly.~~

~~Revenue~~A ~~from~~description ~~professional services increased by 85% from the third quarter~~ of ~~2004 to~~ the ~~third~~types ~~quarter~~ of ~~2005,~~products and asservices aprovided ~~percentage~~by ofeach ~~total revenue, also increased~~reportable ~~from~~segment ~~5.0% to 9.2% quarter over quarter. The increase from the September 2004 quarter~~ is ~~primarily~~as ~~a result of growth in our professional services in our Federal government storage solutions and EarthWhere businesses.~~follows:

● The Storage Solutions segment is a system integrator that provides data storage solutions to meet a client’s specific needs, including both data storage networks and data backup/recovery systems; along with associated maintenance services and storage-related consulting services;

● The EarthWhere segment consists of the resale of our proprietary data management software product, “EarthWhere™,” which facilitates imagery data access and provisioning for geospatial digital imagery users (principally satellite and aerial imagery and map data), together with associated support and consulting services.

Segment Data

The results of the reportable segments are derived directly from SANZ’ internal management reporting system. The accounting policies used to derive reportable segment results are substantially the same as those used by the consolidated Company. Management measures the performance of each segment based on several metrics, including income (loss) from operations and income (loss) from operations excluding depreciation and amortization. These results are used, in part, to evaluate the performance of, and to assign resources to, each of the segments. A significant portion of total consolidated expenses are directly attributable to the two business segments. However, certain operating expenses, which are separately managed at the corporate level, are not allocated to segments. These unallocated costs include management fees and certain audit, consulting, and legal costs incurred on a corporate level. There was no inter-segment revenue for all periods presented.

~~Revenue~~Selected ~~from~~financial ~~maintenance~~information ~~services~~for ~~and~~each ~~maintenance~~reportable ~~contract~~segment ~~fees~~was ~~(“first~~as ~~call” maintenance~~follows ~~services~~for ~~and~~ the ~~resale of vendor maintenance contracts) increased~~three byand ~~25%~~six ~~from~~months ~~the~~ended ~~third~~June ~~quarter of 2004 to the third quarter of 2005~~30, ~~and as a percentage of total revenue~~2006, ~~increased approximately 24%. Individually, maintenance service revenue increased 15%~~ and ~~maintenance~~2005 ~~contract fees increased 106% quarter over quarter. The significant increase~~ (in ~~maintenance contract fees was attributable to product mix.~~ thousands):

Gross Profit and Margin. Gross profit for the quarter ended September 30, 2005 was also a record high for the Company, and was up nearly 19% compared to the same period of the prior year, primarily from an overall higher gross margin percentage (“gross margin”). Total Company gross margin increased from 21.4% in the September 2004 quarter to 25.4% in the September 2005 quarter, and was a result of higher gross margins on most revenue components. Gross margins on product sales and vendor supplied services were higher in the September 2005 quarter, primarily from a favorable product mix and higher margins on certain large Federal government projects. Gross margins on consulting and engineering services were lower in 2005, primarily due to the utilization of outside contractors on a significant Federal government storage solutions project. Gross margins on maintenance revenue increased in the third quarter of 2005 compared to the third quarter of 2004 in part due to a higher percentage of sales of vendor maintenance contracts, which are reported on a net revenue basis. As stated above, we continue to be a project-based business, and as a result, gross margins fluctuate from project to project, and, depending on mix, may fluctuate from quarter to quarter.

For the three months ended June 30,	Storage Solutions			EarthWhere			Total
2006
Total net revenue	$	13,463		$	443		$	13,906
Depreciation and amortization		175			51			226
Segment loss from operations		(431	)		(1,142	)		(1,573	)

2005
Total net revenue		12,552			721			13,273
Depreciation and amortization		207			71			278
Segment loss from operations	$	(433	)	$	(43	)	$	(476	)

Operating Expenses. Operating expenses comprise selling, marketing, engineering, and general and administrative (“SG&A”) expenses, as well as depreciation and amortization expense. For the three months ended September 30, 2005, SG&A expenses increased approximately 17% as compared to the same period of the prior year. This increase from 2004 is primarily the result of significant investment in expanding our geospatial software business; higher sales and engineering personnel costs, primarily due to an increase in the number of employees (“headcount”) in the consulting and engineering group in our Federal government storage solutions business; and higher storage solutions sales commissions. Our average headcount for the September 2005 quarter was 120, of which 22 were in our geospatial business and 79 were in our storage solutions business. This compares to average headcount for the September 2004 quarter, which was 100, of which 9 were in our geospatial business and 65 were in our storage solutions business.

For the six months ended June 30,	Storage Solutions			EarthWhere			Total
2006
Total net revenue	$	27,402		$	776		$	28,178
Depreciation and amortization		366			120			486
Segment loss from operations		(457	)		(2,028	)		(2,485	)

2005
Total net revenue		27,783			1,006			28,789
Depreciation and amortization		461			125			586
Segment loss from operations	$	(23	)	$	(395	)	$	(418	)

~~Amortization~~The reconciliation of ~~capitalized~~segment ~~software~~loss ~~decreased~~ from ~~the~~operations ~~September 2004 quarter~~ to ~~the September~~SANZ’ ~~2005~~consolidated ~~quarter.~~loss ~~This decrease is due to the~~from ~~effect~~operations ofand ~~$43,000~~net ~~that~~loss was charged to amortization expense in the first and second quarters of 2005 related to amounts capitalized in 2004. Software development costs of $65,000 that had been capitalized in 2003, but that did not have sufficient contemporaneous documentation to support capitalization, were expensed as ~~R&D~~follows (in the September 2005 quarter and included in SG&A expense. In addition, in the September 2005 quarter, we recorded a charge of $26,000 to amortization expense related to the end of life of EarthWhere version 3.thousands):

Depreciation and amortization of intangibles for the third quarter of 2005 decreased as compared to 2004, due in part to the completion of amortization of certain intangible assets acquired as part of the Solunet Storage acquisition in 2003.

	Three months ended June 30,						Six months ended June 30,
	2006			2005			2006			2005

Net segment revenue	$	13,906		$	13,273		$	28,178		$	28,789
Loss from operations:
Total segment loss from operations		(1,573	)		(476	)		(2,485	)		(418	)
Unallocated corporate costs		(247	)		(160	)		(446	)		(330	)
Loss from operations		(1,820	)		(636	)		(2,931	)		(748	)

Interest expense		(291	)		(405	)		(765	)		(752	)
Charge for warrants issued to related party for debt guaranty		--			(520	)		--			(1,569	)
Benefit (charge) for change in estimated fair value of derivative financial instruments - Warrants		2,701			--			(1,317	)		--
Charge for fair value of Warrants in excess of net cash proceeds		(924	)		--			(924	)		--
Other income (expense)		--			1			(14	)		(4	)
Net loss	$	(334	)	$	(1,560	)	$	(5,951	)	$	(3,073	)

Interest Expense. Interest expense for the third quarter of 2005 increased approximately 36% compared to the third quarter of 2004. The increase is due to higher average borrowings in 2005 as well as to higher interest rates, which increased on average by nearly 2 points in the third quarter of 2005 compared to the third quarter of 2004. Average debt outstanding for the third quarter of 2005 was $16.4 million as compared to $16.0 million for the third quarter of 2004.

~~Results~~Customer ~~of Operations for the Nine months Ended September 30, 2005~~ Concentration

~~Compared~~The tofollowing table shows significant customers as a percentage of accounts receivable at June 30, 2006 and 2005 and as a percentage of revenue for the three ~~Nine~~and six months ~~Ended~~ended ~~September~~June 30, ~~2004~~2006, and 2005, respectively. Customer A represents the aggregate of all Federal government agencies to which the Company sells directly. Both the Storage Solutions and EarthWhere segments report revenue from Customer A; all of Customer B, C, D and E’s revenue is reported under the Storage Solutions segment.

(In thousands, except for percentages)	For the nine months ended September 30,												$ Change			% Change
	Accounts receivable						Revenue
	2005			% of rev			2004			% of rev			2004 - 2005			2004 - 2005
							For the three months ended						For the six months ended
							As restated
	June 30,						June 30,						June 30,
Revenue
	2006			2005			2006			2005			2006			2005
Product sales and vendor supplied services	$	35,846			76.5	%	$	41,536			83.0	%	$	(5,690	)		(13.7	)%
Customer A		7.5%			24.1%			5.9%			17.7%			5.3%			20.5%
Consulting and engineering services		4,102			8.8			2,897			5.8			1,205			41.6
Customer B		1.2			--			28.9			1.0			15.1			0.4
Maintenance services and contract fees		6,880			14.7			5,619			11.2			1,261			22.4
Customer C		17.2			--			8.6			--			4.4			--
Total Revenue		46,828			100.0			50,052			100.0			(3,224	)		(6.4	)
Customer D		0.4			--			--			--			10.4			2.4
Gross Profit (% of respective revenue)
Customer E		--			11.4			--			9.0			--			9.8
Product sales and vendor supplied services		7,906			22.1			7,822			18.8			84			1.1
Consulting and engineering services		1,573			38.3			1,276			44.0			297			23.3
Maintenance services and contract fees		2,085			30.3			1,714			30.5			371			21.6
Total Gross Profit		11,564			24.7			10,812			21.6			752			7.0
Operating expenses
Selling, general and administrative		11,425			24.4			11,721			23.4			(296	)		(2.5	)
Amortization of capitalized software		78			0.2			75			0.1			3			4.0
Depreciation and amortization of intangibles		868			1.9			959			1.9			(91	)		(9.5	)
Total operating expenses		12,371			26.5			12,755			25.4			(384	)		(3.0	)
Loss from operations		(807	)		(1.7	)		(1,943	)		(3.9	)		1,136			(58.5	)
Other income (expense)
Interest expense		(1,164	)		(2.5	)		(878	)		(1.8	)		(286	)		32.6
Charge for warrants issued to related party for debt guaranty		(1,569	)		(3.4	)		--			--			(1,569	)		100.0
Other income (expense)		(39	)		(0.1	)		457			0.9			(496	)		(108.5	)
Net loss	$	(3,579	)		(7.6	)%	$	(2,364	)		(4.7	)%	$	(1,215	)		51.4	%

~~Revenue.~~Geographic Revenue for the nine months ended September 2005 decreased by approximately 6.4% from the comparable 2004 period. For this same 2005 period, our sales of products (hardware and software) and vendor supplied services decreased by 14% from the comparable 2004 period, but revenue from professional services increased by 42% from the first nine months of 2004 to the first nine months of 2005, and as a percentage of total revenue, increased approximately 52%. The year on year decrease in hardware/software sales reflects market trends including the continued shift in product mix from tape to disk, continued downward trends on price per unit capacity and some September 2005 quarter Federal and commercial sector project delays resulting from the impact of Hurricane Katrina primarily on our Southern Texas/Gulf Coast commercial business. Information

~~The~~All ~~year~~of ~~on year improvement in professional services revenue is~~ the ~~result of the company~~Company’s ~~continued~~assets ~~commitment~~are tolocated ~~grow this generally higher margin sector of our business. Our year on year growth was heavily concentrated~~ in the Federal sector, which had an increase of approximately 100%, versus an approximately 40% decrease in the commercial sector for the same period. Revenue from maintenance services and ~~maintenance~~all ~~contract fees increased by 22% from the first nine months~~ of ~~2004 to~~ the ~~first~~Company’s ~~nine~~operating ~~months of 2005, and as a percentage of total~~results ~~revenue,~~are ~~increased~~derived ~~approximately 31%. Individually, maintenance service revenue increased 20% and maintenance contract fees increased 31%~~ from ~~the~~operations ~~2004 period to the 2005 period. The significant increase~~ in ~~maintenance contract fees was primarily attributable to~~ the ~~continued~~United ~~shift in product mix from tape to disk~~States.

Gross Profit and Margin. Despite lower revenue compared to the prior year, gross profit for the nine months ended September 30, 2005 was up 7% or $752,000 compared to the same period of the prior year. The increase in gross profit from 2004 was attributable to a $1,448,000 favorable variance from higher overall gross margin for the first nine months of 2005, offset by an unfavorable $696,000 variance from lower revenue in the same 2005 period versus the 2004 comparable period.

~~Gross~~Item ~~margin increased from 21~~2.6% inManagement’s ~~the~~Discussion ~~nine months ended September 2004 to 24.7% in the nine months ended September 2005. Gross margins on product sales~~ and ~~vendor supplied~~Analysis ~~services were higher in 2005, primarily from a favorable product mix and certain high-margin large orders in 2005. Increased sales~~ of ~~EarthWhere™ software~~Financial ~~licenses~~Condition ~~($548,000 in 2005 versus $218,000 in 2004) contributed to the improved gross margin in 2005. Gross margin on consulting~~ and ~~engineering services~~Results ~~was lower in 2005, primarily due to the utilization~~ of ~~outside~~ contractors on a significant Federal government storage solutions project. The maintenance revenue gross margins decreased slightly in the first nine months of 2005 compared to the first nine months of 2004 due to slight changes in product mix.Operations

Operating Expenses. Operating expenses comprise selling, marketing, engineering, and general and administrative (“SG&A”) expenses, as well as depreciation and amortization expense. For the nine months ended September 30, 2005, SG&A expenses decreased approximately 3% as compared to the same period of the prior year. This decrease is primarily a result of cost reductions made during the second half of 2004 in our storage solutions business (three office closures and related employee reductions) and employee reductions during this same period in corporate general and administrative departments. These decreases were offset by increased spending during the nine months ended September 30, 2005 in expanding our EarthWhere business and in increasing our headcount in the consulting and engineering group in our Federal government storage solutions business. Our average headcount yearFORWARD-~~to-date at September 30, 2005 was 112, of which 19 were~~LOOKING in our geospatial business and 72 were in our storage solutions business. This compares to year-to-date average headcount at September 30, 2004, which was 102, of which 7 were in our geospatial business and 74 were in our storage solutions business.STATEMENTS

~~Amortization~~This ofreport contains “forward-looking ~~capitalized~~statements” ~~software~~within ~~for~~the meaning of the ~~nine~~Private ~~month~~Securities Litigation ~~period~~Reform ~~ended~~Act ~~September~~of 301995. In many but not all cases you can identify forward-looking statements by words such as “anticipate,” ~~2005~~“believe,” ~~includes~~“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negative ~~write~~of these terms or other similar expressions. These forward-~~off~~looking ofstatements ~~costs~~include ofstatements ~~$26~~regarding our expectations,~~000~~ beliefs, ~~related~~or tointentions about the ~~end~~future, ofand ~~life~~are ofbased ~~EarthWhere~~on information available ~~version~~to 3us at this time. ~~Software~~We ~~development~~assume ~~costs~~no ofobligation ~~$99,000~~to ~~that~~update ~~had~~any ~~been~~of ~~capitalized~~these statements inand specifically decline any obligation to update or correct any forward-looking ~~2003,~~statements ~~but~~to ~~that~~reflect ~~did~~events ~~not~~or ~~have~~circumstances ~~sufficient~~after ~~contemporaneous~~the ~~documentation~~date of such statements or to ~~support~~reflect the occurrence of anticipated or unanticipated events. Actual ~~capitalization,~~events ~~were~~and ~~expensed~~results could differ materially from our expectations as ~~R&D~~a result of many factors, including those identified in ~~the~~this ~~nine~~report. ~~months~~We urge you ~~ended~~to ~~September~~review 30and consider those factors, and those identified from time to ~~2005~~time in our reports and ~~included~~filings inwith ~~SG&A~~the ~~expense~~SEC, for information about risks and uncertainties that may affect our future results. All ~~The~~forward-looking ~~expense~~statements ofwe ~~$99,000~~make ~~was~~after ~~comprised~~the date of this filing are also ~~$17,000~~qualified ~~each~~by inthis ~~the~~cautionary ~~first~~statement and ~~second~~identified ~~quarters~~risks. ~~and~~Additional ~~$65,000~~risk factors are discussed in the ~~third~~Company’s ~~quarter~~2005 Annual Report on Form 10-K and its ofother ~~2005~~reports filed with the SEC, to which reference should be made.

Depreciation and amortization of intangibles for the first half of 2005 decreased as compared to 2004, due in part to the completion of amortization of certain intangible assets acquired as part of the Solunet Storage acquisition in 2003. Overview

~~Interest~~SANZ ~~Expense.~~provides ~~Interest expense~~enterprise-level ~~for~~data ~~the~~storage ~~first~~and ~~nine~~data ~~months~~management ofsolutions ~~2005~~to ~~increased~~commercial ~~approximately 33% compared~~and togovernment ~~the~~clients. ~~first~~We ~~nine~~design, ~~months~~deliver, ofservice ~~2004.~~and ~~The~~sometimes ~~increase~~manage isdata storage ~~due~~systems, toespecially ~~higher~~those ~~average borrowings~~that inare ~~2005~~built asusing ~~well~~a asnetwork toarchitecture. As ~~higher~~an ~~interest~~outgrowth ~~rates,~~of ~~which~~our ~~increased~~understanding onof data management processes and ~~average~~requirements, bywe ~~nearly~~have ~~2 points~~developed inand ~~2005~~sell ~~compared~~a toproprietary ~~2004.~~data-management ~~Average debt~~software ~~outstanding~~application designed specifically for ~~the~~managing ~~first~~geospatial ~~nine~~imagery ~~months~~data. EarthWhere™ of(“EarthWhere”) ~~2005~~is ~~was~~designed ~~$16.8~~to ~~million~~facilitate asa ~~compared~~user’s provisioning and ~~to $16.3 million~~distribution ~~for~~of ~~the~~stored ~~first~~geospatial ~~nine~~data ~~months~~(e.g., ofsatellite ~~2004~~and aerial imagery, map data, etc.).

~~Charge for Warrants issued to Related Party for Debt Guaranty.~~ In ~~March, May and June 2005 and in consideration for our Harris debt guaranty~~the ~~provided~~course ~~by Sun Capital II, an affiliate~~ of our ~~majority shareholder~~business, ~~Sun Solunet,~~ we ~~were~~provide ~~obligated~~the tofollowing ~~issue~~products and ~~issued to Sun Solunet three stock purchase warrants for a total of 3~~services,~~086,218,~~ 2,244,522 and 480,969 shares of our common stock, respectively, with an exercise price of $0.001 per share. These warrants were immediately exercisable upon issuance. Based on the number of shares issued pursuant to the warrants, we recorded non-cash charges which ~~aggregated~~are ~~approximately~~reported ~~$1,569,000, calculated~~ as ~~the~~two ~~number~~business ofsegments ~~shares~~in ~~issued multiplied~~our byfinancial ~~the~~statements ~~closing market price of SANZ’ common stock as of March 23, May~~included ~~16, and June 3, 2005, the dates of issuance of the respective warrants. See further discussion regarding the debt guaranty warrants issued~~ in ~~the discussion~~ ofPart “I—~~Liquidity~~Item ~~and~~1: ~~Capital Resources” below.~~

~~Liquidity~~ · Data storage solutions that we design and ~~Capital~~deliver ~~Resources~~as a customized project to meet a client’s specific needs, including both data storage networks and data backup/recovery systems;

~~Liquidity~~· Maintenance services on storage hardware and software;

~~Our unaudited~~· ~~consolidated~~Storage-related ~~financial~~professional statements as presented in Part I—Item 1 of this Report have been prepared in conformity with US GAAP (except with regard to omission of certain disclosures within interim financial statements, as permitted by the SEC), which contemplate our continuation as a going concern. However, we have incurred substantial losses from operations since inception, including a net loss of $6.8 million for the year ended December 31, 2004, and a net loss of $3.6 million for the nine months ended September 30, 2005. In addition, as of September 30, 2005, we have negative working capital (current liabilities in excess of current assets) of $17.9 million. Accordingly, as of September 30, 2005, the recoverability of a major portion of the recorded asset amounts, including “Goodwill,” 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.services;

A proprietary data management software product known as “EarthWhere,” which facilitates imagery data access and provisioning for geospatial digital imagery users (principally satellite and aerial imagery and map data);

Maintenance and customer support services on our EarthWhere software product; and

Geospatial imagery data management consulting services.

We report the first three products and services in our “Storage Solutions” segment and the latter three in our “EarthWhere” segment.

AsResults of ~~September~~ 30, 2005, we had $1.4 million of undrawn availability on our credit facilities with Wells Fargo and Harris. In October 2005, we increased our availability through an increase in the Harris facility from $11.5 to $13.0 million. While availability on our Harris credit facility is not subject to asset levels, borrowings under our line of credit with Wells Fargo is dependent at any time on our having adequate eligible accounts receivable to support borrowings and complying with financial covenants related thereto. Operations

WeSelected ~~continue~~Consolidated toStatements attempt to improve our liquidity through improving our operating results and exploring debt and equity capital opportunities. Key operating performance improvement levers continue to be; sustaining or moderately increasing existing revenue levels, achieving higher revenue gross margins from increased services revenue and EarthWhere software license sales, and maintaining operating expenses as a percentage of ~~gross~~Operations profit at the same or lower percentage. We also continue to invest in our EarthWhere business, in particular in the product development and sales and distribution areas. At the current revenue levels for EarthWhere, such investment requires significant cash. Increased revenue from EarthWhere software sales would substantially improve operating cash flow. By continuing to generate positive operating cash flow from our storage solutions business, or achieving break-even to positive operating cash flow from our EarthWhere business, and assuming continuation of current bank debt facilities, the guaranty from Sun Capital II on our Harris credit facility, and current business trends and supplier relations, we believe that our existing credit facilities are adequate in providing sufficient liquidity to fund our operations. However, given the additional uncertainty and competitiveness in the information technology market sector, there is a possibility that we will need either to undertake further cost-cutting measures (which could entail curtailing certain operations), or to raise additional debt or equity capital, or both. If we do seek to raise debt or equity capital, there is no assurance that it will be available on favorable terms or in an amount sufficient to avoid further cost-cutting. If equity capital is raised, the issuance of those shares would also be dilutive to the ownership interests of all other stockholders.Data

~~Wells~~The ~~Fargo~~following ~~Line~~table presents Consolidated Statements of ~~Credit~~Operations data for the three and six months ended June 30, 2006 and 2005 based on the percentage of revenue for each line item, as well as the dollar and percentage change of each of the items.

InResults ~~March 2005, we amended our $12.0 million credit facility with Wells Fargo. As part~~ of ~~the~~ ~~amendment,~~Operations ~~Wells~~for ~~Fargo waived our non-compliance on certain financial covenants as of December 31, 2004. In addition, Wells Fargo reset~~ the ~~following financial~~Three ~~covenant~~Months ~~requirements~~Ended ~~effective~~June ~~January 1~~30, ~~2005: (1) minimum net~~2006 income (loss) on a year to date basis, calculated quarterly (see covenants below); (2) minimum net worth plus “subordinated debt” (measured in the aggregate, with amounts loaned to SANZ Inc. and its wholly-owned subsidiary, Solunet Storage, (the Company’s borrowers) from SANZ being defined as subordinated debt), calculated on a monthly basis (see covenants below); (3) minimum average availability of $500,000, calculated monthly; (4) capital expenditure limit of $1,500,000, calculated on an annual basis; and (5) a minimum cash infusion from SANZ or an outside source if SANZ Inc. and its subsidiary, Solunet Storage, generate a net loss in a given quarter and has generated a net loss on a year to date basis at that time, in an amount equal to the lesser of the quarterly net loss or the year to date net loss.

Period	Minimum Net Income (Operating subsidiaries only)
Three months ending March 31, 2005	$ (300,000)
Six months ending June 30, 2005	(250,000)
Nine months ending September 30, 2005	0
Twelve months ending December 31, 2005	300,000

Compared to the Three Months Ended June 30, 2005

Period	Minimum Book Net Worth plus Subordinated Debt (Operating subsidiaries only)
(In thousands, except for percentages)		For the three months ended June 30,												$ Change			% Change
March 31, 2005	$ 26,231,447
		2006			% of rev			2005			% of rev			2005 - 2006			2005 - 2006
April 30, 2005	25,845,023
Revenue
May 31, 2005	25,370,393
Product sales and vendor supplied services		$	11,037			79.4	%	$	9,549			72.0	%	$	1,488			15.6	%
June 30, 2005	26,281,447
Consulting and engineering services			1,164			8.4			1,187			8.9			(23	)		(1.9	)
July 31, 2005	26,041,364
Maintenance services and contract fees			1,705			12.2			2,537			19.1			(832	)		(32.8	)
August 31, 2005	25,645,398
Total revenue			13,906			100.0			13,273			100.0			633			4.8
September 30, 2005	26,531,447
Gross Profit (% of respective revenue)
October 31, 2005	26,277,279
Product sales and vendor supplied services			2,224			20.2			2,015			21.1			209			10.4
November 30, 2005	25,910,771
Consulting and engineering services			437			37.5			461			38.8			(24	)		(5.2	)
December 31, 2005 and each month thereafter	26,831,447
Maintenance services and contract fees			584			34.3			710			28.0			(126	)		(17.7	)
Total gross profit			3,245			23.3			3,186			24.0			59			1.9
Operating expenses
Selling, engineering, general and administrative			4,839			34.8			3,544			26.7			1,295			36.5
Depreciation and amortization of intangibles			226			1.6			278			2.1			(52	)		(18.7	)
Total operating expenses			5,065			36.4			3,822			28.8			1,243			32.5
Loss from operations			(1,820	)		(13.1	)		(636	)		(4.8	)		(1,184	)		186.2
Other income (expense)
Interest expense			(291	)		(2.1	)		(405	)		(3.1	)		114			28.1
Charge for warrants issued to related party for debt guaranty			--			--			(520	)		(3.9	)		520			100.0
Benefit for change in estimated fair value of derivative financial instruments - Warrants			2,701			19.4			--			--			2,701			100.0
Charge for fair value of Warrants in excess of net cash proceeds			(924	)		(6.6	)		--			--			(924	)		100.0
Other income (expense)			--			--			1			0.0			(1	)		100.0
Net loss		$	(334	)		(2.4	)	$	(1,560	)		(11.8	)	$	1,226			(78.6	)

Revenue. Revenue for the second quarter of 2006 increased from the comparable 2005 quarter, primarily related to an increase in sales of hardware and software. It is important to note that a significant percentage of our revenue continues to be project-based, and as such quarterly results may vary significantly.

Revenue from professional services decreased by 2% from the second quarter of 2005 to the second quarter of 2006, primarily due to a decrease in EarthWhere professional services quarter on quarter. As a percentage of total revenue, revenue from professional services decreased slightly, from 8.9% to 8.4% quarter over quarter.

Revenue from maintenance services and maintenance contract fees (“first call” maintenance services and the resale of vendor maintenance contracts) decreased by 33% from the second quarter of 2005 to the second quarter of 2006, primarily due to product mix - a higher percentage of maintenance contract fees (which are reported net of cost of revenue) versus maintenance services in 2006 as compared to 2005.

Gross Profit and Margin. Gross profit for the quarter ended June 30, 2006 increased approximately 2% compared to the same period of the prior year. The $59,000 quarter-on-quarter increase in gross profit was attributable to a favorable variance of $151,000 due to higher revenue, partially offset by a $92,000 unfavorable variance due to lower gross margin percentage (“gross margin”) in 2006. Total Company gross margin decreased from 24.0% in the June 2005 quarter to 23.3% in the June 2006 quarter, a decrease which was due to a combination of slightly lower gross margins on hardware, software and professional services partially offset by higher gross margins on maintenance revenue. Gross margins on consulting and engineering services were lower in 2006, primarily due to the utilization of outside contractors on a significant Federal government storage solutions project. Gross margins on maintenance revenue increased in the second quarter of 2006 compared to the second quarter of 2005 in part due to a higher percentage of sales of vendor maintenance contracts, as noted above, which are reported on a net revenue basis. As stated above, we continue to be a project-based business, and as a result, gross margins fluctuate from project to project, and, depending on mix, may fluctuate from quarter to quarter.

~~Additionally,~~Operating ~~the~~Expenses. Operating expenses ~~amended~~comprise ~~credit~~selling, ~~agreement~~marketing, ~~with~~engineering, ~~Wells~~general ~~Fargo~~and ~~includes~~administrative (“SG&A”) expenses, as anwell ~~additional~~as depreciation and amortization expense. For ~~borrower,~~the three ~~Solunet~~months ~~Storage,~~ended ~~which~~June in30, ~~March~~2006, ~~2005~~operating ~~became~~expenses aincreased ~~wholly-owned subsidiary~~approximately of33% as ~~SANZ~~compared ~~Inc.,~~to ~~itself~~the asame ~~wholly-owned~~period ~~subsidiary~~ of ~~SANZ~~the prior year. AsThis ~~part~~increase offrom ~~the~~2005 is ~~co-borrowing~~primarily ~~arrangement~~the ~~with~~result ~~SANZ~~of ~~Inc.~~significant ~~and~~investment ~~Solunet~~in ~~Storage,~~expanding ~~each~~our ~~of the~~EarthWhere ~~borrowers~~segment, ~~has~~for awhich ~~separate~~operating ~~borrowing base; however~~expenses, ~~total~~including ~~borrowings~~an ~~under~~allocation ~~the~~for general ~~facility~~and administrative ~~may~~expenses, ~~not~~increased ~~exceed~~from $12490,000~~,000.~~ ~~Additionally,~~in ~~each~~the ~~entity~~second isquarter ~~required~~of 2005 to ~~guaranty~~ ~~each~~$1.2 ~~other’s~~million ~~debt~~in ~~under~~ the ~~borrowing~~second ~~facility~~quarter of 2006. ~~Cash~~Higher ~~transfers~~sales ~~from~~and engineering ~~SANZ~~personnel ~~Inc.~~costs, toprimarily ~~Solunet~~due ~~Storage~~to ~~are~~an ~~limited~~increase toin the ~~funding~~number of ~~Solunet~~employees ~~Storage’s~~in ~~operating~~the consulting ~~expenses,~~and ~~subject~~engineering togroup anin ~~annual~~our ~~limit,~~Federal ~~and~~government tostorage ~~a minimum availability~~solutions ~~on the~~business ~~date~~and under-utilization of ~~any~~these ~~such~~resources, ~~transfer.~~also contributed to higher ~~During the~~SG&A ~~June~~expenses ~~and~~in the ~~September~~June ~~2005~~2006 ~~quarters,~~quarter ~~the~~as ~~Company~~compared ~~was~~to ~~not~~the inJune ~~compliance~~2005 quarter. ~~with~~Our average headcount for the ~~minimum~~June ~~availability~~2006 ~~covenant~~quarter ~~required~~was ~~for~~132, ~~such~~of ~~cash~~which ~~transfers.~~29 ~~This~~were in our ~~violation~~EarthWhere ~~occurred~~segment, on82 ~~one~~in ~~cash~~our ~~transfer~~Storage inSolutions ~~June~~segment, and 21 in ~~September 2005.~~general ~~Subsequent~~and administrative to(“G&A”) ~~the~~personnel. ~~June~~This ~~and~~compares ~~September~~to ~~2005~~an ~~quarters,~~average ~~the~~headcount ~~Company received a~~for ~~waiver~~the ~~from~~June ~~Wells~~2005 ~~Fargo~~quarter ~~for~~of ~~each~~116, of ~~these~~which ~~periods.~~20 Aswere ofin ~~September~~our 30EarthWhere segment, ~~the~~76 ~~Company~~in our ~~was~~Storage inSolutions ~~compliance~~segment ~~with~~and ~~all~~20 ofin ~~the~~G&A. ~~other~~In ~~financial~~addition, ~~covenants~~we ~~under~~recorded ~~the~~an ~~Wells~~employee ~~Fargo~~severance ~~credit~~charge ~~agreement~~of approximately $200,000 in June, 2006.

~~Also,~~Share-Based asCompensation Expense. ~~part of the amended agreement and effective~~ On January 1, ~~2005~~2006, ~~Wells Fargo increased~~ the ~~interest~~Company ~~rate~~adopted onthe ~~our~~provisions ~~borrowings~~of toStatement ~~prime plus 5.0%, an increase~~ of ~~three~~ ~~points. This rate is subject to potential decreases, as permitted by~~Financial ~~Wells Fargo,~~Accounting ~~based~~Standard ~~on SANZ Inc~~No. ~~and~~123 ~~its subsidiary, Solunet Storage, achieving certain net income~~ (~~loss~~revised) ~~levels~~(“SFAS ~~during 2005. For the March 2005 quarter~~123R”), ~~SANZ~~“Share-Based ~~Inc.~~Payment,” ~~and Solunet~~using ~~Storage achieved a minimum net loss threshold and~~ the ~~borrowing~~modified ~~rate was reduced~~prospective ~~to prime plus 4.0%~~method, ~~effective~~which ~~May~~requires 1,that ~~2005.~~compensation ~~SANZ~~expense ~~Inc. and~~be ~~Solunet~~recorded ~~Storage did not achieve a minimum net loss threshold~~ for ~~the~~all ~~six months~~unvested ~~ended~~stock ~~June~~options ~~30, 2005 or for the nine months ended September 30, 2005,~~ and as ~~such,~~restricted ~~effective~~stock ~~July~~over ~~1, 2005,~~ the ~~interest rate on the Company’s borrowings~~ ~~reverted~~remaining toaward ~~prime~~service ~~plus 5~~period.0% ~~from prime plus 4.0%. Our borrowing rate on this facility at September 30, 2005 was prime plus 5.0% or 11.75%.~~

~~Harris~~For ~~Credit~~the three ~~Facility~~months ended June 30, 2006, we recorded share-based compensation expense of $82,000, which is included in SG&A expense. The expense recorded during the period related to the current period compensation expense for stock options granted in the second quarter and for unvested stock options granted in prior years as calculated under the provisions of Statement of Financial Accounting Standard No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” In accordance with SFAS 123R, we accounted for options granted in prior years using the fair value pricing model used at the grant date to calculate the pro-forma compensation expense required for disclosure under SFAS 123, adjusted to include a provision for estimated forfeitures. We have estimated forfeitures at 20% annually, based on historical trends related to employee turnover and the market price of the Company’s common stock. The Company considers revisions to its assumptions in estimating forfeitures on an ongoing basis. We used the Black-Scholes option pricing model, as we believe this model best reflects the Company’s historical option exercise patterns, with weighted average assumptions as disclosed in Note 4 of the consolidated financial statements included with this report.

OnAs ~~February 16, 2005,~~ we ~~entered into a revised credit agreement with Harris,~~are ~~which increased~~applying ~~our~~the ~~availability~~modified byprospective ~~$2.0 million,~~method ~~for a total~~ of ~~$10.0 million~~adoption, ~~and~~ ~~consolidated~~there ~~two~~was ~~credit~~no ~~lines (one maintained by Solunet Storage and one~~share-based ~~maintained~~compensation byexpense ~~SANZ)~~recorded ~~into~~in ~~one facility with SANZ as~~ the ~~sole~~same ~~borrower~~period ~~and guaranteed by Sun Capital II, an affiliate~~ of ~~our majority shareholder, Sun Solunet. On June 3,~~ 2005~~, we entered into a revised credit agreement with Harris, which increased the facility from $10~~.0 ~~million~~As todisclosed ~~$11.5~~in ~~million. On~~Note ~~October~~ 4~~, 2005, we executed an additional amendment to the Harris credit~~ ~~agreement,~~of ~~which increased~~ the ~~facility~~consolidated ~~from~~financial ~~$11.5~~statements ~~million~~included towith ~~$13.0~~this ~~million. This facility is unsecured~~report, ishad ~~not limited by availability under a borrowing~~we ~~base,~~applied ~~does not require~~ the ~~maintenance~~fair-value ofrecognition ~~specified~~provisions ~~financial covenants, and as~~ of ~~September~~SFAS ~~30,~~123 ~~2005,~~in ~~bore~~the ~~interest~~second ~~at a rate of prime plus 1.0% or 7.75%.~~quarter ~~While~~of ~~the Harris facility is a demand note~~2005, ~~under~~we ~~the~~would ~~revised~~have ~~agreement~~recorded ~~it has been extended to February 2006~~$60,000 ~~unless~~of ~~called~~share-based ~~earlier~~compensation ~~by the lender.~~expense ~~The Sun~~in ~~Capital~~that ~~II guaranty also expires in February 2006~~period. ~~Additionally, Sun Capital~~The IItotal ~~has~~compensation ~~agreed~~cost ~~that,~~related ~~upon~~to ~~the~~nonvested ~~written~~options ~~request~~not ofyet ~~SANZ,~~recognized itat ~~will~~June ~~provide SANZ with~~30, ~~sufficient~~2006 ~~funds~~was to$1.6 ~~repay~~million and the ~~debt~~weighted-average ~~outstanding~~period ~~under~~over ~~the~~which ~~credit~~this ~~facility in~~expense ~~the~~is ~~event~~expected ~~that~~to ~~Harris~~be ~~requires~~recognized ~~repayment~~is ofapproximately ~~such~~three ~~debt~~and ~~or,~~a athalf ~~Sun~~years. ~~Capital~~The ~~II’s~~total ~~election,~~fair ~~pay~~value ~~the~~of ~~outstanding~~options ~~debt~~vested ~~directly~~during ~~to Harris; provided that in no event will Sun Capital II’s obligation exceed~~ the ~~amount~~second quarter of ~~Sun~~2006 ~~Capital II’s guaranty;~~was ~~this agreement expires on December 31~~$291, ~~2005~~000.

~~Other~~Depreciation ~~financing~~and Amortization. Depreciation and amortization of intangibles for the second quarter of 2006 decreased as compared to 2005, due in part to the completion of amortization of certain intangible assets acquired as part of the Solunet Storage acquisition in 2003, as well as the full depreciation in 2005 of certain property and equipment acquired in 2002.

InInterest ~~October~~Expense. Interest ~~2005,~~expense ~~SANZ~~for ~~Inc.~~the ~~executed~~second aquarter ~~security~~of ~~agreement~~2006 ~~with~~decreased ~~Avnet,~~approximately ~~its~~28% as compared ~~largest~~to the second quarter of 2005. The decrease ~~supplier,~~is ~~granting~~due ato ~~security~~lower ~~interest~~average borrowings in ~~all~~2006, ofas ~~its~~a ~~assets.~~result ~~Pursuant~~of to the decreased debt ~~security~~following ~~agreement,~~ the ~~Company’s~~equity ~~indebtedness~~raised ~~with~~in ~~Avnet~~the isPrivate ~~secured,~~Placement ~~except~~(as ~~for~~defined under the ~~$1,000,000.~~“Liquidity ~~The~~and ~~security~~Capital ~~agreement~~Resources” ~~specifies~~section ~~events~~ of ~~default,~~this ~~including~~Item). ~~but~~See additional ~~not~~information ~~limited~~regarding tothe ~~any~~Private ~~failure~~Placement byin ~~the~~Note ~~Company~~3 to ~~maintain~~the ~~total cash and customer~~unaudited ~~receivables~~consolidated ~~(less~~financial ~~indebtedness~~statements ofincluded ~~the~~with ~~Company~~this toreport. ~~Wells~~The ~~Fargo)~~effect ~~in an amount~~on ~~that is~~interest atexpense ~~least~~due ~~equal~~ to the ~~amount~~decrease ofin ~~outstanding~~average ~~trade~~borrowings ~~accounts~~was ~~payable~~partially ~~to Avnet,~~offset ~~less~~by ~~$2,000,000.~~higher ~~The security~~ interest ~~granted~~rates, towhich ~~Avnet~~increased ison ~~subordinate~~average toby ~~the~~nearly 200 ~~security~~basis points ~~interest~~in ~~granted~~the tosecond ~~Wells~~quarter ~~Fargo~~of by2006 ~~the~~compared ~~Company~~to inthe ~~connection~~second ~~with~~quarter ~~the Company’s~~of ~~principal~~2005. ~~borrowing~~Average ~~facility~~debt ~~with~~outstanding ~~Wells~~for ~~Fargo~~the ~~and~~second toquarter ~~evidence~~of ~~the~~2006 was $9.0 ~~subordination,~~million ~~Avnet~~as ~~and~~compared ~~Wells~~to ~~Fargo~~$17.1 million ~~entered~~for ~~into~~the ansecond ~~intercreditor~~quarter ~~agreement~~of 2005.

Debt Guaranty Warrants

As discussed above, the Harris credit facility term extends until February 2006. Pursuant to the Credit Support Agreement provided by Sun Capital II, until the Company reduces the guaranteed debt to $3.0 million or less, it is required to issue stock purchase warrants at an exercise price of $0.001 to Sun Solunet beginning on November 16, 2004 and continuing at six-month intervals in the future (each May and November). The number of warrants to be issued is dependent on the amount by which the remaining guaranteed debt exceeds $3.0 million, according to formulas applicable to each such date, as disclosed in our 2004 Annual Report on Form 10-K. The issuance of these warrants will result in dilution of the other shareholders of the Company.

AsBenefit ~~consideration~~ for ~~the~~Change ~~Sun~~in ~~Capital~~Estimated IIFair ~~guaranty~~Value onof ~~the~~Derivative $2Financial Instruments—Warrants.~~0 million increase~~ inThe ~~the~~Warrants ~~Harris~~issued ~~credit facility~~ in ~~February~~the ~~2005,~~Private ~~the~~Placement ~~Company~~were ~~issued~~accounted onfor ~~March~~as ~~23,~~a derivative ~~2005~~financial ainstrument ~~warrant~~and toclassified ~~purchase~~as 3a liability,~~086,218~~ ~~shares~~due ofto ~~our~~not ~~common~~meeting ~~stock with an exercise~~the ~~price~~requirements offor ~~$0.001~~equity ~~per~~classification ~~share~~as tostipulated ~~our~~in ~~majority~~EITF ~~shareholder, Sun Solunet~~00-19. ~~The number~~In ofaccordance ~~shares~~with ~~underlying~~US ~~the~~GAAP, ~~warrant~~we ~~was~~estimate ~~calculated~~the ~~using~~fair value of the ~~formula~~Warrants ~~applicable~~at each ~~to the~~reporting ~~November~~period. ~~16,~~The ~~2004~~net ~~measurement~~change ~~(as~~in if the ~~$2.0~~estimated ~~million~~fair ~~debt~~value ~~guaranty~~is ~~was~~recorded as ina ~~place~~benefit as(charge) ofto ~~November~~the ~~16,~~statement ~~2004)~~of operations. ~~This~~In ~~warrant~~the ~~was~~second ~~immediately~~quarter ~~exercisable~~of ~~and~~2006, ~~resulted~~the inestimated ~~approximately~~fair 3%value ~~dilution~~ of the ~~other~~Warrants ~~shareholders~~decreased as of ~~the~~June ~~Company.~~30, 2006, ~~Based~~primarily ondue to the ~~number~~closing price of ~~underlying~~our ~~shares~~common ~~issued~~stock ~~pursuant~~as toof ~~the~~June ~~warrant~~30, ~~the~~2006, ~~Company~~resulting ~~recorded~~ in ~~the March 2005 quarter~~ a ~~charge~~benefit of $12,701,000.1 ~~million,~~See ~~calculated as~~further ~~the~~discussion ~~number~~ of ~~shares issued under~~ the ~~warrant multiplied by the closing~~Warrants ~~market~~in Note ~~price~~3 ofto ~~SANZ’~~the ~~common~~consolidated ~~stock~~financial onstatements ~~the~~included ~~issuance~~in ~~date~~this report.

~~Pursuant~~Charge tofor ~~the~~Fair ~~Credit~~Value ~~Support~~of ~~Agreement,~~Warrants onin ~~May~~Excess ~~16,~~of ~~2005, the Company became obligated~~Proceeds. toWe recorded ~~issue~~the ~~and~~Warrants issued toin ~~Sun~~the ~~Solunet~~April aand ~~stock~~May ~~purchase~~2006 ~~warrant~~closings toof ~~purchase~~the Private ~~2,244,522~~ ~~shares of the~~Placement ~~Company’s common stock~~ at an ~~exercise~~initial ~~price~~fair value of approximately $02.~~001~~6 ~~per share~~million. ~~This warrant~~Because ~~was immediately exercisable upon issuance. The number of shares~~the ~~underlying~~estimated ~~this~~fair ~~warrant~~value ~~represented approximately 2%~~ of the ~~Company’s outstanding~~Warrants ~~common~~exceeded ~~stock as of~~ the ~~issuance~~net ~~date~~cash ~~and~~proceeds ~~was~~of ~~calculated in~~$1.7 ~~accordance~~million, ~~with~~we ~~the~~recorded ~~formula~~a ~~set~~charge ~~forth~~ in the ~~Credit~~statement ~~Support~~of ~~Agreement. Pursuant to~~operations ~~the~~of ~~warrant issuance~~$924,000 for the ~~Company~~difference ~~recorded~~between inthe ~~May~~estimated ~~2005~~fair avalue ~~charge~~ of ~~$405,000,~~the ~~calculated~~Warrants asand the ~~number~~net cash ~~of shares~~proceeds ~~issued~~raised. ~~under~~See ~~the~~further ~~warrant~~discussion ~~multiplied~~of by the ~~closing~~Warrants ~~market~~in ~~price~~Note of3 ~~SANZ’~~to the ~~common~~consolidated ~~stock~~financial onstatements ~~May~~included ~~16,~~in ~~2005~~this report.

OnSegment June 27, 2005 and in consideration of an additional $1.5 million guaranty by Sun Capital II on the Company’s increased Harris facility, the Company issued a warrant to purchase 480,969 shares of our common stock with an exercise price of $0.001 per share to our majority shareholder, Sun Solunet. The Company and Sun Solunet agreed that the number of shares exercisable under this warrant would be calculated pursuant to the same formula set forth in the Credit Support Agreement, based on the amount that the outstanding guaranty provided on behalf of the Company by Sun Capital II on the Harris Facility exceeded $3.0 million as of May 16, 2005 (as if the additional $1.5 million guaranty was in place as of May 16, 2005). This warrant was immediately exercisable upon issuance and the number of shares underlying this warrant represented approximately 0.5% of the Company’s outstanding common stock as of the issuance date. Pursuant to the warrant issuance, the Company recorded in June 2005 a charge of $115,000, calculated as the number of shares issued under the warrant multiplied by the closing market price of SANZ’ common stock on June 3, 2005, the effective date of the revised Harris credit facility and Sun Capital II guaranty.Information

OnThe ~~October~~Company 4currently operates and reports in two business segments—Storage Solutions and EarthWhere. A detailed description of the products and services, as ~~2005~~well as financial data, wefor ~~amended~~each ~~our~~segment ~~credit~~can ~~facility~~be ~~with~~found ~~Harris,~~in ~~increasing~~Note 8 to the ~~available~~consolidated ~~line~~financial bystatements ~~$1.5~~included ~~million~~in tothis ~~$13~~report.~~0 million.~~ ~~Sun~~Based ~~Capital~~on IIthe ~~has~~way ~~provided~~in which amanagement ~~guaranty~~reviews onand ~~this~~evaluates ~~additional~~segment ~~amount.~~performance, ~~The~~the ~~Company~~segment operating ~~was~~results shown below do not ~~required~~include non-allocated corporate expenses, ~~to issue~~interest ~~stock~~expense, ~~purchase~~charges ~~warrants~~for asdebt ~~consideration~~guaranty ~~for~~warrants ~~this~~and ~~additional~~other ~~guaranty;~~income and ~~however,~~expense. ~~the~~Such ~~increase~~items inare ~~borrowings~~only ~~was~~considered ~~included~~when inevaluating the ~~warrant~~results ~~issued~~of onthe ~~November~~consolidated ~~16,~~Company. ~~2005,~~Future aschanges ~~described~~to ~~below~~this organizational structure may result in changes to the reportable segments disclosed.

~~Pursuant~~Storage toSolutions the Credit Support Agreement, on November 16, 2005, the Company issued to Sun Solunet a stock purchase warrant to purchase 6,539,490 shares of the Company’s common stock at an exercise price of $0.001 per share. This warrant was immediately exercisable upon issuance. The number of shares underlying this warrant represented approximately 7% of the Company’s outstanding common stock as of the issuance date and was calculated in accordance with the formula set forth in the Credit Support Agreement. Pursuant to the warrant issuance, the Company recorded in November 2005 a charge of $1.3 million, calculated as the number of shares issued under the warrant multiplied by the closing market price of SANZ’ common stock on November 16, 2005.

Cash and Cash Flows

(in thousands)	For the three months ended June 30,
Net revenue		2006			2005
Product sales and vendor supplied services	$	10,792		$	9,102
Consulting and engineering services		1,019			955
Maintenance services and contract fees		1,652			2,495
Total net revenue		13,463			12,552

Gross Profit		3,123			2,658
Gross margin percentage		23.2	%		21.2	%
Segment loss from operations	$	(431	)	$	(433	)

~~Our~~EarthWhere cash and cash equivalents decreased from $486,000 at December 31, 2004 to $-0- at September 30, 2005. For the nine months ended September 30, 2005, net cash provided by operating activities was $28,000, compared to $3.0 million used in operating activities in the same period of 2004. Significant uses of cash from operations for the nine months ended September 30, 2005 were: (1) the net loss incurred for the period of $3.6 million, less $0.9 million in depreciation and amortization and less a $1.6 million non-cash charge related to warrants issued to Sun Solunet, discussed above; (2) a decrease in accrued expenses related to payments in 2005 for severance and office lease commitments accrued as of December 31, 2004, and (3) a decrease in deferred revenue due to lower internal maintenance billings in the third quarter of 2005 as compared to the fourth quarter of 2004. Our significant source of cash from operations was a decrease in our accounts receivable of $1.6 million, due primarily to lower customer billings for the month of September 2005 compared to the month of December 2004.

(in thousands)	For the three months ended June 30,
Net revenue	2006			2005
EarthWhere licenses and services	$	255		$	666
Other hardware and software		188			55
Total net revenue		443			721

Gross Profit		122			528
Gross margin percentage		27.5	%		73.2	%
Segment loss from operations	$	(1,142	)	$	(43	)

The quarter on quarter increase in overall Company revenue was attributable to the Storage Solutions segment. EarthWhere license and services revenue was down from the second quarter of 2005 to the second quarter of 2006, due in part to contract award delays on certain Department of Defense opportunities in 2006, with the closing cycle on larger projects taking longer than previously anticipated.

~~Cash~~As ~~used~~shown in ~~investing~~the ~~activities~~tables ~~for~~above, the ~~first~~Company’s ~~nine~~overall ~~months~~decrease ofin ~~2005~~gross ~~was~~margin ~~comprised~~from ofthe ~~purchases~~second ofquarter ~~equipment~~ of ~~$275,000~~2005 ~~and~~to ~~capitalized~~the ~~software~~second ~~costs~~quarter of ~~$653,000. Cash~~2006 ~~provided~~is byprimarily ~~financing activities for the first nine months of 2005~~attributable ~~consisted~~to ofa ~~net~~decrease ~~payments~~in ofgross ~~$3.4~~margin ~~million~~in onthe ~~our~~EarthWhere ~~Wells~~segment, ~~Fargo~~which ~~line~~is ofdue ~~credit as~~to aan ~~result~~increase ofin athe ~~lower~~amortization ~~accounts~~expense ~~receivable~~of ~~borrowing~~capitalized ~~base~~software atdevelopment ~~September 30~~costs, ~~2005~~ ~~as compared~~which tois ~~December~~included ~~31,~~in ~~2004,~~cost ~~and~~of ~~additional~~revenue, ~~borrowings~~in ~~of $3~~2006.8 ~~million~~For onthe Storage Solutions ~~our Harris~~Segment, ~~credit~~gross ~~facility~~margin asincreased afrom ~~result~~21.2% ofin the ~~lower~~second ~~borrowing~~quarter ~~availability~~of on2005 ~~our~~to ~~Wells~~23.2% ~~Fargo~~in ~~facility~~the second quarter of 2006.

Results of Operations for the Six Months Ended June 30, 2006

Compared to the Six Months Ended June 30, 2005

(In thousands, except for percentages)	For the six months ended June 30,												$ Change			% Change
	2006			% of rev			2005			% of rev			2005 - 2006			2005 - 2006
Revenue
Product sales and vendor supplied services	$	22,195			78.8	%	$	21,784			75.7	%	$	411			1.9	%
Consulting and engineering services		2,474			8.8			2,444			8.5			30			1.2
Maintenance services and contract fees		3,509			12.4			4,561			15.8			(1,052	)		(23.1	)
Total revenue		28,178			100.0			28,789			100.0			(611	)		(2.1	)

Gross Profit (% of respective revenue)
Product sales and vendor supplied services		4,586			20.7			4,636			21.3			(50	)		(1.1	)
Consulting and engineering services		920			37.2			972			39.8			(52	)		(5.3	)
Maintenance services and contract fees		1,246			35.5			1,335			29.3			(89	)		(6.7	)
Total gross profit		6,752			24.0			6,943			24.1			(191	)		(2.8	)

Operating expenses
Selling, engineering, general and administrative		9,197			32.7			7,105			24.7			2,092			29.4
Depreciation and amortization of intangibles		486			1.7			586			2.0			(100	)		(17.1	)
Total operating expenses		9,683			34.4			7,691			26.7			1,992			25.9

Loss from operations		(2,931	)		(10.4	)		(748	)		(2.6	)		(2,183	)		291.8

Other income (expense)
Interest expense		(765	)		(2.7	)		(752	)		(2.6	)		(13	)		1.7
Charge for warrants issued to related party for debt guaranty		--			--			(1,569	)		(5.5	)		1,569			100.0
Charge for change in estimated fair value of derivative financial instruments - Warrants		(1,317	)		(4.7	)		--			--			(1,317	)		100.0
Charge for fair value of Warrants in excess of net cash proceeds		(924	)		(3.3	)		--			--			(924	)		100.0
Other income (expense)		(14	)		(0.0	)		(4	)		(0.0	)		(10	)		250.0

Net loss	$	(5,951	)		(21.0	)	$	(3,073	)		(10.7	)	$	(2,878	)		93.7

Deemed dividend related to beneficial conversion feature of Series A Preferred Stock		(4,539	)		(16.1	)		--			--			(4,539	)		100.0

Net loss available to common stockholders	$	(10,490	)		(37.1	)%	$	(3,073	)		(10.7	)%	$	(7,417	)		241.4	%

Revenue. Revenue from maintenance services and maintenance contract fees (“first call” maintenance services and the resale of vendor maintenance contracts) decreased by 23% from the first half of 2005 to the first half of 2006, primarily due to product mix - a higher percentage of maintenance contract fees (which are reported net of cost of revenue) versus maintenance services in 2006 as compared to 2005.

Revenue from hardware/software sales increased from the first six months of 2005 to the first six months of 2006 by nearly 2%, primarily from an increase in revenue from our Storage Solutions segment offset by a decrease in product sales in our EarthWhere segment. It is important to note that a significant percentage of our revenue continues to be project-based, and as such quarterly results may vary significantly.

Revenue from professional services remained relatively flat from the first half of 2005 to the first half of 2006, with an increase in Storage Solutions professional services partially offset by a slight decrease in EarthWhere professional services year on year. As a percentage of total revenue, revenue from professional services increased slightly, from 8.5% to 8.8% from the first six months of 2005 to the first six months of 2006.

Gross Profit and Margin. Gross profit for the six months ended June 30, 2006 decreased approximately 3% compared to the same period of the prior year. The $191,000 year-on-year decrease in gross profit was attributable to an unfavorable variance of $146,000 due to lower revenue and a $45,000 unfavorable variance due to lower gross margin percentage (“gross margin”) in 2006. Total Company gross margin decreased from 24.1% in the first six months of 2005 to 24.0% in the first six months of 2006, a decrease which was due to a combination of slightly lower gross margins on hardware, software and professional services partially offset by higher gross margins on maintenance revenue. The lower gross margin on product sales was attributable to an increase in the amortization expense of capitalized software development costs, which is included in cost of goods sold. Gross margins on consulting and engineering services were lower in 2006, primarily due to the utilization of outside contractors on a significant Federal government storage solutions project. Gross margins on maintenance revenue increased in the first half of 2006 compared to the first half of 2005 in part due to a higher percentage of sales of vendor maintenance contracts, as noted above, which are reported on a net revenue basis. As stated above, we continue to be a project-based business, and as a result, gross margins fluctuate from project to project, and, depending on mix, may fluctuate from quarter to quarter.

Operating Expenses. Operating expenses comprise selling, marketing, engineering, general and administrative (“SG&A”) expenses, as well as depreciation and amortization expense. For the six months ended June 30, 2006, operating expenses increased approximately 26% as compared to the same period of the prior year. This increase from 2005 is primarily the result of significant investment in expanding our EarthWhere segment. Higher sales and engineering personnel costs, primarily due to an increase in the number of employees in the consulting and engineering group in our Federal government storage solutions business and under-utilization of these resources, also contributed to higher SG&A expenses in the first half of 2006 as compared to the first half of 2005. Our average headcount for the first six months of 2006 was 131, of which 29 were in our EarthWhere segment, 82 in our Storage Solutions segment, and 20 in G&A personnel. This compares to an average headcount for the first half of 2005 of 111, of which 18 were in our EarthWhere segment, 72 in our Storage Solutions segment and 21 in G&A. In addition, we recorded an employee severance charge of approximately $200,000 in June, 2006.

Share-Based Compensation Expense. On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standard No. 123 (revised) (“SFAS 123R”), “Share-Based Payment,” using the modified prospective method, which requires that compensation expense be recorded for all unvested stock options and restricted stock over the remaining award service period.

For the six months ended June 30, 2006, we recorded share-based compensation expense of $154,000, which is included in SG&A expense. The expense recorded during the period related to the current period compensation expense for stock options granted in the second quarter and for unvested stock options granted in prior years as calculated under the provisions of Statement of Financial Accounting Standard No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” In accordance with SFAS 123R, we accounted for options granted in prior years using the fair value pricing model used at the grant date to calculate the pro-forma compensation expense required for disclosure under SFAS 123, adjusted to include a provision for estimated forfeitures. We have estimated forfeitures at 20% annually, based on historical trends related to employee turnover and the market price of the Company’s common stock. The Company considers revisions to its assumptions in estimating forfeitures on an ongoing basis. We used the Black-Scholes option pricing model, as we believe this model best reflects the Company’s historical option exercise patterns, with weighted average assumptions as disclosed in Note 4 of the consolidated financial statements included with this report.

As we are applying the modified prospective method of adoption, there was no share-based compensation expense recorded in the same period of 2005. As disclosed in Note 4 of the consolidated financial statements included with this report, had we applied the fair-value recognition provisions of SFAS 123 in the first six months of 2005, we would have recorded $185,000 of share-based compensation expense in that period. The total compensation cost related to nonvested options not yet recognized at June 30, 2006 was $1.6 million and the weighted-average period over which this expense is expected to be recognized is approximately three and a half years. The total fair value of options vested during the first half of 2006 was $320,000.

Depreciation and Amortization. Depreciation and amortization of intangibles for the first six months of 2006 decreased as compared to 2005, due in part to the completion of amortization of certain intangible assets acquired as part of the Solunet Storage acquisition in 2003, as well as the full depreciation in 2005 of certain property and equipment acquired in 2002.

Interest Expense. Interest expense for the six months ended June 30, 2006 increased approximately 2% as compared to the same period of 2005. This slight increase is due to higher interest rates in 2006, which increased on average by nearly 200 basis points in the first half of 2006 as compared to the first half of 2005. The effect on interest expense due to the increase in interest rates was partially offset by lower average borrowings in 2006, as a result of lower debt following the equity raised in the Private Placement. See additional information regarding the Private Placement in Note 3 to the unaudited consolidated financial statements included with this report. Average debt outstanding for the first six months of 2006 was $13.0 million as compared to $16.8 million for the first half of 2005.

Charge for Change in Estimated Fair Value of Derivative Financial Instruments—Warrants. We estimate the fair value of the Warrants at each reporting period, and the net change in the estimated fair value is recorded as a benefit (charge) to the statement of operations. For the six months ended June 30, 2006, the estimated fair value of the Warrants increased as of June 30, 2006, primarily due to the closing price of our common stock as of June 30, 2006, resulting in a charge of $1,317,000. See further discussion of the Warrants in Note 3 to the consolidated financial statements included in this report.

Charge for Fair Value of Warrants in Excess of Proceeds. We recorded the Warrants issued in the April and May 2006 closings of the Private Placement at an initial fair value of approximately $2.6 million. Because the estimated fair value of the Warrants exceeded the net cash proceeds of $1.7 million, we recorded a charge in the statement of operations of $924,000 for the difference between the estimated fair value of the Warrants and the net cash proceeds raised. See further discussion of the Warrants in Note 3 to the consolidated financial statements included in this report.

Deemed Dividend Related to Beneficial Conversion Feature of Convertible Series A Preferred Stock. As part of the Private Placement, we issued convertible Series A Preferred Stock, which contained a beneficial conversion feature, based on the difference between the closing price of the Company’s common stock and the effective conversion price of the convertible Series A Preferred Stock on the closing dates of the transaction. The beneficial conversion feature for the March closing was measured at $4.5 million and recorded as a deemed dividend to preferred stockholders in the March 2006 quarter. No deemed dividend was recorded for the April and May closings based on the $-0- ascribed to the Series A Preferred Stock for those closings. The deemed dividend is included in the net loss available to common stockholders and the basic and diluted net loss per share calculation in the first six months of 2006. See further discussion of the Private Placement in Note 3 to the consolidated financial statements included in this report.

Segment Information

The Company currently operates and reports in two business segments—Storage Solutions and EarthWhere. Following is a summary of segment data for the six months ended June 30, 2006 and 2005.

Storage Solutions

	For the six months ended June 30,
(in thousands)	2006			2005
Net revenue
Product sales and vendor supplied services	$	21,824		$	21,172
Consulting and engineering services		2,180			2,106
Maintenance services and contract fees		3,398			4,505
Total net revenue		27,402			27,783

Gross Profit		6,459			6,233
Gross margin percentage		23.6	%		22.4	%
Segment loss from operations	$	(457	)	$	(23	)

EarthWhere

	For the six months ended June 30,
(in thousands)	2006			2005
Net revenue
EarthWhere licenses and services	$	531		$	901
Other hardware and software		245			105
Total net revenue		776			1,006

Gross Profit		292			710
Gross margin percentage		37.6	%		70.6	%
Segment loss from operations	$	(2,028	)	$	(395	)

Both of our operating segments experienced a decrease in revenue from the first half of 2005 to the first half of 2006. EarthWhere revenue was down approximately 22% from 2005 to 2006, due in part to contract award delays on certain Department of Defense opportunities in 2006, with the closing cycle on larger projects taking longer than previously anticipated.

As shown in the tables above, the Company’s overall decrease in gross margin from the first half of 2005 to the first half of 2006 is primarily attributable to a decrease in gross margin in the EarthWhere segment, which is due to an increase in the amortization expense of capitalized software development costs, which is included in cost of revenue, in 2006. For the Storage Solutions Segment, gross margin increased from 22.4% in the first half of 2005 to 23.6% in the first half of 2006, resulting in a 3.6% increase in gross profit in 2006 in spite of slightly lower revenue for the segment.

Liquidity and Capital Resources

Liquidity

Our unaudited consolidated financial statements as presented in Part I—Item 1 of this report have been prepared in conformity with US GAAP (except with regard to omission of certain disclosures within interim financial statements, as permitted by the SEC), which contemplate our continuation as a going concern. However, we have incurred substantial losses from operations since inception, including a net loss of $15.8 million, which included a $9.2 million charge for goodwill impairment, for the year ended December 31, 2005, and a net loss of $6.0 million for the six months ended June 30, 2006, which included non-cash charges totaling $2.2 million for the change in estimated fair value of derivative financial instruments (the Warrants issued in the March, April and May closings of the Private Placement), and for the fair value of derivative financial instruments (Warrants) issued in excess of net cash proceeds. In addition, as of June 30, 2006, we have negative working capital (current liabilities in excess of current assets) of $5.5 million. Accordingly, as of June 30, 2006, the recoverability of a major portion of the recorded asset amounts, including “Goodwill,” 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.

As of June 30, 2006, the Company had $2.8 million of undrawn availability on its borrowing facility with Wells Fargo Bank, National Association (“Wells Fargo”). This facility combined with open credit lines with suppliers is anticipated to provide continued liquidity. Our ability to borrow under the Wells Fargo facility is subject to maintaining our accounts receivable balance at current levels, as well as complying with the financial covenants we have made to the lender. If we are unable to comply with our financial covenants to Wells Fargo, the facility could cease to be available to us.

At June 30, 2006, the Company also held a $5.0 million three year term loan (the “Sun Term Loan”) with its majority shareholder, Sun Solunet, LLC (“Sun Solunet”). See further discussion of the Sun Term Loan borrowing terms in Note 6 to the consolidated financial statements included in this report.

On March 2, April 18 and May 4, 2006, we completed three closings of a private placement transaction exempt from registration under the Securities Act of 1933, as amended pursuant to Section 4 (2) and Regulation D promulgated thereunder (the “Private Placement”) with third-party investors, Company executive management and Sun Solunet. We raised approximately $12.3 million, comprised of $4.3 million of cash, net of placement agent and legal fees of approximately $784,000, and Sun Solunet converted $8.0 million of the Sun Loan (as defined below) to equity. We repaid $1.0 million of the outstanding Sun Loan to Sun Solunet, and the remaining $5.0 million of outstanding debt on the Sun Loan was converted to the Sun Term Loan, bearing interest at prime plus 1.0%. We have used the net cash proceeds of approximately $4.3 million from the Private Placement for general working capital needs and funding the EarthWhere segment’s losses for the six months ended June 30, 2006.

We continue to attempt to improve our liquidity through improving our operating results and exploring debt and equity capital opportunities. Key operating performance improvement levers continue to be: sustaining or moderately increasing existing revenue levels, achieving higher revenue gross margins from increased services revenue and EarthWhere software license sales, and maintaining operating expenses as a percentage of gross profit at the same or lower percentage. We also continue to invest in our EarthWhere business, in particular in the product development and sales and distribution areas. At the current revenue levels for EarthWhere, such investment requires significant cash. Increased revenue from EarthWhere software sales would substantially improve operating cash flow. By continuing to generate positive operating cash flow from our Storage Solutions business, and assuming continuation of our current credit facility with Wells Fargo, current business trends and supplier relations, we believe that we have adequate resources to provide sufficient liquidity to fund our operations. However, we may 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 additional equity capital is raised, the issuance of those shares would also be dilutive to the ownership interests of all other stockholders.

Wells Fargo Line of Credit

In April 2006, the Company and Wells Fargo executed an amendment to the Company’s $12.0 million credit facility credit agreement. This amendment reset financial covenants for 2006 and waived a covenant violation that occurred as of March 31, 2006. Our borrowing rate on this facility at June 30, 2006 was prime plus 5.0%, or 13.25%. This rate is subject to potential decreases, as permitted by Wells Fargo, based on SANZ Inc. and its subsidiary, Solunet Storage, achieving certain financial thresholds during 2006. For the June 2006 quarter, SANZ Inc. and Solunet Storage did not achieve the minimum financial threshold and the borrowing rate on the facility remained at prime plus 5.0% for the Company’s fiscal third quarter of 2006.

Sun Solunet Credit Facility and Term Loan

At December 31, 2005, the Company had borrowed $13.1 million on its credit facility with Harris (now Sun Solunet as assignee of Harris) (the “Sun Loan”). On February 6, 2006, the Sun Loan was amended in order to increase the borrowing availability from $13.0 million to $14.0 million. In addition to increasing the Company’s borrowing availability, this amendment changed the maturity date to December 31, 2006 and permitted accrual of interest to the principal amount of the loan until maturity.

Effective March 2, 2006, as part of the Company’s Private Placement, Sun Solunet converted $8.0 million of its loan to the Company into Units as described in Note 3 to the consolidated financial statements included in this report, and the Company paid down $1.0 million of the Sun Loan. On April 19, 2006, the Company and Sun Solunet executed an amendment to the Sun Loan agreement, which reduced the loan balance from $13.0 million to $5.0 million and modified the loan from a revolving line of credit to a term loan maturing on March 2, 2009. This amendment formalized the agreement with respect to the Sun Loan that had been previously made in the Credit Support Termination Agreement on March 2, 2006. The parties agreed that Sun Solunet has no additional lending obligation to the Company under the credit facility. Also as part of the new agreement, the Company is no longer obligated to issue debt guaranty warrants to Sun Solunet related to the Sun Loan. The Sun Term Loan bears interest at prime plus 1.0% and all interest accrues and is payable on the maturity date. As of June 30, 2006, the Company had $5.0 million plus $443,000 of accrued interest due to Sun Solunet on the Sun Term Loan.

Cash and Cash Flows

Our cash and cash equivalents decreased from $6,000 at December 31, 2005 to $-0- at June 30, 2006. For the six months ended June 30, 2006, net cash provided by operating activities was $1.2 million, compared to $0.4 million used in operating activities in the same period of 2005. Significant sources of cash from operations for the six months ended June 30, 2006 were: (1) a decrease in our accounts receivable of $4.1 million, due primarily to increased collections of past-due accounts; and (2) an increase in accounts payable of $0.4 million, due to the timing of vendor payments. Our significant use of cash from operations was the net loss incurred for the period of $6.0 million, less non-cash charges of $2.2 million related to the estimated fair value of derivative financial instruments (Warrants issued in the Private Placement), less $649,000 in depreciation and amortization and less a $154,000 non-cash expense for share-based compensation.

Cash used in investing activities for the first six months of 2006 was comprised of purchases of equipment of $233,000 and capitalized software costs of $416,000.

Cash provided by financing activities for the first six months of 2006 consisted of net cash proceeds of $4.3 million from the Private Placement and net payments of $5.2 million on our Wells Fargo line of credit as a result of a lower accounts receivable borrowing base at June 30, 2006 as compared to December 31, 2005.

Capital Resources

We anticipate our capital expenditures for property and equipment for the ~~fourth~~remainder ~~quarter~~ of ~~2005~~2006 to be in the range of $5075,000 to $75100,000 per quarter ($300,000 to ~~$325,000~~ ~~annually), consistent with the first nine months’ expenditures of~~ $~~275~~400,000 annually). In addition, we ~~expect~~will to continue to capitalize ~~certain~~the development ~~costs of~~ of our EarthWhere™ software products, which, we anticipate, will be approximately $~~200~~500,000 ~~to $250,000~~ for the ~~fourth~~remainder ~~quarter~~ of ~~2005~~2006. We expect to fund these capital expenditures from ~~either~~ cash, either from operations or line of credit borrowings.

Contractual Obligations

In ~~September~~February ~~2005~~2006, we ~~commenced~~executed a ~~new~~ lease on ~~our~~additional office space in Englewood, Colorado. This lease renewal was executed in April 2005 and disclosed in the Company’s Form 10-Q for the quarterly period ended March 31, 2005. This location serves as our headquarters and houses most of our financial, administration and order processing operations, a regional sales operation, and most of our EarthWhere personnel. The new lease is for three years, beginning ~~September~~ February 15, 2006 through ~~2005~~February ~~through September~~ 14, ~~2008~~2009, and the monthly rent of approximately $147,000 represents ~~represents~~ a total commitment over the three years of approximately $~~500~~250,000.

In ~~addition~~the first quarter of 2006, we ~~entered~~executed ~~into~~an aexpansion ~~capital~~ lease for ~~approximately~~additional ~~$60~~office space in our existing Vienna,~~000~~ ofVirginia ~~computer~~office, to expand our Federal sales ~~equipment~~efforts, and ~~software~~we moved into the additional space in May, 2006. ~~The~~This expansion lease is for athree ~~period~~years, offrom ~~three~~May ~~years~~2006 ~~and~~to ~~contains a bargain~~May ~~purchase~~2009. ~~price~~Monthly rent of approximately $~~1.00~~4,400 atrepresents ~~the~~a ~~end~~total ofcommitment over the ~~lease.~~three years of approximately $160,000.

Other than these two additions, there were no other material changes in our contractual obligations, excluding bank debt obligations, during the ~~third~~first ~~quarter~~six months of ~~2005~~2006.

Critical Accounting Policies

We prepare our financial statements in accordance with US GAAP. The accounting policies most fundamental to understanding our financial statements are those relating to recognition of revenue, to our use of estimates, to the capitalization of software development costs and those relating to the impairment testing of goodwill and intangible assets. We have not adopted any material changes to our critical accounting policies from those discussed under this heading in Note 4 to our ~~2004~~2005 Annual Report on Form 10-K except as described below.

As a result of the Private Placement, we have determined that the accounting for and valuation of financial instruments, including preferred stock, warrants, derivative financial instruments and other potential derivatives, which relate to the issuance of the Series A Preferred Stock and the Warrants in the Private Placement, are additional critical accounting policies. For a detailed discussion on the application of these accounting policies, see Notes 1 and 3 to the unaudited consolidated financial statements included in this report.

The accounting for financial instruments and potential derivatives is significant to our financial statements because the estimated fair value of our derivative financial instruments (the Warrants issued in the Private Placement) is a significant component of our total liabilities, representing approximately 30% of our total liabilities at June 30, 2006, and because the accounting for such instruments requires the use of management’s significant estimates and assumptions. This accounting policy is also significant because of the potential fluctuations in the estimated fair value from period to period, which are recorded as a benefit (charge) to net income on the statement of operations. We estimate the fair value of the Warrants using the Black-Scholes option pricing model. This model requires the use of significant estimates and assumptions related to the estimated term of the financial instruments, the volatility of the price of the Company’s common stock, and interest rates, among other items. Fluctuations in these assumptions may have a significant impact on the estimated fair value of financial instruments, which, in turn, may have a significant impact on our reported financial condition and results of operations.

Recent Accounting Pronouncements

In ~~December~~February, ~~2004~~2006, the FASB issued ~~SFAS~~Statement ~~123R,~~of ~~“Share-Based~~Financial ~~Payment,”~~Accounting ~~which provides~~Standard ~~guidance on share-based payment transactions and requires fair value accounting for all share-based compensation~~No. ~~SFAS 123R requires the Company to measure~~ ~~the cost~~155, of“Accounting ~~employee~~for ~~services~~Certain ~~received~~Hybrid inFinancial ~~exchange for~~ Instruments—an ~~award~~amendment of ~~equity~~FASB ~~instruments~~Statements ~~based on the grant-date fair value of the award (with limited exceptions)~~No. ~~That~~133 ~~cost~~and ~~will~~140,” ~~be recognized over the period during~~ which ~~an employee~~provides isguidance ~~required~~on ~~to provide service in exchange for~~ the ~~award,~~accounting ~~usually~~for ~~the vesting~~beneficial ~~period.~~interests ~~Under~~in ~~SFAS~~securitized ~~123R,~~financial ~~the Company was required to adopt SFAS 123R at the beginning of its third quarter of 2005~~assets. In April 2005, the SEC postponed the required adoption of SFAS 123R until the beginning of fiscal years starting after June 15, 2005, which for SANZ will be effective beginning January 1, 2006.

WeIn ~~are~~June ~~currently~~2006, ~~evaluating~~ the ~~impact~~FASB ofissued ~~SFAS 123R~~Interpretation onNo. ~~our~~48, ~~financial~~“Accounting ~~position~~for Uncertainty in ~~and results~~Income ofTaxes—an ~~operations~~interpretation asof ~~well~~FASB asStatement ~~alternative~~No. ~~transition~~109, ~~methods~~‘Accounting ~~under~~for Income ~~SFAS 123R.~~Taxes,’” Inwhich ~~addition,~~clarifies wethe ~~have~~accounting ~~not~~for ~~determined~~uncertainty ~~whether~~in ~~the~~income ~~adoption~~taxes ~~of SFAS 123R~~recognized ~~will result~~ in ~~amounts~~a ~~that~~company’s ~~are~~financial ~~similar to the current pro forma disclosures under SFAS 123~~statements.

InSee ~~June 2005,~~further ~~the~~discussion FASB issued SFAS 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 supersedes APB Opinion No. 20, “Accounting Changes,” and SFAS 3, “Reporting Accounting Changes in ~~Interim~~Note ~~Financial~~7 ~~Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies~~ to ~~all voluntary changes in accounting principle and to changes required by an accounting pronouncement in~~ the ~~unusual instance~~unaudited ~~that~~consolidated ~~the~~financial ~~pronouncement does not include specific transition provisions.~~statements ~~SFAS~~included ~~154 must be adopted for accounting changes and corrections of errors made~~ in ~~fiscal~~this ~~years beginning after December 15, 2005~~report. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date SFAS 154 is issued. The Company does not expect the adoption of SFAS No. 154 to have a material impact on its financial results.

23We believe that the adoption of these and other recent accounting pronouncements will not have a material impact on our financial results.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates on our outstanding bank debt. At ~~September~~June 30, ~~2005~~2006, we had $147.95 million in variable, prime rate based bank ~~bank~~ debt. At ~~September~~June 30, ~~2005~~2006, our ~~Harris~~Sun ~~debt~~Term Loan of $~~11.~~5.4 million bore interest at at the rate of prime plus 1.0% (or 79.7525%) and our Wells Fargo line of credit of $32.4 1 million bore interest at the rate of prime plus 5.0% (or 1113.7525%). At ~~September~~ June 30, ~~2005~~ 2006, a hypothetical 100 basis point increase in the prime rate would result in additional interest expense of $~~149~~75,000 on an annualized basis, assuming ~~assuming~~ estimated borrowing amounts of $~~11.~~5.4 million for ~~Harris~~the Sun Term Loan and $32.41 million for Wells Fargo. Currently, we do not utilize interest rate swaps or other types of financial derivative instruments.

Item 4. Controls and Procedures

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

As required by SEC Rule 13a-15(b), the Company carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 as of the end of the period covered by this report. ~~This~~Based on the ~~evaluation included~~foregoing, ~~consideration~~our Chief ofExecutive ~~the~~Officer ~~restatements~~and ~~described~~Chief Financial inOfficer ~~Note~~have concluded that 1our disclosure controls and ~~Note~~procedures 7are toeffective ~~the~~in timely alerting them to ~~Company’s~~material ~~unaudited~~information ~~consolidated~~required ~~financial~~to ~~statements~~be included in ~~Part~~our I,periodic ~~Item~~SEC 1filings and ofto ensure ~~this~~that ~~report~~information ~~further~~required ~~described~~to ~~below.~~be ~~Based~~disclosed onin ~~the~~our ~~foregoing~~periodic SEC filings is accumulated and communicated to our management, including our Chief Executive ~~Executive~~ Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. We have ~~concluded~~not ~~that~~made any changes in our disclosure controls ~~controls~~ and procedures ~~are~~or ~~effective~~ in ~~timely~~other ~~alerting~~factors ~~them~~that tocould ~~material~~have materially affected or are ~~information~~reasonably ~~required~~likely to bematerially ~~included~~affect inthose ~~our~~disclosure ~~periodic~~controls ~~SEC~~and ~~filings~~procedures subsequent to the date of the evaluation described above.

As disclosed in Note 1 to the Company’s unaudited consolidated financial statements included in Part I, Item 1 of this report, the Company is restating its financial statements for December 31, 2004 and the interim financial statements as of and for the quarter and six months ended June 30, 2004, as of and for the quarter and nine months ended September 30, 2004, for the quarter ended December 31, 2004 and as of March 31, 2005 and June 30, 2005. Management believes that the control deficiency of insufficient contemporaneous documentation to support capitalization of software development costs that led to this restatement is a “significant deficiency,” as defined under standards established by the Public Companies Accounting Oversight Board. Management has reported this significant deficiency to the audit committee in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. Management believes that it has corrected this significant deficiency by reviewing and revising our methodologies and assumptions for capitalizing software development costs and providing contemporaneous documentation for such costs. 29

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

Part II. Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

The 2006 Annual Meeting of Shareholders of the Company was held on July 28, 2006. The agenda items for such meeting are shown below together with the vote of the Company’s common stock with respect to such agenda items.

1. The election of nine directors to serve for a term of one year and until their respective successors are elected and qualified.

	Votes For	Votes Withheld
John Jenkins	84,212,173	390,569
Clarence E. Terry	84,214,673	388,069
Stephen G. Marble	84,214,673	388,069
M. Steven Liff	84,144,140	458,533
T. Scott King	84,214,071	388,069
C. Daryl Hollis	84,214,140	388,602
George R. Rea	84,214,673	388,069
Case H. Kuehn	84,214,673	388,069
Kent J. Lund	84,214,673	388,069

2. The adoption of an amendment to the Company’s Second Amended and Restated Articles of Incorporation, as amended, to increase the number of authorized shares of the Company’s common stock from 200,000,000 to 400,000,000.

Votes For		Votes Against		Abstain
83,847,210		562,582		192,950

3. To authorize the board of directors to effect a reverse stock split of the Company’s common stock at a ratio to be determined by the board within a range from 1 for 10 shares and 1 for 25 shares at any time before the date of the next annual meeting of shareholders.

Votes For		Votes Against		Abstain
83,845,700		554,092		202,950

4. The ratification of the appointment of Grant Thornton LLP by the audit committee of the board of directors as the Company’s independent registered public accounting firm for the year ending December 31, 2006.

Votes For		Votes Against		Abstain
84,301,839		290,370		10,533

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits. The following exhibits are filed with this Form 10-Q:

31.01		CEO Certification pursuant to Rule 13a-14(a)/15(d)-14(a).
31.02		CFO Certification pursuant to Rule 13a-14(a)/15(d)-14(a).
32.01		CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.02		CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

2531

SIGNATURES

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

	SAN Holdings, Inc.(Registrant)
	SAN Holdings, Inc. (Registrant)
Date: November 21, 2005	By:	/s/ John Jenkins
Date: August 25, 2006	By:	/s/ John Jenkins
		John Jenkins, Chief Executive Officer

Date: November 21, 2005	By:	/s/ Robert C. Ogden
Date: August 25, 2006	By:	/s/ Robert C. Ogden
		Robert C. Ogden, Chief Financial Officer
		(Principal Financial and Accounting Officer)

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