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|                                                
|------------------------------------------------
|UNITED STATES SECURITIES AND EXCHANGE COMMISSION
|Washington,
  D.C. 20549                        
|                                                
|FORM 10-KSB                                     

xANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: December 31, 2005

oTRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ___________ to
___________

Commission File Number: 333-16031

INCENTRA
SOLUTIONS, INC.(Exact name of small business issuer as specified in its charter)

|                                                                   |  |                                  
|------------------------------------------------------------------ |  | ---------------------------------
|Nevada                                                             |  | 86-0793960                       
|(State
  or other jurisdiction
  of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                                   |  |                                  
|1140 Pearl Street
  Boulder, Colorado                              |  | 80302                            
|(Address of principal executive offices)                           |  | (Zip Code)                       

(303) 440-7930(Issuers telephone
number)

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

|                                                           
|-----------------------------------------------------------
|None                                                       
|                                                           
|(Title
  of Class)                                         
|                                                           
|Not Applicable                                             
|                                                           
|(Name
  of each exchange on which registered)              
|                                                           
|Securities registered pursuant to Section 12(g) of the Act:
|                                                           
|Common Stock, par value $.001                              
|                                                           
|(Title
  of Class)                                         

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

Check
if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o

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

Revenues
for the fiscal year ended December 31, 2005 were $50.8 million.

The
aggregate market value of shares of the Companys common stock held by
non-affiliates as of March 23, 2006 was $10,168,781 based upon the average bid
and asked prices of the issuers common stock on the OTC Bulletin Board on
March 23, 2006. Shares of common stock held by each executive officer or
director and by each person who beneficially owns more than 5% of the
outstanding common stock have been excluded in that such persons may under
certain circumstances be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.

As
of March 23, 2006, there were 13,326,810 shares of common stock of the Company
outstanding. The Company also had outstanding as of such date 2,466,971 shares
of Series A convertible preferred stock, which were convertible into 4,933,942
shares of the Companys common stock. The issuers common stock currently
trades on the OTC Bulletin Board under the symbol ICEN.

Transitional
Small Business Disclosure Format (Check one): Yes o No x

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WHEN
USED IN THIS REPORT, THE WORDS BELIEVES, ANTICIPATES, EXPECTS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED.

OUR
BUSINESS AND RESULTS OF OPERATIONS ARE AFFECTED BY A WIDE VARIETY OF FACTORS
THAT COULD MATERIALLY AND ADVERSELY AFFECT US AND OUR ACTUAL RESULTS,
INCLUDING, BUT NOT LIMITED TO: (1) THE AVAILABILITY OF ADDITIONAL FUNDS TO
ENABLE US TO SUCCESSFULLY PURSUE OUR BUSINESS PLAN; (2) THE UNCERTAINTIES
RELATED TO THE EFFECTIVENESS OF OUR TECHNOLOGIES AND THE DEVELOPMENT OF OUR
PRODUCTS AND SERVICES; (3) OUR ABILITY TO MAINTAIN, ATTRACT AND INTEGRATE
MANAGEMENT PERSONNEL; (4) OUR ABILITY TO COMPLETE THE DEVELOPMENT OF OUR
PROPOSED PRODUCTS IN A TIMELY MANNER; (5) OUR ABILITY TO EFFECTIVELY MARKET AND
SELL OUR PRODUCTS AND SERVICES TO CURRENT AND NEW CUSTOMERS; (6) OUR ABILITY TO
NEGOTIATE AND MAINTAIN SUITABLE STRATEGIC PARTNERSHIPS AND CORPORATE
RELATIONSHIPS; (7) THE INTENSITY OF COMPETITION; AND (8) GENERAL ECONOMIC
CONDITIONS. AS A RESULT OF THESE AND OTHER FACTORS, WE MAY EXPERIENCE MATERIAL
FLUCTUATIONS IN FUTURE OPERATING RESULTS ON A QUARTERLY OR ANNUAL BASIS, WHICH
COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION,
OPERATING RESULTS AND STOCK PRICE.

THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

---



PART I

|        |                        
|------- | -----------------------
|ITEM 1. | DESCRIPTION OF BUSINESS

General

Incentra
Solutions, Inc. is a leading provider of complete solutions for the data protection
needs of an enterprise. We supply a broad range of storage products and storage
management services to broadcasters, enterprises and information technology service
providers worldwide. We market our products and (services to broadcasters under
the trade name Front Porch Digital (Front Porch) and to service providers
and enterprise clients under the trade names Incentra Solutions of Colorado (Colorado),
ManagedStorage International (MSI),
Incentra Solutions of California (Incentra of CA) and PWI Technologies
(PWI). Front Porch provides unique software and professional services
solutions for digital archive management to broadcasters and media companies.
Through MSI, Incentra of CA and PWI, we provide complete IT solutions for
enterprise and service provider clients, including engineering, hardware and
software procurement, maintenance support services and remote storage
operations services.

We
believe our ability to deliver a complete storage infrastructure and management
solution to our customers differentiates us from most of our competitors. A
complete storage solution for the customers in our target markets includes the
following components:

| |   |                                                                                                 |                                                                                 
| | - | ----------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------
| |  | Hardware and software
  products and services                                                  
| |   |                                                                                                | Third party storage,
  servers, software, networking, and security              
| |   |                                                                                                | Proprietary products
  DIVArchive solutions, GridWorks software/service platform
| |   |                                                                                                 |                                                                                 
| |  | Monitoring and management
  solutions  Automated/remote monitoring, management and maintenance
| |   | services:                                                                                      
| |   |                                                                                                | Alert Monitoring &
  Notification                                               
| |   |                                                                                                | Health/Capacity/Performance                                                     
| |   |                                                                                                | Management of Data
  Protection Systems                                         
| |   |                                                                                                 |                                                                                 
| |  | Professional services 
  engineering/implementation:                                          
| |   |                                                                                                | IT Assessments                                                                  
| |   |                                                                                                | System Design Services                                                          
| |   |                                                                                                | Project Management
  Services                                                   
| |   |                                                                                                | Level 1-3 Engineering
  Support                                                 
| |   |                                                                                                | Staff
  Augmentation/Outsourcing of Operations                                  
| |   |                                                                                                 |                                                                                 
| |  | Capital/financing
  solutions                                                                  

Through
Front Porch, we provide a software and management solution that enables
searching, browsing, editing, storage and on-demand delivery of media-rich
content in nearly any digital format. Our complete digital archive solution
includes our proprietary software bundled with professional services,
hardware/software procurement and resale, remote monitoring/management
services, complete support for our proprietary software solutions and first
call support for third-party hardware and software maintenance. Our software
converts audio, video, images, text and data into digital formats for ease of
use and archiving. With more than 115 installations worldwide, our DIVArchive
software solution has become one of the leading digital archive management
applications among European and Asian broadcast and media companies and is
gaining an increasing share of the North American market. Front Porchs
DIVArchive and transcoding applications provide the essential integration layer
within the digital content creation and broadcast environments. All of Front
Porchs products were built on intelligent, distributed architecture. As a
result, Front Porchs archive management and transcoding solutions are
flexible, scalable, easily upgradeable, failure resilient and integratable with
leading automation and asset management applications.

1

---



Through
MSI, we deliver comprehensive storage services, including remote
monitoring/management services, maintenance support services (first call) for
third-party hardware and software maintenance, professional services,
third-party hardware/software procurement and resale and financing solutions.
MSI provides data protection solutions and services that ensure
that its customers data is backed-up and recoverable and meets internal data
retention compliance policies. MSIs remote monitoring and management services
are delivered from its Storage Network Operations Center (NOC) in Broomfield,
Colorado, which monitors and manages a wide spectrum of diverse storage
infrastructures on a 24x7 basis throughout the United States, the United Kingdom,
the Netherlands, Bermuda and Japan. MSI delivers these services worldwide using
its proprietary GridWorks Operations Support System, which enables automated
remote monitoring and management of complete storage infrastructures and
back-up applications. MSI provides outsourcing solutions for customer data
protection needs under long-term contracts. Customers pay on a monthly basis
for storage services based on the number of assets managed and/or the volume of
storage assets utilized. We believe customers benefit from improved operating
effectiveness with reduced operating costs and reductions in capital
expenditures.

Through
Incentra of CA and PWI, we deliver complete IT solutions, including
professional services, third-party hardware/software procurement and resale,
financing solutions, maintenance support services (first call) for third-party
hardware and software maintenance and managed storage solutions. Solutions are
sold primarily to enterprise customers in the financial services, government, hospitality,
retail, security, healthcare and manufacturing sectors. Incentra of CA and PWI
primarily service customers in the western United States.

Industry Trends

Industry
Data Corporation (IDC) estimates annual data growth at a compound rate of
approximately 50% annually through 2007 and beyond. We believe that because of
the ongoing growth in the creation and storage of data and the increasing
strategic importance of having data available, secure and recoverable, the data
storage markets in which we compete will continue to expand. We also believe
this growth will include an accelerating growth rate in the demand for
services, including data management and monitoring solutions. According to an
August 2005 report of IDC worldwide IT spending for 2005 was estimated at $1
trillion, growing at a 5.9% compound annual growth rate (CAGR) through 2009.
The total market for IT services
worldwide according to Gartner Dataquest is forecast to grow to almost $800
billion by 2009 from $595 billion in 2004, with a 6% CAGR. More importantly,
the worldwide market for storage services is expected to grow to $30 billion by
2008, with a 7% CAGR, according to Gartner Dataquest.

Worldwide:
Storage Services Forecast (millions)

|                             |  |      |        |      |  |        |  |      |        |       |  |        |  |  |    | 
|---------------------------- |  | ---- | ------ | ---- |  | ------ |  | ---- | ------ | ----- |  | ------ |  |  | -- | 
|                             |  | 2005 |        | 2006 |  | 2007   |  | 2008 |        | CAGR% | 
|                             |  |      |        |      |  |        |  |      |        |       | 
|Consulting                   |  |      | 3,033  |      |  | 3,153  |  |      | 3,514  |       |  | 3,803  |  |  | 9  | 
|Implementation/Consolidation |  |      | 3,467  |      |  | 3,645  |  |      | 3,879  |       |  | 4,182  |  |  | 6  | 
|Management Services          |  |      | 5,112  |      |  | 5,680  |  |      | 6,437  |       |  | 7,300  |  |  | 10 | 
|HW Support                   |  |      | 8,848  |      |  | 9,169  |  |      | 9,497  |       |  | 9,871  |  |  | 4  | 
|SW Support                   |  |      | 3,209  |      |  | 3,445  |  |      | 3,731  |       |  | 4,089  |  |  | 8  | 
|                             |  |      |        |      |  |        |  |      |        |       |  |        |  |  |    | 
|Total Worldwide              |  |      | 23,669 |      |  | 25,092 |  |      | 27,058 |       |  | 29,245 |  |  | 7  | 
|                             |  |      |        |      |  |        |  |      |        |       |  |        |  |  |    | 

|                                          
|------------------------------------------
|                                          
|Source:
  Gartner Dataquest (January 2005)

IT
departments are faced with the challenges of rapidly expanding amounts of data
to manage, increasing demands for availability for day-to-day business and to
meet regulatory requirements, and increasing and more stringent compliance and
governmental regulations regarding data storage, integrity and recoverability.
Conversely, IT headcount is projected by IDC to increase by only 10% annually,
which should increase the need for organizations to improve storage management
productivity and to evaluate outsourced management solutions to accommodate the
increasing demands being placed on the organization. We believe companies will
consolidate their storage infrastructures and implement enhanced software and
service capabilities, such as storage area network management, virtualization,
storage resource management and outsourcing automated storage monitoring and
management services.

2

---



Excluding
hardware infrastructure, IDC estimates that worldwide revenue for backup and
archive software solutions in 2003 totaled $2.4 billion and is expected to grow
to an estimated $3.0 billion in 2008, or at a 4.1% CAGR.
In Europe, our largest market for archive software, Datamonitor reports that
European sales of archive software are expected to grow at a CAGR of 42%
through 2008. The total market in Europe for complete
archive and digital workflow solutions, including hardware infrastructure, (the
broadcast value chain) is estimated at $2.6 billion currently and is expected
to grow to $3.6 billion by 2008, or a CAGR of 8.4%.
Datamonitor estimates that today only 15% of broadcasters in Europe have
converted to a fully-digital environment. Based upon our experience in the
industry, we believe the rate of adoption in North America is no greater than
that in Europe, and likely significantly lower. Accordingly, we believe
opportunities for the sale of complete archive solutions to broadcasters making
the conversion to a fully-digital environment will continue to accelerate in
2006 and beyond. We also believe our business strategy to grow archive software
sales as part of our complete solution offering, incorporating our proprietary
storage management and monitoring services, professional services and
third-party hardware and software solutions, will accelerate revenue growth and
increase profitability.

We
believe companies will continue to make additional investments in data
storage products and services and that spending in this area will become a
larger percentage of the customers total IT budget. We believe the following
customer needs will be primary drivers of data storage and management spending:

Acceptance
and growing need for storage services.We expect a few key factors to drive
organizations to increasingly outsource storage-related IT services
(consulting, implementation and support). These factors include IT staffing
limitations, the growing strategic importance of data retention and recovery,
increasing volume of types of data to be stored, the growing complexity of
networked storage environments and the increasing scope of spending on storage.

Data
protection requirements.An increasing need for high throughput performance, greater frequency of
backups, quicker restoration of data and stringent data availability
requirements are key factors that we expect to drive the migration to
disk-based data protection solutions. We believe disk will not only be used as
a target device for replication and mirroring, but will also be incorporated
into traditional backup systems.

Emphasis
on security.Organizations
worldwide require data protection solutions that assure financial compliance
and transparent audits. Our software solutions and 24X7 NOC provides solutions
worldwide for the delivery of accurate and timely information compliance.

Adoption
of robust storage management software solutions.A number of storage management software
innovations have recently entered the market. Storage management software
enhancements can be divided into four segments: storage area network
management, virtualization, storage resource management and automated resource
management. We anticipate that advances in each of these areas will enable
improved storage availability, manageability and performance.

Continued
migration to networked storage infrastructures.We expect that through a variety of storage
networking technologies, organizations will attain shared (consolidated)
storage capabilities. Consolidated storage benefits include increased
flexibility in implementing and managing storage, increased storage device
utilization levels, improved quality of service, reduced administration costs
and increased operational efficiency.

Evolution
away from large, monolithic storage systems to modular storage systems.We expect that many organizations will
implement modular storage systems as compared to large, monolithic storage
systems. Smaller versions of their high-end, full-featured counterparts,
modular disk systems enable organizations to cost-effectively implement
storage, while enjoying the performance and functionality of large, enterprise
systems.

3

---



Business Strategy

Our
objective is to further our position as a leading provider of storage
management and IT infrastructure solutions and services and to further expand
our worldwide presence. To achieve these objectives, we have adopted the
following strategies:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Growth
  through Acquisition.Our
  acquisitions (two since January 2005, one in 2004) have expanded our customer
  base, provided a large suite of products and services, expedited the
  development of a strong 55 person sales force, added management talent,
  created a platform from which to extract revenue synergies among our various
  product and service offerings, and provided significant opportunities for
  consolidation/cost reduction. We believe the storage management and services
  industry is highly fragmented and that there are many smaller storage product
  and software/services providers with successful product offerings that are
  seeking merger or acquisition partners. We intend initially to seek
  acquisition candidates that have the following characteristics: a large
  percentage of product sales that are generated from storage solutions;
  reseller agreements with most major manufacturers, strong professional services
  organizations, recurring service revenues and strong sales, engineering and
  management personnel. Our initial focus for acquisition candidates is on
  candidates with facilities and targeted customers located in the United
  States.                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Strategic
  Alliances.We
  intend to supplement our marketing efforts by aligning ourselves with
  complementary solutions providers and technology partners. Strategic
  alliances also will assist us in keeping pace with technological developments
  of the major software and hardware vendors and, in certain instances, provide
  us with product development services. We have entered into strategic
  alliances with a number of leading providers of storage products and storage
  management solutions. In the media and entertainment market, we have
  established similar strategic alliances with the leading broadcast systems
  integration firms. To advance the joint sales initiatives of these
  partnerships, the agreements often include co-marketing and
  technology-sharing arrangements targeting the large existing customer base of
  both companies, thus providing us access to a large existing customer base.
  Through similar alliances, we expect to gain greater exposure and acceptance
  of our products and services.                                                                                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Offer
  Complete Digital Archive Solutions to Broadcasters.Through the sale of
  our complete digital archive solutions, we intend to capture an increasing
  portion of the total IT spending of our broadcast customers and position ourselves
  for follow on sales and services. Since the inception of this strategy, we
  have successfully sold complete solutions, often valued in excess of $1 million,
  to numerous global media brands. A complete digital archive solution includes:
  Archive Software, Archive Servers, Content Management Software, Transcoding
  Software, Professional Services, and Storage Hardware and Maintenance. We estimate
  that archive software comprises only 10-15% of the total spending of a broadcast
  customer for a complete digital archive solution. By increasing our penetration
  into these other areas, we believe we will generate significant
  increases in revenue and gross margin as these untapped components comprise
  the vast majority of a customers total spending. We believe by leveraging
  Front Porchs longstanding customer relationships, the dominant market
  position of Front Porchs DIVArchive solutions, Front Porchs world-class
  customer list of broadcast entities and its reputation for superior service
  and support, Front Porch will continue to capture an increasingly
  larger portion of our customers total IT budget.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Offer
  Complete Data Protection Solutions.A complete data protection solution includes storage resource
  management, back-up applications, storage hardware, professional services,
  operations and financing solutions. Prior to 2005, we were primarily
  focused on the operations component of the complete data protection solution
  with limited participation in the other areas. We estimate that the
  operations component comprises only 10-15% of the total spending of an
  enterprise or service provider customer for a complete data protection
  solution. We believe our GridWorks proprietary monitoring and management
  solutions position us to offer a superior and more complete storage and data
  protection solution to our customers than that which is currently offered by
  our competitors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  | New
  Product Development.We
  intend to continue to produce a quality software product and service solution
  that meets client expectations in terms of functionality, flexibility,
  procurement cost, implementation cost and ongoing maintenance cost. We believe
  our storage and digital archive management product lines                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

4

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | meet these expectations
  and will continue to do so as these products evolve. We are committed to
  continuous product improvement through a software development program that is
  driven by industry focus groups and customer input. We intend to continue to
  utilize our industry, customer and supplier relationships to keep abreast of
  emerging standards, protocols and application programming interfaces as such
  trends are introduced and gain market acceptance.                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Increase
  Marketing and Direct Sales Efforts.Our direct sales organization is organized into sales teams that are
  assigned to our operating units. We intend to leverage our successes by
  devoting significant marketing and direct sales resources to cross-marketing
  products and services offered by our operating units. Our sales teams intend
  to add established distributors with the skills necessary to sell our
  comprehensive storage solutions.                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Foster a
  Culture of Excellence and Customer Service.We intend to continue to employ rigorous
  recruiting, training and evaluation practices to help us attract and retain
  employees who dedicate themselves to delivering outstanding products and
  consulting services to our customers. We have emphasized the creation of an
  environment of excellence and customer services and believe our commitment to
  excellence will continue to provide new customer referrals from satisfied
  customers that have used our products and services.

Customers

Many
organizations continue to face data growth, technology obsolescence, shrinking
IT budgets and new compliance objectives. Our focus on storage and IT
management from a complete solution approach allows customers to economically
deal with these challenges. Our complete solutions include professional
services, products, proprietary software platforms, IT outsourcing services and
financing services. By focusing on data protection services, organizations may
achieve numerous benefits, including improved infrastructure performance,
business risk mitigation and cost management/reduction for overall operations.
We believe organizations currently are facing the following issues:

|  |                                                                 
|- | ----------------------------------------------------------------
| | Total storage is
  increasing 50% annually                      
| 
| | New technologies require
  integration across platforms         
| 
| | Increasing levels of
  external and internal compliance policies
| 
| | Staffing is projected to
  grow only 10%                        
| 
| | Limited capital or
  operating expenses                         

Our
customers are located in North America, South and Central America, Europe, Asia
and the Pacific Rim and are primarily in the following markets: Broadcast,
Media and Entertainment; Fortune 2000 Enterprises and mid-tier Enterprises; and
Data Center Operators and IT Service Providers.

During
2005, a significant portion of our revenues was derived from the European and
Asian geographic markets. For the year ended December 31, 2005, aggregate
revenues from customers located in Europe or Asia amounted to $13.4 million,
    or 26% of total revenue as compared to $4.7 million, or 35% of total revenue
    in 2004. The portion of our business represented by these markets has grown
    significantly since 2004; however, it comprises a smaller percentage of our
    total revenue in 2005 due to our acquisitions of Incentra of CA and PWI.

Broadcast,
media and entertainment

Our
customer base in the broadcast industry includes some of the largest and
best-known entities worldwide, including CBS Television City, Comcast,
Discovery Networks, A&E Television Networks, Rainbow Networks
Communications, Inc., CHUM Television, Astral Media, Playboy Television, Canal
+, Walt Disney Company, Oxygen, BBC Broadcast, Bayerischer Rundfunk, Turner
Entertainment Networks Asia, Sony Pictures, Telecinco, France 3, SKY Perfect
TV, Eastern Television/Taiwan, TV Azteca, Puma Television, Central China
Television, Seven Networks and MTV Networks-Europe. Many of the customers are
served in multiple locations worldwide.

5

---



Datacenter
Operators and IT Service Providers

Customers
in this segment consist primarily of managed service providers offering hosting
and colocation solutions. These are both regional and national providers that
require a competitive backup offering and deep professional engineering support
for their core data center services. Representative customers include Cable
& Wireless UK, Viawest, Quovadis, Data Return, Japan Telecom IDC (Softbank
Group), and Telepacific Communications.

Fortune
2000 Enterprises and mid market

Customers
in this segment consist primarily of mid-tier enterprise businesses that
require IT expertise to manage their complex IT and storage infrastructures.
Complete solutions have been provided to customers such as Network Appliance,
Inc., Accenture, AON, American Airlines, Hilton Hotels, Good Technology and
Transora. Other representative customers include Standard Insurance, Xilinx,
Solar Turbines and Washington Mutual.

Products and Services

We are a complete solutions
provider of storage management and IT infrastructure products and services. We
classify our revenues as either product or service revenue. Product revenue
includes the sale of all hardware and software products. Service revenue
includes recurring managed service revenue, professional services revenue and
recurring maintenance service revenue.

Products

Our
products include a broad range of software and hardware solutions that are
offered to our customers as part of our complete solution offerings. Under our
various product brands, we offer these product solutions worldwide to customers
in all of the market segments in which we compete.

Digital video archive management software and solutions

Under
our Front Porch Digital brand, we offer a comprehensive integrated suite of
digital video archive management solutions. Our proprietary DIVArchive
(Distributed Intelligent Versatile Archive) software products enable customers
to manage large-scale digital video archives in the broadcast, media and
entertainment industry. With over 115 installations worldwide, we believe
DIVArchive maintains a dominant position in Europe and Asia and is gaining
market share in North America and South America. We believe participants in the
entertainment industry are increasingly seeking to convert non-digitized data
to digital formats that may easily be accessed, browsed, indexed, managed and
distributed.

DIVArchive
is a middleware software product that manages large-scale digital archives
for the entertainment industry. DIVArchive simplifies the process of
preserving, managing and accessing content, as part of a high-capacity,
expandable and scalable solution that satisfies the highest performance
standards. The principal benefits derived from DIVArchive include storage
optimization, protection and control, full-life cycle management, near-line
editing and partial retrieval, content repurposing and sharing, and archives
networking. Architectures can scale from small disk-only systems to large
capacity systems using different forms of physical storage to balance response
time, performance and cost.

Recent
upgrades and modifications to the standard DIVArchive product offering include
the following:

DIVArchive5.8:
The most recent version of DIVArchive features the following enhanced
functionality:

|  |                                                                                  
|- | ---------------------------------------------------------------------------------
| | Integration with the full
  range of TeleStream FlipFactory transcoding solutions
|  |                                                                                  
| | Enhanced integration with
  leading non-linear editing platforms                 
|  |                                                                                  
| | Greater control through
  the Storage Plan Manager Configuration Engine          
|  |                                                                                  
| | Expanded support for Tape
  Import/Export and Meta Source                        
|  |                                                                                  
| | New capabilities for MXF
  devices including partial restore functionality       

6

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DIVAdirector: This
distributed, web-based content
management application addresses the most fundamental asset management
requirements for global broadcasters. It enables active tracking of all assets
in the DIVArchive 5.8 system, low bit rate proxy browse, frame accurate EDL
generation and export, and robust metadata search and management capabilities.

DIVAmonitor: The
ever-increasing complexity of
mission-critical broadcast systems often presents an operational challenge for
broadcast customers, particularly in the support and maintenance of multiple
applications and devices. DIVAmonitor enables real time remote monitoring of
DIVArchive and all connected broadcast/storage devices. Accessed through the
DIVAmonitor portal, hardware and software in the archive layer are monitored by
a team of support professionals working at our NOC in Broomfield, Colorado

DIVAcomplete: DIVAcomplete is a
complete digital archive
solution that includes a set of products and services that deliver integration
and on-going support for complex storage and archive solutions. DIVAcomplete
solutions include archive layer workflow analysis, infrastructure assessments,
specification, designs, hardware procurement, installation and commissioning.
DIVAcomplete solutions may also include DIVAmonitor and 24x7 support for all
associated storage hardware and software to complete a total end-to-end archive
management solution.

DIVAworks: DIVAworks is
a robust, plug and play archive
management appliance that includes a server, near-line storage with a
10-cassette data tape library that operates under the control of DIVArchive
5.8. This turnkey, single chasse unit is offered at prices tailored to the
needs of broadcasters making a first-time investment in a basic archive system.
This product was designed specifically to meet the needs of the independent
broadcaster for a high-performance system at an economical price point.

DIVAnet: DIVAnet, which
is expected to be released in
April 2006, will enable customers that operate DIVArchive in more than one
geographic location to network and operate multiple archive installations from
one centralized archive management application. DIVAnet also enables enhanced
worldwide content creation and distribution, as well as fail-safe disaster
recovery protection.

GridWorks Operations Support System (OSS)

Our
GridWorks Operations Support System is a proprietary software application that
provides proactive management of the health, capacity and utilization of a
storage infrastructure. Our platform serves as the application that enables our
NOC to manage customer infrastructures globally through automation. Our
GridWorks Portal is the user interface into the GridWorks suite of applications
that monitor and manage the status, health, performance and capacity of an
enterprise storage infrastructure. GridWorks provides the functionality of many
costly Storage Resource Management (SRM) software products, but is included as
part of a service contract. From this one consolidated application, enterprise
customers can access all the information required to review our operation and
management of their complex heterogeneous, geographically distributed storage
environments.

Resale of third-party hardware and software

Our
DIVArchive and GridWorks products and services use an open architecture that
enables customers to use various operating systems, operate on multiple
hardware platforms and interoperate with many third-party software applications
and legacy systems. This open system capability enables customers to continue
using their existing computer resources and to choose among a wide variety of
existing and emerging computer hardware and peripheral technologies.

In
connection with the sale of DIVArchive and GridWorks, we resell various
products developed by third parties, including computer hardware and software
and other peripheral devices. We resell all third-party products pursuant to
agreements with the manufacturers or through distributor authorized reseller
agreements pursuant to which we are entitled to purchase products at discounted
prices and to receive technical support in connection with product
installations and subsequent product malfunctions. Accordingly, we believe we
are able to obtain pricing at competitive and often superior terms than other
resellers. We represent most major OEMs and all major storage OEMs, including
the following:

7

---



|                        |  |                                       
|----------------------- |  | --------------------------------------
|Products                |  | Suppliers                             
|                        |  |                                       
|Primary Storage         |  | Sun Microsystems                      
|                        |  | Hitachi Data Systems
  Corporation    
|                        |  | Network Appliance, Inc.               
|                        |  | StorageTek                            
|                        |  | Xiotech                               
|                        |  | EMC                                   
|                        |  |                                       
|Servers and Systems     |  | Sun Microsystems                      
|                        |  | HP Compaq                             
|                        |  | Dell Computer                         
|                        |  |                                       
|Tape Automation         |  | Quantum Corporation                   
|                        |  | Spectra Logic Corporation             
|                        |  | StorageTek                            
|                        |  | Xiotech                               
|                        |  |                                       
|Data Protection         |  | VERITAS Software                      
|                        |  | CommVault Software                    
|                        |  | Data Domain                           
|                        |  |                                       
|Networking and Security |  | Cisco Systems                         
|                        |  | Brocade Communications
  Systems, Inc.
|                        |  | Symantec Software                     
|                        |  | Juniper Networks                      
|                        |  | Checkpoint Software                   
|                        |  | McData Corporation                    

Professional Services

Our
professional services include a broad range of assessment, project management,
design and implementation services that are applied across most products sold in
our markets. Our engineering staff has a broad expertise and has received
appropriate certifications from our OEM partners. The services we provide
include:

|  |                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Storage &
  infrastructure assessments  providing critical feedback on the health, performance and
  utilization of storage and systems infrastructure, as well as a report card
  of business performance and compliance relative to established objectives and
  peer organizations.
|  |                                                                                                                                                                                                                                                                                        
| | Storage system design
  services  defining
  the appropriate technical architecture and unbiased product selection to meet
  key business criteria and assure optimal results.                                                                                                        
|  |                                                                                                                                                                                                                                                                                        
| | Implementation and
  integration services
   assuring technology purchases are installed and optimized to achieve the
  best possible performance and utilization of resources minimizing ongoing
  operations costs while assuring the best possible availability.                   
|  |                                                                                                                                                                                                                                                                                        
| | Cost of ownership
  assessments 
  helping organizations identify key cost areas, most effectively align
  resources and leverage technology to reduce ongoing expenses and streamline
  operations.                                                                                  
|  |                                                                                                                                                                                                                                                                                        
| | Project management
  services 
  supplying professional assistance to oversee deployment of assets,
  implementations of new applications while assisting in the alignment of
  scarce technical resources for timely solutions.                                                      
|  |                                                                                                                                                                                                                                                                                        
| | Level 1, 2 & 3
  engineering support
   assisting in rapid problem diagnosis, vendor response and problem
  resolution across a very broad range of systems and storage applications.                                                                                                 

24x7 First Call Operations and Maintenance Support

We
operate a 24x7 NOC in Broomfield, Colorado where all first call and maintenance
in-coming calls are received, diagnosed and routed to the appropriate
engineering personnel or vendor. Support services are provided on all
proprietary

8

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and third party products and
services. In many cases, the support personnel in our NOC have the ability, if
enabled by a customer, to remotely access the customers infrastructure
using our GridWork's platform to respond to alert notifications from the customer
and remotely correct the problem. In other cases, the NOC notifies our customers
of the problem and corrects (or instructs corrective action) or dispatches vendor
support prior to the customer calling the NOC. We also have a secondary support
desk in San Diego, California. Our engineering staff also provides level 2 and
3 support worldwide. These services are sold under long-term recurring service
contracts ranging from one to three years.

Outsourcing Services

Our
service offerings revolve around the complementary nature of our products. Our
managed services and first-call maintenance services are an integral part of
the continued operations, security and protection around the products we sell
and are key to the customers IT and storage infrastructure. Services are sold
under long-term recurring service contracts usually one to three years in term.

Managed storage and monitoring services

We
offer a proprietary managed storage and monitoring service through our
proprietary GridWorks Operations Support Systems platform. The GridWorks
platform enables automated remote monitoring, alert and notification and the
remote management of back-up applications. The service enables a proactive
heterogeneous look into a customers infrastructure, which provides real-time
insight to the performance of the customers technology investment. The service
is offered to customers in three options ranging from a basic monitoring
service to a complete service including all underlying IT equipment and
software.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our GridWatch solution is
  a remote monitoring, alert and notification service. The service is performed
  on the customers existing storage infrastructure and includes monthly
  reporting on performance, efficiency, reliability and the integrity of the
  data storage networks.                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Our GridManage solution
  provides remote management of storage applications and hardware
  infrastructure. The service is performed using the customers existing
  storage infrastructure and includes the actual day-to-day operation of the
  customers data storage applications, including specifically the back up and
  recoverability of data. This service solution includes all of the services
  provided by our GridWatch solution.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Our GridComplete offering
  is a complete storage solution by which we provide the storage
  infrastructure, integration/implementation services and complete management
  of storage applications and infrastructure. This solution encompasses all of
  the services offered by our GridWatch and GridManage products.                                                                                                                         

Outsourcing and Staff Augmentation

Our
outsourcing solutions assist our customers in the management of their IT
environment by augmenting their staff and operations with personnel as well as
methodologies and technologies that are based on industry best practices. We
assist with the design, implementation and management of new IT environments, or
leverage an existing environment to unlock value and enhance business
performance. Our flexible solutions are provided as full or partial outsourcing
engagements as well as overflow support for existing service operations.

Financing Solutions

We
offer various financing alternatives to our customers for the financing of both
equipment purchases and complete service solutions (GridComplete). Our
financing alternatives offer the customer a more flexible approach to
purchasing equipment. When a customer purchases a managed solution (long-term
service contract), it is common to incorporate the hardware cost into the
monthly recurring payment from the customer and to finance a complete solution
with one monthly payment/operating expense for the customer. The financing
alternatives offered to a customer typically include alternatives for direct
financing by our company and by third-party financing sources. The decision of
internal or external financing is largely dependent on the size of the
transaction, as well as the creditworthiness and size of the customer.

9

---



Sales and Distribution

We
distribute our products and services through both direct and indirect sales
channels depending on the products or services being sold. In many cases, our
sales personnel work closely with the sales personnel of third-party systems
integrators, data center operators, hardware and software distributors or
original equipment manufacturers to coordinate the sales efforts relating to a
particular customer or project.

At
March 23, 2006, our direct sales force consisted of 55 sales people. Sales and
marketing personnel are located at our offices in Broomfield, Colorado;
Phoenix, Arizona; San Ramon, Los Angeles and San Diego, California; Boise,
Idaho; Chicago, Illinois; Mount Laurel, New Jersey; Beaverton, Oregon; Dallas,
Texas and Kirkland, Washington. Sales and marketing personnel are also located
at our international sales and support offices in the United Kingdom, France
and Hong Kong. We conduct comprehensive marketing programs that include
telemarketing, public relations, direct mail, advertising, seminars, trade
shows and ongoing customer communications programs.

We
obtain sales leads through cold calling, existing relationships, advertising,
seminars, trade shows and relationships with industry consultants. A typical
sales cycle begins with the generation of a sales lead or the receipt of a
request for proposal (RFP) from a prospective customer or his representative.
After qualification of the sales lead and analysis of the prospective
customers requirements, a quote or a formal proposal in response to the RFP is
prepared. The proposal generally describes how our products and services are
expected to meet the RFP requirements and associated costs. Product
demonstrations may be conducted at the prospective customers facilities. Site
visits to existing installations of our products are also encouraged by our
sales staff. While the sales cycle varies substantially from customer to
customer, it typically ranges from three to eight months.

We
supplement our marketing efforts by entering into formal and informal
partnerships with entities focused on other areas of the complete solution
value chain. Since our products often are part of a larger-scale integration
and implementation project, we believe partnering with industry leaders is an
effective means of penetrating markets and positioning our products and
services. Strategic alliances also assist us in keeping pace with technological
developments of the major software and hardware vendors and system integrators.

Our
indirect channel partners are located in North America and South America, Europe,
Australia, Asia and the Pacific Rim. Indirect sales channels lend themselves
more to the sale of our products and services to the broadcast, media and
entertainment industry than in our other markets. The supply chain for digital
media workflow conversion includes a wide range of providers of hardware,
software and services. Storage hardware, video server and other component
manufacturers, automation and asset management vendors and broadcast systems
integrators all exercise influence in the final selection of components chosen
in the final integrated solution.

We
have co-marketing relationships with national and regional distribution
partners to drive regional and local market penetration, and market-specific
regional marketing partners to drive vertical market penetration. Manufacturers
and distributors make available to us certain funds for marketing expenses
through various programs. These programs include direct mail, lead generation,
advertising, event marketing, brand awareness and sales solutions.
Manufacturing rebates are also applied to fund a significant portion of our
marketing expenses. Our businesses earn marketing coop funds based on a
percentage of product sales and associated volumes. In addition to a percentage
of total sales volume, manufacturers also provide special rebate programs.
These co-op funds are managed to support our marketing activities, including,
but not limited to, marketing communications, training, certification,
advertising, events, branding and lead generation programs.

Research and Development

We
maintain a research and software development staff that designs and develops
our new products and services. We believe that by performing most of our own
software development, we can more quickly and cost-effectively introduce new
and innovative technologies and services. In addition, we believe we are better
equipped to incorporate customer preferences into our development plans.

Through
Front Porch, we seek to offer an extensive, integrated product line that
provides digital archive management solutions to broadcasters and media
companies worldwide. Through MSI, we seek to offer comprehensive storage
services using our proprietary GridWorks Operations Support System, which
enables automated remote

10

---



monitoring and
management of complete storage infrastructures and back-up applications. To
effect this strategy, we intend to continue to introduce upgraded functionality
and enhancements to existing products.

We
are continuing our software development efforts for our DIVArchive and
GridWorks software solutions by designing enhancements that address application
programming interfaces (APIs) for tape media, optical disk, tape and optical
libraries and autoloaders, tape images on disk, tape and disk operational
classes, components and test utilities. We are also directing our efforts
toward the development of digital audiovisual software and storage and
streaming applications covering DVD, Internet/Intranet, digital cable,
broadcast digital television, datacasting and wireless transmission.

Developing
new technology, products and services is complex and involves uncertainties.
There can be no assurance that our development efforts will be successful. For
the years ended December 31, 2005 and December 31, 2004, we incurred total
costs, of which a portion was capitalized and the remainder was expensed, related
to research and development activities totaling $1,085,547 and $1,337,180,
respectively. See Note 3 to Notes to Consolidated Financial Statements. On a
pro forma basis for 2004, assuming the acquisitions of MSI, PWI and Incentra
    of California had occurred on January 1, 2004, we incurred total costs, of
    which a portion was capitalized and the remainder was expensed, related to
    research and development activities amounting to $1,909,373.

Patents, Trademarks and Licenses

We
regard our technology as proprietary and will attempt to protect our technology
through patents, copyrights, trade secret laws, restrictions on disclosure and
other methods. We currently hold one patent (#6,947,598), which we were awarded
on September 20, 2005, covering key methods and apparatus that are
critical to the archive management function within global broadcast facilities.
This patent allows us to protect the valuable intellectual property that Front
Porch has developed within DIVArchive. We believe that, because of the rapid
pace of technological change in the data storage industry, patent and copyright
protection are beneficial to the competitive position of our products and
services. We continue to pursue patent protection around advanced developments
in DIVArchive and in our GridWorks storage management software platform.

We
generally sell our products to our customers under a non-transferable perpetual
license. We generally license our products solely for the customers internal
operations and only at a designated site. We also make available multi-site
licenses and enterprise licenses. Domestic multi-site licenses are discounted
from the first license fee for the second site and beyond. Enterprise licenses
are structured as a one-time fee with unlimited usage, plus an additional fee
as additional sites are installed with the software. Discounts are generally
applied for multi-site licenses. International license fees tend to be slightly
higher and are structured by region.

We
do not provide source code to the customer under our licenses. We believe that
providing source code increases the likelihood of misappropriation or other misuse
of our intellectual property. We have, however, entered into source code escrow
agreements with certain customers whereby source code is made available to a
customer. This is a common practice in the software industry. Under the terms
of our license agreement, we generally own all modifications to our software
that are implemented for a customer.

We
are not aware of any case in which our products, trademarks or other
proprietary rights infringe the property right of third parties, but have not
performed any independent investigations to determine whether such infringement
exists. Accordingly, there can be no assurance that third parties will not
assert infringement claims against us in the future with respect to current or
future product or that any such assertion may not require us to enter into
royalty arrangement or result in litigation. As the number of software products
in the industry increases and the functionality of these products further
overlap, we believe that software developers may become increasingly subject to
infringement claims. Any such claims, with or without merit, can be time
consuming and expensive to defend.

Competition

The
markets for our products and services are becoming increasingly competitive. We
believe our ability to compete depends on a number of factors, both within and
outside of our control. These factors include, among others, the functionality,
price and performance our products and services relative to our competitors
offerings, customer satisfaction and customer support capabilities, the breadth
of product lines and support services, the strength of our sales force

11

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and channel
partnership relationships and general economic and business conditions. We
expect additional companies to begin offering products and services similar to
those we offer. Many of these companies have significantly greater financial
resources than we do.

We
expect our competitors to continue to improve the design and performance of
their products. Competitors may develop future generations of competitive
products that will offer superior price or performance features or technologies
that may render our products or services less competitive or obsolete.
Increased competitive pressures could also lead to lower prices for our
products or services, thereby adversely affecting our business and results of
operations.

We
believe the primary competitors for our digital archive solutions include
Avalon, a division of EMC Corporation, Software Generation Limited, a
privately-held company based in Southampton, England, and Masstech Group, a
privately-held corporation headquartered in Toronto, Canada.

We
believe the primary competitors for our data protection solutions and complete
solutions to enterprises include Arsenal Digital, Electonic Data Systems
(EDS) and IBM Global Services (IBM). However, EDS and IBM primarily deliver
solutions from a total IT outsourcing and management solution perspective and
do not focus on the storage layer as a core competency. In addition, these
competitors often do not meet mid-tier enterprise budget constraints. We also
compete with systems integrators such as Datalink Corporation, SANZ, Inc.,
Midrange Computer Solutions, Inc. (MCSI) and Foresyth Technologies, Inc.

Employees

As
of March 23, 2006, we employed 168 persons on a full-time basis, of which 11
were executive management, 27 were in finance and administration, 55 were in
sales and marketing, 48 were in engineering/delivery and software development
and 27 were in customer service and support.

None
of our employees is subject to a collective bargaining agreement and we are not
aware of any efforts to unionize any employees. We believe our labor relations
are good.

Development of Business

We
were incorporated in the State of Nevada on April 27, 1995 under the name
Landmark Leasing, Corp. During the period from our formation to May 2, 2000,
we generated no significant revenues, and accumulated no significant assets, as
we attempted to develop various business opportunities. On May 2, 2000, we
acquired 100% of the outstanding equity securities of Front Porch Digital,
Inc., a Delaware corporation formed in February 2000 (Front Porch). This
transaction is commonly referred to as a reverse acquisition in which all of
the capital stock of Front Porch was effectively exchanged for a controlling
interest in our company, which was a publicly-held shell corporation. In
connection with that transaction, we changed our name to Front Porch Digital,
Inc.

In
August 2002, we acquired from ManagedStorage International, Inc., a Delaware
corporation (MSI), the DIVArchive operations of MSI located in Toulouse,
France. In connection with this acquisition, we acquired intellectual property,
fixed assets and substantially all of the personnel of this business.

In
April 2003, we sold to Eastman Kodak Company (Kodak) the Companys
intellectual property rights relating to the DIVArchive product applications
for the medical imaging and information management market. In connection with
such sale, Kodak offered employment to substantially all of our personnel
associated with the transferred assets and assumed certain software support
obligations to our existing DIVArchive customers in the medical industry.

On
August 18, 2004, we acquired all of the outstanding capital stock of MSI (the
Acquisition). The Acquisition was accounted for as a reverse merger, as more
fully described in Note 4(c) to the Consolidated Financial Statements in Item
7, and MSI was deemed to be the acquirer for accounting purposes. We changed
our name on October 25, 2004 to Incentra Solutions, Inc.

As a result of
the acquisition, the consolidated financial statements presented
herein include the financial statements of MSI for all periods prior to August
18, 2004 and the financial statements of the consolidated companies from the
date of the Acquisition forward. In addition, we are disclosing pro forma
financial information, which reflects

12

---



the
consolidated financial statements of both MSI and Front Porch prior to the
Acquisition as if the Acquisition occurred at the beginning of the periods
presented.

On
February 18, 2005, we acquired all of the outstanding capital stock of Incentra
of CA (formerly Star Solutions of Delaware, Inc.), a privately-held company.
    In connection with this acquisition, we acquired all assets and liabilities
    of the business, primarily cash and accounts receivable/payable, and substantially
    all of the personnel (45) of this business.

On
March 30, 2005, we acquired all of the outstanding capital stock of PWI, a
privately-held company. In connection with this acquisition, we acquired all
assets and liabilities of the business, primarily accounts receivable/ payable,
and substantially all of the personnel (33) of this business.

|        |                        
|------- | -----------------------
|ITEM 2. | DESCRIPTION OF PROPERTY

Our
executive offices and certain administrative functions are located in Boulder,
Colorado, where we lease approximately 5,000 square feet of office space under
a month-to-month arrangement. We lease approximately 4,000 square feet of
office space in Mount Laurel, New Jersey through September 2006. The New Jersey
site houses our research and software development resources, our
development/testing/staging laboratory facilities, and certain information
management systems for domestic operations of our Front Porch business.
International operations of the Front Porch business are located in 410 square
meters of office and production space in Toulouse, France under a lease that
expires in 2014 and 150 square meters of office space in Annecy, France.

We
lease approximately 10,700 square feet of office space in Broomfield, Colorado
through September 2007. The Broomfield site houses our software development
resources, engineering, managed storage and monitoring operations center,
information management systems and administrative functions. We lease a total
of approximately 17,000 square feet of office space in Kirkland, Washington;
Beaverton, Oregon; and San Diego, California through March, 2008, which also
house our sales, operations and administrative functions. We also have sales
offices and operating locations in San Ramon, California, Geneva, Switzerland
and London, England.

At
December 31, 2005, aggregate lease payments under the Mount Laurel, New Jersey,
Broomfield, Colorado, Kirkland, Washington, Beaverton, Oregon, San Diego,
California, San Ramon, California, Annecy, France and Toulouse, France leases
through the end of the lease terms were as follows:

| |                            |  |   |           | 
| | -------------------------- |  | - | --------- | 
| | Mount
  Laurel, New Jersey |  | $ | 41,571    | 
| | Broomfield,
  Colorado     |  |   | 275,604   | 
| | Kirkland,
  Washington     |  |   | 298,370   | 
| | Beaverton,
  Oregon        |  |   | 51,842    | 
| | San Diego,
  California    |  |   | 214,685   | 
| | San Ramon,
  California    |  |   | 53,346    | 
| | Annecy,
  France           |  |   | 186,496   | 
| | Toulouse,
  France         |  |   | 659,351   | 
| |                            |  |   |           | 
| | Total                      |  | $ | 1,781,265 | 
| |                            |  |   |           | 

We
believe our current facilities are adequate for our existing operations and
that all of our properties are adequately covered by insurance.

13

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|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

Star Note Default

We
are engaged in an arbitration proceeding, which is scheduled to begin on April
4, 2006, to resolve a dispute with one of our creditors that, if resolved
unfavorably, would have a material adverse affect on our liquidity and
financial condition. In connection with our acquisition of STAR (now known as
Incentra of CA) in February 2005, we issued to Alfred Curmi, the principal
stockholder of STAR, a promissory note (the STAR Note) in the principal
amount of $2.5 million that is payable in ten installments and matures on
August 1, 2007. On August 1, 2005, we elected to cease making payments to Mr.
Curmi due under the STAR Note after we identified significant required
post-closing adjustments to the purchase price for the assets of STAR and,
consequently, the principal amount of the STAR Note. On August 16, 2005, we
received a demand for arbitration from legal counsel to Mr. Curmi. As of
December 31, 2005, we have reclassified the balance of $2.4 million on the STAR
Note to current liabilities due to the default and the possibility that the
arbitrator may rule in favor of Mr. Curmi in such proceeding. While management
does not believe the debt will be paid within one year of the balance sheet
date, the reclassification on the balance sheet was made as the debt is now
callable. We do not have the cash available to pay such amount and, in such
event, we would require additional financing to meet our obligation. There can
be no assurance that we would be able to obtain additional funding when needed,
or that such funding, if available, will be obtainable on terms acceptable to
us. In the event our operations do not generate sufficient cash flow, or we
cannot obtain additional funds if and when needed, we may be forced to curtail
or cease our activities, which would likely result in the loss to investors of
all or a substantial portion of their investment. The event of default on the
STAR Note created an event of default of certain provisions of our various promissory
notes with Laurus. See Note 9(A) to the Notes to Consolidated Financial Statements.

|        |                                                      
|------- | -----------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
  HOLDERS

None

PART II

|        |                                                                                                                    
|------- | -------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR COMMON EQUITY AND RELATED
  STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Our
common stock is currently quoted on the OTC Bulletin Board under the symbol
ICEN. The following table sets forth the high and low bid prices for our
common stock for each fiscal quarter within our last two fiscal years, as
reported by the National Quotation Bureau. The prices set forth below represent
interdealer quotations, without retail markup, markdown or commission and may
not be reflective of actual transactions. Prices for periods prior to June 9,
2005 have been adjusted to reflect a ten-for-one reverse split of our common
stock effective on that date.

|                               |  |          |       |         |   |      | 
|------------------------------ |  | -------- | ----- | ------- | - | ---- | 
|                               |  | High Bid |       | Low Bid |  
|                               |  |          |       |         |  
|Year ended
  December 31, 2004 |  |          |       |         |   |      | 
|First
  Quarter                |  | $        | 11.25 |         | $ | 1.20 | 
|Second
  Quarter               |  |          | 8.60  |         |   | 3.20 | 
|Third
  Quarter                |  |          | 3.90  |         |   | 1.60 | 
|Fourth
  Quarter               |  |          | 3.50  |         |   | 2.00 | 
|                               |  |          |       |         |   |      | 
|Year ended
  December 31, 2005 |  |          |       |         |   |      | 
|First
  Quarter                |  | $        | 3.10  |         | $ | 1.61 | 
|Second
  Quarter               |  |          | 2.80  |         |   | 0.51 | 
|Third
  Quarter                |  |          | 2.00  |         |   | 0.90 | 
|Fourth
  Quarter               |  |          | 1.90  |         |   | 0.85 | 

14

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Holders

At
March 23, 2006, there were approximately 350 record holders of our common
stock. This number excludes any estimate by us of the number of beneficial
owners of shares held in street name, the accuracy of which cannot be
guaranteed.

Dividends

We
have not paid cash dividends on any class of common equity since formation and
we do not anticipate paying any dividends on our outstanding common stock in
the foreseeable future. The purchase agreement relating to our outstanding
senior secured convertible promissory note prohibits the declaration or payment
of dividends on our common stock so long as twenty-five percent (25%) of the
principal amount of such note remains outstanding, unless we obtain the written
consent of the noteholder. Furthermore, the terms of our Series A Preferred
Stock provide that, so long as at least 250,000 shares of our originally issued
shares of Series A Preferred Stock are outstanding, we cannot declare or pay
any dividend without having obtained the affirmative vote or consent of at
least 80% of the voting power of our shares of Series A Preferred Stock.

Securities Authorized for Issuance Under
Equity Compensation Plans

As
of December 31, 2005, the following equity compensation plans were in effect:

|                                                                |  |                                                                                             |           |                                                                             |  |                                                               |   |      |  |  |  |        |  | 
|--------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | --------- | --------------------------------------------------------------------------- |  | ------------------------------------------------------------- | - | ---- |  |  |  | ------ |  | 
|Plan category                                                   |  | Number of securitiesto be issued upon exerciseof outstanding options,
  warrants and rights |           | Weighted averageexercise price ofoutstanding options,
  warrants and rights |  | Number of securitiesremaining available
  for future issuance |  
|                                                                |  |                                                                                             |           |                                                                             |  |                                                               |  
|Equity compensation plans approved by
  security holders        |  |                                                                                             | -0-       |                                                                             |  |                                                               |   | N/A  |  |  |  | -0-    |  | 
|                                                                |  |                                                                                             |           |                                                                             |  |                                                               |   |      |  |  |  |        |  | 
|Equity compensation
    plans not approved by security holders: |  |                                                                                             |           |                                                                             |  |                                                               |   |      |  |  |  |        |  | 
|2000 Equity Incentive Plan (a)                                  |  |                                                                                             | 2,217,016 |                                                                             |  |                                                               | $ | 2.92 |  |  |  | 45,484 |  | 
|MSI 2000 Stock Option Plan (b)                                  |  |                                                                                             | 216,536   |                                                                             |  |                                                               | $ | 0.43 |  |  |  | -0-    |  | 
|                                                                |  |                                                                                             |           |                                                                             |  |                                                               |   |      |  |  |  |        |  | 
|Total                                                           |  |                                                                                             | 2,433,552 |                                                                             |  |                                                               | $ | 2.70 |  |  |  | 45,484 |  | 
|                                                                |  |                                                                                             |           |                                                                             |  |                                                               |   |      |  |  |  |        |  | 

(a)
Total number of securities remaining available for future issuance includes
2,262,500 shares for issuance under our 2000 Equity Incentive Plan, less options
outstanding.

(b)
Represents options to purchase unregistered shares of our common stock pursuant
to grants under the MSI 2000 Stock Option and Grant Plan. There will be no
additional grants under such plan.

Our
equity incentive plans are more fully described in Part III herein and in Note
11 to Notes to Consolidated Financial Statements.

|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

Our
significant accounting policies are described in Note 3 to the Consolidated
Financial Statements. Some of these significant accounting policies require
management to make difficult, subjective or complex judgments or estimates.
Management believes our most important accounting policies include revenue
recognition, software development costs, stock-based compensation, accounting
for obligations and instruments potentially settled in shares of our common
stock, impairment of long-lived assets, and concentrations of risk related to
customers.

15

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Revenue Recognition

Given
our diverse product and sales mix, as well as the complexities and estimates
involved in measuring and determining revenue in accordance with generally
accepted accounting principles, our accounting for revenue is crucial to the
proper periodic reporting of revenue and deferred revenue.

We
license software under license agreements and provide professional services,
including training, installation, consulting and maintenance. License fee
revenues are recognized when a license agreement has been signed, the software
product has been shipped, the fees are fixed and determinable, collection is
reasonably assured, and no significant vendor obligations remain.

We
recognize revenue under the completed contract method of accounting as
prescribed by American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 97-2 in connection with an arrangement to deliver
software or a software system requiring significant production, modification or
customization of software. We recognize revenue when persuasive evidence of an
arrangement exists, delivery and acceptance has occurred, the fee is fixed or
determinable, and collection is reasonably assured.

We
allocate revenue to each component of the contract based on objective evidence
of its fair value, as established by management. Because licensing of the
software is generally not dependent on the professional services portion of the
contract, software revenue is generally recognized upon delivery, unless a
contract exists with a customer requiring customer acceptance.

We
recognize revenues from storage services at the time the services are provided
and are billed on a monthly basis. Fees received for up-front implementation
services are deferred and recognized over the term of the arrangement. Deferred
revenue is recorded for billings sent to or paid by customers for whom we have
not yet performed certain services.

We
sell computer equipment and software purchased from third parties to customers
as part of an integrated solution and on a stand-alone basis. Hardware sales
are recognized when the hardware is received by the customer.

We
recognize fees for maintenance agreements ratably over the terms of the
agreements. Maintenance is generally billed in advance resulting in deferred
revenues.

We
provide hardware and software-related professional services. Services are
generally provided on a time and materials basis and revenue is recognized as
the services are provided.

Software Development Costs

As
expenditures for software development are expected to increase, the capture and
measurement, as well as proper capitalization and amortization of these costs,
is a key focus of management. The proper matching of these costs with the
related revenue impacts the proper periodic reporting of earnings. We
capitalize costs in developing software products upon determination that
technological feasibility has been established for the product, if that product
is to be sold, leased or otherwise marketed. Costs incurred prior to the
establishment of technological feasibility are charged to research and
development expense. When the product is available for general release to
customers, capitalization is ceased, and all previously capitalized costs are
amortized over the remaining estimated economic useful life of the product, not
to exceed to three years.

Stock-Based Compensation

Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation, defines a fair-value-based method of accounting for stock-based
employee compensation plans and transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees, and
encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value.

We
have elected to account for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, employee compensation cost for stock options is
measured as the excess, if any, of the estimated fair value of our stock at the
date of the grant over the amount an employee must pay to acquire the stock.

16

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Transactions
in which we issue stock-based compensation for goods or services received from
non-employees are accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. We often utilize pricing models in determining the fair
values of options and warrants issued as stock-based compensation to
non-employees. These pricing models utilize the market price of our common
stock and the exercise price of the option or warrant, as well as time value
and volatility factors underlying the positions.

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R)
Share-Based Payment, which addresses the accounting for share-based payment
transactions. SFAS No. 123(R) eliminates the ability to account for share-based
compensation transactions using APB Opinion No. 25, Accounting for Stock
Issued to Employees, and generally requires instead that such transactions be
accounted and recognized in the statement of income based on their fair value.
SFAS No. 123(R) will be effective for us for our filing on Form 10-QSB for the
first quarter of 2006. We have evaluated the provisions of this standard, and
we expect that the implementation of this standard will have a material impact
on our financial position and results of operations.

Accounting for Obligations and Instruments
Potentially Settled in the Companys Common Stock

We
account for obligations and instruments potentially to be settled in our stock
in accordance with Emerging Issues Task Force (EITF) No. 00-19,
Accounting
for Derivative Financial Instruments Indexed To, and Potentially Settled In a
Companys Own Stock. This issue addresses the initial balance sheet
classification and measurement of contracts that are indexed to, and
potentially settled in, our own stock.

Under
EITF No. 00-19 contracts are initially classified as equity or as either assets
or liabilities, depending on the situation. All contracts are initially
measured at fair value and subsequently accounted for based on the then current
classification. Contracts initially classified as equity do not recognize
subsequent changes in fair value as long as the contracts continue to be
classified as equity. For contracts classified as assets or liabilities, we
report changes in fair value in earnings and disclose these changes in the
financial statements as long as the contracts remain classified as assets or
liabilities. If contracts classified as assets or liabilities are ultimately
settled in shares, any previously reported gains or losses on those contracts
continue to be included in earnings. The classification of a contract is
reassessed at each balance sheet date.

Impairment of Long-Lived Assets

Long-lived,
tangible and intangible assets that do not have indefinite lives, such as fixed
assets and intellectual property, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. As a result of the acquisitions in 2004
and 2005, we have approximately $13.7 million in intangible assets.
Determination of recoverability is based on an estimate of undiscounted
future cash flows resulting from the use of such assets and their eventual
disposition. Measurement of an impairment loss for such long-lived assets
is based on the fair value of the assets.

Goodwill
is not amortized and is subject to write downs charged to results of operations
only when its carrying amounts is determined to be more than its estimated fair
value based upon impairment tests that are required to be made annually or more
frequently under certain circumstances. Fair values are determined based on
models that incorporate estimates of future probability and cash flows.  As a
 result of the 2005 acquisitions, we have approximately $5.9
million in goodwill after recording an impairment loss of $4.2 million as
discussed in Note 4 to the Notes to Consolidated Financial Statements.

In
    connection with preparing the December 31, 2005, consolidated financial statements,
    we determined that an error was made in accounting for goodwill recognized
    in connection with business acquisitions that occurred in the first quarter
    of 2005. As a result of the error, goodwill was overstated by approximately
    $4.5 million and shareholders deficit was understated by the same
amount at March 31, June 30, and September 30, 2005. There was no effect on the
Companys consolidated statements of operations for the year ended December
31, 2005 or for any quarter of 2005 as a result of this error. The error was
corrected in the fourth quarter of 2005 by decreasing goodwill and increasing
shareholders deficit by $4.5 million.

Concentration of Risk  Customers and
  Geographic

The following is a breakdown of our revenues and long lived assets
    by geographic area* (in thousands):

|                             |               |        |             |  |       |        |  |   |        |  | 
|---------------------------- | ------------- | ------ | ----------- |  | ----- | ------ |  | - | ------ |  | 
|Year Ended December 31, 2005 | North America |        | Europe/Asia |  | Total |       
|                             |               |        |             |  |       |       
|Revenues                     | $             | 37,420 |             |  | $     | 13,412 |  | $ | 50,832 |  | 
|                             |               |        |             |  |       |        |  |   |        |  | 
|Long-lived assets, net       |               | 1,625  |             |  |       | 605    |  |   | 2,230  |  | 
|                             |               |        |             |  |       |        |  |   |        |  | 
|Year Ended December 31, 2004 |               |        |             |  |       |        |  |   |        |  | 
|                             |               |        |             |  |       |        |  |   |        |  | 
|Revenues                     |               | 8,575  |             |  |       | 4,710  |  |   | 13,285 |  | 
|                             |               |        |             |  |       |        |  |   |        |  | 
|Long-lived assets, net       |               | 1,779  |             |  |       | 674    |  |   | 2,453  |  | 

*The geographic breakout by country is not practical to obtain.Long-lived assets
includes Property, Plant and Equipment

During
2005, one customer represented 16% of revenues. During 2004, revenues from two
customers, each exceeding 10% of total revenues, aggregated 13% and 11%,
respectively.

17

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General

Business Outlook

The
following discussion of financial results is based on actual results for the
years ended December 31, 2005 and December 31, 2004. For the year ended
December 31, 2005, revenues increased 283% to $50.8 million from $13.3 million
for the comparable prior year period. The significant growth in revenue was a
result of the added sales of products and services from two acquisitions
completed in early 2005 and a full year for our Front Porch operations in 2005. Sales
and deliveries of our proprietary DIVArchive solution and related professional
services also increased in 2005. In addition, the revenue base created by our
proprietary GridWorks OSS solution provides a monthly recurring revenue stream
that adds stability and predictability in revenue, as well as a significant
growth opportunity through the expansion of services to existing customers, the
continued increase in the amount of data under protection, and new enterprise
and service provider customer opportunities.

During
the year ended December 31, 2005, we completed two strategic acquisitions that
allowed us to become a more complete solutions provider of IT infrastructure
products and services. One of the major benefits from adding the IT solutions
providers was our ability to leverage the existing capabilities of the MSI business
    which enables us to offer additional professional services, managed service
solutions, and first call maintenance support on many of the products sold. The
introduction of additional value-added services allows us to achieve higher
gross margins than we realize by selling hardware and software alone. Prior
    to providing the capabilities of first call maintenance, maintenance was
    sold along side other products. All revenues and costs were recognized upon
recording the sale. By creating the ability to provide first call maintenance
support, we now are providing a service to the customer over time, and
therefore the revenues and the costs are ratably recognized over the service
period. The overall margin is enhanced as well. On the broadcast side of the
business, we continued to sell and deliver fully integrated digital archives
and storage infrastructure to customers throughout the world.

We
continue to invest in the development of our software in digital archiving,
data storage and infrastructure areas. During the year ended December 31,
2005, we invested approximately $1.6 million in software development and
approximately $1.1 million for data storage infrastructure. As we continue to
grow, we will need to sustain and possibly increase the investment of capital
into our software technologies, GridWorks and DIVArchive, to ensure they
maintain their competitive advantage and to further enhance their
interoperability and feature sets.

For
the year ended December 31, 2005, our loss from operations was $12.0 million,
as compared to a loss of $7.7 million for the comparable prior year period. In
2005, we recorded a goodwill impairment loss related to the acquisition of Incentra
    of CA amounting to $4.2 million as compared to an impairment loss of $0.2
    million related to an earlier acquisition in the prior year. For the year
    ended December 31, 2005, we incurred an EBITDA loss of $1.8 million compared
    to an EBITDA loss of $3.5 million for the comparable prior year period. Excluding
    the impact on EBITDA of non-cash stock option compensation expense, amortization
    of referral fees and merger costs, the adjusted EBITDA loss was $1.2 million
    in 2005 and $1.5 million in 2004.1

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|1 | EBITDA is
  defined as earnings before interest, taxes, depreciation and amortization and
  cumulative effect of changes in accounting principles. Although EBITDA is not
  a measure of performance or liquidity calculated in accordance with generally
  accepted accounting principles (GAAP), we believe the use of the
  non-GAAP financial measure EBITDA enhances an overall understanding of our
  past financial performance and is a widely used measure of
  operating performance in practice. In addition, we believe the use
  of EBITDA provides useful information to the investor because EBITDA excludes
  significant non-cash interest and amortization charges related to our past
  financings and acquisitions that, when excluded, we believe produces
  more meaningful operating information. EBITDA also excludes depreciation and
  amortization expenses, which are significant when compared to such levels
  prior to the acquisition of MSI. However, investors should not consider this
  measure in isolation or as a substitute for net income, operating income,
  cash flows from operating activities or any other measure for determining our
   operating performance or liquidity that are calculated in
  accordance with GAAP, and this measure may not necessarily be comparable to
  similarly titled measures employed by other companies. A reconciliation of
  EBITDA to the most comparable GAAP financial measure net loss before deemed
  dividends and accretion on preferred stock is set forth below.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | EBITDA
  Reconciliation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                                    |  |                                     |         |      |   |         |  
|------------------------------------------------------------------- |  | ----------------------------------- | ------- | ---- | - | ------- | -
|                                                                    |  | For the years ending
  December 31, |        
|                                                                    |  | 2005                                |         | 2004 |  
|                                                                    |  |                                     |         |      |  
|                                                                    |  | All amounts in (000s)              |        
|Net loss before deemed dividends and
  accretion on preferred stock |  | $                                   | (14,226 | )    | $ | (10,438 | )
|Depreciation and amortization                                       |  |                                     | 5,424   |      |   | 3,974   |  
|Loss on impairment of goodwill                                      |  |                                     | 4,151   |      |   | 198     |  
|Taxes                                                               |  |                                     | 469     |      |   | 400     |  
|Interest (cash portion)                                             |  |                                     | 768     |      |   | 181     |  
|Interest (non-cash portion)                                         |  |                                     | 1,623   |      |   | 2,226   |  
|                                                                    |  |                                     |         |      |   |         |  
|EBITDA                                                              |  |                                     | 1,791   |      |   | (3,459  | )
|Non-cash stock based compensation                                   |  |                                     | 521     |      |   | 392     |  
|Merger costs                                                        |  |                                     |        |      |   | 1,275   |  
|Referral fees                                                       |  |                                     | 72      |      |   | 288     |  
|                                                                    |  |                                     |         |      |   |         |  
|EBITDA, as adjusted                                                 |  | $                                   | (1,198  | )    | $ | (1,504  | )
|                                                                    |  |                                     |         |      |   |         |  

18

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We
continue to leverage our unique intellectual property by taking advantage of
our position as a leading provider of archive software solutions. During 2005,
we expanded our product and service offerings, positioning us as a provider of
a wide range of services and products to the broadcast and media markets and
further solidifying our leading market position. Revenues from the broadcast
    and media markets grew by over 40% on a pro forma basis due to sales to existing
    and new customers, from strong growth of DIVArchive software revenues, and
    by offering complete archive solutions, including storage hardware and software,
    servers and peripheral devices, as well as first call support services. We
    increased our volume of products available for resale to the customers both
    directly and through existing channel partners. We increased our expenditures
    for sales and marketing initiatives to meet an increasing volume of digital
    archive implementations worldwide. We introduced the sales of managed services
    along with our sales of storage products and professional services directly
     to enterprise customers.

The
following discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. These estimates are based on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Results of OperationsYear Ended December 31, 2005 Compared
to the Year Ended December 31, 2004

Our Independent Registered Public Accounting Firms report
    on our consolidated financial statements as of December 31, 2005, and for
    each of the years in the two-year period then ended, includes a going
    concern explanatory paragraph, that describes factors that raise substantial
    doubt about our ability to continue as a growing concern.

Revenue.Total revenue for the
year ended December 31, 2005 increased $37.5 million, or 283%, to $50.8 million
compared to total revenue of $13.3 million for the year ended December 31,
2004. Revenue from the sale of our products increased to $37.6 million compared
to revenue of $5.2 million for the comparable prior year period. This increase
was attributable to:(1) the additional revenues resulting from the acquisitions
of Incentra of CA and PWI, (2) increased orders for our software and related
products, consisting primarily of sales of our DIVArchive solutions, (3)
revenues resulting from the conclusion of the results of operations of Front
Porch for the full year 2005 and (4) sales of hardware as part of
complete archive solutions. Revenue from
delivery of our services increased $5.1 million, or 63%, to $13.2 million
compared to $8.1 million for the comparable prior year period. The increase in
service revenue was the result of the additional revenues resulting from the
professional services provided by Incentra of CA and PWI to its customers, as
well as the introduction of first call maintenance services by these
businesses. Pro forma revenue for the year ended December 31, 2005 increased
to $61.3 million compared to $56.5 million in the previous year. The increase
was due to the increased revenue from PWI and the broadcast division, which was
offset in part by the decline in the revenues of Incentra of CA and MSI.

For
the year ended December 31, 2005, a significant portion of our revenues was
derived from the European and Asian geographic markets. During that period,
aggregate revenues from customers located in Europe, Asia and the Pacific Rim
amounted to $13.4 million, or 26% of total revenue, while revenues from
customers located in North America totaled $37.4 million, or 74% of total
revenue. For the year ended December 31, 2004, our revenues from customers located
in Europe and Asia amounted to $4.7 million, or 35% of total revenue, while
revenues from customers located in North America totaled $8.6 million, or 65%
of total revenue.

19

---



Gross
Margin.Total gross
margin for the year ended December 31, 2005 increased $10.3 million to $16.3
million, or 32% of total revenue, as compared to gross margin of $6.0 million,
or 45% of total revenue, for the comparable prior year period. The decrease in
margin percentage was due to the introduction of third-party product sales from
the two acquisitions in 2005. Product gross margin for the year ended December
31, 2005 totaled $12.2 million, or 32% of product revenue. Service gross margin
for the year ended December 31, 2005 totaled $4.2 million, or 32% of service
revenue. The decrease in the margin percentage in product revenue was due to
the introduction of third-party products offered by the new acquisitions compared
to the heavier percentage of the DIVArchive products in the prior year. On a
pro forma basis, the gross margin for the year ended December 31, 2005 was
$17.9 million compared to $16.8 million in the comparable prior year period.
The increase of $1.1 million was net of a decrease of $1.2 million in gross
margin from Incentra of CA.

Selling,
General and Administrative Expenses.Selling, general and administrative
(SG&A) expenses for the year
ended December 31, 2005 increased by approximately $10.2 million to $20.5
million from $10.3 million for the comparable prior year period. SG&A
expenses for the year ended December 31, 2005 included $14.5 million in
salaries and related benefits for employees not directly related to the
production of revenue, $2.6 million in general office expenses, $1.6 million
in professional fees, $1.1 million for travel-related costs, $1.1 million in
facilities costs, $0.1 million in bad debt expense and $0.1 million in research
and development costs. SG&A expenses of $10.3 million for the prior year
ending December 31, 2004 included $5.9 million in salaries and related benefits
for employees not directly related to the production of revenue, $1.7 million
in general office expenses, $0.9 million in professional fees, $0.8 million in
travel related costs, $0.6 million of facilities costs and $0.2 million of bad
debt expense. The increase in SG&A expenses during the year ended December
31, 2005 was a direct result of the inclusion of the SG&A expenses for a
full year of Front Porch and the inclusion of SG&A expenses relating to the
Incentra of CA and PWI businesses from the dates of the acquisitions forward.
On a pro forma basis, SG&A expenses were $21.8 million for the year ending
December 31, 2005 compared to $20.4 million for the comparable prior year period,
a slight increase.

Merger
Costs.Merger costs
of $1.3 million in 2004 consisted of costs incurred in the acquisition of Front
Porch. These costs consisted of $0.8 million in compensation expense
related to the accelerated vesting of stock options, $0.4 million in
professional fees for legal, banking and accounting services, and $0.1 million of
severance-related costs due to reductions in staffing as result of the
acquisition. There were no significant merger-related costs in 2005.

Depreciation
and Amortization.Amortization
expense consists of amortization of intellectual property, capitalized research and development costs and other intangible
assets. Depreciation expense consists of depreciation of furniture, equipment,
software and improvements.
Depreciation and amortization expense was approximately $5.4 million and $4.0
million for the years ended December 31, 2005 and 2004, respectively, of which
$1.1 million and $2.0 million respectively was included in cost of revenue. The
increase of $1.4 million was primarily the result of the increase in amortization
associated with the Front Porch intangible assets.

Operating
Loss.During the year
ended December 31, 2005, we incurred a loss from operations of $12.0 million
as compared to a loss from operations of $7.7 million for the year ended December
31, 2004. The increase in the loss for 2005 is due to a loss for impairment of
the goodwill related to the acquisition of Incentra of CA of $4.2 million.
Included in the operating loss for the year ended December 31, 2004 was $1.3
million of costs related to the acquisition of Front Porch. On a pro
forma basis, the net operating loss for the year ended December 31, 2005 was
$11.9 million compared to $8.9 million for the comparable prior year period.
This increase was due to the impairment loss being offset in part by improved
performance.

Interest
Expense.Interest
expense was $2.4 million for the year ended December 31, 2005 compared to $2.4
million for the year ended December 31, 2004. Interest expense during 2005
included cash interest costs of $0.8 million on notes payable and capital
leases and non-cash interest charges of $1.6 million, consisting of $0.7 million
related to amortization of debt discounts, $0.3 million related to warrants,
$0.2 million related to the beneficial conversion feature of the Laurus note,
and $0.4 million related to amortization of financing costs. Interest expense
during 2004 included cash interest costs of $0.2 million on notes payable and
capital leases and non-cash interest charges of $2.2 million, consisting of $1.7
million of interest on MSIs previously outstanding Series C preferred stock,
$0.2 million related to amortization of debt discounts, $0.2 million related to
warrants, and $0.1 million related to amortization of financing costs.

Other
Income and Expense.Other
income of $0.7 million for 2005 included $0.2 million of income from the sale
of New Jersey state net operating losses from prior years and $0.4 million related
to a gain on the adjustment

20

---



to the valuation of warrants
classified as liabilities. Other income of $0.4 million for 2004 included $0.3
million of income for the sale of New Jersey state net operating losses from
prior years and $0.1 million for investment income and gains from the sale of
fixed assets.

Foreign
Currency Translation and Transactions.As discussed above, we conduct business
in various countries outside the United States in which the functional currency
of the country is not the U. S. dollar. As a result, we have foreign currency
exchange translation exposure as the results of these foreign operations are
translated into U.S. dollars in our consolidated financial statements. For the
year ended December 31, 2005, we reported an accumulated translation loss of
$103,235 as a component of accumulated other comprehensive loss. We are also
subject to foreign exchange transaction exposure because we provide for
intercompany funding between the U.S. and international operations, when we
and/or our French subsidiary transacts business in a currency other than our
own functional currency. The effect of exchange rate fluctuations in
remeasuring foreign currency transactions for the years ended December 31, 2005
and 2004 was a loss of $43,209 and $24,756, respectively. In June 2004, we
entered into two forward contracts, one of which expired on December 7, 2004
and the other on April 1, 2005. We recorded a $59,900 realized gain on these
contracts as of December 31, 2005 which represented the change in the fair
value of the foreign currency forward contract related to the difference
between changes in the spot and forward rates excluded from the assessment of
hedge effectiveness. We recorded a realized loss of $144,086 and an unrealized
loss of $134,500 on these contracts as of December 31, 2004.

Income
Tax Expense.We
incurred income tax expense for the years ended December 31, 2005 and 2004 of
$0.5 million and $0.4 million, respectively. This charge represented non-cash
deferred income tax expense related to our French subsidiary, Front Porch
Digital International, S.A.S. The income taxes were incurred during the period
from the date of the MSI acquisition through December 31, 2005 and represented
the utilization of the subsidiarys deferred tax assets (net operating losses)
during that period, which was recorded as a deferred tax asset as part of the
allocation of the purchase price of the subsidiary.

Net
Loss Applicable to Common Stockholders.During the year ended December 31,
2005, we incurred a net loss applicable to common stockholders of $16.8 million
as compared to a net loss applicable to common stockholders of $11.8 million
for the year ended December 31, 2004. Included in the net loss for the year ended
December 31, 2004 was $1.3 million of costs related to the merger with Front
Porch. The increase in net loss for the year ended December 31, 2005 was
primarily due to the $4.2 million impairment loss related to Incentra of CA,
additional amortization of $1.5 million and the net increase of the accretion
and dividends on preferred stock of $1.3 million.

Liquidity and Capital Resources

At
December 31, 2005, we had $1.1 million of cash and cash equivalents. Issuance
of convertible debt and equity securities and access to revolving lines of
credit have been the principal sources of liquidity for us.

On
May 13, 2004, we consummated a private placement pursuant to which we issued
    to Laurus Master Fund Ltd (Laurus) a secured convertible term
    note due May 13, 2007 in the principal amount of $5.0 million (the 2004
    Note), and
    a common stock purchase warrant entitling the noteholder to purchase 4,435,500
    shares of our common stock. Subsequent to that date, the note and other terms
    related to the indebtedness have been amended on several occasions.

On
February 6, 2006 we entered into an Amendment and Deferral Agreement (the
Amendment and Deferral Agreement) with Laurus amending the 2004 Note.
Pursuant to the Amendment and Deferral Agreement, the monthly principal amount
due Laurus under the 2004 Note for each of January, February, March, April, May
and June 2006, equal to an aggregate of $952,495, is deferred until May 13, 2007.

On
February 18, 2005, Incentra of CA obtained a revolving line of credit from
Wells Fargo Bank, N.A. that provided for borrowings, from time to time until
March 1, 2007, of up to $5,000,000. This note was repaid in full on July 5,
2005 in connection with the financing discussed below.

On
June 30, 2005, we entered into a Security Agreement with Laurus pursuant to
which Laurus provided us with a $9 million revolving, convertible credit
facility (the 2005 Facility). The term of the 2005 Facility was three years.
In connection with the 2005 Facility, we executed in favor of Laurus a $9
million secured revolving note

21

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(the Revolver Note).
Borrowings under the 2005 Facility accrue interest at a rate per annum equal
    to the prime rate (as published in The Wall Street Journal) plus
    1%, which was subject to reduction if the market price of our common stock
    exceeded certain designated thresholds. Pursuant to the 2005 Facility, the
    minimum initial amount available to us, until December 31, 2005, was $6.0
    million. Thereafter, the maximum principal amount of all borrowings under
    the 2005 Facility could not exceed 90% of the combined eligible accounts
    receivable of PWI and Incentra of CA. At December 31, 2005, the outstanding
    principal balance on the 2005 Facility was $5.5 million, net of debt discount
    of $0.5 million. At December 31, 2005, our accounts receivable did not meet
    the 90% threshold.

The
outstanding principal amount of the revolver note was paid off on February 6,
    2006 in connection with our execution of a new security agreement with Laurus
    pursuant to which Laurus  provided us a non-convertible revolving
    credit facility of up to $10 million (the 2006 Facility). The
    term of the 2006 Facility is three years and borrowings under the 2006 Facility
    accrue interest on the unpaid principal and interest at a rate per annum
    equal to the prime
    rate
published in The Wall Street Journal from time to time, plus 1%
subject to a floor of seven percent (7%). In connection with the 2006 Facility,
we executed in favor of Laurus a secured non-convertible revolving note in the
principal amount of $10 million (the 2006 Revolver Note). Interest
on borrowings under the 2006 Revolver Note is payable monthly on the first day
of each month during the term of the 2006 Revolver Note, commencing on March
1, 2006. All outstanding principal amounts are due and payable on February 6,
2009. The minimum amount available to us until April 30, 2006 is $6.5 million.
Thereafter, the maximum principal amount outstanding under the 2006 Revolver
Note cannot exceed 90% of the combined eligible accounts receivable of all our
U.S. subsidiaries.

On
     March 31, 2006, we consummated a private placement pursuant to which we
    issued a secured term note due May 31, 2009 in the principal amount of $1,500,000
    (the
2006 Term Note) and a secured convertible term note due May 31, 2009
in the principal amount of $1,750,000 (the 2006 Convertible Note).
In connection with the issuance of the 2006 Term Note and 2006 Convertible Note,
we issued a common stock purchase warrant entitling Laurus  to purchase 417,857
shares of common stock (the 2006 Warrant) at $0.001 per share. The
funding under the 2006 Term note and the 2006 Convertible Note is contingent
upon meeting certain closing conditions which must be satisfied on or before
April 21, 2006. In the event that such conditions are not satisfied on or before
that date, the private placement will terminate and no funding will occur.

As
of December 31, 2005, we had current assets of $13.0 million. These assets were
primarily derived from our operations in 2005 and from our acquisitions of
Incentra of CA and PWI. Long-term assets of $24.9 million consisted of $13.7
million of intangible assets acquired during the transactions with MSI, Incentra
of CA and PWI, $5.9 million of goodwill acquired during the Incentra of CA and
PWI transactions, $2.2 million of property and equipment, $2.1 million of
software development costs and $1.0 million of other assets, which consisted
    of $0.8 million of deferred financing costs, $0.1 million of restricted cash
    and $0.1 million of deposits, prepaid expenses and other receivables.

Current
liabilities of $26.1 million at December 31, 2005 consisted of $7.8 million of
accounts payable; $1.9 million of deferred revenue, which consisted of billings
in excess of revenue recognized, deposits and progress payments received on
engagements currently in progress; $5.3 million of accrued expenses; and $11.1
million of current portion of notes payable, other long term obligations, and
capital leases.

Our
working capital deficit was $13.0 million as of December 31, 2005, which
included $5.5 million under a line of credit, net of debt discount of $0.5
million. Also included in the deficit is $1.3 million attributable to the
reclassification of the promissory note issued to a former owner of an acquired
company to current liabilities due to a default on such note and subsequent
arbitration proceeding, as described in Note 16 in the Notes to Consolidated
Financial Statements and an additional $1.5 million
    due to cross-default provisions in other long-term indebtedness (see Note
    9(A) in the Notes to Consolidated Financial Statements). With the exclusion
    of these items, the working capital deficit is $4.7 million.

We
used net cash of $1.5 million in operating activities during the year ended
December 31, 2005 primarily as a result of the net loss incurred during the
periods. We used net cash of $1.1 million in investing activities during the
year ended December 31, 2005, of which $1.7 million represented cash acquired
from the acquisitions. This was offset in part by $2.7 million used primarily
    to purchase or develop computer software and equipment. Financing activities
provided net cash of $0.7 million during the year ended December 31, 2005
primarily from a new line of credit which provided $1.3 million in net new
borrowings, offset by repayment of capital leases, long-term obligations and
notes payable.

We
are still in the early stages of executing our business strategy. Two
acquisitions were completed in 2005. We expect to pursue additional acquisition
opportunities during the next 12 months. Although we are achieving success in
the deployment of our marketing strategy for the sale and delivery of our
DIVArchive and other software solutions, continuation of this success is
contingent upon several factors, including the availability of cash resources,
the prices of our products and services relative to those of our competitors,
and general economic and business conditions, among others.

We
expect anticipated cash flow from operations combined with our cash and cash
equivalents at April 1, 2006 will be sufficient to operate through March 31,
2007. However, there can be no assurance that we will not need to

22

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access the capital markets
for additional financing to fund our organic growth and subsequent acquisitions
and that sufficient capital will be available upon acceptable terms.

During
2005, we continued to have success in deploying our marketing strategy for the
sale and delivery of our DIVArchive software solutions. Our revenue backlog at
 December 31, 2005 was $2.4 million compared to $1.7 million at December 31, 2004.

Our
actual financial results may differ materially from the stated plan of
operations. Factors, which may cause a change from our plan of operation, vary,
but include, without limitation, decisions of our management and board of
directors not to pursue the stated plan of operations based on its reassessment
of the plan and general economic conditions. Additionally, there can be no
assurance that our business will generate cash flows at or above current
levels. Accordingly, we may choose to defer capital expenditure plans and
extend vendor payments for additional cash flow flexibility.

We
expect capital expenditures to be approximately $3.5  million during the
12-month period ended December 31, 2006. It is expected that our principal uses
of cash will be for working capital, to finance capital expenditures and for
other general corporate purposes, including financing the expansion of our
business and implementation of our sales and marketing strategy. The amount of
spending in each respective area is dependent upon the total capital available
to us.

Going Concern and Managements Plans

Our
    consolidated financial statements as of December 31, 2005 and for the year
    then ended have been prepared on a going concern basis, which contemplates
    the realization of assets and settlements of liabilities and commitments
    in the normal course of business.

The
    event of default on the STAR Note created an event of default of certain
    provisions of debt outstanding with Laurus, our senior secured lender. As
    a result, the entire balance of amount owed to Laurus, which totals $8.8
    million has been classified as a current liability at December 31, 2005.
    We believe we have a good relationship with Laurus; however, there is uncertainty
    regarding our ability to comply with required debt covenants in the future
    which places the debt in the position to be called due. This raises substantial
    doubt about our ability to continue as a going concern. Our ability to continue
    as a going concern is dependent on future financial results as well as the
    arbitration proceeding discussed above and, should we be in breach of the
    covenants on the debt, our ability to restructure or otherwise amend the
    terms of that debt. The financial statements do not include any adjustments
    to reflect the possible future effects on the recoverability and classification
    of assets or the amounts and classifications of liabilities that might result
    from the outcome of this uncertainty.

Managements
    plans in regard to these matters are as follows:

If
    we continue to be in default of our covenants in the future, we would, as
    we have in the past, seek to obtain amendments to the debt or waivers of
    the covenants so that we are no longer in violation.

While
    we believe that we will execute our current business plan that calls for
    growth in the business, we will also institute various cost controls to reduce
    operating expenses where necessary. This includes the timely monitoring of
    labor and selling, general and administrative costs.

Recently Issued Accounting Pronouncements

In
December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R), Share-Based Payment, which addresses the accounting for share-based
compensation transactions. SFAS No. 123(R) eliminates the ability to account
for share-based compensation transactions using APB 25, and generally requires
instead that such transactions be accounted and recognized in the statement of
operations based on their fair value. SFAS No. 123(R) will be effective for
us during the first quarter of 2006. We have evaluated
the provisions of this standard, and we expect that the implementation of this
standard will have material impact on our financial position and results of
operations.

In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which changes the requirements for the accounting and reporting
of a change in accounting principle and applies to all voluntary changes in
accounting principles. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. APB No. 20 required
that most voluntary changes in accounting principle be recognized by including
in net income of the period of the change the cumulative effect of changing to
the new accounting principles. This statement requires retrospective
application to prior period financial statements of changes in accounting
principles, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. The provisions of SFAS No. 154
are effective for fiscal years beginning after December 15, 2005. We do not expect
this statement to have a material impact on our financial position or results
of operations.

|        |                     
|------- | --------------------
|ITEM 7. | FINANCIAL STATEMENTS

The
report of our independent registered public accounting firm and our
consolidated financial statements and associated notes are included in Part
III, Item 13 of this report beginning on page F-1.

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
  ACCOUNTING AND FINANCIAL DISCLOSURE

None

|         |                         
|-------- | ------------------------
|ITEM 8A. | CONTROLS AND PROCEDURES.

Disclosure
Controls and Procedures.Our management, with the participation of our chief executive officer
and chief financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term

23

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is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end
of the period covered by this report. Based on such evaluation, our chief executive
officer and chief financial officer have concluded that, as of the end of such
period, our disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act with the exception of the procedures surrounding the recording of the purchase
price allocation for acquired businesses. These controls and procedures have
been addressed and will be implemented on future acquisitions.

Internal
Control Over Financial Reporting.There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fourth quarter of 2005 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.

|         |                  
|-------- | -----------------
|ITEM 8B. | OTHER INFORMATION

None

PART III

|        |                                                                                                                  
|------- | -----------------------------------------------------------------------------------------------------------------
|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
  PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

MANAGEMENT AND BOARD OF DIRECTORS

The
following sets forth the name, age and position of each of our directors and
executive officers as of March 31, 2006:

|                      |  |     |  |                                                               | 
|--------------------- |  | --- |  | ------------------------------------------------------------- | 
|Name                  |  | Age |  | Position(s)                                                   | 
|                      |  |     |  |                                                               | 
|Thomas P. Sweeney III |  | 45  |  | Chairman of the Board and
  Chief Executive Officer          
|Shawn OGrady         |  | 43  |  | President and Chief
  Operating Officer                      
|Michael Knaisch       |  | 49  |  | President of Front Porch
  Digital Division                  
|Paul McKnight         |  | 49  |  | Chief Financial Officer                                      
|Matthew Richman       |  | 35  |  | Senior Vice President 
  Corporate Development and Treasurer
|Walter Hinton         |  | 43  |  | Chief Technology Officer                                     
|Patrick Whittingham   |  | 57  |  | Director                                                     
|James Wolfinger       |  | 49  |  | Director                                                     
|Carmen J. Scarpa      |  | 41  |  | Director                                                     
|Thomas G. Hudson      |  | 59  |  | Director                                                     
|David E. Weiss        |  | 62  |  | Director                                                     

All
directors serve for one year and until their successors are elected and
qualified. All officers serve at the pleasure of the Board of Directors. There
are no family relationships among any of our officers and directors.

Information
concerning our executive officers and directors is set forth below.

Thomas
P. Sweeney III.Mr.
Sweeney has been our Chief Executive Officer since August 18, 2004, the date of
our acquisition of ManagedStorage International, Inc. (MSI), and Chairman of
our Board of Directors since August 2002. Mr. Sweeney previously served on our
Board of Directors for the period November 30, 2000 through February 12, 2002.
From February 2001 until August 19, 2004, Mr. Sweeney was Chief Executive
Officer and Chairman of the Board of MSI. Since such date, Mr. Sweeney has also
served as President and a director of MSI. Mr. Sweeney is the founder of Equity
Pier LLC, a business advisory and venture capital firm, and has served as its
Managing Partner since May 2000.

Shawn
OGrady.Mr. OGrady
has been our President and Chief Operating Officer
since October 2005. Prior to his employment with our company, Mr. OGrady
was employed by Siemens Business Services (SBS), the information
technology (IT) services division of Siemens AG. From June 2004 until October
2005, Mr. OGrady
was the Senior Vice President and Business Unit General Manager, Consulting and
Integration, of SBS. From October 2002 until June 2004, he served as SBS Senior
Vice President, Business Development. From October 2000 until October 2002, Mr.
OGrady was the Senior Vice President, Regional Business Unit of SBS.

24

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Michael
Knaisch.Mr. Knaisch
has been President of our Front Porch Digital Division since August  2004.
From June 2003 to August  2004, Mr. Knaisch was our Chief Executive Officer.
From January 2003 to June 2003, Mr. Knaisch was our Chief Operating Officer.
From October 2002 to January 2003, Mr. Knaisch provided consulting services to
us. From August 1998 through September 2002, Mr. Knaisch was Senior Vice
President of Global Strategic Alliances at Level 3 Communications, Inc.

Paul
McKnight.Mr.
McKnight has been our Chief Financial Officer since October 2004. Mr.
McKnight also served on our Board of Directors from August 2002 to November
2005. From August 2002 to January 2003, Mr. McKnight also served as our interim
Chief Financial Officer. Since August 2001, Mr. McKnight has been the Chief
Financial Officer of MSI. From May 2000 to August 2001, Mr. McKnight served as
Chief Financial Officer of Equity Pier LLC, a business advisory and venture
capital firm.

Matthew
Richman.Mr. Richman
has been our Senior Vice President - Corporate Development and Treasurer since
October 2004. From January 2003 to October  2004, Mr. Richman was our Chief
Financial Officer and from June 2003 to October  2004, our Chief Operating
Officer. From October 2002 to January 2003, Mr. Richman provided consulting
services to us. From February 2001 to September 2002, Mr. Richman served as
Chief Financial Officer of Advanced Data Center, Inc., a data center and
managed technology services provider.

Walter
Hinton.Mr. Hinton
has been our Chief Technology Officer since October 2004. Mr. Hinton was the
Chief Technology Officer for MSI from March 2000 through October 2004.

Patrick
Whittingham.Mr.
Whittingham has served on the Board of Directors since April 2004. Since April
2004, Mr. Whittingham has been a consultant in the area of broadcast and
production technology, systems integration and digital cinema. Prior to
February 2004, Mr. Whittingham had been for more than 28 years an employee of
various affiliates of Sony Corporation, including President of the Sony
Broadcast and Production Systems Division of Sony Electronics (USA), Inc. from
June 2003 to January 2004; President of Sony Business Solution and System
Company (USA) from June 2002 to June 2003; Senior Vice President of System
Solutions Division (USA) from February 2001 to June 2002; and Executive Vice
President of Sony of Canada Ltd. from May 1997 to February 2001.

James
Wolfinger.Mr.
Wolfinger has served on our Board of Directors since May 2004. Mr. Wolfinger is
the founder of Outdoor Site Group, LLC, a wireless site location company, and
has served as its Managing Partner since February 2003. From October 2002 to
September 2003, Mr. Wolfinger served as a business and operational consultant
for MSI. From 1996 through September 2002, Mr. Wolfinger was the President of
MCI WorldCom Wireless.

Carmen
J. Scarpa.Mr. Scarpa
has served on our Board of Directors since August 2004. Mr. Scarpa joined Tudor
Ventures Group LLC (Tudor Ventures), a private equity firm specializing in
mid- and late-stage technology and growth companies, in June 1996 and has been
a partner and managing director of Tudor Ventures since January 2001.

Thomas
G. Hudson.Mr. Hudson
has served on our Board of Directors since November 2005. From 1996 to June
2005, Mr. Hudson served as President, Chief Executive Officer and a director of
Computer Network Technologies Corporation, a fiber switch company that was sold
to McData Corporation, a storage networking solutions company, in June 2005.
Since June 2005, Mr. Hudson has served as a director for McData Corporation.
Since May 1999 until it was acquired by McData Corporation in 2005, he also
served as its Chairman of the Board. Mr. Hudson currently serves as a director
of Lawson Software, Inc., a publicly-held enterprise resource planning (ERP)
software company, and Plato Learning, Inc., a publicly-held educational
software company.

David
E. Weiss.Mr. Weiss
has served on our Board of Directors since November 2005. From 2000 to 2005,
Mr. Weiss served as a management consultant. From May 1996 until
2000, Mr. Weiss served as the Chairman, President and Chief Executive Officer
of Storage Technology Corporation, a developer, manufacturer and distributor
of data storage solutions for management, retrieval and protection of business
information. Mr. Weiss currently serves as a director of Apogee Enterprises,
Inc., a publicly-held holding company engaged in the design and development of
value-added glass products, services and systems.

Section 16(a) Beneficial Ownership Reporting Compliance

Section
16(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act),
requires our directors and executive officers, and persons who own more than
ten percent of a registered class of our equity securities (10%
Shareholders), to file with the Securities and Exchange Commission (the
Commission) initial reports of ownership

25

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and reports of
changes in ownership of our common stock and other equity securities. Officers,
directors and 10% Shareholders are required by Commission regulation to furnish
us with copies of all Section 16(a) forms they file.

Based
solely on our review of the copies of such reports received by us, we believe
that for the fiscal year ended December 31, 2005, all Section 16(a) filing
requirements applicable to our officers, directors and 10% Shareholders were
complied with, except (i) David E. Weiss, a director, was late in filing an
Initial Statement of Beneficial Ownership of Securities on Form 3 for options
granted to him on December 14, 2005 to purchase 25,000 shares of our common
stock and (ii) Thomas G. Hudson, a director, was late in filing an Initial
Statement of Beneficial Ownership of Securities on Form 3 for options granted
to him on December 14, 2005 to purchase 25,000 shares of common stock.

Code of Ethics

We
have not yet adopted a formal code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. Management expects to
implement a formal code of ethics and related control for these persons during
2006.

|         |                       
|-------- | ----------------------
|ITEM 10. | EXECUTIVE COMPENSATION

The
following Summary Compensation Table sets forth compensation we paid for
services rendered to our Chief Executive Officer, and to our most highly
compensated executive officers at December 31, 2005, other than our Chief
Executive Officer (collectively, the Named Executed Officers).

|                          |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|------------------------- |  | ------------- | ---- | ------------ | --------------------- | ---------- | ------ | ----------------------------------- | ------- | ----------------------------------- |  | --------------------------------------------- |  | ------------------------ | ---- | -------------------------------- |  | --------- |  |  | ---- |  |  | - | ------ |  | 
|                          |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  | Long-Term
  Compensation |     
|                          |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |     
|                          |  |               |      |              | Annual
  Compensation |            | Awards |                                     | Payouts |                                    
|                          |  |               |      |              |                       |            |        |                                     |         |                                    
|                          |  | Fiscal
  Year |      | Salary
  ($) |                       | Bonus
  ($ |        | Other
  Annual
  Compensation
  ($) |         | Restricted
  Stock
  Award(s)
  ($) |  | Securities
  Underlying
  Options/
  SARs (#) |  | LTIP
  Payouts
  ($)     |      | All
  Other
  Compensation
  ($) | 
|                          |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  | 
|                         
|Thomas P. Sweeney III(1)  |  |               | 2005 |              | $                     | 299,038    |        | $                                   | 75,000  |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | -0-       |  |  | $-0- |  |  | $ | 12,600 |  | 
|Chief Executive Officer   |  |               | 2004 |              | $                     | 220,192    |        | $                                   | 220,000 |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | 1,106,200 |  |  | $-0- |  |  | $ | 12,010 |  | 
|                          |  |               | 2003 |              | $                     | 125,000    |        | $                                   | 150,000 |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | 151,009   |  |  | $-0- |  |  | $ | 3,200  |  | 
|                          |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|Michael Knaisch(2)        |  |               | 2005 |              | $                     | 200,000    |        | $                                   | 162,500 |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | -0-       |  |  | $-0- |  |  | $ | 11,345 |  | 
|Chief Executive Officer   |  |               | 2004 |              | $                     | 200,000    |        | $                                   | 142,667 |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | 60,000    |  |  | $-0- |  |  | $ | -0-    |  | 
|until August 2004         |  |               | 2003 |              | $                     | 217,000    |        | $                                   | 129,000 |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | 75,000    |  |  | $-0- |  |  | $ | -0-    |  | 
|President of Front Porch  |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|Digital Division since    |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|August 2004               |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|                          |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|Matthew Richman(3)        |  |               | 2005 |              | $                     | 182,500    |        | $                                   | 44,063  |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | -0-       |  |  | $-0- |  |  | $ | -0-    |  | 
|Chief Financial Officer & |  |               | 2004 |              | $                     | 160,000    |        | $                                   | 119,133 |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | 42,500    |  |  | $-0- |  |  | $ | 15,000 |  | 
|Chief Operating Officer   |  |               | 2003 |              | $                     | 168,000    |        | $                                   | 105,000 |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | 50,000    |  |  | $-0- |  |  | $ | -0-    |  | 
|until October 2004        |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|Sr. Vice President -      |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|Corporate Development     |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|and Treasurer since       |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|October 2004              |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|                          |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|Paul McKnight(4)          |  |               | 2005 |              | $                     | 209,423    |        | $                                   | 18,750  |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | -0-       |  |  | $-0- |  |  | $ | -0-    |  | 
|Chief
  Financial Officer |  |               | 2004 |              | $                     | 195,000    |        | $                                   | 25,000  |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | 50,000    |  |  | $-0- |  |  | $ | -0-    |  | 
|since October 2004        |  |               | 2003 |              | $                     | 195,000    |        | $                                   | 9,000   |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | 27,588    |  |  | $-0- |  |  | $ | -0-    |  | 
|                          |  |               |      |              |                       |            |        |                                     |         |                                     |  |                                               |  |                          |      |                                  |  |           |  |  |      |  |  |   |        |  | 
|Walter Hinton(5)          |  |               | 2005 |              | $                     | 224,423    |        | $                                   | 20,000  |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | -0-       |  |  | $-0- |  |  | $ | 3,920  |  | 
|Chief Technical Officer   |  |               | 2004 |              | $                     | 210,000    |        | $                                   | 50,000  |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | 70,000    |  |  | $-0- |  |  | $ | 3,920  |  | 
|since October 2004        |  |               | 2003 |              | $                     | 210,000    |        | $                                   | 45,000  |                                     |  | $-0-                                          |  |                          | $-0- |                                  |  | 33,642    |  |  | $-0- |  |  | $ | 3,720  |  | 

(1)
Mr. Sweeney was appointed as our Chief Executive Officer effective August 18,
2004 and has also served as our Chairman of the Board since August 2002. Prior
to August 18, 2004, Mr. Sweeney served as the President and Chief Executive
Officer of MSI, which we acquired on August 18, 2004. Included in the 2005
salary and bonus earned by Mr. Sweeney is $86,538 of accrued but unpaid
compensation. Compensation paid to Mr. Sweeney in 2004 included salary of
$93,077 paid by our company after the Acquisition and salary of $127,115 paid
by MSI prior to the Acquisition. Compensation in 2003 represents compensation
paid to Mr. Sweeney by MSI.

26

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(2)
Mr. Knaisch served as our Chief Executive Officer from June 2, 2003 to August
18, 2004 (the date of our acquisition of MSI), on which date he was appointed
President of our Front Porch Digital Division. Included in the 2005 salary and
bonus earned by Mr. Knaisch is $83,333 of accrued but unpaid compensation. From
June 1, 2003 to December 31, 2003, Mr. Knaisch was an employee of ours and
received $117,000 in salary for serving as our Chief Executive Officer. From
January 1, 2003 to June 2, 2003, Mr. Knaisch provided consulting services to us
and received $100,000 in consulting fees and $12,000 in bonus as compensation
for services provided as our Chief Operating Officer.

(3)
Mr. Richman served as our Chief Financial Officer and Treasurer from January
2003 and our Chief Operating Officer from June 2003 until October 12, 2004, on
which date he was appointed Senior Vice President -Corporate Development.
Included in the 2005 salary and bonus earned by Mr. Richman is $21,980 of
accrued but unpaid compensation. From June 1, 2003 to December 31, 2003, Mr.
Richman was an employee of ours and received $93,000 in salary for serving in
the capacities described above. From January 1, 2003 to May 31, 2003, Mr.
Richman provided consulting services to us and received $75,000 in consulting
fees and $12,000 in bonus as compensation for services provided as our Chief
Financial Officer.

(4)
Mr. McKnight was appointed our Chief Financial Officer on October 12, 2004.
Prior to August 18, 2004 (the date of our acquisition of MSI), Mr. McKnight
served as the Chief Financial Officer of MSI. Included in the 2005 salary and
bonus earned by Mr. McKnight is $26,827 of accrued but unpaid compensation.
Compensation paid to Mr. McKnight in 2004 includes salary and bonus of $66,000 and
$25,000, respectively, paid by us after the acquisition of MSI and salary of
$129,000 paid by MSI prior to the acquisition of MSI. Compensation in 2003
represents compensation paid to Mr. McKnight by MSI.

(5)
Mr. Hinton has served as our Chief Technical Officer since October 12, 2004.
Prior to such date, Mr. Hinton served as the Chief Technical Officer of MSI,
which was acquired by us in August 2004. Included in the 2005 salary and bonus
earned by Mr. Hinton is $27,404 of accrued but unpaid compensation.
Compensation paid to Mr. Hinton in 2004 includes salary and bonus of $71,077
and $45,000, respectively, paid by us after the acquisition of MSI and salary
and bonus of $138,923 and $50,000, respectively, paid by MSI prior to the
acquisition of MSI. Compensation in 2003 represents compensation paid to Mr.
Hinton by MSI.

Equity Incentive Plan

In
May 2000, we adopted our 2000 Equity Incentive Plan (the Incentra Option
Plan) for the purpose of attracting, retaining and maximizing the performance
of executive officers and key employees and consultants. We have reserved
2,265,000 shares for issuance under the Incentra Option Plan. The Incentra
Option Plan has a term of ten years. The Incentra Option Plan provides for the
grant of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, non-statutory stock options, stock
appreciation rights and restricted stock awards. The Incentra Option Plan is
administered by the Compensation Committee of the Board of Directors (the
Compensation Committee). The exercise price for non-statutory stock options
may be equal to or more or less than 100 percent of the fair market value of
shares of common stock on the date of grant. The exercise price for incentive
stock options may not be less than 100 percent of the fair market value of
shares of common stock on the date of grant (110 percent of fair market value
in the case of incentive stock options granted to employees who hold more than
ten percent of the voting power of our issued and outstanding shares of common
stock).

Options
granted under the Incentra Option Plan may not have a term of more than a
ten-year period (five years in the case of incentive stock options granted to
employees who hold more than ten percent of the voting power of our common
stock) and generally vest over a three-year period. Options generally terminate
three months after the optionees termination of employment by us for any
reason other than death, disability or retirement, and are not transferable by
the optionee other than by will or the laws of descent and distribution.

The
Incentra Option Plan also provides for grants of stock appreciation rights
(SARs), which entitle a participant to receive a cash payment, equal to the
difference between the fair market value of a share of common stock on the
exercise date and the exercise price of SAR. The Board of Directors at its
discretion will determine the exercise price of any SAR granted under the
Incentra Option Plan at the time of the grant. SARs granted under the Incentra
Option Plan may not be exercisable for more than a ten-year period. SARs
generally terminate one month after the grantees termination of employment by
us for any reason other than death, disability or retirement. Although the
Board of Directors has the authority to grant SARs, it does not have any
present plans to do so.

27

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Restricted
stock awards, which are grants of shares of common stock that are subject to a
restricted period during which such shares may not be sold, assigned,
transferred, made subject to a gift, or otherwise disposed of, or mortgaged,
pledged or otherwise encumbered, may also be made under the Option Plan. At
this time, the Board of Directors has not granted, and does not have any plans
to grant, restricted shares of common stock.

Managed Storage International, Inc.  2000
Stock Option and Grant Plan

Prior
to our acquisition of ManagedStorage International, Inc. (MSI), which is
accounted for as a reverse merger, MSI adopted and administered its 2000 Stock
Option and Grant Plan (the MSI Plan) for its employees, directors,
consultants and other key persons. As a result of such acquisition, no
additional grants will be made under the MSI Plan. However, outstanding stock
options previously issued pursuant to the MSI Plan may be exercised for
unregistered shares of our common stock. As provided in the MSI acquisition
agreements, upon the exercise of any outstanding options issued under the MSI
Plan, we will issue 0.3089 shares of our unregistered shares of common stock
for each share of MSI common stock that would have been issuable upon the
exercise of such options. Currently, there are outstanding under the MSI Plan
options to purchase 216,536 shares of our common stock.

The
following table sets forth information with respect to each exercise of stock
options during the year ended December 31, 2005 by each of the Named Executive
Officers and the value at December 31, 2005 of all unexercised stock options
held by such persons.

AGGREGATED OPTION EXERCISES IN THE YEAR ENDED
DECEMBER 31, 2005 AND DECEMBER 31, 2005 OPTION VALUES

|                        |  |                                     |     |                        |  |                                                                                                              |  |                                                                                                      |  |             |  |  | 
|----------------------- |  | ----------------------------------- | --- | ---------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------- |  | ----------- |  |  | 
|Name                    |  | Shares
  Acquired
  on Exercise (#) |     | Value
  Realized
  ($) |  | Number
  of Securities
  Underlying Unexercised
  Options at
  December 31, 2005
  Exercisable/Unexercisable |  | Value
  of Unexercised
  In-the-money options at
  December 31, 2005
  Exercisable/Unexercisable (a) | 
|                        |  |                                     |     |                        |  |                                                                                                              |  |                                                                                                      | 
|                       
|Thomas P.
  Sweeney III |  |                                     | -0- |                        |  | $-0-                                                                                                         |  | 483,998/775,219(1)                                                                                   |  | $2,811/$-0- | 
|                        |  |                                     |     |                        |  |                                                                                                              |  |                                                                                                      |  |             |  |  | 
|Michael
  Knaisch       |  |                                     | -0- |                        |  | $-0-                                                                                                         |  | 135,000/0                                                                                            |  | $-0-/$-0-   | 
|                        |  |                                     |     |                        |  |                                                                                                              |  |                                                                                                      |  |             |  |  | 
|Matthew
  Richman       |  |                                     | -0- |                        |  | $-0-                                                                                                         |  | 92,500/0                                                                                             |  | 0/$-0-      | 
|                        |  |                                     |     |                        |  |                                                                                                              |  |                                                                                                      |  |             |  |  | 
|Paul
  McKnight         |  |                                     | -0- |                        |  | $-0-                                                                                                         |  | 42,492/35,230(2)                                                                                     |  | $188/$-0-   | 
|                        |  |                                     |     |                        |  |                                                                                                              |  |                                                                                                      |  |             |  |  | 
|Walter
  Hinton         |  |                                     | -0- |                        |  | $-0-                                                                                                         |  | 48,902/55,077(3)                                                                                     |  | $472/$-0-   | 

(a)
Potential unrealized value is calculated as the fair market value at December
31, 2005 ($1.40 per share on the OTC-BB), less the option exercise price, times
the number of shares.

(1)
Includes vested options to purchase 115,265 shares issued under the MSI Plan

(2)
Includes vested options to purchase 5,825 shares issued under the MSI Plan

(3)
Includes vested options to purchase 25,569 shares issued under the MSI Plan

Compensation of Directors

With
    the exception of Mr. Carmen Scarpa, Non-employee
directors receive $2,500 per month for their services and all are reimbursed
    for their reasonable out-of-pocket expenses incurred in attending meetings
    of the Board. In April 2004, James Wolfinger and Patrick Whittingham, non-employee
    directors, were each granted options to purchase up to 25,000 shares of our
    common stock at a price of $2.20 per share. In December 2005, Thomas G. Hudson
    and David E. Weiss, non-employee directors, were each granted options to
    purchase up to 25,000 shares of our common stock at $1.21 per share. The
    options vest pursuant to a three-year vesting schedule.

Employment Contracts

On
August 18, 2004, we entered into a two-year employment agreement with Thomas P.
Sweeney III, our Chairman of the Board of Directors and Chief Executive
Officer. Mr. Sweeneys employment agreement contains the following

28

---



provisions:
annual base salary of $275,000 and $300,000 for the first and second years,
respectively; annual bonus of up to 100% of the base salary; the payment of
insurance premiums under Mr. Sweeneys existing life insurance policy; the
issuance of options to purchase up to 1,023,700 shares of our common stock at
$2.80 per share, which options are subject to a three-year vesting schedule;
severance provisions for the payment of one-year of base salary; a pro-rated
bonus and certain benefits in the event of a change of control or the
termination of Mr. Sweeneys employment for any reason other than for cause (as
defined).

On
December 6, 2004, we entered into a two-year employment agreement with Michael
Knaisch, the President of our Front Porch Digital Division (and our former
Chief Executive Officer). The employment agreement with Mr. Knaisch contains
the following provisions: annual base salary of $200,000, subject to increase
at the discretion of the compensation committee of our Board of Directors;
quarterly performance-based bonuses of up to $37,500, as determined by our
Board of Directors, during the fiscal year ending December 31, 2005; and additional
life insurance for Mr. Knaisch paid by us with a benefit equal to three times
the annual base salary. The agreement provides that Mr. Knaisch may terminate
the agreement upon thirty (30) days prior written notice to us, and we may
terminate the agreement with or without cause, upon written notice to Mr.
Knaisch. If Mr. Knaisch is terminated without cause he will be entitled to
receive his full salary and group health plan benefits for 12 months following
such termination.

On
December 21, 2004, we entered into an at-will employment agreement with Paul
McKnight, our Chief Financial Officer. Mr. McKnights employment agreement
contains the following provisions: annual base salary of $210,000, subject to
increase at the discretion of the compensation committee of our Board of
Directors; an annual performance-based bonus of up to $75,000, as determined by
our Chief Executive Officer; termination of the agreement by Mr. McKnight upon
30 days prior written notice and by us, with or without cause, upon written
notice to Mr. McKnight. Mr. McKnight will be entitled to receive his full
salary and group health plan benefits for 12 months following termination if he
is terminated without cause (as defined).

On
December 21, 2004, we entered into an at-will employment agreement with Walter
Hinton, our Chief Technology Officer. Mr. Hintons employment agreement
contains the following provisions: annual base salary of $225,000, subject to
increase at the discretion of the compensation committee of our Board of
Directors; an annual performance-based bonus of up to $75,000, as determined by
our Chief Executive Officer; and termination of the agreement by Mr. Hinton
upon 30 days prior written notice and by us, with or without cause, upon
written notice to Mr. Hinton. Mr. Hinton will be entitled to receive his full
salary and group health plan benefits for 12 months following termination if he
is terminated without cause (as defined).

On
October 10, 2005, we entered into a two-year employment agreement with Shawn
OGrady, our President and Chief Operating Officer. Mr. OGradys
employment agreement contains the following provisions: annual base salary of
$240,000, subject to increase at the discretion of the compensation committee
of our Board of Directors; beginning in 2006, an annual performance-based bonus
of up to $160,000, but in no event less than $40,000; an additional bonus at
the discretion of our Board of Directors if performance objectives are exceeded
by three percent (3%) or more; and termination of the agreement by Mr. OGrady
upon 30 days prior written notice and by us, with or without cause, upon written
notice to Mr. OGrady. Mr. OGrady will
be entitled to receive his full salary and group health plan benefits for 12
months following termination if he is terminated without cause (as defined).

|         |                                                                                                  
|-------- | -------------------------------------------------------------------------------------------------
|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The
information relating to the aggregated option exercises and fiscal year-end
option value for the Named Executive Officers found in Part II, Item 5 of this
report is hereby incorporated by reference.

The
following table sets forth information as of March 23, 2006 regarding beneficial
stock ownership of (i) all persons known to us to be beneficial owners of more
than five percent (5%) of our outstanding common stock and Series A preferred
stock, (ii) each of our directors, (iii) the Named Executive Officers and (iv)
all of our officers and directors as a group. Each of the persons in the table
below has sole voting power and sole dispositive power as to all of the shares
shown as beneficially owned by them, except as otherwise indicated:

29

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|                                       |  |                            |  |                                                |  |  |                                           |      
|-------------------------------------- |  | -------------------------- |  | ---------------------------------------------- |  |  | ----------------------------------------- | -----
|Name                                   |  | Title
  of Class           |  | Number
  of
  Shares
  Beneficially
  Owned(1) |  |  | Percent
  of
  Outstanding
  Shares(2)(3)
|                                       |  |                            |  |                                                |  |  |                                          
|5%
  Beneficial Owners                 |  |                            |  |                                                |  |  |                                           |      
|Great Hill
  Equity Partners LP        |  | Common Stock               |  | 3,732,612                                      |  |  | 24.9                                      | %(4) 
|One Liberty
  Square                   |  | Series A
  Preferred Stock |  | 843,170                                        |  |  | 34.2                                      | %    
|Boston, MA
  02109                     |  |                            |  |                                                |  |  |                                           |      
|                                      
|Tudor
  Investment Corporation         |  | Common Stock               |  | 2,684,547                                      |  |  | 17.5                                      | %(5) 
|1275 King
  Street                     |  | Series A
  Preferred Stock |  | 1,004,405                                      |  |  | 40.7                                      | %    
|Greenwich,
  CT 06831                  |  |                            |  |                                                |  |  |                                           |      
|                                      
|J.P. Morgan
  Direct Venture Capital   |  | Common Stock               |  | 2,330,797                                      |  |  | 16.0                                      | %(6) 
|Institutional Investors, LLC           |  | Series A
  Preferred Stock |  | 602,775                                        |  |  | 24.4                                      | %    
|522 Fifth
  Avenue                     |  |                            |  |                                                |  |  |                                           |      
|New York, NY
  10036                   |  |                            |  |                                                |  |  |                                           |      
|                                      
|Alfred N.
  Curmi                      |  | Common Stock               |  | 1,135,580                                      |  |  | 8.5                                       | %(7) 
|910 Seasage
  Drive                    |  |                            |  |                                                |  |  |                                           |      
|Delray
  Beach, Florida 33483          |  |                            |  |                                                |  |  |                                           |      
|                                       |  |                            |  |                                                |  |  |                                           |      
|Directors and Named Executive Officers |  |                            |  |                                                |  |  |                                           |      
|Thomas P.
  Sweeney III                |  | Common Stock               |  | 846,707                                        |  |  | 6.1                                       | %(8) 
|1140 Pearl
  Street                    |  | Series A
  Preferred Stock |  | 16,588                                         |  |  | *                                         |      
|Boulder, CO
  80302                    |  |                            |  |                                                |  |  |                                           |      
|                                      
|Michael
  Knaisch                      |  | Common Stock               |  | 199,814                                        |  |  | 1.5                                       | %(9) 
|Matthew
  Richman                      |  | Common Stock               |  | 152,514                                        |  |  | 1.1                                       | %(10)
|James
  Wolfinger                      |  | Common Stock               |  | 76,191                                         |  |  | *                                         | (11) 
|Walter
  Hinton                        |  | Common Stock               |  | 69,217                                         |  |  | *                                         | (12) 
|Paul
  McKnight                        |  | Common Stock               |  | 44,623                                         |  |  | *                                         | (13) 
|Patrick
  Whittingham                  |  | Common Stock               |  | 16,667                                         |  |  | *                                         | (14) 
|Carmen J.
  Scarpa                     |  |                           |  |                                               |  |  |                                          |      
|Thomas G.
  Hudson                     |  |                           |  |                                               |  |  |                                          |      
|David E.
  Weiss                       |  |                           |  |                                               |  |  |                                          |      
|All directors and executive            |  | Common Stock               |  | 1,405,734                                      |  |  | 9.9                                       | %    
|officers as a group (10 persons)       |  | Series A Preferred Stock   |  | 16,588                                         |  |  | 0.7                                       | %    



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Constitutes
  less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(1) | For the
  purposes of this table, a person is deemed to have beneficial ownership of
  any shares of capital stock that such person has the right to acquire within
  60 days of March 23, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(2) | All
  percentages for common stock are calculated based upon a total of 13,326,810
  shares outstanding as of March 23, 2006, plus, in the case of the person for
  whom the calculation is made, that number of shares of common stock that such
  person has the right to acquire within 60 days after March 23, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(3) | All
  percentages for Series A preferred stock are calculated based upon a total of
  2,466,971 shares outstanding as of March 23, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(4) | Represents
  3,611,082 shares of common stock owned of record by Great Hill Equity
  Partners LP (GHEP) (assuming conversion of 815,715 shares of Series A
  preferred stock into 1,631,430 shares of common stock) and 121,530 shares of
  common stock owned of record by Great Hill Investors, LLC (GHI) (assuming
  conversion of 27,455 shares of Series A preferred stock into 54,909 shares of
  common stock). The foregoing numbers represent shares for which GHEP and GHI
  each has shared dispositive and voting power. Such shares may be deemed to be
  beneficially owned by Great Hill Partners GP, LLC (GP), the general partner
  of GHEP, Great Hill Partners, LLC (GHP), a manager of GP and Messrs.
  Christopher S. Gaffney, John G. Hayes and Stephen F. Gormley, the managers of
  GHI, GHP and GP. Share information is furnished in reliance on the Schedule
  13D dated August 18, 2004 filed by the persons named herein with the
  Securities and Exchange Commission. The persons named herein have each
  specifically disclaimed that they are a member of a group for purposes of
  Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended
  (the Exchange Act).

30

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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5)  | Represents 2,416,151 shares of common stock owned of record by Tudor
  Ventures II LP (Tudor) (assuming conversion of 903,994 shares of Series A
  preferred stock into 1,807,988 shares of common stock), 266,583 shares of
  common stock owned of record by The Raptor Global Portfolio Ltd. (Raptor)
  (assuming conversion of 99,741 shares of Series A preferred stock into
  199,482 shares of common stock), and 1,813 shares of common stock held by The
  Altar Rock Fund LP (Altar) (assuming conversion of 670 shares of Series A
  preferred stock into 1,340 shares of common stock). The foregoing numbers
  represent shares for which Tudor, Raptor and Altar each has shared
  dispositive and voting power. Such shares may be deemed to be beneficially
  owned by Tudor Investment Corporation (TIC), the sole general partner of
  Altar and an investment advisor for Tudor and Raptor, and Paul Tudor Jones,
  II, the controlling shareholder of TIC. Tudor Ventures Group LP (TV GP),
  the general partner of Tudor, and Tudor Ventures Group LLC, the general
  partner of TV GP, may also be deemed to be beneficial owners of the shares
  held by Tudor. Share information is furnished in reliance on the Schedule 13D
  dated August 18, 2004 filed by the persons named herein with the Securities
  and Exchange Commission. The persons named herein have each specifically
  disclaimed that they are a member of a group for purposes of Section 13(d) or
  13(g) of the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(6)  | Represents 1,924,580 shares of common stock owned of record by JP Morgan
  Direct Venture Capital Institutional Investors LLC (JPM Institutional)
  (assuming conversion of 497,532 shares of Series A preferred stock into
  995,063 shares of common stock), 311,514 shares of common stock owned of
  record by JP Morgan Direct Venture Private Investors LLC (JPM Private)
  (assuming conversion of 81,136 shares of Series A preferred stock into
  162,273 shares of common stock), and 94,703 shares of common stock owned of
  record by 522 Fifth Avenue Fund, LP (522 Fund) (assuming conversion of
  24,107 shares of Series A preferred stock into 48,214 shares of common
  stock). The foregoing numbers represent shares for which JPM Institutional,
  JPM Private and 522 Fund each has shared dispositive and voting power. The
  shares held by JPM Institutional may be deemed to be beneficially owned by
  JPMorgan Chase Bank (JPMCB), its investment advisor, and JPMorgan Chase
  & Co., the parent of JPMCB. The shares held by JPM Private may be deemed
  to be beneficially owned by J.P. Morgan Investment Management Inc. (JPMIM),
  its investment advisor. The shares held by 522 Fund may be deemed to be
  beneficially owned by 522 Fifth Avenue Corp. (522 Corp.), its general
  partner, JPMIM, its investment advisor and the sole stockholder of 522 Corp.,
  J.P. Morgan Fleming Asset Management Holdings Inc. (Fleming), the sole
  stockholder of JPMIM, and JPMCB, the sole stockholder of Fleming and the
  indirect parent of JPMIM. Share information is furnished in reliance on the
  Schedule 13D dated August 18, 2004 filed by the persons named herein with the
  Securities and Exchange Commission. The persons named herein have each
  specifically disclaimed that they are a member of a group for purposes of
  Section 13(d) or 13(g) of the Exchange Act.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(7)  | Share information is furnished in reliance on the Schedule 13G dated
  March 2, 2005 filed by the person named herein with the Securities and
  Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(8)  | Represents 122,443 shares of common stock owned of record by Equity
  Pier LLC, of which Mr. Sweeney is the founder and managing member, 141,837
  shares of common stock owned of record by Mr. Sweeney, and 549,250 shares
  issuable upon the exercise of presently exercisable options held by Mr.
  Sweeney and assumes conversion of 16,588 shares of Series A preferred stock
  owned of record by Mr. Sweeney into 33,177 shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(9)  | Represents 64,814 shares of common stock owned of record by Mr.
  Knaisch and 135,000 shares of common stock issuable upon the exercise of
  presently exercisable options held by Mr. Knaisch.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(10) | Represents 60,014 shares of common stock owned of record by Mr.
  Richman and 92,500 shares of common stock issuable upon the exercise of
  presently exercisable options held by Mr. Richman.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(11) | Represents 59,524 shares owned of record by Mr. Wolfinger and 16,667
  shares of common stock issuable upon the exercise of presently exercisable
  options held by Mr. Wolfinger.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(12) | Represents 11,905 shares of common stock owned of record by Mr.
  Hinton and 57,312 shares issuable upon the exercise of presently exercisable
  options held by Mr. Hinton.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(13) | Represents 134 shares of common stock owned of record by Mr.
  McKnight, 100 shares of common stock owned by Mr. McKnights spouse and
  44,389 shares issuable upon the exercise of presently exercisable options
  held by Mr. McKnight. Mr. McKnight is a member of Equity Pier LLC and
  disclaims beneficial ownership of the shares of common stock beneficially
  owned by such entity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(14) | Represents shares of common stock issuable upon the exercise of presently
  exercisable options held by Mr. Whittingham.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|         |                                               
|-------- | ----------------------------------------------
|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Thomas P. Sweeney
III, our Chairman and Chief Executive Officer, is the founder and Managing
Partner of Equity Pier LLC (Equity Pier), a beneficial owner of 6.1% of our
outstanding common stock. We leased office space from Equity Pier in 2005 and
2004. Total costs incurred under the leasing arrangement and associated
expenses (utilities, supplies and insurances) amounted to approximately
$190,178 and $84,529, respectively.

|         |         
|-------- | --------
|ITEM 13. | EXHIBITS

(A)(1)
Financial Statements:

|                                                                                                                                    |  |     
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                    |  | Page
|                                                                                                                                    |  |     
|Report of Independent Registered Public
Accounting Firm                                                                             |  | F-1 
|                                                                                                                                    |  |     
|Consolidated Balance Sheet as of December 31,
2005                                                                                  |  | F-2 
|                                                                                                                                    |  |     
|Consolidated Statements of Operations for the
years ended December
  31, 2005 and 2004                                              |  | F-3 
|                                                                                                                                    |  |     
|Consolidated Statements of
Mandatorily and Convertible Redeemable
   Preferred Stock for the years ended December 31, 2005 and 2004 |  | F-4 
|                                                                                                                                    |  |     
|Consolidated Statements of Shareholders
Deficit and Comprehensive
  Loss for the years ended December 31, 2005 and 2004            |  | F-5 
|                                                                                                                                    |  |     
|Consolidated Statements of Cash Flows for the
years ended December
  31, 2005 and 2004                                              |  | F-7 
|                                                                                                                                    |  |     
|Notes to Consolidated Financial
Statements                                                                                          |  | F-9 

31

---



(A)(2)
Exhibits:

(a)
Exhibits

The
following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission.

|              |  |                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  No. |  | Exhibit Description                                                                                                                                                                                                                                               
|              |  |                                                                                                                                                                                                                                                                   
|              |  |                                                                                                                                                                                                                                                                   
|2.1           |  | Stock Purchase Agreement,
  dated as of March 30, 2005, by and among our company, Incentra Merger Corp.,
  Barry R. Andersen and Gary L. Henderson (incorporated by reference to Exhibit
  10.1 filed with our Current Report on Form 8-K filed on April 1, 2005).
|              |  |                                                                                                                                                                                                                                                                   
|3.1           |  | Articles of Incorporation
  dated as of April 10, 1995 (incorporated by reference to the exhibit of the
  same number filed with our Registration Statement on Form SB-2, filed on
  November 13, 1996).                                                          
|              |  |                                                                                                                                                                                                                                                                   
|3.2           |  | Certificate of Amendment
  to the Articles of Incorporation dated as of August 22, 1996 (incorporated by
  reference to the exhibit of the same number filed with our Registration
  Statement on Form SB-2, filed November 13, 1996).                            
|              |  |                                                                                                                                                                                                                                                                   
|3.3           |  | Certificate of Amendment
  to Articles of Incorporation dated as of March 12, 1998 (incorporated by
  reference to Exhibit 3.1 filed with our Current Report on Form 8-K, filed on
  March 27, 1998).                                                             
|              |  |                                                                                                                                                                                                                                                                   
|3.4           |  | Certificate of Amendment
  to Articles of Incorporation dated as April 12, 2000 (incorporated by
  reference to the exhibit of thsame number filed with our Annual Report on
  Form 10-KSB for the period ended December 31, 2000, filed on April 2, 2001).       
|              |  |                                                                                                                                                                                                                                                                   
|3.5           |  | Certificate of Amendment
  to Articles of Incorporation dated as of May 1, 2000 (incorporated by
  reference to Exhibit 2 filed with our Quarterly Report on Form 10-QSB for the
  quarter ended June 30, 2000, filed on August 15, 2000).                        
|              |  |                                                                                                                                                                                                                                                                   
|3.6           |  | Certificate of Amendment
  to Articles of Incorporation dated as of May 25, 2004 (incorporated by
  reference to the Exhibit of the same number with Amendment Number 1 to our
  Registration Statement on Form SB-2, filed on July 15, 2004).                    
|              |  |                                                                                                                                                                                                                                                                   
|3.7           |  | Certificate of Amendment
  to Articles of Incorporation dated as of October 18, 2004 (incorporated by
  reference to Exhibit A to the Definitive Schedule 14C Information Statement,
  filed on October 14, 2004).                                                
|              |  |                                                                                                                                                                                                                                                                   
|3.8           |  | Certificate of
  Designations, Preferences and Rights of Series A Convertible Preferred Stock
  of our company (incorporated by reference to Exhibit 3.2 filed with our
  Current Report on Form 8-K, filed on August 20, 2004).                                  
|              |  |                                                                                                                                                                                                                                                                   
|3.9           |  | By-Laws of the Company
  dated as of May 8, 1995 (incorporated by reference to the Exhibit of the same
  number filed with our Registration Statement on Form SB-2, filed on November
  13, 1996).                                                                
|              |  |                                                                                                                                                                                                                                                                   
|3.10          |  | Certificate of Amendment
  to Articles of Incorporation dated as June 9, 2005 (incorporated by reference
  to Exhibit 3.1 filed with our Current Report on Form 8-K, filed June 9, 2005.                                                                          
|              |  |                                                                                                                                                                                                                                                                   
|10.1          |  | 2000 Equity Incentive Plan
  dated as of May 2, 2000 (incorporated by reference to Exhibit 10.9 filed with
  our Annual Report on Form 10-KSB for the period ended December 31, 2000,
  filed on April 2, 2001).                                                  
|              |  |                                                                                                                                                                                                                                                                   
|10.2          |  | Registration Rights
  Agreement dated as of October 10, 2000 between us and Equity Pier LLC
  (incorporated by reference to Exhibit 10.11 filed with our Annual Report Form
  10-KSB for the period ended December 31, 2000, filed on April 2, 2001).             
|              |  |                                                                                                                                                                                                                                                                   

32

---



|              |  |                                                                                                                                                                                                                                                                                           
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  No. |  | Exhibit Description                                                                                                                                                                                                                                                                       
|              |  |                                                                                                                                                                                                                                                                                           
|              |  |                                                                                                                                                                                                                                                                                           
|10.3          |  | Securities Purchase
  Agreement, dated as of May 13, 2004, by and between our company and Laurus
  Master Fund, Ltd. (incorporated by reference to Exhibit 10.1 filed with our
  Quarterly Report on Form 10-QSB for the period ended March 31, 2004, filed on
  May 17, 2004).           
|              |  |                                                                                                                                                                                                                                                                                           
|10.4          |  | Secured Convertible Term
  Note, dated as of May 13, 2004, made by our company in favor of Laurus Master
  Fund, Ltd. (incorporated by reference to Exhibit 10.2 filed with our
  Quarterly Report on Form 10-QSB for the period ended March 31, 2004, filed on
  May 17, 2004).          
|              |  |                                                                                                                                                                                                                                                                                           
|10.5          |  | Master Security Agreement,
  dated May 13, 2004, by and between our company and Laurus Master Fund, Ltd.
  (incorporated by reference to Exhibit 10.3 filed with our Quarterly Report on
  Form 10-QSB for the period ended March 31, 2004, filed on May 17, 2004).                       
|              |  |                                                                                                                                                                                                                                                                                           
|10.6          |  | Registration Rights
  Agreement, dated as of May 13, 2004, by and between our company and Laurus
  Master Fund, Ltd. (incorporated by reference to Exhibit 10.4 filed with our
  Quarterly Report on Form 10-QSB for the period ended March 31, 2004, filed on
  May 17, 2004).           
|              |  |                                                                                                                                                                                                                                                                                           
|10.7          |  | Common Stock Purchase
  Warrant, dated May 13, 2004, issued by our company in favor of Laurus Master
  Fund, Ltd. (incorporated by reference to Exhibit 10.5 filed with our
  Quarterly Report on Form 10-QSB for the period ended March 31, 2004, filed on
  May 17, 2004).              
|              |  |                                                                                                                                                                                                                                                                                           
|10.8          |  | Registration Rights
  Agreement dated as of August 18, 2004 by and among our company and the other
  signatory parties thereto (incorporated by reference to Exhibit 10.1 filed
  with our Current Report on Form 8-K filed on August 20, 2004).                                          
|              |  |                                                                                                                                                                                                                                                                                           
|10.9          |  | Registration Rights Agreement
  dated as of August 18, 2004 by and among our company and the other signatory
  parties thereto (incorporated by reference to Exhibit 10.2 filed with our
  Current Report on Form 8-K filed on August 20, 2004).                                          
|              |  |                                                                                                                                                                                                                                                                                           
|10.10         |  | Lock Up and Voting
  Agreement dated as of August 18, 2004 by and among our company, Thomas P.
  Sweeney III, Equity Pier, LLC and the other signatory parties thereto
  (incorporated by reference to Exhibit 10.3 filed with our Current Report on
  Form 8-K filed on August 20, 2004).
|              |  |                                                                                                                                                                                                                                                                                           
|10.11         |  | Lock Up and Voting
  Agreement dated as of August 18, 2004 by and among our company and the other
  signatory parties thereto (incorporated by reference to Exhibit 10.4 filed
  with our Current Report on Form 8-K filed on August 20, 2004).                                           
|              |  |                                                                                                                                                                                                                                                                                           
|10.12         |  | Director Indemnification
  Agreement dated as of August 18, 2004 by and between our company and Thomas
  P. Sweeney III (incorporated by reference to Exhibit 10.5 filed with our
  Current Report on Form 8-K filed on August 20, 2004).                                                 
|              |  |                                                                                                                                                                                                                                                                                           
|10.13         |  | Director Indemnification
  Agreement dated as of August 18, 2004 by and between our company and Paul
  McKnight (incorporated by reference to Exhibit 10.6 filed with our Current
  Report on Form 8-K filed on August 20, 2004).                                                         
|              |  |                                                                                                                                                                                                                                                                                           
|10.14         |  | Director Indemnification
  Agreement dated as of August 18, 2004 by and between our company and James
  Wolfinger (incorporated by reference to Exhibit 10.7 filed with our Current
  Report on Form 8-K filed on August 20, 2004).                                                       
|              |  |                                                                                                                                                                                                                                                                                           
|10.15         |  | Director Indemnification
  Agreement dated as of August 18, 2004 by and between our company and Patrick
  Whittingham (incorporated by reference to Exhibit 10.8 filed with our Current
  Report on Form 8-K filed on August 20, 2004).                                                   
|              |  |                                                                                                                                                                                                                                                                                           
|10.16         |  | Director Indemnification
  Agreement dated as of August 18, 2004 by and between our company and Carmen
  J. Scarpa (incorporated by reference to Exhibit 10.9 filed with our Current
  Report on Form 8-K filed on August 20, 2004).                                                      

33

---



|              |  |                                                                                                                                                                                                                                                                                                             
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  No. |  | Exhibit Description                                                                                                                                                                                                                                                                                         
|              |  |                                                                                                                                                                                                                                                                                                             
|              |  |                                                                                                                                                                                                                                                                                                             
|10.17         |  | Director Indemnification
  Agreement dated as of August 18, 2004 by and between our company and
  Christopher S. Gaffney (incorporated by reference to Exhibit 10.10 filed with
  our Current Report on Form 8-K filed on August 20, 2004).                                                                 
|              |  |                                                                                                                                                                                                                                                                                                             
|10.18         |  | Employment Agreement dated
  as of August 18, 2004 by and between our company and Thomas P. Sweeney III
  (incorporated by reference to Exhibit 10.11 filed with our Current Report on
  Form 8-K filed on August 20, 2004).                                                                                
|              |  |                                                                                                                                                                                                                                                                                                             
|10.19         |  | Stock Pledge Agreement
  dated as of August 18, 2004 by and between our company and Laurus Master
  Fund, Ltd. (incorporated by reference to Exhibit 10.1 filed with our
  Quarterly Report on Form 10-QSB for the period ended September 30, 2004,
  filed on December 10, 2004).                          
|              |  |                                                                                                                                                                                                                                                                                                             
|10.20         |  | Subsidiary Guaranty dated
  as of August 18, 2004, executed by ManagedStorage International, Inc.
  (incorporated by reference to Exhibit 10.2 filed with our Quarterly Report on
  Form 10-QSB for the period ended September 30, 2004, filed on December 10,
  2004).                                     
|              |  |                                                                                                                                                                                                                                                                                                             
|10.21         |  | Joinder in the Master
  Security Agreement dated as of August 18, 2004, executed by our company and
  ManagedStorage International, Inc. (incorporated by reference to Exhibit 10.3
  filed with our Quarterly Report on Form 10-QSB for the period ended September
  30, 2004, filed on December 10, 2004).
|              |  |                                                                                                                                                                                                                                                                                                             
|10.22         |  | Employment Agreement dated
  as of December 21, 2004 by and between our company and Paul McKnight
  (incorporated by reference to Exhibit 10.11 filed with our Current Report on
  Form 8-K filed on December 22, 2004).                                                                                    
|              |  |                                                                                                                                                                                                                                                                                                             
|10.23         |  | Employment Agreement dated
  as of December 21, 2004 by and between our company and Walter Hinton
  (incorporated by reference to Exhibit 10.11 filed with our Current Report on
  Form 8-K filed on December 22, 2004).                                                                                    
|              |  |                                                                                                                                                                                                                                                                                                             
|10.24         |  | Amendment and Waiver,
  dated as of October 25, 2004, our company and Laurus Master Fund, Ltd.
  (incorporated by reference to Exhibit 10.6 filed with our Current Report on
  Form 8-K filed on October 29, 2004).                                                                                         
|              |  |                                                                                                                                                                                                                                                                                                             
|10.25         |  | Common Stock Purchase
  Warrant, dated October 25, 2004, issued by our company in favor of Laurus
  Master Fund, Ltd. (incorporated by reference to Exhibit 10.6 filed with our
  Current Report on Form 8-K filed on October 29, 2004).                                                                    
|              |  |                                                                                                                                                                                                                                                                                                             
|10.26         |  | Employment Agreement dated
  as of December 6, 2004 between our company and Michael Knaisch. (incorporated
by reference to Exhibit 10.28 filed with our Annual Report on Form 10-KSB for
the year ended December 31, 2004).                                                                                 
|              |  |                                                                                                                                                                                                                                                                                                             
|10.27         |  | Office Lease, dated as of
  March 15, 2002, by and between W9/MTN Real Estate Limited Partnership and
  ManagedStorage International, Inc. (incorporated
by reference to Exhibit 10.29 filed with our Annual Report on Form 10-KSB for
the year ended December 31, 2004).                                   
|              |  |                                                                                                                                                                                                                                                                                                             
|10.28         |  | First Amendment to Office
  Lease, dated as of June 30, 2002, by and between W9/MTN Real Estate Limited
  Partnership and ManagedStorage International, Inc. (incorporated
by reference to Exhibit 10.30 filed with our Annual Report on Form 10-KSB for
the year ended December 31, 2004).                 
|              |  |                                                                                                                                                                                                                                                                                                             
|10.29         |  | 2000 Stock Option and
  Grant Plan of ManagedStorage International, Inc., as amended (incorporated
by reference to Exhibit 10.31 filed with our Annual Report on Form 10-KSB for
the year ended December 31, 2004).                                                                                         
|              |  |                                                                                                                                                                                                                                                                                                             
|10.30         |  | $2,500,000 Convertible
  Promissory Note, dated as of February 18, 2005, by our company in favor of
  Alfred Curmi (incorporated by reference to Exhibit 10.1 filed with our
  Current Report on Form 8-K filed on February 23, 2005).                                                                      
|              |  |                                                                                                                                                                                                                                                                                                             
|10.31         |  | Registration Rights
  Agreement, dated as of February 18, 2005, by and between our company and
  Alfred Curmi (incorporated by reference to Exhibit 10.2 filed with our
  Current Report on Form 8-K filed on February 23, 2005).                                                                           
|              |  |                                                                                                                                                                                                                                                                                                             
|10.32         |  | Employment Agreement,
  dated as of February 18, 2005, by and between STAR Solutions of Delaware,
  Inc. and Elaine Bellock (incorporated by reference to Exhibit 10.3 filed with
  our Current Report on Form 8-K filed on February 23, 2005).                                                             

34

---



|              |  |                                                                                                                                                                                                                                                                  
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  No. |  | Exhibit Description                                                                                                                                                                                                                                              
|              |  |                                                                                                                                                                                                                                                                  
|              |  |                                                                                                                                                                                                                                                                  
|10.33         |  | Consulting Agreement,
  dated as of February 18, 2005, by and between our company and FGBB, Inc.
  (incorporated by reference to Exhibit 10.4 filed with our Current Report on
  Form 8-K filed on February 23, 2005).                                           
|              |  |                                                                                                                                                                                                                                                                  
|10.34         |  | Amendment and Waiver,
  dated as of February 17, 2005, by and between our company and Laurus Master
  Fund, Ltd. (incorporated by reference to Exhibit 10.10 filed with our Current
  Report on Form 8-K filed on February 23, 2005).                            
|              |  |                                                                                                                                                                                                                                                                  
|10.35         |  | Common Stock Purchase
  Warrant, dated as of February 17, 2005, issued by our company to Laurus
  Master Fund, Ltd. (incorporated by reference to Exhibit 10.11 filed with our
  Current Report on Form 8-K filed on February 23, 2005).                         
|              |  |                                                                                                                                                                                                                                                                  
|10.36         |  | Employment Agreement,
  dated as of March 30, 2005, by and between PWI Technologies, Inc. and Barry
  R. Andersen (incorporated by reference to Exhibit 10.2 filed with our Current
  Report on Form 8-K filed on April 4, 2005).                                
|              |  |                                                                                                                                                                                                                                                                  
|10.37         |  | Registration Rights
  Agreement, dated as of March 30, 2005 by and between Incentra Solutions, Inc.
  and MRA Systems, Inc. (d/b/a GE Access) (incorporated by reference to Exhibit
  10.3 filed with our Current Report on Form 8-K filed on April 4, 2005).    
|              |  |                                                                                                                                                                                                                                                                  
|10.38         |  | First Amendment to Credit
  Agreement, dated as of March 20, 2005, by and between STAR Solutions of
  Delaware, Inc. and Wells Fargo Bank, N.A. (incorporated by reference to
  Exhibit 10.4 filed with our Current Report on Form 8-K filed on April 4,
  2005).

35

---



|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  No. |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                                               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|10.39         |  | Security Agreement, dated
  as of June 30, 2005, by and among Incentra Solutions, Inc., PWI Technologies,
  Inc., Star Solutions of Delaware, Inc. and Laurus Master Fund. Ltd.
  (incorporated by reference to Exhibit 10.1 filed with our Current Report on
  Form 8-K filed on June 30, 2005).                                                                                 
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|10.40         |  | Secured Revolving Note,
  dated as of June 30, 2005, by Incentra Solutions, Inc., PWI Technologies,
  Inc. and Star Solutions of Delaware, Inc. in favor of Laurus Master Fund,
  Ltd. (incorporated by reference to Exhibit 10.2 filed with our Current Report
  on Form 8-K filed on June 30, 2005).                                                                            
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|10.41         |  | Secured Convertible
  Minimum Borrowing Note, dated as of June 30, 2005, by Incentra Solutions,
  Inc. in favor of Laurus Master Fund, Ltd. (incorporated by reference to
  Exhibit 10.3 filed with our Current Report on Form 8-K filed on June 30,
  2005).                                                                                                                     
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|10.42         |  | Stock Pledge Agreement,
  dated as of June 30, 2005, by and between Incentra Solutions, Inc. and Laurus
  Master Fund, Ltd. (incorporated by reference to Exhibit 10.4 filed with our
  Current Report on Form 8-K filed on June 30, 2005).                                                                                                                                       
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|10.43         |  | Minimum Borrowing Note
  Registration Rights Agreement, dated as of June 30, 2005, by and between
  Incentra Solutions, Inc. and Laurus Master Fund, Ltd. (incorporated by reference
  to Exhibit 10.5 filed with our Current Report on Form 8-K filed on June 30,
  2005).                                                                                                       
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|10.44         |  | Common Stock Purchase
  Warrant, dated as of June 30, 2005, by Incentra Solutions, Inc. in favor of
  Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.6 filed
  with our Current Report on Form 8- K filed on June 30, 2005).                                                                                                                                   
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|10.45         |  | Subsidiary Guaranty, dated
  as of June 30, 2005, by and among PWI Technologies, Inc., Star Solutions of
  Delaware, Inc. and Laurus Master Fund, Ltd. (incorporated by reference to
  Exhibit 10.7 filed with our Current Report on Form 8-K filed on June 30,
  2005).                                                                                                          
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|10.46         |  | Amendment and Waiver,
  dated as of June 30, 2005, by and between Incentra Solutions, Inc. and Laurus
  Master Fund, Ltd. (incorporated by reference to Exhibit 10.8 filed with our
  Current Report on Form 8- K filed on June 30, 2005).                                                                                                                                        
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|10.47         |  | Employment Agreement,
  effective October 17, 2005, between Incentra Solutions, Inc. and Shawn
  OGrady (incorporated by reference to Exhibit 10.1 filed with our Current
  Report on Form 8-K filed on October 17, 2005.)                                                                                                                                                       
|              |  |                                                                                                                                                                                                                                                                                                                                                                                   
|10.48         |  | Security Agreement, dated
  as of February 6, 2006, by and among our company, PWI Technologies, Inc.,
  Incentra Solutions of California, Inc., ManagedStorage International, Inc.,
  and Incentra Solutions International, Inc. and Laurus Master Fund, Ltd.
  (incorporated by reference to Exhibit 10.1 filed with our Current Report on
  Form 8-K filed on February 6, 2006).

36

---



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  No. |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                                                                           
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.49         |  | Secured Non-Convertible
  Revolving Note, dated as of February 6, 2006, executed by our company, PWI
  Technologies, Inc., Incentra Solutions of California, Inc., ManagedStorage
  International, Inc., and Incentra Solutions, International, Inc. in favor of
  Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.2 filed
  with our Current Report on Form 8-K filed on February 6, 2006).
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.50         |  | Stock Pledge Agreement,
  dated as of February 6, 2006, executed by our company and ManagedStorage
  International, Inc. in favor of Laurus Master Fund, Ltd. (incorporated by
  reference to Exhibit 10.3 filed with our Current Report on Form 8-K filed on
  February 6, 2006).                                                                                                                            
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.51         |  | Subsidiary Guaranty, dated
  as of February 6, 2006, executed by PWI Technologies, Inc., Incentra
  Solutions of California, Inc., ManagedStorage International, Inc., and
  Incentra Solutions International, Inc. in favor of Laurus Master Fund, Ltd.
  (incorporated by reference to Exhibit 10.4 filed with our Current Report on
  Form 8-K filed on February 6, 2006).                                 
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.52         |  | Registration Rights
  Agreement, dated as of February 6, 2006 by and between our company and Laurus
  Master Fund, Ltd. (as incorporated by reference to Exhibit 10.5 filed with
  our Current Report on Form 8-K on February 6, 2006).                                                                                                                                                                       
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.53         |  | Common Stock Purchase Option,
  dated as of February 6, 2006, executed by our company in favor of Laurus
  Master Fund, Ltd. (incorporated by reference to Exhibit 10.6 filed with our
  Current Report on Form 8-K filed on February 6, 2006).                                                                                                                                                               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.54         |  | Grant of Security Interest
  in Patents and Trademarks, dated as of February 6, 2006, executed by our
  company and ManagedStorage International, Inc. in favor of Laurus Master
  Fund, Ltd. (incorporated by reference to Exhibit 10.7 filed with our Current
  Report on Form 8-K filed on February 6, 2006).                                                                                              
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.55         |  | Amendment and Deferral
  Agreement, dated as of February 6, 2006, by and between our company and
  Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.8 filed
  with our Current Report on Form 8-K filed on February 6, 2006).                                                                                                                                                                
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.56         |  | Securities Purchased Agreement, dated as of March 31, 2006, by and
between our company and Laurus Master Fund, Ltd.                                                                                                                                                                                                                                                                                           
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.57         |  | Secured Convertible Term Note, dated as of March 31, 2006, by
Incentra Solutions, Inc. in favor of Laurus Master Fund, Ltd.                                                                                                                                                                                                                                                                                   
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.58         |  | Non-convertible Secured Term Note, dated as of March 31, 2006,
by Incentra Solutions, Inc. in favor of Laurus Master Fund, Ltd.                                                                                                                                                                                                                                                                               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.59         |  | Common Stock Purchase Warrant, dated as of March 31, 2006,
issued by our company to Laurus Master Fund, Ltd.                                                                                                                                                                                                                                                                                                  
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.60         |  | Registration Rights Agreement, dated as of March 31, 2006,
 by and between our company and Laurus Master Fund, Ltd.                                                                                                                                                                                                                                                                                           
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.61         |  | Joinder Agreement, dated as of March 31, 2006, executed by PWI
Technologies, Inc., Incentra Solutions of California, Inc. and Incentra
Solutions International, Inc. and delivered to Laurus Master Fund, Ltd.                                                                                                                                                                                                
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|23.1          |  | Consent of GHP Horwath,
  P.C., independent registered public accounting firm.                                                                                                                                                                                                                                                                                                                                
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|31.1          |  | Certification of our Chief
  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                     
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|31.2          |  | Certification of our Chief
  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                     
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|32.1          |  | Certification of our Chief
  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                     
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|32.2          |  | Certification of our Chief
  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                     



37

---



|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

The
firm of GHP Horwath, P.C. has served as our independent registered public
accounting firm since November 9, 2004. The firm of J.H. Cohn LLP served as our
independent registered public accounting firm from October 24, 2003 through
November 8, 2004.

The
aggregate fees billed and to be billed for the audit of our 2005 financial
statements included in our annual report on Form 10-KSB and for the reviews of
our financial statements included in our quarterly reports on Form 10-QSB for
our fiscal year ended December 31, 2005 are approximately $197,000. For the year
ended December 31, 2004, the aggregate audit fees billed by GHP Horwath, P.C.
and J.H. Cohn LLP were $100,000 and $23,000, respectively.

Audit-Related Fees

The
aggregate fees billed in each of fiscal 2005 and 2004 for assurance and related
services that are reasonably related to the audit or
review of our financial statements and that were not covered in the Audit Fees
disclosure above were $14,600 and $72,706 (comprised of $23,811 by J.H. Cohn
LLP, $20,365 by Ernst & Young LLP and $28,530 by KPMG LLP), respectively.
Services rendered by Ernst & Young LLP and KPMG LLP in 2004 were for MSI.

Tax Fees

J.H. Cohn LLP billed aggregate fees for tax compliance,
advice, or planning of $66,310 and $72,655 for fiscal 2005 and 2004,
respectively.

All Other Fees

There
were no fees billed in fiscal 2005 or 2004 for professional services rendered
by authorized independent registered public accounting firms except as disclosed above.

Board of Directors Pre-Approval

Our
Board of Directors reviews and approves audit and non-audit services performed
by our authorized independent registered public accounting firms as well as the fees charged by
the authorized Independent registered public accounting firms for such services. All of the
services provided and fees charged by the authorized independent registered public
accounting firms were pre-approved in 2005 and approved in 2004 by our Board of Directors.

38

---



SIGNATURES

In
accordance with 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.

|                     |  |                          |                             | 
|-------------------- |  | ------------------------ | --------------------------- | 
|Dated: April 4, 2006 |  | Incentra Solutions, Inc.
|                     |  |                          |                             | 
|                     |  | By:                      | /s/ Thomas P.
  Sweeney III | 
|                     |  |                          |                             | 
|                     |  |                          | Thomas
  P. Sweeney III     | 
|                     |  |                          | Chief
  Executive Officer   | 

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

|                                      |  |                                                | 
|------------------------------------- |  | ---------------------------------------------- | 
|Signature                             |  | Title                                          | 
|                                      |  |                                                | 
|                                      |  |                                                | 
|/s/ Thomas P. Sweeney III             |  | Chief Executive Officer
  and Director         | 
|                                      |  | (principal executive
  officer)                | 
|Thomas P. Sweeney III
  April 4, 2006 |  |                                                | 
|                                      |  |                                                | 
|/s/ Paul McKnight                     |  | Chief Financial Officer                        | 
|                                      |  | (principal financial and
  accounting officer) | 
|Paul McKnight
  April 4, 2006         |  |                                                | 
|                                      |  |                                                | 
|/s/ James Wolfinger                   |  | Director                                       | 
|                                      |  |                                                | 
|James Wolfinger
  April 4, 2006       |  |                                                | 
|                                      |  |                                                | 
|/s/ Patrick Whittingham               |  | Director                                       | 
|                                      |  |                                                | 
|Patrick Whittingham
  April 4, 2006   |  |                                                | 
|                                      |  |                                                | 
|/s/ Carmen J. Scarpa                  |  | Director                                       | 
|                                      |  |                                                | 
|Carmen J. Scarpa
  April 4, 2006      |  |                                                | 
|                                      |  |                                                | 
|/s/ Thomas G. Hudson                  |  | Director                                       | 
|                                      |  |                                                | 
|Thomas G. Hudson                      |  |                                                | 
|April 4, 2006                         |  |                                                | 
|                                      |  |                                                | 
|/s/ David E. Weiss                    |  | Director                                       | 
|                                      |  |                                                | 
|David E. Weiss                        |  |                                                | 
|April 4, 2006                         |  |                                                | 

39

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2005 and 2004

Table of Contents

|                                                                                                                                   |  |     
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                   |  | Page
|                                                                                                                                   |  |     
|Report of Independent Registered
Public Accounting
  Firm                                                                          |  | F-1 
|                                                                                                                                   |  |     
|Consolidated Balance Sheet as of
December 31, 2005                                                                                 |  | F-2 
|                                                                                                                                   |  |     
|Consolidated Statements of
Operations for the years
  ended December 31, 2005 and 2004                                             |  | F-3 
|                                                                                                                                   |  |     
|Consolidated Statements of
Mandatorily and Convertible
  Redeemable Preferred Stock for the years ended December 31, 2005 and 2004 |  | F-4 
|                                                                                                                                   |  |     
|Consolidated Statements of
Shareholders Deficit and
  Comprehensive Loss for the years ended December 31, 2005 and 2004           |  | F-5 
|                                                                                                                                   |  |     
|Consolidated Statements of Cash
Flows for the years
  ended December 31, 2005 and 2004                                             |  | F-7 
|                                                                                                                                   |  |     
|Notes to Consolidated Financial
Statements                                                                                         |  | F-9 

40

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of
Directors
Incentra Solutions, Inc.

We have audited the accompanying consolidated balance sheet of
    Incentra Solutions, Inc. and subsidiaries (the Company) as of
    December 31, 2005, and the related consolidated statements of operations,
    mandatorily and convertible redeemable preferred stock, shareholders deficit
    and comprehensive loss, and cash flows for each of the years in the two-year
    period ended December 31, 2005. These consolidated financial statements are
    the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Incentra Solutions,
Inc. and subsidiaries as of December 31, 2005, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.

The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, as of December 31, 2005, the Company is in
    default on a note payable in the amount of $2,374,139.
This event of default created an event of default with regard to other
indebtedness of the Company. The events of default  make debt in the amount
    of $11,231,420 callable. This raises substantial doubt about the Companys
ability to continue as a going concern. Managements plans in regard to
these matters are also described in Note 1. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

As discussed in Note 3 to the consolidated financial statements,
    during the fourth quarter of 2005, the Company corrected its accounting for
    goodwill recorded in connection with business acquisitions that occurred
    in the first quarter of 2005.

/s/ GHP
Horwath, P.C.
Denver, Colorado

March 24, 2006, except for Note 17(B) as to which the date is
    March 31, 2006

F-1

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEET
December 31, 2005

|                                                                                                                                                                               |  |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | ------------ | -
|ASSETS                                                                                                                                                                         |  |   |              |  
|Current assets:                                                                                                                                                                |  |   |              |  
|Cash and cash equivalents                                                                                                                                                      |  | $ | 1,108,642    |  
|Accounts receivable, net of allowance for
  doubtful accounts of $219,234                                                                                                      |  |   | 10,576,172   |  
|Other current assets                                                                                                                                                           |  |   | 1,284,505    |  
|                                                                                                                                                                               |  |   |              |  
|Total current assets                                                                                                                                                           |  |   | 12,969,319   |  
|                                                                                                                                                                               |  |   |              |  
|                                                                                                                                                                              
|Property and equipment, net                                                                                                                                                    |  |   | 2,230,201    |  
|Capitalized software development costs, net                                                                                                                                    |  |   | 2,133,203    |  
|Intangible assets, net                                                                                                                                                         |  |   | 13,685,359   |  
|Goodwill                                                                                                                                                                       |  |   | 5,857,770    |  
|Restricted cash                                                                                                                                                                |  |   | 80,956       |  
|Other assets                                                                                                                                                                   |  |   | 926,535      |  
|                                                                                                                                                                               |  |   |              |  
|                                                                                                                                                                               |  |   | 24,914,024   |  
|                                                                                                                                                                               |  |   |              |  
|Total assets                                                                                                                                                                   |  | $ | 37,883,343   |  
|                                                                                                                                                                               |  |   |              |  
|                                                                                                                                                                               |  |   |              |  
|Liabilities and shareholders deficit                                                                                                                                          |  |   |              |  
|Current liabilities:                                                                                                                                                           |  |   |              |  
|Current portion of notes payable, capital
  leases and other long-term obligations                                                                                             |  | $ | 11,066,921   |  
|Accounts payable                                                                                                                                                               |  |   | 7,787,603    |  
|Accrued expenses                                                                                                                                                               |  |   | 5,344,475    |  
|Current portion of deferred revenue                                                                                                                                            |  |   | 1,874,636    |  
|                                                                                                                                                                               |  |   |              |  
|Total current liabilities                                                                                                                                                      |  |   | 26,073,635   |  
|                                                                                                                                                                               |  |   |              |  
|Notes payable, capital leases and other
  long-term obligations, net of current portion                                                                                        |  |   | 303,652      |  
|Deferred revenue, net of current portion                                                                                                                                       |  |   | 104,796      |  
|                                                                                                                                                                               |  |   |              |  
|Total liabilities                                                                                                                                                              |  |   | 26,482,083   |  
|                                                                                                                                                                               |  |   |              |  
|                                                                                                                                                                               |  |   |              |  
|Commitments and contingencies                                                                                                                                                  |  |   |              |  
|Series A convertible redeemable preferred
  stock, $.001 par value, $31,500,000 liquidation preference, 2,500,000 shares
  authorized, 2,466,971 shares issued and outstanding |  |   | 24,618,333   |  
|                                                                                                                                                                               |  |   |              |  
|                                                                                                                                                                               |  |   |              |  
|Shareholders deficit:                                                                                                                                                         |  |   |              |  
|Preferred
    stock, nonvoting, $.001 par value, 2,500,000 shares authorized, none issued
    or outstanding                                                                   |  |   |             |  
|Common stock, $.001 par value, 200,000,000
  shares authorized, 13,326,810 shares
  issued and outstanding                                                                     |  |   | 13,327       |  
|Additional paid-in capital                                                                                                                                                     |  |   | 119,517,168  |  
|Accumulated other comprehensive loss                                                                                                                                           |  |   | (103,235     | )
|Accumulated deficit                                                                                                                                                            |  |   | (132,644,333 | )
|                                                                                                                                                                               |  |   |              |  
|Total shareholders deficit                                                                                                                                                    |  |   | (13,217,073  | )
|                                                                                                                                                                               |  |   |              |  
|                                                                                                                                                                               |  |   |              |  
|Total liabilities and shareholders deficit                                                                                                                                    |  | $ | 37,883,343   |  
|                                                                                                                                                                               |  |   |              |  

See accompanying Notes to Consolidated
Financial Statements

F-2

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                           |  |                          |             |      |   |             |  
|-------------------------------------------------------------------------- |  | ------------------------ | ----------- | ---- | - | ----------- | -
|                                                                           |  | Years Ended December 31, |            
|                                                                           |  |                          |            
|                                                                           |  | 2005                     |             | 2004 |  
|                                                                           |  |                          |             |      |  
|REVENUES:                                                                  |  |                          |             |      |   |             |  
|Products                                                                   |  | $                        | 37,607,872  |      | $ | 5,155,101   |  
|Services                                                                   |  |                          | 13,224,064  |      |   | 8,129,569   |  
|                                                                           |  |                          |             |      |   |             |  
|Total revenue                                                              |  |                          | 50,831,936  |      |   | 13,284,670  |  
|                                                                           |  |                          |             |      |   |             |  
|Cost of
  revenue:                                                         |  |                          |             |      |   |             |  
|Products                                                                   |  |                          | 25,448,135  |      |   | 1,479,580   |  
|Services                                                                   |  |                          | 9,058,835   |      |   | 5,820,755   |  
|                                                                           |  |                          |             |      |   |             |  
|Total cost
  of revenue                                                    |  |                          | 34,506,970  |      |   | 7,300,335   |  
|                                                                           |  |                          |             |      |   |             |  
|Gross margin                                                               |  |                          | 16,324,966  |      |   | 5,984,335   |  
|                                                                           |  |                          |             |      |   |             |  
|Selling,
  general and administrative                                      |  |                          | 20,516,251  |      |   | 10,262,730  |  
|Acquisition
  costs                                                        |  |                          |            |      |   | 1,275,189   |  
|Amortization                                                               |  |                          | 3,229,919   |      |   | 1,776,473   |  
|Depreciation                                                               |  |                          | 465,747     |      |   | 183,057     |  
|Impairment
  of goodwill                                                   |  |                          | 4,151,450   |      |   | 198,280     |  
|                                                                           |  |                          |             |      |   |             |  
|                                                                           |  |                          | 28,363,367  |      |   | 13,695,729  |  
|                                                                           |  |                          |             |      |   |             |  
|Loss from operations                                                       |  |                          | (12,038,401 | )    |   | (7,711,394  | )
|                                                                           |  |                          |             |      |   |             |  
|Other income
  (expense):                                                  |  |                          |             |      |   |             |  
|Interest
  income                                                          |  |                          | 33,317      |      |   | 22,096      |  
|Interest
  expense                                                         |  |                          | (2,424,218  | )    |   | (2,428,643  | )
|Other income                                                               |  |                          | 656,088     |      |   | 382,989     |  
|Foreign
  currency transaction gain (loss)                                 |  |                          | 16,691      |      |   | (303,342    | )
|                                                                           |  |                          |             |      |   |             |  
|                                                                           |  |                          | (1,718,122  | )    |   | (2,326,900  | )
|                                                                           |  |                          |             |      |   |             |  
|Loss before income tax                                                     |  |                          | (13,756,523 | )    |   | (10,038,294 | )
|Income tax
  expense                                                       |  |                          | (469,034    | )    |   | (400,000    | )
|                                                                           |  |                          |             |      |   |             |  
|Net loss                                                                   |  |                          | (14,225,557 | )    |   | (10,438,294 | )
|                                                                           |  |                          |             |      |   |             |  
|Deemed
  dividends on redeemable preferred stock                           |  |                          |            |      |   | (348,493    | )
|Accretion of
  redeemable preferred stock to redemption amount             |  |                          | (2,617,566  | )    |   | (990,826    | )
|                                                                           |  |                          |             |      |   |             |  
|Net loss applicable to common shareholders                                 |  | $                        | (16,843,123 | )    | $ | (11,777,613 | )
|                                                                           |  |                          |             |      |   |             |  
|Weighted
  average number of common shares outstanding  basic and diluted |  |                          | 12,541,642  |      |   | 5,102,733   |  
|                                                                           |  |                          |             |      |   |             |  
|Basic and
  diluted net loss per share applicable to common shareholders   |  | $                        | (1.34       | )    | $ | (2.31       | )
|                                                                           |  |                          |             |      |   |             |  

See accompanying Notes to Consolidated
Financial Statements

F-3

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF MANDATORILY AND CONVERTIBLE REDEEMABLE 
PREFERRED STOCKYears ended
December 31, 2005 and 2004

|                                                                                                     |  |                           |         |                            |   |                             |   |        |          |        |   |            |   |       |           |  |   |            |  |   |            |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | -------------------------- | - | --------------------------- | - | ------ | -------- | ------ | - | ---------- | - | ----- | --------- |  | - | ---------- |  | - | ---------- | -
|                                                                                                     |  | MSI Series
  A redeemable |         | MSI Series
  B convertible |   | FPDI
  Series A convertible |   |        |          |       
|                                                                                                     |  | preferred
  stock         |         | preferred
  stock          |   | preferred
  stock           |   |        |          |       
|                                                                                                     |  |                           |         |                            |   |                             |   |        |          |        |   |            |   |       |           |  |   |            |  |   |            |  
|                                                                                                     |  | Shares                    |         | Amount                     |   | Shares                      |   | Amount |          | Shares |   | Amount     |   | Total |          
|                                                                                                     |  |                           |         |                            |   |                             |   |        |          |        |   |            |   |       |           |  |   |            |  |   |            |  
|Balance at December 31, 2003                                                                         |  |                           | 50,000  |                            | $ | 5,000,000                   |   |        | 650,000  |        | $ | 8,587,011  |   |       |           |  |   |            |  | $ | 13,587,011 |  
|Exchange of MSI Series A redeemable preferred stock for common stock
  of FPDI in merger             |  |                           | (50,000 | )                          |   | (5,000,000                  | ) |        |         |        |   |           |   |       |           |  |   |            |  |   | (5,000,000 | )
|Deemed dividends on MSI redeemable preferred stock                                                   |  |                           |        |                            |   |                            |   |        |         |        |   | 348,493    |   |       |           |  |   |            |  |   | 348,493    |  
|Accretion of MSI mandatorily redeemable preferred stock to redemption
  amount                       |  |                           |        |                            |   |                            |   |        |         |        |   | 19,793     |   |       |           |  |   |            |  |   | 19,793     |  
|Exchange of MSI Series B convertible redeemable preferred stock for common stock
  of FPDI in merger |  |                           |        |                            |   |                            |   |        | (650,000 | )      |   | (8,955,297 | ) |       |           |  |   |            |  |   | (8,955,297 | )
|Issuance of FPDI Series A convertible redeemable preferred
  stock due to merger                     |  |                           |         |                            |   |                             |   |        |          |        |   |            |   |       | 2,466,971 |  | $ | 21,029,734 |  |   | 21,029,734 |  
|Accretion of FPDI convertible preferred stock to redemption
amount                                   |  |                           |         |                            |   |                             |   |        |          |        |   |            |   |       |           |  |   | 971,033    |  |   | 971,033    |  
|                                                                                                     |  |                           |         |                            |   |                             |   |        |          |        |   |            |   |       |           |  |   |            |  |   |            |  
|Balance at December 31, 2004                                                                         |  |                           |        |                            |   |                            |   |        |         |        |   |           |   |       | 2,466,971 |  |   | 22,000,767 |  |   | 22,000,767 |  
|Accretion of FPDI convertible preferred stock to redemption
amount                                   |  |                           |        |                            |   |                            |   |        |         |        |   |           |   |       |           |  |   | 2,617,566  |  |   | 2,617,566  |  
|                                                                                                     |  |                           |         |                            |   |                             |   |        |          |        |   |            |   |       |           |  |   |            |  |   |            |  
|Balance at December 31, 2005                                                                         |  |                           |        |                            | $ |                            |   |        |         |        | $ |           |   |       | 2,466,971 |  | $ | 24,618,333 |  | $ | 24,618,333 |  
|                                                                                                     |  |                           |         |                            |   |                             |   |        |          |        |   |            |   |       |           |  |   |            |  |   |            |  

See accompanying Notes to Consolidated
Financial Statements

F-4

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF SHAREHOLDERS DEFICIT AND COMPREHENSIVE LOSS 
Years ended December 31, 2005 and 2004

|                                                                                        |  |                |            |        |   |        |   |                                       |                        |                                                         |       |                          |   |                                    |          |                                                         |   |             |   |   |        |  |   |              |   |   |             |  
|--------------------------------------------------------------------------------------- |  | -------------- | ---------- | ------ | - | ------ | - | ------------------------------------- | ---------------------- | ------------------------------------------------------- | ----- | ------------------------ | - | ---------------------------------- | -------- | ------------------------------------------------------- | - | ----------- | - | - | ------ |  | - | ------------ | - | - | ----------- | -
|                                                                                        |  |                |            |        |   |        |   | Class A 
  common
  stock 
  warrants |                        | Series C 
  redeemable
  preferred 
  stock 
  warrants |       | Deferred 
  compensation |   | Additional
  
  paid-in 
  capital |          | Accumulated
  
  other 
  comprehensive
  income (loss) |   |             |   |   |        |  |  
|                                                                                        |  |                |            |        |   |        |   |                                       |                        |                                                         |       |                          |   |                                    |          |                                                         |   |            
|                                                                                        |  |                |            |        |   |        |   |                                       |                        |                                                         |       |                          |   |                                    |          |                                                         |   |            
|                                                                                        |  | Common
  stock |            |        |   |        |   |                                       | Accumulated

  deficit |                                                         | Total |                         
|                                                                                        |  | Shares         |            | Amount |   |        |   |                                       |                        |                                                         |       |                         
|                                                                                        |  |                |            |        |   |        |   |                                       |                        |                                                         |       |                          |   |                                    |          |                                                         |   |             |  
|Balance at December 31, 2003                                                            |  |                | 1,949,827  |        | $ | 1,950  |   | $                                     | 65,571                 |                                                         | $     | 115,652                  |   | $                                  | (362,140 | )                                                       | $ | 85,123,989  |   |   |       |  | $ | (107,980,482 | ) | $ | (23,035,460 | )
|Accretion of MSI mandatorily redeemable
preferred stock to redemption
  amount          |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | (19,793     | ) |   |       |  |   |             |   |   | (19,793     | )
|Accretion of FPDI mandatorily redeemable
preferred stock to redemption
  amount         |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | (971,033    | ) |   |       |  |   |             |   |   | (971,033    | )
|Deemed dividends on MSI redeemable preferred
stock                                      |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | (348,493    | ) |   |       |  |   |             |   |   | (348,493    | )
|Exercise of MSI stock options                                                           |  |                | 3,480      |        |   | 4      |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | 1,835       |   |   |       |  |   |             |   |   | 1,839       |  
|Repurchase of MSI common stock                                                          |  |                | (7,284     | )      |   | (7     | ) |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | (4,769      | ) |   |       |  |   |             |   |   | (4,776      | )
|Cancellations of MSI stock options                                                      |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    | 11,519   |                                                         |   | (11,519     | ) |   |       |  |   |             |   |   |            |  
|Transactions related to reverse acquisition of
FPDI by MSI:                             |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   |            |   |   |       |  |   |             |   |   |            |  
|Common stock issued in exchange
for MSI Series A preferred stock in
  merger            |  |                | 1,000,000  |        |   | 1,000  |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | 4,999,000   |   |   |       |  |   |             |   |   | 5,000,000   |  
|Common stock issued in exchange
for MSI Series B preferred stock in
  merger            |  |                | 1,806,285  |        |   | 1,806  |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | 8,953,491   |   |   |       |  |   |             |   |   | 8,955,297   |  
|Stock-based compensation
incurred in connection with merger                             |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | 798,598     |   |   |       |  |   |             |   |   | 798,598     |  
|Acquisition of FPDI by MSI
based on fair value of common stock;
  options and warrants  |  |                | 5,723,870  |        |   | 5,724  |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | 16,468,706  |   |   |       |  |   |             |   |   | 16,474,430  |  
|Class A common stock warrants
of MSI exchanged for common stock warrants
  of FPDI      |  |                |           |        |   |       |   |                                       | (65,571                | )                                                       |       |                         |   |                                    |         |                                                         |   | 65,571      |   |   |       |  |   |             |   |   |            |  
|Series C warrants of MSI
exchanged for Series A stock warrants of FPDI                  |  |                |           |        |   |       |   |                                       |                       |                                                         |       | (115,652                 | ) |                                    |         |                                                         |   | 115,652     |   |   |       |  |   |             |   |   |            |  
|Reclassification of deferred
compensation to additional paid-in capital
  due to merger |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    | 238,388  |                                                         |   | (238,388    | ) |   |       |  |   |             |   |   |            |  
|Cancellation
        of MSI common stock exchanged for common stock of FPDI             |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | 6,277       |   |   |       |  |   |             |   |   | 6,277       |  
|Amortization of deferred compensation and stock
option expense                          |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    | 112,233  |                                                         |   | 280,446     |   |   |       |  |   |             |   |   | 392,679     |  
|                                                                                        |  |                |            |        |   |        |   |                                       |                        |                                                         |       |                          |   |                                    |          |                                                         |   |             |   |   |        |  |   |              |   |   |             |  
|FPDI common stock issued in lieu of interest
payment                                    |  |                | 29,365     |        |   | 29     |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | 12,471      |   |   |       |  |   |             |   |   | 12,500      |  
|Reclassification of derivative warrant to
liability                                     |  |                |            |        |   |        |   |                                       |                        |                                                         |       |                          |   |                                    |          |                                                         |   | (1,836,534  | ) |   |       |  |   |             |   |   | (1,836,534  | )
|Exercise of FPDI stock options                                                          |  |                | 455        |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | 138         |   |   |       |  |   |             |   |   | 138         |  
|Acquisition costs                                                                       |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   | (30,000     | ) |   |       |  |   |             |   |   | (30,000     | )
|Components of comprehensive loss:                                                       |  |                |            |        |   |        |   |                                       |                        |                                                         |       |                          |   |                                    |          |                                                         |   |             |   |   |        |  |   |              |   |   |             |  
|Net loss                                                                                |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   |            |   |   |       |  |   | (10,438,294  | ) |   | (10,438,294 | )
|Change in foreign currency
translation adjustments                                      |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   |            |   | $ | 19,184 |  |   |             |   |   | 19,184      |  
|                                                                                        |  |                |            |        |   |        |   |                                       |                        |                                                         |       |                          |   |                                    |          |                                                         |   |             |   |   |        |  |   |              |   |   |             |  
|Total comprehensive
loss                                                                |  |                |           |        |   |       |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         |   |            |   |   |       |  |   |             |   |   | (10,419,110 | )
|                                                                                        |  |                |            |        |   |        |   |                                       |                        |                                                         |       |                          |   |                                    |          |                                                         |   |             |   |   |        |  |   |              |   |   |             |  
|Balance at December 31, 2004                                                            |  |                | 10,505,998 |        | $ | 10,506 |   |                                       |                       |                                                         |       |                         |   |                                    |         |                                                         | $ | 113,365,645 |   | $ | 19,184 |  | $ | (118,418,776 | ) | $ | (5,023,441  | )
|                                                                                        |  |                |            |        |   |        |   |                                       |                        |                                                         |       |                          |   |                                    |          |                                                         |   |             |   |   |        |  |   |              |   |   |             |  

(continued)

F-5

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
DEFICIT AND COMPREHENSIVE LOSS
(Continued)
Years ended December 31, 2005 and 2004

|                                                                                                                |  |              |            |        |   |        |  |                                              |             |                                                                 |   |                              |   |       |              |   |   |             |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ------ | - | ------ |  | -------------------------------------------- | ----------- | --------------------------------------------------------------- | - | ---------------------------- | - | ----- | ------------ | - | - | ----------- | -
|                                                                                                                |  |              |            |        |   |        |  | Additional 
        paid-in 
        capital |             | Accumulated 
        other 
        comprehensive income (loss) |   | Accumulated 
        deficit |   | Total |             
|                                                                                                                |  | Common stock |            |        |   |        | 
|                                                                                                                |  |              |            |        |   |        | 
|                                                                                                                |  | Shares       |            | Amount |   |        |  |                                              |            
|                                                                                                                |  |              |            |        |   |        |  |                                              |             |                                                                 |   |                              |  
|Balance
          at December 31, 2004                                                                          |  |              | 10,505,998 |        | $ | 10,506 |  | $                                            | 113,365,645 |                                                                 | $ | 19,184                       |   | $     | (118,418,776 | ) | $ | (5,023,441  | )
|Common
          stock issued in the acquisition of Incentra of CA (formerly Star Solutions)
          (Note 4) |  |              | 1,261,756  |        |   | 1,262  |  |                                              | 3,135,102   |                                                                 |   |                             |   |       |             |   |   | 3,136,364   |  
|Common
          stock issued in the acquisition of PWI Technologies (Note 4)                                   |  |              | 841,934    |        |   | 842    |  |                                              | 1,683,026   |                                                                 |   |                             |   |       |             |   |   | 1,683,868   |  
|Accretion
          of FPDI convertible preferred stock to redemption amount                                    |  |              |           |        |   |       |  |                                              | (2,617,566  | )                                                               |   |                             |   |       |             |   |   | (2,617,566  | )
|Exercise
          of MSI stock options                                                                         |  |              | 453        |        |   |       |  |                                              | 134         |                                                                 |   |                             |   |       |             |   |   | 134         |  
|Amortization
          of stock based compensation expense                                                      |  |              |           |        |   |       |  |                                              | 520,641     |                                                                 |   |                             |   |       |             |   |   | 520,641     |  
|Reclassification
          of derivative warrant to equity                                                      |  |              |            |        |   |        |  |                                              | 1,910,254   |                                                                 |   |                              |   |       |              |   |   | 1,910,254   |  
|Warrant
          issued to Laurus related to line of credit                                                    |  |              |           |        |   |       |  |                                              | 538,240     |                                                                 |   |                             |   |       |             |   |   | 538,240     |  
|Conversion
          of notes payable and accrued interest in exchange for common stock                         |  |              | 716,669    |        |   | 717    |  |                                              | 994,114     |                                                                 |   |                             |   |       |             |   |   | 994,831     |  
|Acquisition
          costs                                                                                     |  |              |           |        |   |       |  |                                              | (12,422     | )                                                               |   |                             |   |       |             |   |   | (12,422     | )
|Components
          of comprehensive loss:                                                                     |  |              |            |        |   |        |  |                                              |             |                                                                 |   |                              |   |       |              |   |   |             |  
|Net
          loss                                                                                              |  |              |           |        |   |       |  |                                              |            |                                                                 |   |                             |   |       | (14,225,557  | ) |   | (14,225,557 | )
|Change
          in foreign currency translation adjustments                                                    |  |              |           |        |   |       |  |                                              |            |                                                                 | $ | (122,419                     | ) |       |             |   |   | (122,419    | )
|                                                                                                                |  |              |            |        |   |        |  |                                              |             |                                                                 |   |                              |   |       |              |   |   |             |  
|Total
          comprehensive loss                                                                              |  |              |           |        |   |       |  |                                              |            |                                                                 |   |                              |   |       |              |   |   | (14,347,976 | )
|                                                                                                                |  |              |            |        |   |        |  |                                              |             |                                                                 |   |                              |   |       |              |   |   |             |  
|Balance
          at December 31, 2005                                                                          |  |              | 13,326,810 |        | $ | 13,327 |  | $                                            | 119,517,168 |                                                                 | $ | (103,235                     | ) | $     | (132,644,333 | ) | $ | (13,217,073 | )
|                                                                                                                |  |              |            |        |   |        |  |                                              |             |                                                                 |   |                              |   |       |              |   |   |             |  

See accompanying Notes to Consolidated
Financial Statements

F-6

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                         |  |                            |             |      |   |             |  
|---------------------------------------------------------------------------------------- |  | -------------------------- | ----------- | ---- | - | ----------- | -
|                                                                                         |  | Years
  ended December 31, |            
|                                                                                         |  |                            |            
|                                                                                         |  | 2005                       |             | 2004 |  
|                                                                                         |  |                            |             |      |  
|Cash flows from operating
  activities:                                                  |  |                            |             |      |   |             |  
|Net loss                                                                                 |  | $                          | (14,225,557 | )    | $ | (10,438,294 | )
|Adjustments to reconcile net loss to net
  cash used in operating activities:            |  |                            |             |      |   |             |  
|Depreciation                                                                             |  |                            | 1,557,068   |      |   | 2,197,213   |  
|Amortization of intangible assets and
  software development costs                       |  |                            | 3,867,068   |      |   | 1,776,473   |  
|Amortization of non-cash loan discount                                                   |  |                            | 12,735      |      |   |            |  
|Stock-based compensation                                                                 |  |                            | 520,641     |      |   | 1,191,277   |  
|Interest expense paid with common stock                                                  |  |                            |            |      |   | 12,500      |  
|Non-cash interest expense                                                                |  |                            | 1,610,030   |      |   | 447,797     |  
|Non-cash interest expense on Series C
  mandatorily redeemable preferred stock liability |  |                            |            |      |   | 1,703,332   |  
|Non-cash tax expense                                                                     |  |                            | 469,034     |      |   | 400,000     |  
|Share of losses of Front Porch Digital,
  Inc. and related impairment of goodwill        |  |                            |            |      |   | 198,280     |  
|Loss on disposal of assets                                                               |  |                            | 47,809      |      |   | 22,291      |  
|Impairment of goodwill                                                                   |  |                            | 4,151,450   |      |   |            |  
|Gain on revaluation of warrant liability                                                 |  |                            | (390,280    | )    |   |            |  
|Bad debt expense                                                                         |  |                            | 60,608      |      |   | 233,864     |  
|Changes in operating assets and
  liabilities, net of business acquisitions:             |  |                            |             |      |   |             |  
|Accounts and other receivables                                                           |  |                            | 513,921     |      |   | (942,174    | )
|Other current assets                                                                     |  |                            | (562,078    | )    |   | 91,811      |  
|Other assets                                                                             |  |                            | 30,771      |      |   | 45,295      |  
|Accounts payable                                                                         |  |                            | (544,337    | )    |   | (73,065     | )
|Accrued liabilities                                                                      |  |                            | 1,133,631   |      |   | 339,287     |  
|Deferred revenue                                                                         |  |                            | 787,671     |      |   | (738,456    | )
|Other liabilities                                                                        |  |                            | (513,048    | )    |   | (11,784     | )
|                                                                                         |  |                            |             |      |   |             |  
|Net cash used in operating activities                                                    |  |                            | (1,472,863  | )    |   | (3,544,353  | )
|                                                                                         |  |                            |             |      |   |             |  
|Cash flows from investing activities:                                                    |  |                            |             |      |   |             |  
|Purchases of property and equipment                                                      |  |                            | (1,065,172  | )    |   | (1,152,120  | )
|Capitalized software development costs                                                   |  |                            | (1,604,404  | )    |   | (1,044,325  | )
|Acquisition costs                                                                        |  |                            |            |      |   | (198,597    | )
|Proceeds from sale of property and
  equipment                                           |  |                            | 2,808       |      |   | 126,084     |  
|Cash and restricted cash acquired in FPDI
  acquisition (Note 4)                         |  |                            |            |      |   | 4,005,685   |  
|Cash acquired in STAR acquisition (Note
4)                                               |  |                            | 1,597,498   |      |   |            |  
|Cash acquired in PWI acquisition (Note 4)                                                |  |                            | 74,297      |      |   |            |  
|Earnout payment related to PWI acquisition
  (Note 4)                                    |  |                            | (100,000    | )    |   |            |  
|Net change in restricted cash                                                            |  |                            | (908        | )    |   | (638        | )
|Maturities of short-term investments                                                     |  |                            |            |      |   | 3,793,099   |  
|                                                                                         |  |                            |             |      |   |             |  
|Net cash (used in) provided by investing
activities                                      |  |                            | (1,095,881  | )    |   | 5,529,188   |  
|                                                                                         |  |                            |             |      |   |             |  
|Cash flows from financing activities:                                                    |  |                            |             |      |   |             |  
|Payments on capital leases, notes payable
  and other long term liabilities              |  |                            | (11,422,289 | )    |   | (1,966,973  | )
|Proceeds from exercise of stock options and
  purchase of restricted stock               |  |                            | 136         |      |   | 1,977       |  
|Proceeds
    from capital lease line and line of credit                                  |  |                            | 12,099,320  |      |   | 815,654     |  
|Repurchase of common stock                                                               |  |                            |            |      |   | (31,427     | )
|                                                                                         |  |                            |             |      |   |             |  
|Net cash provided by (used in) financing
activities                                      |  |                            | 677,167     |      |   | (1,180,769  | )
|                                                                                         |  |                            |             |      |   |             |  
|Effect of exchange rate changes on cash and cash equivalents                             |  |                            | (68,239     | )    |   | 63,200      |  
|                                                                                         |  |                            |             |      |   |             |  
|Net (decrease) increase in cash and cash
equivalents                                     |  |                            | (1,959,816  | )    |   | 867,266     |  
|Cash and cash equivalents at beginning of year                                           |  |                            | 3,068,458   |      |   | 2,201,192   |  
|                                                                                         |  |                            |             |      |   |             |  
|Cash and cash equivalents at end of year                                                 |  | $                          | 1,108,642   |      | $ | 3,068,458   |  
|                                                                                         |  |                            |             |      |   |             |  

(continued)

F-7

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

|                                                                                 |  |                          |           |      |   |           | 
|-------------------------------------------------------------------------------- |  | ------------------------ | --------- | ---- | - | --------- | 
|                                                                                 |  | Years ended December 31, |          
|                                                                                 |  |                          |          
|                                                                                 |  | 2005                     |           | 2004 |  
|                                                                                 |  |                          |           |      |  
|Supplemental disclosures of
  cash flow information:                             |  |                          |           |      |   |           | 
|Cash paid during the year for interest                                           |  | $                        | 801,454   |      | $ | 202,516   | 
|Supplemental disclosures of non-cash
  investing and financing activities:       |  |                          |           |      |   |           | 
|Net liabilities acquired in FPDI acquisition,
  excluding cash (Note 4)          |  | $                        |          |      | $ | 3,122,007 | 
|Net liabilities acquired in Incentra of CA
  acquisition excluding cash (Note 4) |  |                          | 620,178   |      |   |          | 
|Net assets aquired in PWI acquisition
  excluding cash (Note 4)                  |  |                          | 269,306   |      |   |          | 
|Conversion of notes payable and accrued interest in exchange for common stock    |  |                          | 994,831   |      |   |          | 
|Reclassification of derivative contract to
  liability                           |  |                          |          |      |   | 1,836,534 | 
|Reclassification of derivative contract to
  equity                              |  |                          | 1,910,254 |      |   |          | 
|Purchases of property and equipment
  included in accounts payable               |  |                          | 93,766    |      |   | 130,471   | 

See accompanying Notes to Consolidated
Financial Statements

F-8

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

|    |             
|--- | ------------
|(1) | Organization

Incentra
Solutions, Inc. (which is referred to herein together with its subsidiaries as
we, us or our), formerly Front Porch Digital, Inc. (FPDI), was
organized and incorporated in the state of Nevada. On October 25, 2004, we
changed our name from Front Porch Digital, Inc. to Incentra Solutions, Inc.,
and our common stock now trades on the Over-the-Counter Bulletin Board under
the trading symbol ICNS. We have completed three acquisitions: On August 18,
2004, we acquired ManagedStorage International, Inc., a Delaware corporation
incorporated in March 2000 (MSI); on February 18, 2005, we acquired Incentra of
CA, formerly known as STAR Solutions of Delaware, Inc., a privately-held
Delaware corporation (Incentra of CA ); and on March 30, 2005, we acquired
PWI Technologies, Inc., a privately-held Washington corporation (PWI). The
MSI acquisition was accounted for as a reverse merger, and therefore, MSI was
deemed to be the acquirer for accounting purposes. Accordingly, the
consolidated financial statements presented herein include the results of
operations of MSI for all periods presented and include the results of
operations of the acquired companies from the dates of the acquisitions
forward.

We
market our complete storage solutions to broadcasters under the trade name
Front Porch Digital and to service providers and enterprise clients under the
trade name ManagedStorage International. Through FPDI, we provide a software
and management solution that enables searching, browsing, editing, storage and
on-demand delivery of media-rich content in nearly any digital format. The
software converts audio, video, images, text and data into digital formats for
ease of use and archiving. Through MSI, we deliver comprehensive storage
services, including professional services, hardware/software procurement and
resale, financing solutions and remote monitoring/management services. We focus
on providing data protection solutions and services that ensure that our
customers data is backed-up and recoverable and that meet internal data
retention compliance policies. MSIs remote monitoring and management services
are delivered from its Storage Network Operations Center, which monitors and
manages a multitude of diverse storage infrastructures on a 24x7 basis
throughout the United States, United Kingdom, Bermuda and Japan.

MSI
delivers these services utilizing its proprietary GridWorks Operations Support
System, which enables automated remote monitoring, and management of complete
storage infrastructures and back-up applications. MSI provides outsourcing
solutions for customer data protection needs under long-term contracts.
Customers pay on a monthly basis for storage services based on the number of
assets managed and/or the volume of storage assets utilized.

Through
Incentra of CA and PWI, we deliver complete IT solutions, including
professional services, third-party hardware/software procurement and resale,
financing solutions, maintenance support services (first call) for third-party
hardware and software maintenance and managed storage solutions. Solutions are
sold primarily to enterprise customers in the financial services, government,
hospitality, retail, security, healthcare and manufacturing sectors. Incentra
of CA and PWI primarily service customers in the western United States.

Our
customers are located in North America, Europe, Asia and the Pacific Rim.

Basis of
Presentation

At
December 31, 2005, the consolidated financial statements include Incentra
Solutions, Inc. and its wholly-owned subsidiaries, Front Porch Digital
International, SAS, which is based in France, MSI, which is based in Colorado,
and MSIs wholly-owned subsidiaries, ManagedStorage UK, Inc. and Seabrook
Technologies, Inc., Incentra of CA, which is based in San Diego, California,
and PWI, which is based in Kirkland, Washington. ManagedStorage UK, Inc. and
Seabrook Technologies, Inc. did not have any operating activities during the
year ended December 31, 2005. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Going Concern and Managements Plans

Our
    consolidated financial statements as of December 31, 2005 and for the year
    then ended have been prepared on a going concern basis, which contemplates
    the realization of assets and settlements of liabilities and commitments
    in the normal course of business.

F-9

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 
December 31, 2005 and 2004

|    |                         
|--- | ------------------------
|(1) | Organization (continued)

former owner of Incentra of CA
    a promissory note in the principal amount of $2,500,000 (the STAR
    Note). On August 1, 2005 we elected to cease making payments on the
    STAR Note, which created an event of default. On August 16, 2005, we received
    a demand for arbitration from legal counsel of the former owner. In the event
    the dispute is not resolved in our favor, the full outstanding balance of
    the STAR Note could be accelerated. As a result, the entire balance of the
    STAR Note, which totals $2.4 million, is classified as a current liability
    at December 31, 2005 as it is callable. We do not have the cash available
    to pay such amount and, in such event, we would require additional financing
    to meet our obligation. There can be no assurance that we would be able to
    obtain additional funding when needed, or that such funding, if available,
    will be obtainable on terms acceptable to us. See Note 16.

The
    event of default on the STAR Note created an event of default of certain
    provisions of debt outstanding with Laurus Master Fund Ltd. (Laurus), our
    senior secured lender. As a result, the entire balance of the amount owed
    to Laurus, which totaled $8.8
    million at December 31, 2005 has been classified as a current liability at
    December 31, 2005 as it is callable. We believe we have a good relationship
    with Laurus; however, there is uncertainty regarding our ability to comply
    with required debt covenants in the future which places the debt in a position
    to be called due. This raises substantial doubt about our ability to continue
    as a going concern. Our ability to continue as a going concern is dependent
    on future financial results as well as the arbitration proceeding discussed
    above and, should we continue to be in breach of the covenants on the debt,
    our ability to restructure or otherwise amend the terms of that debt. The
    financial statements do not include any adjustments to reflect the possible
    future effects on the recoverability and classification of assets or the
    amounts and classifications of liabilities that might result from the outcome
    of this uncertainty.

Managements
    plans in regard to these matters are as follows:

If we continue to be in default of our covenants
    in the future, we would, as we have in the past, seek to obtain amendments
    to the debt or waivers of the covenants so that we are no longer in violation.

While
    we believe we will execute our current business plan that calls for
    growth in the business, we will also institute various cost controls to reduce
    operating expenses where necessary. This includes the timely monitoring of
    labor and selling, general and administrative costs.

|    |                         
|--- | ------------------------
|(2) | Share and Per Share Data

In
accordance with generally accepted accounting principles, and as a result of
the MSI acquisition being accounted for as a reverse merger, all share and per
share data prior to the MSI acquisition have been retroactively adjusted to
reflect the 0.3089 to one  exchange of shares occurring in connection with the
merger with MSI, in a manner similar to a reverse stock split, with the
difference in par value being recorded through an offset to additional
paid-in-capital.

On
April 12, 2005, our Board of Directors (the Board) and the holders of the
required number of shares of our capital stock approved an amendment to our
Articles of Incorporation to effect a one-for-ten reverse stock split effective
June 9, 2005. All references to shares, options, and warrants in the year ended
December 31, 2005 and in prior periods, have been adjusted to reflect the
post-reverse split amounts.

|    |                                           
|--- | ------------------------------------------
|(3) | Summary of Significant Accounting Policies

Use of Estimates

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. We have
recorded transactions that include the issuance of options and warrants to
purchase shares of our preferred and common stock. The accounting for such
securities is based upon fair values of our equity securities and other
valuation criteria that were determined by our Board and us. We believe these
estimates of fair value are reasonable. Other significant estimates made by us
include those related to fair values of acquired intangible assets, and the
establishment of an allowance for estimates of uncollectible accounts
receivable.

Reclassifications

Certain
reclassifications of previously reported amounts have been made to conform to
the current period presentation.

F-10

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|    |                                                       
|--- | ------------------------------------------------------
|(3) | Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

We
consider all highly-liquid investments purchased with an original maturity of
three months or less to be cash equivalents.

Restricted Cash

We
have restricted cash of $80,956 at December 31, 2005, (classified as a
non-current asset) which secures a letter of credit issued in connection with an
operating lease (Note 9).

Property and Equipment

Property
and equipment, if acquired at the formation date of MSI or through acquisition,
have been recorded at the estimated fair value at the acquisition date.
Otherwise, all other property and equipment have been recorded at cost.
Property and equipment are depreciated on a straight-line basis over their
respective estimated useful lives ranging from two to seven years. Equipment
recorded under capital leases and leasehold improvements are amortized using
the straight-line method over the shorter of the respective lease term or
estimated useful life of the asset.

Impairment of Long-Lived Assets

In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we review the carrying value of long-lived
assets, including property and equipment and amortizable intangible assets, to
determine whether there are any indications of impairment. Impairment of
long-lived assets is assessed by a comparison of the carrying amount of an
asset to expected future cash flows to be generated by the asset. If the assets
are considered to be impaired, the impairment recognized is measured by the
amount by which the carrying amount of the assets exceeds the estimated fair
value of the assets.

Goodwill and Correction of Error in Accounting for Goodwill

Goodwill
represents the excess of the purchase price  over the net of the fair value
of the identifiable tangible and intangible assets acquired and the fair value
of liabilities assumed in acquisitions. SFAS No. 142, Goodwill and Other
Intangible Assets, (SFAS 142) requires the testing of goodwill and indefinite-lived
intangible assets for impairment at least annually. We test goodwill for impairment
 in the fourth quarter each year.

With
    the acquisitions of Incentra of CA in February 2005 and PWI in March 2005,
    we recorded goodwill of $6,177,686 and $3,831,534, respectively. The fair
    value of our reporting units used in determination of the goodwill impairment
    is computed using the expected present value of associated future cash flows.
    As more fully discussed in Note 16, operating profits and cash flows were
    lower than expected in the fourth quarter of 2005 for Incentra of CA. Based
    on that trend, the earnings forecast for the next five years was revised.
    Therefore, during the fourth quarter of 2005 we determined that the goodwill
    associated with the Incentra of CA acquisition was impaired and accordingly
recorded an impairment loss of $4,151,450.

Prior
  to the MSI acquisition, MSI accounted for an investment in common stock and
  warrants of FPDI using the equity method of accounting. The excess estimated
  fair value of FPDIs common stock and warrants over MSIs share of FPDIs
  net assets at the date of the investment purchase (July 31, 2002), was recognized
  as goodwill. In 2004, MSI reviewed such goodwill for impairment and recognized
  an impairment loss when there was a loss in value in the equity method investment,
  which was other than a temporary decline. For the year ended December 31, 2004,
  MSI recorded an impairment loss of $198,280.

In
    connection with preparing the December 31, 2005, consolidated financial statements,
    management  determined that an error was made in accounting for goodwill
    recognized in connection with business acquisitions that occurred in the
    first quarter of 2005. As a result of the error, goodwill was overstated
    by approximately $4.5 million and shareholders deficit was understated
    by the same amount at March 31, June 30, and September 30, 2005. There was
    no effect on the Companys consolidated statements of operations for
    the year ended December 31, 2005 or for any quarter of 2005 as a result of
    this error. The error was corrected in the fourth quarter of 2005 by decreasing
    goodwill and increasing shareholders deficit by $4.5 million.

Income Taxes

Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which

F-11

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 
December 31, 2005 and 2004

|    |                                                      
|--- | -----------------------------------------------------
|(3) | Summary of Significant Accounting Policie (continued)

those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

Revenue Recognition

Revenue
is recognized when all of the following criteria are met: persuasive evidence
of an agreement exists, delivery has occurred or services have been rendered,
the sales price is fixed or determinable, and collectibility is reasonably
assured.

We
license software under license agreements and provide professional services,
including training, installation, consulting and maintenance. License fee
revenues are recognized when a license agreement has been signed, the software
product has been shipped, the fees are fixed and determinable, collection is
reasonably assured, and no significant vendor obligations remain.

We
allocate revenue to each component of a contract based on objective evidence of
its fair value, as established by management. Because licensing of software is
generally not dependent on the professional services portion of the contract,
software revenue is generally recognized upon delivery, unless a contract
exists with the customer requiring customer acceptance.

Fees
for first call maintenance agreements are recognized ratably over the terms of
the agreements. Maintenance is generally billed in advance, resulting in
deferred revenue.

We
also provide software-related professional services. Services are generally
provided on a time-and-materials basis and revenue is recognized as the
services are provided.

Revenues
from storage services are recognized at the time the services are provided and
are billed on a monthly basis. Fees received for up-front implementation
services are deferred and recognized over the term of the arrangement. Deferred
revenue is recorded for billings sent to or paid by customers for whom we have
not yet performed the related services.

Revenues
from product sales, including the resale of third-party maintenance contracts,
are recognized when shipped. Consulting revenues are recognized when the
services are performed.

Cost of Revenue

Cost
of revenue consists primarily of direct labor, cost of hardware, depreciation
($1,091,321 in 2005 and $2,014,156 in 2004), amortization, third party
royalties and licenses and facilities costs.

Advertising Expenses

All
advertising and promotion costs are expensed as incurred. Total advertising
expenses incurred were $60,586 and $80,844 for the years ended December 31,
2005 and 2004, respectively.

Software Development Costs

We
account for costs related to software developed for internal use and marketed
for external use in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed. MSIs GridWorks software product is used
internally for providing services to our customers and is also marketed
separately as a stand-alone product. FPDIs DIVArchive software product is
marketed solely as a stand-alone product. As required by SFAS No. 86, we
capitalize costs in developing software products upon determination that
technological feasibility has been established for the product, if that product
is to be sold, leased or otherwise marketed. Costs incurred prior to the
establishment of technological feasibility are charged to research and
development expense. When the product or enhancement is available for general
release to customers, capitalization is ceased, and previously capitalized
costs are amortized based on current and future revenue for the product, but
with an annual

F-12

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 
December 31, 2005 and 2004

|    |                                                       
|--- | ------------------------------------------------------
|(3) | Summary of Significant Accounting Policies(continued)

amortization amount
at least equal to the straight-line amortization over an estimated useful life
of three years. For the years ended December 31, 2005 and 2004, capitalized
software development costs, which related primarily to enhancements to the
Companys GridWorks and DIVArchive software solutions totaled $1,604,404
and $1,044,325, respectively. These costs are amortized on a straight-line basis
over the estimated life, typically three years. For the years ended December
31, 2005 and 2004, $592,259 and $384,974, respectively, were charged to expense.
As of December 31, 2005, the unamortized portion of software development costs
was $2,133,203.

Deferred Loan Costs

Deferred
loan costs, included in other non-current assets, are amortized over the
three-year term of the related loan using the straight-line method.

Research and Development Costs

Research
and development costs are expensed as incurred. For the years ended December
31, 2005 and 2004, research and development costs were $101,760 and $134,793,
respectively.

Foreign Currency Translation and Transactions

The
balance sheet accounts of our international subsidiary (Front Porch Digital
International, SAS) are translated using the exchange rate in effect at the
balance sheet date, and the results of operations are translated at the average
exchange rates during the year. At December 31, 2005, we reported a cumulative
translation loss of $103,235, as a component of accumulated other comprehensive
income (loss). We are also subject to foreign exchange transaction exposure when our
subsidiary transacts business in a currency other than its own functional
currency. The effects of exchange rate fluctuations in remeasuring foreign
currency transactions for the years ended December 31, 2005 and 2004 were
losses of $43,209 and $24,756, respectively.

In
June 2004, we began managing our foreign currency cash flow exposure through
the use of $/Euro forward contracts, which are considered derivative
instruments and which are recorded as either an asset or liability, measured
    at fair value. Changes in fair value are recognized in the statement of
operations. We recorded a $59,900 realized gain on these contracts during the
    year ended December 31, 2005, which represented the change in the fair value
    of the foreign currency forward contract related to the difference between
    changes in the spot and forward rates excluded from the assessment of hedge
    effectiveness. We recorded a realized loss of $144,086 and an unrealized
    loss of $134,500 on these contracts during the year ended December 31, 2004.
    We had no contracts outstanding at December 31, 2005.

Accounting for Obligations and Instruments Potentially Settled
      in the Companys Common Stock

We
  account for obligations and instruments potentially to be settled in our stock
    in  accordance with 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 No. 00-19)
  This issue addresses the initial balance sheet classification and measurement
  of contracts that are indexed to, and potentially settled in, our own stock.

Under
  EITF No. 00-19 contracts are initially classified as equity or as either assets
  or liabilities, depending on the situation. All contracts are initially
  measured at fair value and subsequently accounted for based on the then current
  classification. Contracts initially classified as equity do not recognize
  subsequent changes in fair value as long as the contracts continue to be
  classified as equity. For contracts classified as assets or liabilities, we
  report changes in fair value in earnings and disclose these changes in the
  financial statements as long as the contracts remain classified as assets or
  liabilities. If contracts classified as assets or liabilities are ultimately
  settled in shares, any previously reported gains or losses on those contracts
  continue to be included in earnings. The classification of a contract is
  reassessed at each balance sheet date.

Per Share Data

We
report our earnings (loss) per share in accordance with SFAS No. 128, Accounting for Earnings Per Share. Basic
loss per share is calculated using the net loss allocable to common
shareholders divided by the weighted average common shares outstanding during
the period. In accordance with accounting requirements for reverse mergers and
stock splits, the historical loss per share amounts have been retroactively
restated to reflect our capital structure. Due to our net losses for the
periods presented, shares from the assumed conversion of outstanding warrants,
options, convertible preferred stock and convertible debt have been omitted
from the computations of diluted loss per share for the years ended December 31,
2005 and 2004 because the effect would be antidilutive. 13.2 million and
10.1 million shares of common stock issuable upon the conversion of outstanding
convertible preferred stock, the exercise of options and warrants, and
restricted stock totaling 23.3 million shares have been omitted from the
computations of basic and diluted
loss per share for the year ended December 31, 2005 and 2004, respectively,
because the effect would be antidilutive.

F-13

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|    |                                                         
|--- | --------------------------------------------------------
|(3) | Summary of Significant Accounting Policies
  (continued)

Stock-Based Compensation

We
apply the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25 (APB No. 25), Accounting
for Stock Issued to Employees, and related interpretations,
including Financial Accounting Standards Board (FASB) Interpretation
No. 44 (FIN 44), Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion No.
25, to account for our fixed-plan stock options. Under this method,
compensation expense is generally recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. SFAS
No. 123, Accounting for Stock-Based
Compensationand SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123, established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As permitted by existing accounting standards, we
have elected to continue to apply the intrinsic value-based method of accounting
described above, and have adopted only the disclosure requirements of Statement
123, as amended. The following table illustrates the effect on net loss if the
fair value-based method had been applied to all outstanding and unvested awards
in the years ended December 31, 2005 and 2004. All amounts except per share
amounts in (000s):

|                                                                                          |  |                            |         |      |   |         |  
|----------------------------------------------------------------------------------------- |  | -------------------------- | ------- | ---- | - | ------- | -
|                                                                                          |  | Years
  ended December 31, |        
|                                                                                          |  |                            |        
|                                                                                          |  | 2005                       |         | 2004 |  
|                                                                                          |  |                            |         |      |  
|Net loss before amounts attributable to
  common shareholders, as reported                |  | $                          | (14,226 | )    | $ | (10,438 | )
|Add stock-based employee compensation
  expense included in reported net loss, net of tax |  |                            | 521     |      |   | 1,191   |  
|Deduct total stock-based employee
  compensation expense determined under                 |  |                            |         |      |   |         |  
|fair value-based method for all awards, net
  of tax                                      |  |                            | (1,837  | )    |   | (1,853  | )
|                                                                                          |  |                            |         |      |   |         |  
|Pro forma net loss before deemed dividends
  and accretion on preferred stock             |  | $                          | (15,542 | )    | $ | (11,100 | )
|                                                                                          |  |                            |         |      |   |         |  
|Net loss per weighted average common share
  outstandingbasic and diluted  pro forma    |  | $                          | (1.45   | )    | $ | (2.44   | )
|                                                                                          |  |                            |         |      |   |         |  
|Net loss per weighted average common share
  outstandingbasic and diluted  as reported  |  | $                          | (1.34   | )    | $ | (2.31   | )
|                                                                                          |  |                            |         |      |   |         |  

In
determining the fair value of stock options granted by us in 2005, and thus
determining pro forma compensation expense under the fair value method, we
utilized the Black-Scholes valuation model with the following weighted average
assumptions: dividend yield of 0%, risk free interest rates ranging from 3.64%
to 4.36%, expected volatility ranging from 111% to 113%, and expected lives of
    three years. The weighted average fair value of these options granted during
    2005 was $1.62.

In
determining the fair value of stock options granted by us in 2004, and thus
determining pro forma compensation expense under the fair value method, we utilized
the Black-Scholes valuation model with the following weighted average
assumptions: dividend yield of 0%, risk free interest rates ranging from 1.2%
to 2.09%, expected volatility of 143%, and expected lives of three years. The
weighted average fair value of these options granted during 2004 was $2.80.

For
purposes of pro forma disclosures, the estimated fair value of the options was
amortized to expense over the vesting period of the related options. Previously
recognized compensation expense for forfeited options was included as a
reduction of compensation expense in the period of forfeiture.

F-14

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|    |                                                         
|--- | --------------------------------------------------------
|(3) | Summary of Significant Accounting Policies
  (continued)

Financial Instruments

The
carrying amounts of financial instruments held by us, which include cash
equivalents, restricted cash, accounts receivable, and accounts payable,
approximate fair value due to their short duration. The carrying values of note
payable and other non-current obligations approximate fair values based upon
market rates currently available us. The fair value of a Letter of Credit issued
in conjunction with a lease agreement (Note 8) approximates the fees paid to
obtain it.

Concentrations of Credit Risk

We sell our products and services throughout the United
States, Europe, Asia and the Pacific Rim. We perform periodic credit evaluations of our
customersfinancial condition and generally do not require collateral. Accounts
receivable are reported at their outstanding unpaid principal balances reduced
by an allowance for doubtful accounts. We estimate doubtful accounts based on
historical bad debts, factors related to specific customers ability to pay and
current economic trends. We write off accounts receivable against the allowance
when a balance is determined to be uncollectible. Credit losses have been
within managements expectations. For the year ended December 31, 2005,
aggregate revenues from customers located in Europe, Asia and the Pacific Rim
amounted to $13.4 million or 26% of total revenue, while revenues from
customers located in North America totaled $37.4 million or 74% of total
revenue. For the year ended December 31, 2004, aggregate revenues from
customers located in Europe, Asia and the Pacific Rim amounted to $4.7 million
or 35% of total revenue, while revenues from customers located in North America
totaled $8.6 million or 65% of total revenue. For the year ended December 31,
2005, one customer accounted for 11% of total revenues. One customer accounted
for 16% of accounts receivable at December 31, 2005. For the year ended
December 31, 2004, revenue from two customers individually accounted for
approximately 13% and 11% of total revenues.

The
following is a breakdown of our revenues and long-lived assets by geographic
    area (in thousands):

|Year Ended December
        31, 2005 |               |              |       |   |        |  |   |        | 
|------------------------------------ | ------------- | ------------ | ----- | - | ------ |  | - | ------ | 
|                                     | North America | Europe/Asia* | Total
|Revenues                             | $             | 37,420       |       | $ | 13,412 |  | $ | 50,832 | 
|Long-lived assets, net               |               | 1,625        |       |   | 605    |  |   | 2,230  | 
|                                     |               |              |       |   |        |  |   |        | 
|Year Ended December 31, 2004         |               |              |       |   |        |  |   |        | 
|                                     |               |              |       |   |        |  |   |        | 
|Revenues                             |               | 8,575        |       |   | 4,710  |  |   | 13,285 | 
|Long-lived assets, net               |               | 1,779        |       |   | 674    |  |   | 2,453  | 

Recently Issued Accounting Pronouncements

In
December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which addresses the accounting for share-based compensation transactions. SFAS
No. 123(R) eliminates the ability to account for share-based compensation
transactions using APB 25, and generally requires instead that such transactions
be accounted and recognized in the statement of operations based on their fair
value. SFAS No. 123(R) will be effective for us during the first quarter of
2006. We have evaluated the provisions of this standard, and we expect that the
implementation of this standard will have a material impact on our financial
position and results of operations.

In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which changes the requirements for the accounting and reporting
of a change in accounting principle and applies to all voluntary changes in
accounting principles. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. APB No. 20 Accounting Changes required
that most voluntary changes in accounting principle be recognized by including
in net income of the period of the change the cumulative effect of changing to
the new accounting principles. This statement requires retrospective
application to prior period financial statements of changes in accounting
principles, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. The provisions of SFAS No. 154
are effective for fiscal years beginning after December 15, 2005. We do not expect
this statement to have a material impact on our financial position or results
of operations.

|    |             
|--- | ------------
|(4) | Acquisitions

(A) Acquisition of Incentra of CA, formerly
known as STAR Solutions of Delaware, Inc.

On
February 18, 2005 (the STAR Closing Date), we acquired all of the outstanding
capital stock of Incentra of CA. The acquisition was effected pursuant to an
Agreement and Plan of Merger (the STAR Merger Agreement). The results of
operations of Incentra of CA are included in our consolidated financial
statements beginning on February 18, 2005.

F-15

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|    |                         
|--- | ------------------------
|(4) | Acquisitions (continued)

A) Acquisition of Incentra of CA, formerly
known as STAR Solutions of Delaware, Inc. (continued)

Pursuant
to the STAR Merger Agreement, the purchase price consisted of (i) a cash
payment of $1,500,000, (ii) the issuance of 1,261,756 unregistered shares of
our common stock valued at $3,136,364 (based upon the market price three days
before and after the acquisition date) and (iii) the issuance of an unsecured
convertible promissory note for $2,500,000 (the STAR Note). We
entered  into a consulting agreement with the seller pursuant to which we agreed
to pay consulting fees in the amount of $500,000 which was included as part
of the purchase price. We paid approximately $400,000 in investment banking fees
associated with the transaction.

Interest
on the STAR Note accrues at an annual rate of 0.5%, which has been discounted
    by $300,000 to reflect a fair value rate of interest. The remaining principal
    of $2,374,139 is payable in eight consecutive quarterly payments of $251,722,
which commenced on August 1, 2005, and a single payment of $377,583 on August
    1, 2007 (each of the foregoing dates, a STAR Payment Due Date).
    We elected not to make the August 1, 2005 payment within the grace period
    allowed under the STAR Note, which created an event of default on the STAR
    Note as of August 11, 2005. As of December 31, 2005, we reclassified
    $1.3 million of the debt to current liabilities based on the default, as
    the debt is now callable. Refer to Note 16.

All
or a portion of the outstanding principal and interest due under the STAR Note
may be converted by the holder into shares of our common stock at any time from
the end of each calendar quarter immediately preceding a STAR Payment Due Date
until and including one day prior to such STAR Payment Due Date. The STAR Note
is initially convertible at a conversion price equal to the greater of (i)
$4.00 or (ii) seventy percent (70%) of the average closing price of our common
stock, as reported on the Over-The-Counter Bulletin Board, for the ten (10)
consecutive trading days ending on and including the last day of the calendar
quarter immediately preceding the applicable STAR Payment Due Date. As of
December 31, 2005 and pending the results of the arbitration proceedings
described in Note 16, the principal balance on the STAR Note was convertible
into a maximum of 593,535 shares of our common stock. Our obligations under the
STAR Note are not secured by any of our assets.

Concurrent
with the consummation of the acquisition, we entered into a registration rights
agreement with the seller, pursuant to which, at any time after March 1, 2006,
the seller shall have the right to cause us to register under the Securities
Act of 1933, as amended, the shares of common stock issued to the seller in the
acquisition and the shares of common stock issuable upon conversion of the STAR
Note. The agreement also provides that, after March 1, 2006, the seller shall
have piggy-back registration rights.

The
following represents the purchase price allocation at the date of
the Incentra of CA acquisition:

|                                       |  |   |            |  
|-------------------------------------- |  | - | ---------- | -
|Cash and
  cash equivalents            |  | $ | 1,597,498  |  
|Other
  current assets                 |  |   | 824,998    |  
|Property and
  equipment               |  |   | 20,909     |  
|Other assets                           |  |   | 7,005      |  
|Goodwill.                              |  |   | 6,177,686  |  
|Customer
  relationships (5 year life) |  |   | 540,000    |  
|Current
  liabilities                  |  |   | (1,473,088 | )
|                                       |  |   |            |  
|Total
  purchase price                 |  | $ | 7,695,008  |  
|                                       |  |   |            |  

The purchase price
 allocation was considered final as of December 31, 2005. As a result of the
 goodwill impairment test we completed in the fourth quarter of 2005
in accordance with SFAS 142, the amount allocated to goodwill was
considered impaired and a loss of $4,151,450 was charged to income in the
fourth quarter of 2005.

In
connection with the acquisition, on February 18, 2005, Incentra of CA obtained
a revolving line of credit from a bank that provided for borrowings until March
1, 2007, of up to $5,000,000. This line of credit and all the related accrued
interest were paid in full on July 5, 2005 in connection with the New Laurus
Financing Agreement as discussed in Note 9(C).

F-16

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|    |                         
|--- | ------------------------
|(4) | Acquisitions (continued)

B) Acquisition of PWI Technologies, Inc.

On
March 30, 2005 (the PWI Closing Date), we acquired all of the outstanding
capital stock of PWI. The acquisition was effected pursuant to a Stock Purchase
Agreement, dated as of the PWI Closing Date (the PWI Stock Purchase
Agreement).

The
purchase price of PWI consisted of $2,350,000 in cash and 841,934 shares of our
common stock valued at $1,683,868 (based upon the market price three days
before and after the acquisition date). In addition, the former PWI
shareholders have the opportunity to earn an additional $200,000 in cash and
$1,000,000 in our common stock based upon achieving certain earn out
requirements. During the year ended December 31, 2005, the former PWI
shareholders achieved a partial earn out of $100,000 which was paid to them in
cash. As a result of the earn out payment, the purchase price (goodwill) was
increased by $100,000. Should PWI exceed the earn-out requirements, its former
shareholders can earn additional common stock having a value equal to PWIs
EBITDA contribution over the earn out requirement. We paid approximately
$250,000 in investment banking fees in connection with the transaction.

Concurrently
with the consummation of the acquisition, we granted registration rights with
respect to the shares of our common stock issued in the acquisition. Pursuant
to the registration rights agreement, at any time after March 31, 2006, the
holders of such rights shall have the right to cause us to register under the
Securities Act of 1933, as amended, the shares of our common stock issued on
the PWI Closing Date and the shares of common stock issuable pursuant to the
earn-out described above. The agreement also provides that, after March 31,
2006, the holders have piggy-back registration rights with respect to
such shares.

In
connection with the consummation of the acquisition, the Chief Executive
Officer of PWI prior to the acquisition was appointed President of PWI. PWI
entered into an at-will employment agreement dated as of the PWI Closing Date
that provides that the President will receive an initial annual base salary of
$211,500. The employment agreement also provides that the President may
terminate the agreement upon thirty (30) days prior written notice and that PWI
may terminate employment, with or without cause, at any time upon written
notice. In addition, the Presidents right to receive his pro rata share of the
earn-out described above is subject to his continued employment with PWI for a
period of at least one year from the date of the agreement, except in cases of
his death or disability.

The
following represents the purchase price allocation at the date of
the PWI acquisition:

|                                       |  |   |            |  
|-------------------------------------- |  | - | ---------- | -
|Cash and
  cash equivalents            |  | $ | 74,297     |  
|Other
  current assets                 |  |   | 7,009,601  |  
|Property and
  equipment               |  |   | 173,610    |  
|Other assets                           |  |   | 28,010     |  
|Goodwill                               |  |   | 3,831,534  |  
|Customer
  relationships (5 year life) |  |   | 310,000    |  
|Current
  liabilities                  |  |   | (6,877,351 | )
|Other
  liabilities                    |  |   | (64,564    | )
|                                       |  |   |            |  
|Total
  purchase price                 |  | $ | 4,485,137  |  
|                                       |  |   |            |  

The purchase price
allocation was considered final as of December 31, 2005.

Financing
for the cash component of the acquisition was provided by a bank through an
existing line of credit (LOC) that was established as part of the acquisition
of Incentra of CA. In connection with the financing, the LOC was amended to
make PWI a co-borrower under the agreements and to modify certain financial
covenants to accommodate the addition of PWI to the LOC. The LOC and related
accrued interest were paid in full on July 5, 2005, in connection with the New
Laurus Financing Agreement, as discussed in Note 9 (C) to these consolidated
financial statements.

F-17

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 
December 31, 2005 and 2004

|    |                         
|--- | ------------------------
|(4) | Acquisitions (continued)

C) Acquisition of ManagedStorage
International, Inc.

On
August 18, 2004 (the MSI Acquisition Date), we acquired all of the
outstanding capital stock of MSI. The acquisition of MSI by us was accounted
for as a reverse merger because on a post-merger basis, the former MSI
shareholders held, immediately following the acquisition on the MSI Acquisition
Date, a majority of our outstanding common stock on a voting and diluted basis.
As a result, MSI was deemed to be the acquirer for accounting purposes.
Accordingly, the consolidated financial statements presented herein include the
financial statements of MSI for all periods prior to the MSI Acquisition Date
and the financial statements of the consolidated companies from the MSI
Acquisition Date forward. Historical share and per share amounts for periods
prior to the MSI Acquisition Date have been retroactively restated to reflect
the exchange ratio established in the transaction, in a manner similar to a
reverse stock split, with the difference in par values being recorded as an
offset to additional paid-in capital. The restated consolidated accumulated
deficit of the accounting acquirer (MSI) has been carried forward after the MSI
Acquisition. The MSI Acquisition was also accounted for as a step acquisition
as it occurred in multiple steps over the period from July 31, 2002, when MSI
sold to us its French subsidiary. After the acquisition of MSI, the former MSI
shareholders beneficially owned approximately 64% of our outstanding common
stock, after giving effect to the conversion of the Series A Preferred Stock.

D) Proforma Results

The
following unaudited pro forma financial information presents our combined
results of operations as if the acquisitions described in (A), (B) and (C)
above had occurred as of the beginning of each of the periods reported below.
The unaudited pro forma financial information is not intended to represent or
be indicative of the consolidated results of operations that would have been
reported by us had the acquisitions been completed as of the beginning of the
periods presented, and should not be taken as representative of our future
consolidated results of operations or financial condition. Unaudited pro forma
    results were as follows for the years ended December 31, 2005 and 2004:

|                                                                                 |  |                                  |             |             |   |             |  
|-------------------------------------------------------------------------------- |  | -------------------------------- | ----------- | ----------- | - | ----------- | -
|                                                                                 |  | For the years ended December 31, |            
|                                                                                 |  |                                  |            
|                                                                                 |  | 2005                             |             | 2004        |  
|                                                                                 |  |                                  |             |             |  
|                                                                                 |  | (Unaudited)                      |             | (Unaudited) |  
|Revenue                                                                          |  | $                                | 61,275,697  |             | $ | 56,517,509  |  
|Cost of revenue                                                                  |  |                                  | 43,412,888  |             |   | 39,744,908  |  
|                                                                                 |  |                                  |             |             |   |             |  
|Gross margin                                                                     |  |                                  | 17,862,809  |             |   | 16,772,601  |  
|Operating expenses                                                               |  |                                  | 29,720,088  |             |   | 25,677,685  |  
|                                                                                 |  |                                  |             |             |   |             |  
|Loss from operations                                                             |  |                                  | (11,857,279 | )           |   | (8,905,084  | )
|Other expense, net                                                               |  |                                  | (1,795,951  | )           |   | (3,403,691  | )
|Income tax expense                                                               |  |                                  | (470,641    | )           |   | (400,000    | )
|                                                                                 |  |                                  |             |             |   |             |  
|Net loss                                                                         |  |                                  | (14,123,871 | )           |   | (12,708,775 | )
|Dividends on redeemable preferred stock                                          |  |                                  |            |             |   | (348,493    | )
|Accretion of redeemable preferred stock to redemption amount                     |  |                                  | (2,617,566  | )           |   | (990,826    | )
|                                                                                 |  |                                  |             |             |   |             |  
|Net loss applicable to common shareholders                                       |  | $                                | (16,741,437 | )           | $ | (14,048,094 | )
|                                                                                 |  |                                  |             |             |   |             |  
|Net loss per share applicable to common shareholders-basic
          and diluted |  | $                                | (1.33       | )           | $ | (1.31       | )
|                                                                                 |  |                                  |             |             |   |             |  

F-18

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 
December 31, 2005 and 2004

|    |                       
|--- | ----------------------
|(5) | Property and Equipment

Property
and equipment consists of the following as of December 31, 2005:

|                                 |  |   |            |  
|-------------------------------- |  | - | ---------- | -
|Computer
  equipment             |  | $ | 4,865,823  |  
|Software                         |  |   | 1,591,440  |  
|Office
  furniture and equipment |  |   | 631,135    |  
|Leasehold
  improvements         |  |   | 63,246     |  
|Assets under
  construction      |  |   | 114,886    |  
|                                 |  |   |            |  
|                                 |  |   | 7,266,530  |  
|Less
  accumulated depreciation  |  |   | (5,036,329 | )
|                                 |  |   |            |  
|                                 |  | $ | 2,230,201  |  
|                                 |  |   |            |  

Depreciation
expense for the years ended December 31, 2005 and 2004 was $1,557,068 and
$2,197,213, respectively.

Included
in property and equipment is equipment under capital lease with a cost of
$1,512,476 and accumulated depreciation of $669,278 at December 31, 2005.

|    |                  
|--- | -----------------
|(6) | Intangible Assets

Intangible
assets consist of the following as of December 31, 2005:

|                                                                |  |   |            |  
|--------------------------------------------------------------- |  | - | ---------- | -
|Acquired
  customer baseFPDI (life of 10 years)                |  | $ | 10,039,786 |  
|Intellectual
  propertyDIVArchive (life of 5 years)            |  |   | 6,600,000  |  
|Acquired
  customer baseMSI (life of 3 years)                  |  |   | 2,599,714  |  
|Acquired
  customer relationshipsIncentra of CA (life 5 years) |  |   | 540,000    |  
|Acquired
  customer relationshipsPWI (life 5 years)            |  |   | 310,000    |  
|                                                                |  |   |            |  
|                                                                |  |   | 20,089,500 |  
|Less
  accumulated amortization                                 |  |   | (6,404,141 | )
|                                                                |  |   |            |  
|Intangible
  assets, net                                        |  | $ | 13,685,359 |  
|                                                                |  |   |            |  

Amortization
expense for the years ended December 31, 2005 and 2004 was $3,867,068 and
$1,776,473, respectively. Estimated amortization expense for each of the five
succeeding years is as follows:

|                           |  |   |            | 
|-------------------------- |  | - | ---------- | 
|Year ending
  December 31: |  |   |            | 
|2006                       |  | $ | 2,515,030  | 
|2007                       |  |   | 2,493,978  | 
|2008                       |  |   | 2,493,978  | 
|2009                       |  |   | 1,979,007  | 
|2010                       |  |   | 1,032,978  | 
|Thereafter                 |  |   | 3,170,388  | 
|                           |  |   |            | 
|                           |  | $ | 13,685,359 | 
|                           |  |   |            | 

F-19

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 
December 31, 2005 and 2004

|    |                 
|--- | ----------------
|(7) | Accrued expenses

Accrued
expenses consisted of the following as of December 31, 2005:

|                                    |  |   |           | 
|----------------------------------- |  | - | --------- | 
|Wages,
  benefits and payroll taxes |  | $ | 2,687,296 | 
|Professional
  fees                 |  |   | 420,229   | 
|Customer
  Deposits                 |  |   | 263,738   | 
|Taxes, other
  than income taxes    |  |   | 632,074   | 
|Other
  accrued payables            |  |   | 1,341,138 | 
|                                    |  |   |           | 
|                                    |  | $ | 5,344,475 | 
|                                    |  |   |           | 

|    |                              
|--- | -----------------------------
|(8) | Commitments and Contingencies

We
have employment agreements with certain executives that provide for up to one
year of salary upon termination with the Company.

We
lease facilities and equipment under non-cancelable capital and operating
leases. Rental expense relating to operating leases was $1,176,399 and $536,192
for the years ended December 31, 2005 and 2004, respectively. Certain of the
operating lease agreements have renewal provisions, which range from
month-to-month to 24-month terms.

A
letter of credit was entered into as additional security for an operating lease
due to our limited cash resources at the time the lease was signed. The
agreement requires a letter of credit in decreasing amounts through the
expiration of the lease on September 30, 2007. The letter of credit expires on
April 1st of every year and is automatically extended without written amendment
every year and would be used to pay rent on the Broomfield, Colorado facility
if we were unable to make the monthly rent payments. At December 31, 2005, the
amount of the letter of credit is $80,956. The letter of credit is secured by
restricted cash in the same amount.

Future
minimum lease payments as of December 31, 2005 are as follows:

|                                        |  |                  |         |                    |   |           | 
|--------------------------------------- |  | ---------------- | ------- | ------------------ | - | --------- | 
|                                        |  |                  |         |                    |  
|                                        |  | Capital
  leases |         | Operating
  leases |  
|                                        |  |                  |         |                    |  
|Year ending
  December 31:              |  |                  |         |                    |   |           | 
|2006                                    |  | $                | 853,936 |                    | $ | 706,781   | 
|2007                                    |  |                  | 28,035  |                    |   | 538,251   | 
|2008                                    |  |                  | 7,314   |                    |   | 184,823   | 
|2009                                    |  |                  |        |                    |   | 113,038   | 
|2010 and thereafter                     |  |                  |        |                    |   | 440,311   | 
|                                        |  |                  |         |                    |   |           | 
|Total minimum lease payments            |  |                  | 889,285 |                    | $ | 1,983,204 | 
|                                        |  |                  |         |                    |   |           | 
|Less amounts representing interest      |  |                  | (57,750 | )                  |   |           | 
|                                        |  |                  |         |                    |   |           | 
|Present value of minimum lease payments |  | $                | 831,535 |                    |   |           | 
|                                        |  |                  |         |                    |   |           | 

F-20

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 
December 31, 2005 and 2004

|    |                                                                
|--- | ---------------------------------------------------------------
|(9) | Note Payable, Capital Leases, and Other
  Long-Term Obligations

The
following is a summary of our long-term debt as of December 31, 2005:

|                                      |  |   |             |  
|------------------------------------- |  | - | ----------- | -
|Senior
  secured convertible note (A) |  | $ | 2,262,968   |  
|Capital
  leases (B)                  |  |   | 831,535     |  
|Line of
  credit (C)                  |  |   | 5,513,244   |  
|STAR Note
  (D)                       |  |   | 2,106,281   |  
|Other
  obligations (E)               |  |   | 656,545     |  
|                                      |  |   |             |  
|                                      |  |   | 11,370,573  |  
|Less current
  portion                |  |   | (11,066,921 | )
|                                      |  |   |             |  
|Long-term
  portion                   |  | $ | 303,652     |  
|                                      |  |   |             |  

|    |                                
|--- | -------------------------------
|(A) | Senior Secured Convertible Note

On
the MSI Acquisition Date, liabilities assumed in the MSI Acquisition included
the fair value of a convertible note. This convertible note originated on May
13, 2004, when we consummated a private placement pursuant to which we issued a
secured convertible term note due May 13, 2007 in the principal amount of
$5,000,000 (the Laurus Note), and we issued a common stock purchase warrant
entitling the holder to purchase 443,500 shares of common stock (the Laurus
Warrant) at $4.80 per share. The Laurus Note and the Laurus Warrant were sold
to Laurus Master Fund, Ltd. (Laurus), for a purchase price of $5,000,000. The
principal and unpaid interest on the Laurus Note is convertible into shares of
our common stock at a price of $3.00 per share, subject to adjustments for standard antidilution
provisions.

In
connection with the issuance of the Laurus Note, we recorded the fair value of
the Laurus Warrant as a debt discount in the amount of approximately $1.8
million based upon the Black-Scholes option-pricing model, resulting in an
imputed interest rate of 37%. This discount is being amortized to earnings as
additional interest expense over the term of the Laurus Note. Accordingly, we
have recorded $500,096 and $209,317 of additional non-cash interest expense
relating to the amortization of the discount for the years ended December 31,
2005 and 2004, respectively.

In
accordance with EITF 00-19, we initially accounted for the fair value of the
Laurus Warrant as equity. As discussed below, in the fourth quarter of 2004,
due to an October 2004 change in the Laurus Note conversion terms, our
authorized and unissued shares available to settle the Laurus Warrant (after
considering all other commitments that may require the issuance of stock during
the maximum period the Laurus Warrant could remain outstanding) were determined
to be insufficient. As a result, we reassessed and reclassified the value of
the Laurus Warrant to a liability at the reassessment date. However, as a result
of the one-for-ten reverse stock split effected on June 9, 2005, there are now
sufficient authorized and unissued common shares to settle the Laurus Warrant,
and it is again included in equity at December 31, 2005. During the years ended
December 31, 2005 and 2004, we recorded a gain of $390,280 and $0, respectively,
on these contracts. The appropriateness of the classification of the Laurus
Warrant is reassessed at each balance sheet date.

The
    Laurus Note provides for monthly payments of interest at a rate per annum
    equal to the prime rate plus 1%, which is subject to reduction if the market
    price of our common stock exceeds certain designated thresholds. However,
    the rate cannot be less than 5% per annum. The Laurus Note also provides
    for monthly amortization of principal, which commenced on September 1, 2004,
    at the rate of $45,455 per month and increased to approximately $159,000
    per month beginning in March 2005, with the balance payable on the maturity
    date. However, due to an event of default on the STAR Note (see Notes 4(A)
    and 16), all amounts due under the Laurus Note have been reclassified to
    current liabilities at December 31, 2005. Laurus has the option to receive
    shares of our common stock in lieu of debt service payments at a fixed price
    of $3.00 per share. The Laurus Note is collateralized by a security interest
    in all of our assets. The Laurus Warrant entitles the holder to purchase,
    at any time through May 13, 2011, up to 443,500 shares of our common stock
at a price of $4.80 per share, subject to standard antidilution adjustments.

F-21

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|(9) | Note Payable, Capital Leases, and Other
  Long-Term Obligations (continued)
|--- | ---------------------------------------------------------------------------

|    |                                            
|--- | -------------------------------------------
|(A) | Senior Secured Convertible Note (continued)

Pursuant
to a Securities Purchase Agreement (the Securities Purchase Agreement) with
Laurus, for so long as 25% of the original principal amount of the Laurus Note
is outstanding, we may not directly or indirectly declare or pay any dividends
without the prior written consent of Laurus. The Securities Purchase Agreement
also requires the written consent of Laurus in connection with any liquidation,
material reorganization or issuance of certain additional indebtedness of the
Company.

On
October 26, 2004, we entered into an Amendment and Waiver (the Amendment and
Waiver) with Laurus that amended the Securities Purchase Agreement and certain
other documents and waived certain events of default under certain of such loan
documents. Pursuant to the Amendment and Waiver, the parties agreed to reduce
the Fixed Conversion Price set forth in the Laurus Note from $5.00 to $3.00
per share and to amend the Master Security Agreement to provide for a Lockbox
Deposit Account to be maintained by us and our subsidiaries under the Master
Security Agreement. Lockbox remittances do not automatically reduce the debt
outstanding unless an event of default has occurred. Laurus further agreed to
(i) release to us approximately $3 million, which represented all funds then
remaining in a restricted account (less outstanding accrued interest and fees);
(ii) postpone until the maturity date of the Laurus Note the monthly principal
payable by us under the Laurus Note from November 1, 2004 through February1,
2005; (iii) waive certain events of default, and all fees and default interest
rates applicable to such events of default; (iv) extend the time for our
subsidiaries to be joined as a party to the Master Security Agreement; (v)
waive all fees and default interest arising from our failure to pay the
liquidated damages set forth in the Registration Rights Agreement and further
waive any liquidated damages due and payable to Laurus by us.

In
consideration of the waivers, we issued a seven-year warrant to Laurus to
purchase 50,000 shares of our common stock with an exercise price of $5.00 per
share. We further agreed to register under the Securities Act the resale of the
shares of common stock issuable upon exercise of the new warrant and the
additional shares of our common stock issuable to Laurus upon conversion of the
Laurus Note due to the adjustment of the Fixed Conversion Price. We valued the
additional warrant at $89,000, which represents the total liquidated damages
waived by Laurus as a result of the Amendment and Waiver. We recorded this
amount as a liability and additional interest expense during the quarter ended
December 31, 2004. In connection with the reverse stock split discussed above,
the fair value of the additional warrant was reclassified to additional paid-in
capital on June 9, 2005. On February 17, 2005, we entered into an Amendment and
Waiver (the Second Amendment and Waiver) with Laurus that waived certain
events of default under the Registration Rights Agreement (as amended on
October 25, 2004) and the Laurus Note. Pursuant to the Second Amendment and
Waiver, Laurus agreed to waive all fees and default interest arising from our
failure to pay the liquidated damages set forth in the Registration Rights
Agreement and to waive any liquidated damages due and payable to Laurus in connection
with our failure to maintain the effectiveness of the Registration Statement.

On
February 18, 2005, we entered into a Waiver and Subordination Agreement with
Laurus (the Laurus Subordination). The Laurus Subordination waived our
obligation under the Securities Purchase Agreement to cause Incentra of CA to
become a party to the Master Security Agreement. Pursuant to the Laurus
Subordination, Laurus also agreed to subordinate to a lender its security
interest in the accounts receivable and other rights to payments, general
intangibles, equipment and inventory of Incentra of CA.

On
February 18, 2005, in satisfaction of $375,000 of liquidated damages to be incurred
due to our failure to maintain the effectiveness of the registration statement,
we issued to Laurus an immediately exercisable seven-year warrant to purchase
362,500 shares of common stock at an exercise price of $2.60 per share (the
Additional Warrant) and further agreed to register under the Securities
Act the resale of the shares of common stock issuable upon exercise of the
Additional Warrant. The Additional Warrant was valued at $375,000 and was
recorded as a liability on the issuance date. We amended our registration
statement on April 14, 2005 to include the shares issuable upon exercise of the
additional warrant and such registration statement was declared effective by
the Securities and Exchange Commission on April 25, 2005. As a result, we
expensed $300,000 for the liquidated damages. In connection with the reverse
stock split discussed above, the fair value of this additional warrant was
reclassified to additional paid-in capital on June 9, 2005.

F-22

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|(9) | Note Payable, Capital Leases, and Other
  Long-Term Obligations (continued)
|--- | ---------------------------------------------------------------------------

|    |                                            
|--- | -------------------------------------------
|(A) | Senior Secured Convertible Note (continued)

During
the year ended December 31, 2005, we agreed to five amendments with Laurus to
the Laurus Note pursuant to which $884,903 of principal was
converted to our common stock on or after April 28, 2005. The conversion price
for each amendment was $1.48, $1.40, $1.52, $1.30
and $1.30, respectively, following each amendment. During the year ended
December 31, 2005, Laurus converted this $884,903 under the Laurus Note into
716,669 shares of our common stock. The conversion was deemed beneficial, and,
as a result, additional interest expense of $226,000 was recorded during the
year ended December 31, 2005.

See
Note 17 for subsequent changes to the senior credit facility with Laurus effective
February 6, 2006.

(B) Capital Leases

On
November 20, 2003, we entered into a capital lease line of credit agreement
(the Lease Line) for $1,500,000 with a third-party lender. The term of the
agreement was for term leases ranging from 12 to 18 months. The interest rate
on the Lease Line ranges from 10.514% per annum to 10.731% per annum. As of
December 31, 2005, we had drawn $1,470,507 on the Lease Line and $29,493 of the
Lease Line expired unused. The original borrowing under the Lease Line was
repaid in full on October 1, 2005.

On
March 2, 2005, we entered into an amendment to the Lease Line. Under this
amendment, we could draw an additional $500,000 (the New Credit Facility) for
equipment purchases through June 30, 2005 of which we used $497,667. The
amendment also grants us a call option to purchase equipment from the lessor.
With respect to $2,333 of the New Credit Facility amount that was unfunded on
June 30, 2005, we paid the lessor 5% of such unfunded amount upon demand by the
lessor. The term of the agreement is for 15 months with an interest rate of
14.96% per annum. The New Credit Facility is to be repaid in monthly principal
and interest installments through September 2006. The unpaid balance at
December 31, 2005 was $278,207.

On
September 11, 2005, we entered into Amendment No. 2 to the Lease Line. Under
this amendment, we may draw an additional $1,000,000 (the Amended Credit
Facility) for equipment purchases through December 31, 2005. The amendment
also grants us a call option to purchase equipment from the lessor. The terms
of the agreement are for lease terms of 12-15 months with interest rates
ranging from 14.964% to 15%. The Amended Credit Facility is to be repaid in
monthly principal and interest installments through September 2006. During the
year ended December 31, 2005, we have drawn $546,527 on the lease line. The
unpaid balance at December 31, 2005 was $465,564.

On
September 11, 2005, we also entered into Amendment No. 1 (the Warrant
Amendment) to amend 6,954 warrants held by the lessor, that were issued in
connection with the original Lease Line. The Lease Line Warrant Amendment
reduced the exercise price of warrants issued to the lessor with the original
Lease Line from $10.35 per warrant to $6.02 per warrant. The impact of the
re-pricing of the warrants on the consolidated financial statements was not
material.

(C) Line of Credit

On
February 18, 2005, Incentra of CA obtained a revolving line of credit from
Wells Fargo Bank, N.A. that provided for borrowings, from time to time until
March 1, 2007, of up to $5,000,000. The LOC Note was repaid in full on July 5,
2005 in connection with the financing, discussed below.

On
June 30, 2005, we entered into a Security Agreement with Laurus pursuant to
which Laurus provided us  a $9 million revolving, convertible credit
facility (the 2005 Facility). The term of the 2005 Facility was three
years. In connection with the 2005 Facility, we executed in favor of Laurus a
$9 million Secured Revolving Note (the Revolver Note). Borrowings
under the 2005 Facility accrue interest at a rate per annum equal to the prime
rate (as
published in The Wall Street Journal) plus 1%, which is subject to reduction
if the market price of our common stock exceeds certain designated thresholds.
Pursuant to the 2005 Facility, the minimum initial amount available to us,
until December 31, 2005, was $6.0 million. Thereafter, the maximum principal
amount of all borrowings under

F-23

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|(9) | Note Payable, Capital Leases, and Other
  Long-Term Obligations (continued)
|--- | ---------------------------------------------------------------------------

(C) Line of Credit (continued)

the 2005
  Facility cannot exceed 90% of the combined eligible accounts receivable of PWI
  and Incentra of CA. At December 31, 2005, the outstanding principal balance on
  the 2005 Facility was $5.5 million, net of debt discount of $0.5 million.

Pursuant
to the Revolver Note, Laurus has the option to convert borrowings under the
2005 Facility into shares of our common stock. The first $3 million of
borrowings are convertible into shares of our common stock registered under the
Securities Act of 1933, as amended (the Act), at a fixed conversion price of
$2.05 (as adjusted for dilutive issuances, stock splits, stock dividends and
the like, as adjusted). The second $3 million of borrowings are convertible
into unregistered shares of our common stock at a fixed conversion price of
$2.56, as adjusted. The last $3 million of borrowings are convertible into
unregistered shares of our common stock at a fixed conversion price of $2.99.
Each conversion is subject to adjustment for standard antidilution provisions.

On
July 5, 2005, we requested, and Laurus agreed to lend, an initial draw under
the 2005 Facility of $6.0 million, of which approximately $4.4 million was used
to extinguish, in full, our indebtedness to Wells Fargo Bank, N.A. and the
balance of the initial draw, less expenses of the 2005 Facility, was used for
general corporate and working capital purposes.

Borrowings
under the 2005 Facility are collateralized by a security interest in
substantially all of our assets, including a pledge to Laurus of all of the
outstanding capital stock of PWI and Incentra of CA. Repayment of borrowings
under the 2005 Facility is guaranteed by PWI and Incentra of CA pursuant to a
Subsidiary Guaranty in favor of Laurus.

In
connection with the financing, we issued Laurus a warrant that entitles Laurus
to purchase, at any time through June 30, 2012, up to 400,000 shares of our
common stock at a price of $2.63 per share, subject to adjustment for standard
antidilution provisions (the 2005 Warrant).
The value of the warrant was determined, using the Black-Scholes model, to be
$0.6 million and is recorded as a debt discount at September 30, 2005. The
discount is being amortized to earnings as additional interest expense over the
term of the 2005 Facility.

In
connection with the 2005 Facility, we paid Laurus approximately $359,000,
comprised of a facility fee of $324,000 (representing an annual fee equal to
1.2% of the 2005 Facility payable in advance at closing) and reimbursement of
$35,000 of Laurus expenses, of which $344,000 were recorded as deferred
financing costs. The deferred financing costs will be amortized to interest
expense over the life of the 2005 Facility.

The
LOC Note was repaid in full in February 2006 in connection with the New Laurus
LOC financing, discussed in Note 17.

(D) STAR Note

Pursuant
to the STAR Merger Agreement, we issued an unsecured convertible promissory
note for $2,500,000 as more fully described in Note 4(A) and in Note 16.

(E) Other Obligations

At
December 31, 2005, we have $656,545 in other long-term obligations related to
contracts with vendors and certain consulting agreements.

F-24

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|(9) | Note Payable, Capital Leases, and Other
  Long-Term Obligations (continued)
|--- | ---------------------------------------------------------------------------

Aggregate
annual maturities of long-term debt are as follows:

|     |  |                                                            |   |                  |  |                      |  |                 |         |                     |  |  |   |           |  |  |   |           |  |  |   |         |  | 
|---- |  | ---------------------------------------------------------- | - | ---------------- |  | -------------------- |  | --------------- | ------- | ------------------- |  |  | - | --------- |  |  | - | --------- |  |  | - | ------- |  | 
|     |  | Senior
  secured
  convertible note, net
  of discount (1) |   | Capital
  Leases |  | Line of
  Credit (1) |  | STAR
  Note (1) |         | Other
  obligations | 
|     |  |                                                            |   |                  |  |                      |  |                 |         |                     | 
|2006 |  |                                                            | $ | 2,262,968        |  |                      |  | $               | 797,867 |                     |  |  | $ | 5,513,244 |  |  | $ | 2,106,281 |  |  | $ | 386,561 |  | 
|2007 |  |                                                            |   |                  |  |                      |  |                 | 26,569  |                     |  |  |   |           |  |  |   |           |  |  |   | 202,567 |  | 
|2008 |  |                                                            |   |                 |  |                      |  |                 | 7,099   |                     |  |  |   |           |  |  |   |           |  |  |   | 67,417  |  | 
|     |  |                                                            |   |                  |  |                      |  |                 |         |                     |  |  |   |           |  |  |   |           |  |  |   |         |  | 
|     |  |                                                            | $ | 2,262,968        |  |                      |  | $               | 831,535 |                     |  |  | $ | 5,513,244 |  |  | $ | 2,106,281 |  |  | $ | 656,545 |  | 
|     |  |                                                            |   |                  |  |                      |  |                 |         |                     |  |  |   |           |  |  |   |           |  |  |   |         |  | 

|(1)  | As
      a result of the events of default, these balances have been reported as
    current obligations regardless of stated maturity dates.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                              
|     |                                                                                                                                              
|(10) | Convertible Redeemable Preferred Stock and
  Common Stock                                                                                    

The
Companys authorized capital stock at December 31, 2005 consists of the
following:

(a) Preferred Stock

Preferred Stock

We
have authorized 2,500,000 shares of preferred stock, nonvoting, par value
$.001. As of the date of this report, none of the shares are issued or
outstanding.

Series A Convertible Redeemable Preferred
Stock

In
connection with the MSI acquisition, we designated 2.5 million authorized
shares of preferred stock as Series A Preferred shares and issued 2,466,971 of
such shares. Warrants are outstanding for the purchase of 26,075 Series A
Preferred shares at a purchase price of $10.35 per share and 6,954 Series A
Preferred shares at a purchase price of $6.02 per share, per the Amendment
described below.

The
Series A Preferred shares are convertible at any time upon written notice to us
into shares of common stock on a two-for-one basis. So long as at least 500,000
originally issued shares of Series A Preferred are outstanding, the holders of
Series A Preferred shares have the right to appoint three directors to our
Board of Directors. As a result, our Board of Directors has been expanded to seven
members to accommodate these three directors. On or after August 16, 2008, the
holders of at least 80% of the Series A Preferred shares may elect to have us
redeem the Series A Preferred for a price equal to the greater of (i) the
original issue price of $12.60 per share ($31.5 million in the aggregate) plus
accrued dividends, to the extent dividends are declared by us, or (ii) the fair
market value of the number of shares of common stock into which such shares of
Series A Preferred are convertible. Other material terms of the Series A
Preferred shares include a preference upon liquidation or dissolution of our
company, weighted-average anti-dilution protection and pre-emptive rights with
respect to subsequent issuances of securities by us (subject to certain
exceptions).

(b) Common Stock

At
December 31, 2005, we had 13,326,810 shares issued and outstanding.

(11) Employee
Stock Option Plans

We
currently have two employee stock option plans - one plan that was originally
established under MSI, and one that was originally established under Front
Porch Digital, Inc. (Incentra Option Plan). As of the date of the MSI
acquisition, we adopted the Incentra Option Plan. In connection with the MSI
acquisition, no additional grants will be made under the MSI Plan, however,
outstanding stock options issued pursuant to the MSI Plan may be exercised for
unregistered common shares.

F-25

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|(11) | Employee Stock Option Plans (continued)
|---- | ---------------------------------------

Employee Equity Incentive Plan

The
Incentra Option Plan provides for the granting of options to key employees,
officers and certain individuals to purchase shares of the Companys common
stock. We currently have reserved 2,262,500 shares of common stock for issuance
under the Incentra Option Plan. The Incentra Option Plan has a term of ten
years and provides for the grant of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
non-statutory stock options, stock appreciation rights and restricted stock
awards. The Incentra Option Plan is administered by our Board of Directors. The
exercise price of non-statutory stock options may be equal to or more or less
than 100 percent (100%) of the fair market value of shares of common stock on
the date of grant. The exercise price for incentive stock options may not be
less than 100 percent (100%) of the fair market value of shares of common stock
on the date of the grant (110 percent (110%) of fair market value in the case
of incentive stock options granted to employees who hold more than ten percent
(10%) of the voting power of the issued and outstanding shares of common
stock).

Options
granted under the Incentra Option Plan may not have a term of more than a
ten-year period (five years in the case of incentive stock options granted to
employees who hold more than ten percent (10%) of the voting power of the
Companys common stock) and generally vest over a three-year period. Options
generally terminate three months after the termination of employment for any
reason other than death, disability or retirement, and are not transferable by
the employee other than by will or the laws of descent and distribution.

We
have granted nonqualified stock options to certain employees with an exercise
price below market at the date of grant. The options vest immediately or
contain accelerated vesting, or vest over three yeas beginning on the first
anniversary of the grant date, and are exercisable for a period of three to ten
years. We have also granted nonqualified stock options to certain directors and
consultants. These options have been granted with an exercise price at or below
market at the date of the grant, vest immediately, and are exercisable for a
period of not more than ten years.

The
Incentra Option Plan also provides for grants of stock appreciation rights
(SARs), which entitle a participant to receive a cash payment, equal to the
difference between the fair market value of a share of common stock on the
exercise date and the exercise price of SAR. The exercise price of any SAR
granted under the Incentra Option Plan will be determined by the Board of Directors
at its discretion at the time of the grant. SARs granted under the Incentra
Option Plan may not be exercisable for more than a ten-year period. SARs
generally terminate one month after the termination of the grantees employment
for any reason other than death, disability or retirement. Although our Board
of Directors has the authority to grant SARs, they have not granted, and do not
have any present plans to grant SARs.

Restricted
stock awards, which are grants of shares of common stock that are subject to a
restricted period during which such shares may not be sold, assigned,
transferred, made subject to a gift, or otherwise disposed of, or mortgaged,
pledged or otherwise encumbered, may also be made under the Incentra Option
Plan. At this time, our Board of Directors has not granted, and does not have
any plans to grant, restricted shares of common stock.

F-26

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|(11) | Employee Stock Option Plans (continued)
|---- | ---------------------------------------

Employee Equity Incentive Plan (continued)

A
summary of all activity in the Incentra Option Plan is as follows:

|                             |  |                     |           |                                     |   |      | 
|---------------------------- |  | ------------------- | --------- | ----------------------------------- | - | ---- | 
|                             |  | Number
  of options |           | Weighted
  average
  exercise price |  
|                             |  |                     |           |                                     |  
|Balance,
  January 1, 2004   |  |                     | 262,371   |                                     | $ | 6.20 | 
|Granted                      |  |                     | 1,584,966 |                                     |   | 2.70 | 
|Exercised                    |  |                     | (10,000   | )                                   |   | 2.80 | 
|Forfeited                    |  |                     | (8,277    | )                                   |   | 3.30 | 
|                             |  |                     |           |                                     |   |      | 
|Balance,
  December 31, 2004 |  |                     | 1,829,060 |                                     |   | 3.20 | 
|Granted                      |  |                     | 456,450   |                                     |   | 1.62 | 
|Exercised                    |  |                     |          |                                     |   |     | 
|Forfeited                    |  |                     | (68,494   | )                                   |   | 2.25 | 
|                             |  |                     |           |                                     |   |      | 
|Balance,
  December 31, 2005 |  |                     | 2,217,016 |                                     | $ | 2.92 | 
|                             |  |                     |           |                                     |   |      | 
|                             |  |                     |           |                                     |   |      | 

|                 |                  |                                                        |  |                                       |           |                                   |  |                                  |  |                                     |   |       |  |  |  |         |  |  |   |       | 
|---------------- | ---------------- | ------------------------------------------------------ |  | ------------------------------------- | --------- | --------------------------------- |  | -------------------------------- |  | ----------------------------------- | - | ----- |  |  |  | ------- |  |  | - | ----- | 
|                 |                  | Outstanding
  options                                  |  | Exercisable
  options                 |          
|                 |                  |                                                        |  |                                       |          
|Exercise
  price |                  | Weighted
  average
  remaining
  shares under
  option |  | Weighted
  contractual
  life (years) |           | Shares
  average
  exercise price |  | Shares
  currently
  exercisable |  | Weighted
  average
  exercise price |  
|                 |                  |                                                        |  |                                       |           |                                   |  |                                  |  |                                     |   |       | 
|                 | $   1.21 - 13.90 |                                                        |  |                                       | 2,188,516 |                                   |  | 8.60                             |  |                                     | $ | 2.52  |  |  |  | 808,992 |  |  | $ | 2.69  | 
|                 | 20.00 - 29.00    |                                                        |  |                                       | 11,000    |                                   |  | 3.40                             |  |                                     |   | 24.06 |  |  |  | 11,000  |  |  |   | 24.06 | 
|                 | 40.00            |                                                        |  |                                       | 17,500    |                                   |  | 0.60                             |  |                                     |   | 40.00 |  |  |  | 17,500  |  |  |   | 40.00 | 
|                 |                  |                                                        |  |                                       |           |                                   |  |                                  |  |                                     |   |       |  |  |  |         |  |  |   |       | 
|                 |                  |                                                        |  |                                       | 2,217,016 |                                   |  | 8.50                             |  |                                     |   | 2.92  |  |  |  | 837,492 |  |  |   | 3.75  | 
|                 |                  |                                                        |  |                                       |           |                                   |  |                                  |  |                                     |   |       |  |  |  |         |  |  |   |       | 

ManagedStorage International, Inc.2000 Stock
Option and Grant Plan

Prior
to the MSI acquisition, MSI adopted and administered its 2000 Stock Option and
Grant Plan (the MSI Plan) for its employees, directors, consultants and other
key persons. In connection with the MSI acquisition, no additional grants will
be made under the MSI Plan; however, outstanding stock options issued pursuant
to the MSI Plan may be exercised for unregistered common shares. As provided in
the MSI acquisition agreement, upon the exercise of any outstanding options
issued under the MSI Plan, we will issue 0.3089 shares of common stock for each
share of MSI common stock that would have been issuable upon the exercise of
such options.

The
maximum number of shares of unregistered common stock available for issuance to
eligible employees, consultants, and directors of the Company under the MSI
Plan pursuant to options previously granted is 216,536 at December 31, 2005.
Options to purchase our unregistered common stock are exercisable at a price as
determined by the board of directors at the time the options were granted.
Under the terms of the MSI Plan, the exercise prices for incentive stock
options granted shall not be less than 100% of the fair market value of the
unregistered common stock or our common stock at the date of grant, or if a
participant owns more than 10% of the Company, the option price may not be less
than 110% of the fair market value of the unregistered common stock or common
stock. No incentive stock options may be exercised more than 10 years from the
date of grant, or when an employee owns more than 10% of the Company, the
incentive stock options may not be exercised more than five years from the date
of grant. Options generally vested over a four-year period, 25% per year,
commencing on the one-year anniversary of the grant and/or the employee hire
date. Unless terminated or otherwise canceled under the MSI Plan provisions,
the contractual life of all such options is no greater than ten years.

F-27

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

(11)    Employee
Stock Option Plans (continued)

A
summary of all activity in the MSI Plan is as follows:

|                             |  |                      |         |                                      |   |      | 
|---------------------------- |  | -------------------- | ------- | ------------------------------------ | - | ---- | 
|                             |  | Number 
  of options |         | Weighted
  average 
  exercise price |  
|                             |  |                      |         |                                      |  
|Balance,
  December 31, 2003 |  |                      | 229,206 |                                      | $ | 0.50 | 
|Granted                      |  |                      | 22,225  |                                      |   | 3.20 | 
|Exercised                    |  |                      | (3,947  | )                                    |   | 3.26 | 
|Forfeited                    |  |                      | (27,883 | )                                    |   | 2.80 | 
|                             |  |                      |         |                                      |   |      | 
|Balance,
  December 31, 2004 |  |                      | 219,601 |                                      | $ | 0.50 | 
|Granted                      |  |                      |         |                                      |   |      | 
|Exercised                    |  |                      | (454    | )                                    |   | 0.30 | 
|Forfeited                    |  |                      | (2,611  | )                                    |   | 0.26 | 
|                             |  |                      |         |                                      |   |      | 
|Balance,
  December 31, 2005 |  |                      | 216,536 |                                      | $ | 0.43 | 
|                             |  |                      |         |                                      |   |      | 

|                  |         |                        |                                                                 |                     |         |                                       |      |  |                                    |   |       |  |                                       |         |  |  |   |       |  | 
|----------------- | ------- | ---------------------- | --------------------------------------------------------------- | ------------------- | ------- | ------------------------------------- | ---- |  | ---------------------------------- | - | ----- |  | ------------------------------------- | ------- |  |  | - | ----- |  | 
|                  |         |                        |                                                                 | Outstanding options |         | Exercisable options                   |     
|                  |         |                        |                                                                 |                     |         |                                       |      |  |                                    |  
|Exercise 
  price |         | Shares under 
  option | Weighted 
  average 
  remaining 
  contractual 
  life (years) |                     |         | Weighted 
  average 
  exercise price |      |  | Shares 
  currently 
  exercisable |   |       |  | Weighted 
  average 
  exercise price |         | 
|                  |         |                        |                                                                 |                     |         |                                       |      |  |                                    |   |       |  |                                       |         |  |  |   |       | 
|                  | $  0.30 |                        |                                                                 |                     | 207,146 |                                       | 7.12 |  |                                    | $ | 0.30  |  |                                       | 154,865 |  |  | $ | 0.30  |  | 
|                  |         |                        |                                                                 |                     |         |                                       |      |  |                                    |   |       |  |                                       |         |  |  |   |       |  | 
|                  | 3.20    |                        |                                                                 |                     | 9,359   |                                       | 8.12 |  |                                    |   | 3.20  |  |                                       | 5,382   |  |  |   | 3.20  |  | 
|                  | 16.20   |                        |                                                                 |                     | 31      |                                       | 6.31 |  |                                    |   | 16.20 |  |                                       | 31      |  |  |   | 16.20 |  | 
|                  |         |                        |                                                                 |                     |         |                                       |      |  |                                    |   |       |  |                                       |         |  |  |   |       |  | 
|                  |         |                        |                                                                 |                     | 216,536 |                                       | 7.16 |  |                                    |   | 0.43  |  |                                       | 160,278 |  |  |   | 0.40  |  | 
|                  |         |                        |                                                                 |                     |         |                                       |      |  |                                    |   |       |  |                                       |         |  |  |   |       |  | 

(12)    Warrants

In
determining the fair value of warrants granted in 2005, we utilized the
Black-Scholes valuation model with the following weighted average assumptions:
dividend yield of 0%, risk free interest rate of 1.16%, expected volatility of
143%, and expected lives of seven years.

At
December 31, 2005, we had the following warrants outstanding for the purchase
of our common stock:

|                                                                      |  |                 |                   |                              |  |           |                  |   |       | 
|--------------------------------------------------------------------- |  | --------------- | ----------------- | ---------------------------- |  | --------- | ---------------- | - | ----- | 
|Description                                                           |  | Expiration Date |                   | Number of 
  Shares Issuable |  |           | Exercise
  Price |  
|                                                                      |  |                 |                   |                              |  |           |                  |   |      
|Issued to
  original Front Porch Shareholders                         |  |                 | March 31, 2007    |                              |  | 30,000    |                  | $ | 6.50  | 
|Issued to
  note holder                                               |  |                 | December 31, 2007 |                              |  | 22,500    |                  | $ | 1.00  | 
|Issued to
  Equity Pier in exchange for consulting services (Note 14) |  |                 | February 28, 2006 |                              |  | 332,470   |                  | $ | 20.00 | 
|Issued to
  noteholder                                                |  |                 | May 1, 2008       |                              |  | 10,000    |                  | $ | 1.00  | 
|Issued to
  noteholder                                                |  |                 | May 1, 2008       |                              |  | 50,000    |                  | $ | 1.00  | 
|Issued in
  connection with debt issuance                             |  |                 | May 13, 2011      |                              |  | 517,850   |                  | $ | 4.80  | 
|Issued to
  Laurus in exchange for liquidated damages                 |  |                 | October 25, 2011  |                              |  | 50,000    |                  | $ | 5.00  | 
|Issued in
  exchange for services in financing transaction            |  |                 | January 10, 2008  |                              |  | 20,274    |                  | $ | 0.003 | 
|Issued to
  Laurus in exchange for liquidated damages                 |  |                 | February 17, 2012 |                              |  | 362,500   |                  | $ | 2.60  | 
|Issued to
  Laurus in connection with debt issuance                   |  |                 | June 30, 2012     |                              |  | 400,000   |                  | $ | 2.63  | 
|                                                                      |  |                 |                   |                              |  |           |                  |   |       | 
|Total
  warrants outstanding                                          |  |                 |                   |                              |  | 1,795,594 |                  |   |       | 
|                                                                      |  |                 |                   |                              |  |           |                  |   |       | 

F-28

---



INCENTRA
SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 
December 31, 2005 and 2004

|     |                     
|---- | --------------------
|(12) | Warrants (continued)

At
December 31, 2005, we had the following warrants outstanding for the purchase
of our Series A Convertible Preferred Stock:

|                                                                     |  |  |                   |  |  |                   |  |   |          | 
|-------------------------------------------------------------------- |  |  | ----------------- |  |  | ----------------- |  | - | -------- | 
|                                                                     |  |  |                   |  |  | Number of         |  |   | Exercise | 
|Description                                                          |  |  | Expiration
  Date |  |  | Shares
  Issuable |  |   | Price    | 
|                                                                     |  |  |                   |  |  |                   |  |   |          | 
|Issued to lease holder
  in connection with equipment lease facility |  |  | November 20, 2010 |  |  | 6,954             |  | $ | 6.02     | 
|Issued in exchange for
  services in financing transaction           |  |  | January 10, 2008  |  |  | 26,075            |  | $ | 10.35    | 
|                                                                     |  |  |                   |  |  |                   |  |   |          | 
|Total warrants
  outstanding                                         |  |  |                   |  |  | 33,029            |  |   |          | 
|                                                                     |  |  |                   |  |  |                   |  |   |          | 

|     |                             
|---- | ----------------------------
|(13) | Employee
  Contribution Plan

We
sponsor a 401(k) Savings Plan (the Plan). The Plan is a defined contribution
plan for all of our regular domestic employees who have attained at least 18
years of age. Employees who meet these requirements may become a participant in
the Plan on the first day of the following month after meeting the eligibility
requirements.

Participants
may elect to make contributions ranging from 1% to 60% of their eligible
compensation, subject to limitations based on provisions of the tax law. We may
make a discretionary pretax matching contribution. The amount would be equal to
a percentage determined annually by a Board of Directors resolution. To date,
no matching contributions have been made.

Employee
contributions are 100% vested. Contributions made by the company, when made, will
be subject to the following vesting schedule: Up to one year of service, 40%
vested; two years of service, 80% vested; three or more years of service, 100%
vested.

|     |                             
|---- | ----------------------------
|(14) | Related-Party
  Transactions

Our
Chairman of the Board and Chief Executive Officer (the CEO) is the
founder and managing partner of Equity Pier LLC (Equity Pier). During
2004, we incurred liabilities to Equity Pier totaling $6,866, primarily related
to the reimbursement of travel and business expenses incurred by the CEO and
other executives. In addition, we leased office space from Equity Pier in 2005
and 2004. Total costs incurred under the leasing arrangement and associated
expenses (utilities, supplies and insurance) amounted to $190,178 and $84,529
in 2005 and 2004, respectively. During 2004, we paid consulting fees
and other reimbursable expenses to shareholders of Equity Pier, excluding salaries
paid to shareholders of Equity Pier in their capacity as employees of MSI, of
$18,613.

During
2004, a director of our company entered into a consulting agreement with our
    company to provide consulting services in the broadcast industry. The agreement
    began on June 1, 2004 and expired on May 31, 2005. The agreement required
    monthly payments of $2,500 plus expenses. During 2005 and 2004, we
    paid the director $13,274 and $18,711, respectively, in consulting fees and
    expenses.

|     |             
|---- | ------------
|(15) | Income Taxes

The
domestic and foreign components of loss before income taxes for the years ended
December 31, 2005 and 2004 are as follows:

|         |  |   |             |   |   |             |  
|-------- |  | - | ----------- | - | - | ----------- | -
|         |  |   | 2005        |   |   | 2004        |  
|         |  |   |             |   |   |             |  
|Domestic |  | $ | (15,123,970 | ) | $ | (11,343,294 | )
|Foreign  |  |   | 1,367,447   |   |   | 1,305,000   |  
|         |  |   |             |   |   |             |  
|         |  | $ | (13,756,523 | ) | $ | (10,038,294 | )
|         |  |   |             |   |   |             |  

F-29

---



INCENTRA
SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|(15) | Income Taxes (continued)
|---- | ------------------------

We account
    for income taxes in accordance with Statement of Financial Standard No. 109
    Accounting For Income Taxes (SFAS 109). Under the provisions of SFAS 109, a deferred tax liability or asset (net
    of a valuation allowance) is provided for in the financial statements by
    applying the provisions of applicable laws to measure the deferred tax consequences
    of temporary differences that will result in net taxable or deductible amounts
    in future years as a result of events recognized in the financial statements
    in the current or preceding years.

The
income tax provisions of $469,034 and $400,000 for the year ended December 31,
2005 and December 31, 2004, respectively, consisted solely of deferred, foreign
income tax expense, related to our French subsidiary. During the
first three quarters of 2005, we recorded foreign income tax expense of
$1.1 million based on the earnings of our French subsidiary. In the fourth quarter
    of 2005, we executed a license agreement for the sale of DIVArchive products
    owned by us and sold to our French subsidiary with an effective date for
    payment of the royalty for 2005 as of January 1, 2005. As a result of recording
    the cross charge for royalties in the fourth quarter, earnings of the subsidiary
decreased, resulting in a fourth quarter reduction in deferred income tax expense
    of $587,216.

The
reconciliation between the federal statutory tax rate and our effective tax rate
on loss for 2005 and 2004 is as follows:

|                                                     |  |  |       |    |  |       |   
|---------------------------------------------------- |  |  | ----- | -- |  | ----- | --
|                                                     |  |  | 2005  |    |  | 2004  |   
|                                                     |  |  |       |    |  |       |   
|Expected tax benefit of
  federal statutory tax rate |  |  | (35.0 | %) |  | (34.0 | %)
|Increase (reduction)
  resulting from:               |  |  |       |    |  |       |   
|State taxnet of
  federal tax benefit               |  |  | (2.4  | %) |  | (4.4  | %)
|Effect of
  permanent differences                    |  |  | 17.7  | %  |  | 10.3  | % 
|Foreign taxes                                        |  |  | 0.1   | %  |  | 4.0   | % 
|Other                                                |  |  |      |    |  |      |   
|Change in
  valuation allowance                      |  |  | 23.0  | %  |  | 28.1  | % 
|                                                     |  |  |       |    |  |       |   
|Actual income
  tax expense                          |  |  | 3.4   | %  |  | 4.0   | % 
|                                                     |  |  |       |    |  |       |   

At
December 31, 2005, approximately $95.9 million of federal and $80.1 million of
state net operating loss carryforwards were available to offset future taxable
income through the year 2025. These net operating loss carryforwards begin to
expire in 2011. At December 31, 2005, the Company had foreign loss
carryforwards of approximately $14.8 million with no expiration date.

The
Tax Reform Act of 1986 contains provisions that limit the utilization of net
operating loss and tax credit carry forwards if there has been a change in
ownership as described in Section 382 of the Internal Revenue Code. As a result
of a private placement in 2003 and a reverse acquisition in 2004, we
believe that there are substantial limitations on the utilization of its net
operating loss carry forwards. We have  not prepared an analysis to
determine if a change of ownership occurred or the effect on the utilization
of the loss and credit carryforwards.

Significant
components of our deferred tax assets and liabilities for federal and
state income taxes consist of the following as of December 31, 2005:

|                                                    |  |   |             |  
|--------------------------------------------------- |  | - | ----------- | -
|Deferred tax assets:                                |  |   |             |  
|Accrued
  liabilities and other                     |  | $ | 1,003,248   |  
|Property and
  equipment                            |  |   | 317,075     |  
|Loss
  carryforwards                                |  |   | 43,369,422  |  
|                                                    |  |   |             |  
|Deferred tax
  assets                               |  |   | 44,689,745  |  
|                                                    |  |   |             |  
|Deferred tax liabilities:                           |  |   |             |  
|Intangible
  assetsFront Porch Digital Acquisition |  |   | (5,011,325  | )
|Unremitted
  earnings of French subsidiary          |  |   | (1,357,960  | )
|                                                    |  |   |             |  
|Deferred tax
  liabilities                          |  |   | (6,369,285  | )
|                                                    |  |   |             |  
|Net deferred tax
  assets                           |  |   | 38,320,460  |  
|Valuation
  allowance                               |  |   | (38,320,460 | )
|                                                    |  |   |             |  
|Net deferred tax
  assets                           |  | $ |            |  
|                                                    |  |   |             |  

F-30

---



INCENTRA
SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 
December 31, 2005 and 2004

|     |                           
|---- | --------------------------
|(15) | Income Taxes
  (continued)

Management
has recorded a valuation allowance against the entire net deferred tax asset, as
management does not consider the realization of this asset to be more likely
than not.

In
addition, any tax benefits recognized in future periods for deferred tax assets
of MSI allowed for at the date of the Acquisition, are to be first applied to
reduce to zero, intangible assets related to the Acquisition. U.S. income taxes
were not provided for on undistributed earnings of non-U.S. subsidiaries as we
intend to reinvest these earnings indefinitely in operations outside the United
States.

|     |                                              
|---- | ---------------------------------------------
|(16) | Incentra of CA Note Default
  and Arbitration

We
are engaged in the early stages of an arbitration proceeding to resolve a
dispute with one of our creditors that, if resolved unfavorably, would have a
material adverse affect on our liquidity and financial condition.

In
connection with our acquisition of Incentra of CA in February 2005, we issued to
the principal stockholder of Incentra of CA a promissory note (the STAR
Note) in the principal amount of $2.5 million that is payable in ten
installments and matures on August 1, 2007. The STAR Note provides that all
unpaid principal and accrued interest shall, at the option of the holder and
without notice, become immediately due and payable upon the occurrence of an
event of default (as defined in the STAR Note). Such events of default include
the occurrence of any of the following events: (i) failure to pay within ten
(10) days after the applicable due date any amounts payable under the STAR Note,
(ii) an assignment for the benefit of creditors, or (iii) failure to perform any
material covenant under the STAR Merger Agreement, the registration rights
agreement or the consulting agreement described below or any other material
agreement between us and the seller. Principal amounts not paid when due
(subject to applicable cure periods) bear interest at the rate of twelve percent
(12%) per annum.

On
August 1, 2005, we elected not to make a scheduled payment due under the STAR
Note after we identified significant required post-closing adjustments to the
purchase price for the assets of STAR and, consequently, the principal amount
of the STAR Note. On August 16, 2005, we received a demand for arbitration from
legal counsel of the principal stockholder. As of the balance sheet date, we
have reclassified approximately $1.3 million of the debt to current liabilities
based on the default. We have been accruing interest at the 12% default rate
since August 11, 2005.

In
the event the dispute is not resolved in a mediation and the parties proceed to
arbitration, the full outstanding balance of the STAR Note could be accelerated
if the arbitrator does not rule in our favor in such proceeding. As of the
balance sheet date, the entire principal balance of $2.4 million ($2.1 million
net of discount) on the STAR Note is classified as current. Management does not
believe the debt will be paid in one year from the balance sheet date, however,
the reclassification on the balance sheet was made as the debt is now
callable.

We
do not have the cash available to pay such amount and, in such event, we would
require additional financing to meet our obligation. There can be no assurance
that we would be able to obtain additional funding when needed, or that such
funding, if available, will be obtainable on terms acceptable to us. In the
event our operations do not generate sufficient cash flow, or we cannot obtain
additional funds if and when needed, we may be forced to curtail or cease our
activities, which would likely result in the loss to investors of all or a
substantial portion of their investment.

The
event of default on the STAR Note created an event of default of certain
provisions of the 2005 Facility and the Term Note with Laurus.

|     |                  
|---- | -----------------
|(17) | Subsequent Events
|     |                  
|(A)  | New Laurus LOC   

On
February 6, 2006, we entered into a New Security Agreement with Laurus pursuant
to which Laurus agreed to provide us with a non-convertible revolving credit
facility of up to $10 million (the 2006 Facility). The term of the 2006
Facility is three (3) years and borrowings under the 2006 Facility shall accrue
interest on the

F-31

---



INCENTRA
SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2005 and 2004

|     |                                
|---- | -------------------------------
|(17) | Subsequent Events
  (continued)

unpaid principal and interest at a rate per annum
equal to the prime rate published in The Wall Street Journal from
time to time, plus 1%, subject to a floor of 7%.
In connection with the 2006 Facility, we executed in favor of Laurus a secured
non-convertible revolving note in the principal amount of $10 million (the
NOTE). Interest on borrowings under the Note is payable monthly on
the first day of each month during the term of the Note, commencing on March
1, 2006. All outstanding principal amounts are due and payable on February 6,
2009.

We
entered into the New Security Agreement to pay off our existing $9 million
convertible revolving credit facility with Laurus (the Existing Facility),
of which approximately $6 million was outstanding as of February 6, 2006. Prior
to such date, the outstanding principal amount under the Existing Facility was
potentially convertible into approximately 3.6 million shares of our common
stock, par value $.01 per share (the Common Stock). In connection
with the 2006 facility, we issued to Laurus an option to purchase 1,071,428 shares
of common stock. We also entered into an Amendment and Deferral
Agreement (the
Amendment and Deferral Agreement) with Laurus amending the Amended
and Restated Secured Convertible Term Note (the 2004 Note) we issued
to Laurus on May 13, 2004 in the aggregate original principal amount of $5,000,000,
that is payable in full on May 13, 2007 (the Maturity Date). Pursuant
to the Amendment and Deferral Agreement, the monthly principal amount due Laurus
under the 2004 Note for each of January, February, March, April, May and June
2006, equal to an aggregate of $952,495, is deferred until the Maturity Date.
The Security Agreement increased the minimum initial amount available to us and
our subsidiaries from $6 million under the Existing Facility to $6.48 million
under the 2006 Facility until April 30, 2006. Thereafter, the maximum principal
amount of all borrowings under the 2006 Facility cannot exceed 90% of the eligible
accounts receivable of each subsidiary, minus such reserves that Laurus may in
good faith deem necessary and appropriate.

On
February 6, 2006, we requested and Laurus agreed to lend an initial draw under
the 2006 Facility of $6.38 million, of which (i) approximately $5.9 million was
used to satisfy in full our indebtedness to Laurus under the Existing Facility,
(ii) $375,000 was paid to Laurus as an early termination fee for the Existing
Facility, and (iii) $107,500 was applied towards expenses of the 2006 Facility.

All
loans and obligations owed by us to Laurus arising under the New Security
Agreement, the Securities Purchase Agreement, dated as of May 13, 2004, between
us and Laurus (the 2004 Securities Purchase Agreement), the Note, the Option
(as defined), the Registration Rights Agreement (as defined), the Stock Pledge
Agreement (as defined), or any other agreements or documents relating to the
relationship between us and Laurus (collectively, the Ancillary Documents) or
otherwise are secured by a security interest in substantially all of the assets
of our company and the Subsidiaries pursuant to the terms of the Security
Agreement.

In
addition, we pledged to Laurus all of the outstanding capital stock of our subsidiaries
    pursuant to a Stock Pledge Agreement (the Stock Pledge
Agreement) executed by us in favor of Laurus, and each of the Subsidiaries
executed a Subsidiary Guaranty, dated February 6, 2006 (the Subsidiary
Guarantee), in favor of Laurus, guaranteeing all of our present and future
obligations to Laurus, whether arising under the 2004 Securities Purchase
Agreement and the Related Documents (referred to therein), or under any other
obligations now existing or hereafter arising.

Under
the terms of the New Security Agreement, if an event of default occurs under
    any of the Ancillary Documents, Laurus has the right to accelerate payments
    under the Note and, in addition to any other remedies available to it, to
    foreclose upon the assets securing the Note. If an event of default occurs
    under any of the Ancillary Documents, within five days after written notice
    to us, Laurus may require a payment of 125% of the unpaid principal
balance of the Note, plus accrued interest and fees, which will become
immediately due and payable. Laurus shall also be entitled to payment of a
default interest rate of 1.5% per month

F-32

---



INCENTRA
SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) December 31, 2005 and 2004

|     |                                
|---- | -------------------------------
|(17) | Subsequent Events
  (continued)

on all amounts due and such other remedies specified
in the Ancillary Documents and under the Uniform Commercial Code. Such events
of default include, without limitation, the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a failure to make payments of principal and interest
  under the Note within three (3) days of when due;                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | a material breach by us of any provision contained
  in any of the Ancillary Documents (that is not cured within the stated cure
  period);                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | the filing of any money judgment or similar final
  process against us for more than $100,000, which remains unvacated, unstayed
  or unbonded for a period of thirty (30) days;                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | if we make an assignment for the benefit of our
  creditors, or a receiver or trustee is appointed for us, or any form of
  bankruptcy or insolvency proceeding is instituted by us, or any involuntary
  proceeding is instituted against us if not vacated within thirty (30) days;                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | if our Common Stock is suspended for five (5)
  consecutive days or for five (5) days during a ten (10) consecutive day
  period from a principal market or pursuant to a stop order issued by the
  Securities and Exchange Commission (the SEC) (provided that we shall not
  have been able to cure such trading suspension within thirty (30) days of our
  receipt of notice thereof or list our Common Stock on another principal
  market within sixty (60) days of such notice); and
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | a failure by us to timely deliver shares of our
  Common Stock to Laurus when due upon exercise of the Option.                                                                                                                                                                                                                                                                                                                                                                                

The
Security Agreement contains certain negative covenants that require us to
obtain the prior written consent or other actions of Laurus in order for us to
take certain actions at any time when borrowings remain outstanding under the
2006 Facility. These negative covenants include, without limitation,
restrictions on our ability to:

| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | incur or assume indebtedness (exclusive of trade
  debt) in excess of $100,000;                                                                                                
| |   |                                                                                                                                                                                
| |  | guarantee or assume any liability in connection with
  any obligations of another person or entity (except on behalf of the
  Subsidiaries in the ordinary course of business);
| |   |                                                                                                                                                                                
| |  | pay or make any dividend or distribution on any
  class of our capital stock or the capital stock of the Subsidiary or issue
  any preferred stock; or                         
| |   |                                                                                                                                                                                
| |  | enter into any merger, consolidation or
  reorganization, with limited exceptions.                                                                                             

OPTION.
We issued to Laurus a common stock purchase option (the Option), entitling
Laurus to purchase up to 1,071,428 shares of our Common Stock at an exercise
price of $.001 per share (subject to applicable adjustments) (the Exercise
Price). The Option expires on February 26, 2026. Pursuant to the Security
Agreement, Laurus may not sell any shares of Common Stock it receives through
the exercise of the Option (the Option Shares) prior to January 31, 2007.
Additionally, Laurus agreed not to sell an amount of Option Shares that would
exceed thirty-five percent (35%) of the aggregate dollar trading volume of our
Common Stock for the twenty-two (22) trading day period immediately preceding
such sale.

Laurus
may not exercise the Option in connection with a number of shares of Common
Stock which would exceed the difference between (i) 4.99% of the issued and
outstanding shares of Common Stock and (ii) the number of shares of Common
Stock beneficially owned by Laurus except upon (i) seventy-five (75) days
prior notice from Laurus to us or (ii) upon the occurrence and continuance of
an event of default under the Security Agreement.

REGISTRATION
RIGHTS AGREEMENT. Pursuant to the terms of an Amended and Restated Registration
Rights Agreement between us and Laurus (the Registration Rights Agreement),
which amends and restates in its entirety that certain Registration Rights
Agreement between Laurus and our company dated May 13, 2004, we are obligated
to file a post-effective amendment to our existing Registration Statement on
Form SB-2 originally filed

F-33

---



INCENTRA
SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 
December 31, 2005 and 2004

|     |                                
|---- | -------------------------------
|(17) | Subsequent Events
  (continued)

on June 29, 2004 to include the shares of Common Stock
issuable (i) upon exercise of the Option, (ii) as a result of adjustments made
to the Exercise Price pursuant to the Option, (iii) upon exercise of the
warrant issued pursuant to the June 30, 2005 Security Agreement, and (iv) as a
result of adjustments made to the Exercise Price pursuant to such warrant.

|    |                      
|--- | ---------------------
|(B) | NEW LAURUS TERM NOTES

On March 31, 2006, we consummated a private placement with Laurus pursuant to which we issued to Laurus a secured term note due May 31, 2009 in the principal
amount of $1,500,000 (the 2006 Note) and a secured convertible term note due May 31, 2009 in the principal amount of $1,750,000 (the 2006 Convertible Note)In connection with the issuance of the 2006 Note and the 2006 Convertible Note, we issued to Laurus a common stock purchase warrant (the 2006 Warrant) entitling the holder to purchase 417,857
shares of common stock (the 2006 Warrant) at $0.001 per share subject to certain antidilution adjustments, at any time after March 31, 2007 and on or prior to March 31, 2013. The 2006 Note, 2006
Convertible Note and the 2006 Warrant were sold to Laurus for a purchase price of $3,250,000.

The 2006 Note and 2006 Convertible Note provide for monthly payments of interest at a rate per annum equal to the prime rate published in the Wall Street Journal from time to time, plus2%, subject to a floor of 9%. The 2006 Note and 2006 Convertible Note also
provide for monthly amortization of principal, which commences on August 1, 2006, at the rate of $101,563 per month. The principal and unpaid interest on the 2006 Convertible Note is convertible into shares of our common stock at a fixed
conversion price of $1.40 per share, subject to certain antidilution adjustments. The 2006 Note and 2006 Convertible Note are collateralized by a security interest in all of our assets.

The March 31, 2006 financing with Laurus is contingent upon meeting certain closing conditions that must be satisfied on or before April 21, 2006.
In the event that such conditions are not satisfied on or before that date, the private placement will terminate and no funding will occur.

Pursuant
to a Registration Rights Agreement (the 2006 Registration Rights)
with Laurus, we are obligated to: (a) file a registration statement under the
Act to register the resale of the shares of our (Registration
Statement) common stock issuable upon conversion of the 2006 Convertible
Note and exercise of the 2006 Warrant on or prior to May 15, 2006. (b) use our
best efforts to have the Registration Statement declared effective under the Act
as promptly as possible, but in any event prior to July 15, 2006 and (c)
maintain the effectiveness of the Registration Statement until the earliest date
of when (i) all Registrable Securities covered by such Registration Statement
have been sold, or (ii) all Registrable Securities covered by such Registration
Statement may be sold immediately without registration under the Securities Act
and without volume restrictions pursuant to Rule 144(k) under the Securities Act,
or (iii) except with respect to the shares issuable upon the exercise of the
2006 Warrant, all amounts payable under the 2006 Convertible Note have been paid
in full. Laurus, or other holders of the 2006 Convertible Note and the 2006
Warrant, are entitled to certain specified remedies if we do not timely comply
with our registration obligations.

Pursuant to the 2006 Securities Purchase Agreement (the Securities Purchase Agreement") with Laurus, for so long as 25% of the original principal
amount of the 2006 Convertible Note and 2006 Warrant is outstanding, we may not directly or indirectly declare or pay any dividends without the prior written consent of Laurus. The
2006 Securities Purchase Agreement also requires the written consent of Laurus in connection with any 1iquidation, material reorganization, merger or acquisition involving our company, or the issuance of certain additional
indebtedness by our company,

The 2006 Note and 2006 Convertible Note contain certain events of default consistent with
those encompassed in our previous financings with Laurus. Following the occurrence and during the continuance of any such event of default, we are required to pay additional interest in anamount equal to (1.5%) per month, and all outstanding obligations, including unpaid interest, shall continue to accrue interest at such additional interest rate
from the date of such event of default until the date such event of default is cured or waived. In addition, following the occurrence and during the continuance of any such event of default,
Laurus, at its option, may demand repayment in full of all obligations and liabilities owing to Laurus and/or may elect, in addition to all rights and remedies of Laurus, require the us to make a default payment which shall be equal to
125% of the outstanding principal amount of the Note, plus accrued but unpaid interest, all other fees then remaining unpaid, and all other amounts payable by us to Laurus.

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