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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549

FORM 10-KSB

|                                             |                                                                                      
|-------------------------------------------- | -------------------------------------------------------------------------------------
|x                                            | ANNUAL
  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934     
|                                             |                                                                                      
|For the Fiscal Year Ended: December 31, 2006
|                                            
|o                                            | TRANSITION
  REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                             |                                                                                      
|For the Transition Period from        to    
|                                            
|Commission File Number: 333-16031           

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

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

|                                                           
|-----------------------------------------------------------
|(303) 449-8279                                             
|(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 o No x

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, 2006 were $66.6 million.

The
aggregate market value of shares of the Companys common stock held by
non-affiliates as of March 23, 2007 was $7,360,535 based upon the average bid
and asked prices of the issuers common stock on the OTC Bulletin Board on
March 23, 2007. 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, 2007, there were 13,320,576 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 ICNS.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.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

We
are a leading provider of complete Information Technology (IT) solutions for
an enterprises infrastructure and data protection needs. We supply a broad
range of IT products and services to enterprises and service providers. We
provide outsourced storage solutions, including engineering, hardware and
software procurement and remote storage operations services. Our customers are
primarily located in North America, Europe and Japan. We market our products and services
to service providers and enterprise clients under the trade name Incentra
Solutions.

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                           
| |   |                                                                                            |   |                                                             
| |  | Third-party maintenance
  contracts                                                       
| |   |                                                                                            |   |                                                             
| |  | Outsourcing solutions
  Automated/remote monitoring, management and maintenance services:
| |   |                                                                                            |   |                                                             
| |   |                                                                                            |  | Alert monitoring and
  notification                         
| |   |                                                                                            |   |                                                             
| |   |                                                                                            |  | Health/capacity/performance                                 
| |   |                                                                                            |   |                                                             
| |   |                                                                                            |  | Management and remote
  operation of data protection systems
| |   |                                                                                            |   |                                                             
| |  | Professional services 
  engineering/implementation/IT help desk:                        
| |   |                                                                                            |   |                                                             
| |   |                                                                                            |  | IT Assessments                                              
| |   |                                                                                            |   |                                                             
| |   |                                                                                            |  | System Design Services                                      
| |   |                                                                                            |   |                                                             
| |   |                                                                                            |  | Project Management
  Services                               
| |   |                                                                                            |   |                                                             
| |   |                                                                                            |  | Level 1-3 Engineering
  Support                             
| |   |                                                                                            |   |                                                             
| |   |                                                                                            |  | Staff Augmentation/Outsourcing of Operations                
| |   |                                                                                            |   |                                                             
| |  | Capital/financing
  solutions                                                             

We
deliver our remote monitoring and management services from our 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, Western Europe, Bermuda and Japan. We
deliver data protection services worldwide using our proprietary GridWorks
Operations Support System, which enables automated remote monitoring and
management of full storage infrastructures and back-up applications. We provide
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 through improved operating effectiveness with reduced
operating costs and reductions in capital expenditures.

Industry Trends

Gartner
Dataquest (Gartner) estimates annual data growth at a compound rate of
approximately 65% annually through 2010 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 reflect an accelerating growth rate in the demand for IT
services, including data management and monitoring solutions. The total market
for IT services worldwide according to Gartner is forecasted to grow to almost
$856 billion by 2010 from $629 billion in 2005, with a 6.4% CAGR. More
importantly, the worldwide market for storage services is expected to grow to
$33 billion by 2010, with a 6.6% CAGR, according to Gartner Dataquest.

1

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Worldwide Storage Services Forecast (millions)

|                                   |  |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |      |   | 
|---------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ |  | ---- | - | 
|                                   |  | 2006 |        | 2007 |   | 2008   |  | 2009 |        | 2010 |   | CAGR % | 
|                                   |  |      |        |      |   |        |  |      |        |      |   |        | 
|                                   |  |      |        |      |   |        |  |      |        |      |   |        | 
|Hardware maintenance and
  support |  | $    | 9,684  |      | $ | 10,105 |  | $    | 10,497 |      | $ | 10,921 |  | $ | 11,380 |  | 4.0  | % | 
|Software support                   |  |      | 2,985  |      |   | 3,278  |  |      | 3,652  |      |   | 4,100  |  |   | 4,681  |  | 11.5 | % | 
|Consulting                         |  |      | 3,658  |      |   | 3,990  |  |      | 4,327  |      |   | 4,639  |  |   | 4,943  |  | 7.8  | % | 
|Development and integration        |  |      | 3,688  |      |   | 3,945  |  |      | 4,186  |      |   | 4,447  |  |   | 4,601  |  | 5.7  | % | 
|IT management                      |  |      | 5,374  |      |   | 5,939  |  |      | 6,518  |      |   | 7,040  |  |   | 7,369  |  | 8.1  | % | 
|                                   |  |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |      |   | 
|                                   |  |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |      |   | 
|Total worldwide                    |  | $    | 25,389 |      | $ | 27,257 |  | $    | 29,180 |      | $ | 31,147 |  | $ | 32,974 |  | 6.6  | % | 
|                                   |  |      |        |      |   |        |  |      |        |      |   |        |  |   |        |  |      |   | 

Source: Gartner Dataquest
(January 2007)

IT
departments are faced with the challenges of rapidly expanding amounts of data
to manage, increasing demands on data availability for day-to-day business and
in meeting regulatory requirements, and increasing and more stringent
compliance and governmental regulations regarding data storage, integrity and
recoverability. Conversely, IT headcount is projected by Industry Data Corporation to increase by
only 10% annually. We expect the disparity between the growth in IT headcount
and data storage demands will increase the likelihood that organizations will
turn to outsourced products and services, such as those provided by us, to
successfully meet 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.

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, the increasing scope
of spending on storage and the need to balance capital expenditures and
operating expenses.

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 storage devices 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 consolidate shared 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.

2

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Business Strategy

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                    | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | 
| |  | Growth
  in Professional and Managed Services Revenue. We have invested and continue to invest
  heavily in our professional and managed services functions. We are in the
  process of rolling out our new national services platform, processes and
  support, including multiple new service offerings. Growth in these
  higher-margin services should drive much greater incremental cash flows and
  enable significant economies of scale. We expect this growth to be achieved
  organically and we will evaluate acquisition opportunities that will supplement our
  growth.                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Growth
  through Acquisition.
  Our acquisitions (four since February 2005) have expanded our customer base,
  provided a large suite of products and services, expedited the development of
  a strong 50-person direct 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 intend to continue to seek acquisition candidates to complete
  our North American geographic presence, as well as to add new and
  complementary service capabilities for rollout through our entire sales
  force. We believe the markets for storage management and services and
  value-added resellers are highly fragmented and that there are many smaller
  providers with successful product offerings that are seeking merger or
  acquisition partners. We 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 is on acquisition candidates with facilities and targeted
customers located in the United States. However, there can be no assurance that
we will be able to identify acquisition candidates that meet any or all of
these criteria.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Development
  of Strategic Alliances.
  We intend to further develop our business and supplement our sales and
  marketing efforts through continued development of our strategic
  relationships with primary IT product manufacturers, service and software
  providers and distributors. These alliances provide us with the additional
  benefit of co-marketing funds, special event funding and funding for specific
  sales initiatives, as well as support in identifying new customers and
  obtaining sales leads and support for our field sales and engineering
  personnel.                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Offer
  Complete Data Protection Solutions. A complete data protection solution includes storage resource
  management, back-up applications, storage hardware, professional services,
  and operations and financing solutions. Prior to 2005, we were primarily
  focused on the operations component of the complete data protection solution
  and had 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 quality software-based service solutions
  that meet client expectations in terms of functionality, flexibility,
  procurement cost, implementation cost and ongoing maintenance cost. We
  believe our product lines meet these expectations and will continue to do so
  as these products evolve. We are committed to continuous product improvement
  through a formal research and 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.                                            

3

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increase
  Marketing and Direct Sales Efforts.We have invested heavily in our sales force and direct marketing
  efforts and will continue to invest in this area. 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. We help customers to deal
economically with these challenges by providing a complete storage and IT
management solution. Our complete solutions include professional services,
products, proprietary software platforms, IT outsourcing services and financing
services. Organizations benefit from our solutions in numerous ways, 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 needs that
  are typically increasing 65% annually;  
| |   |                                                                    
| |  | New technologies requiring
  integration across platforms;         
| |   |                                                                    
| |  | Increasing levels of
  external and internal compliance policies;  
| |   |                                                                    
| |  | Staffing levels that are
  projected to grow only 10% annually; and
| |   |                                                                    
| |  | Limited capital or
  operating budgets.                            

Our
customers are primarily located in North America, Europe and Japan and are primarily in
the following markets: Fortune 2000 Enterprises and mid-tier Enterprises, Data
Center Operators and IT Service Providers.

For
the year ended December 31, 2006, revenues from customers located in North
America amounted to $63.5 million, or 95% of total revenues, and revenues from
customers located in Europe amounted to $3.2 million, or 5% of total revenues.
For the year ended December 31, 2005, aggregate revenues from customers located
in North America amounted to $35.8 million, or 94% of total revenue, and $2.1 million
from customers in Europe, or 6% total revenue.

Datacenter Operators and IT Service Providers

Customers
in this segment consist primarily of managed service providers that offer
hosting and co-location 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, Colt Telecom, 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 a wide range of large and middle
market customers, including Network Appliance, Inc., Accenture, American
Airlines, Hilton Hotels, Good Technology and Transora. Other representative customers
include Blue Cross/Blue Shield, Standard Insurance, Xilinx, Solar Turbines,
Calyon Financial and Huron Consulting.

4

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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 and third-party maintenance contracts. Service revenue includes
recurring managed service revenue, professional services revenue and revenue
from maintenance services managed by us.

Products

Our
products include a broad range of software and hardware solutions and
third-party maintenance contracts 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.

Resale of third-party hardware and software.

We
resell various products developed by third parties, including computer hardware
and software and other peripheral devices, as well as maintenance contracts. 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 to that of other resellers. We represent most
major original equipment manufacturers, or OEMs, and all major storage OEMs,
including the following:

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

Outsourcing
Services. Our service
offerings are based upon 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.

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

5

---



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.

Managed
Storage and Monitoring Services.We
offer a proprietary managed storage and monitoring service through our
proprietary GridWorks Operations Support Systems (OSS) 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 provides proactive management of the health, capacity and
utilization of a storage infrastructure. Our platform serves as a suite of
applications that enables our NOC to monitor and manage customer
infrastructures globally through automation. Our GridWorks Portal is the user
interface into our GridWorks suite of applications, allowing us to 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. 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 our storage infrastructure
  and 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.                                                                                                                      

Our
GridWorks OSS 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.

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

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 and 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.                                                                                                            

6

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| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Implementation and integration
  services  assuring technology purchases are installed and optimized to
  achieve the best possible performance and to utilize resources that minimize
  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
  and implementation 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  broad range of systems and storage
  applications.                                                                               

Financing
Solutions.We offer a
financing option as part of our complete service solutions (GridComplete). 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. We evaluate the creditworthiness of
a customer, as well as the status of the relationship, in determining the
amount of financing to provide.

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
December 31, 2006, our direct sales force consisted of 50 direct sales people. Sales
and marketing personnel are located at our offices in Broomfield, Colorado; San
Diego and San Francisco, California; Boise, Idaho; Chicago, Illinois; Detroit,
Michigan; Anchorage, Alaska; Portland, Oregon; Dallas, Texas; London, England
and Kirkland, Washington. We also have a sales and marketing presence in
Phoenix, Arizona and Los Angeles, California but presently have no physical
locations in these cities. 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 and strategic partners. A typical sales cycle begins with the
generation of a sales lead (event, telemarketing, relationship) or the receipt
of a lead from a strategic partner. After qualification of the sales lead and
analysis of the prospective customers requirements, a proposal including a
statement of work and a corresponding quote for the appropriate product or
service is created. While the sales cycle varies, a solution that includes
individual components, such as products, design services and implementation, or
a combination, typically results in a one to four-month cycle. The sales cycle
for a complete IT solution, which includes ongoing managed services or
outsourced operations, can range from four to 12 months.

We
have co-marketing relationships with national and regional distribution
partners to drive regional and local market penetration, and with
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 also are 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
enhancements and improvements to our  service offerings. 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.

7

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We
seek to offer comprehensive storage services using our proprietary GridWorks
Operations Support System, which enables automated remote 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.

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, 2006 and 2005, we incurred capitalizable software
development costs totaling $588,629 and $611,546, respectively. See Note 2 to
Notes to Consolidated Financial Statements.  Prior to the disposition of Front
Porch in July 2006, expenditures for research and development were significantly higher;
both with respect to the amounts charged to current expense and capitalized
software development costs.

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 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 our
GridWorks storage management platform.

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 of 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 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 name
recognition and financial resources than we do.

We
expect our competitors to continue to improve the design and performance of
their products and services. Competitors may develop future generations of
competitive products and services 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 data protection solutions and complete
solutions to enterprises include Arsenal Digital, Electronic 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, SAN Holdings,
Inc., Midrange Computer Solutions, Inc. (MCSI) and Forsythe Technologies, Inc.

Employees

As
of March 23, 2007, we employed 195 people on a full-time basis, of which 10
were executive management, 71 were in sales and marketing, 81 were in
engineering and software development and 33 were in finance and administration.

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.

8

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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 DIVArchive customers in the medical industry.

In
August 2004, we acquired all of the outstanding capital stock of ManagedStorage
International, Inc. (also known as Incentra of CO (the Incentra of CO Acquisition).
The Incentra of CO Acquisition was accounted for as a reverse merger and
Incentra of CO was deemed to be the acquirer for accounting purposes. On
October 25, 2004, we changed our name to Incentra Solutions, Inc.

As
a result of the Incentra of CO Acquisition, the consolidated financial
statements presented herein include the financial statements of Incentra of CO
for all periods prior to August 18, 2004 and the financial statements of the
consolidated companies from the date of the Incentra of CO Acquisition
forward.

In
February 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.

In
March 2005, we acquired all of the outstanding capital stock of PWI
Technologies, Inc. (also known as Incentra NW), 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.

In
April 2006, we acquired all of the outstanding capital stock of Network Systems
Technologies, Inc. (also known as Incentra MW), 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 (30) of this business.

In
July 2006, we sold to Genuity Capital Management Services, Inc. substantially
all of the assets of Front Porch, including all intellectual property rights
relating to the DIVArchive product applications and its investment in Front
Porch International S.A.S. In connection with such sale, Genuity offered
employment to substantially all of our personnel in the United States
associated with the transferred assets and all those employed by Front Porch
International S.A.S in Europe and assumed certain software support obligations
to our DIVArchive customers.

In
September 2006, we acquired all of the outstanding capital stock of Tactix,
Inc., 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 (18) 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 48,000 square feet of office space in 12 locations,
including approximately 11,000 square feet of office space in Broomfield,
Colorado through September 2007. We are in the process of negotiating with the
landlord on renewal of the lease for the existing space while also searching
for new space in the same geographic area to relocate to at

9

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the end of the
lease if our negotiations are not successful. The Broomfield site houses our software development resources,
engineering, NOC, information management systems and administrative
functions.

At
December 31, 2006, aggregate lease payments under all leases through the end of
the lease terms were as follows:

|                      |  |                |        |                              |   |           | 
|--------------------- |  | -------------- | ------ | ---------------------------- | - | --------- | 
|                      |  | Square Footage |        | Future
  Lease 
  Commitment |  
|                      |  |                |        |                              |  
|San Diego, California |  |                | 4,724  |                              | $ | 398,260   | 
|San Ramon, California |  |                | 1,808  |                              |   | 7,684     | 
|Tigard, Oregon        |  |                | 4,061  |                              |   | 195,342   | 
|Anchorage, Alaska     |  |                | 725    |                              |   | 44,128    | 
|Boise, Idaho          |  |                | 2,543  |                              |   | 90,000    | 
|Kirkland, Washington  |  |                | 6,447  |                              |   | 253,947   | 
|Lombard, IL           |  |                | 11,324 |                              |   | 828,256   | 
|Chicago, IL           |  |                | 400    |                              |   | 65,520    | 
|Detroit, Michigan     |  |                | 3,008  |                              |   | 84.600    | 
|London, England       |  |                | 600    |                              |   | 125,186   | 
|Richardson, Texas     |  |                | 1,661  |                              |   | 48,576    | 
|Broomfield, Colorado  |  |                | 10,673 |                              |   | 197,744   | 
|                      |  |                |        |                              |   |           | 
|                     
|Total                 |  |                | 47,974 |                              | $ | 2,339,243 | 
|                      |  |                |        |                              |   |           | 

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

ITEM 3. 
LEGAL PROCEEDINGS

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

None.

10

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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 ICNS.
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,
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 | 
|                              |  |          |      |         |   |      | 
|Year Ended December 31,
2006: |  |          |      |         |   |      | 
|First Quarter                 |  | $        | 1.40 |         | $ | 0.90 | 
|Second Quarter                |  |          | 1.65 |         |   | 1.05 | 
|Third Quarter                 |  |          | 1.35 |         |   | 1.09 | 
|Fourth Quarter                |  |          | 1.24 |         |   | 0.92 | 

Holders

At
March 23, 2007, 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 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.

11

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Securities Authorized for Issuance Under
Equity Compensation Plans

As
of December 31, 2006, the following equity compensation plans were in effect:

|                                                            |  |                                                                                                       |  |                                                                                     |  |                                                                        |  |   |      |  |  |  |  |         |  | 
|----------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------- |  | - | ---- |  |  |  |  | ------- |  | 
|EQUITY COMPENSATION PLAN INFORMATION                       
|                                                            |  |                                                                                                      
|Plan
  category                                             |  | Number of
  securities to be
  issued upon
  exercise of
  outstanding options,
  warrants and rights |  | Weighted average
  exercise price
  of outstanding
  options, warrants
  and rights |  | Number of
  securities
  remaining
  available
  for future
  issuance | 
|                                                            |  |                                                                                                       |  |                                                                                     |  |                                                                        |  |  
|                                                           
|Equity compensation plans approved by security holders      |  |                                                                                                       |  | -0-                                                                                 |  |                                                                        |  |   | N/A  |  |  |  |  | -0-     |  | 
|                                                            |  |                                                                                                       |  |                                                                                     |  |                                                                        |  |   |      |  |  |  |  |         |  | 
|Equity compensation plans not approved by security
holders: |  |                                                                                                       |  |                                                                                     |  |                                                                        |  |   |      |  |  |  |  |         |  | 
|                                                            |  |                                                                                                       |  |                                                                                     |  |                                                                        |  |   |      |  |  |  |  |         |  | 
|2000 Incentra Option Plan (a)                               |  |                                                                                                       |  | 1,831,996                                                                           |  |                                                                        |  | $ | 2.54 |  |  |  |  | 430,504 |  | 
|                                                            |  |                                                                                                       |  |                                                                                     |  |                                                                        |  |   |      |  |  |  |  |         |  | 
|Incentra of CO 2000 Stock Option and Grant Plan (b)         |  |                                                                                                       |  | 215,893                                                                             |  |                                                                        |  | $ | 0.45 |  |  |  |  | -0-     |  | 
|                                                            |  |                                                                                                       |  |                                                                                     |  |                                                                        |  |   |      |  |  |  |  |         |  | 
|2006 Stock Option Plan (c)                                  |  |                                                                                                       |  | 1,235,911                                                                           |  |                                                                        |  | $ | 1.24 |  |  |  |  | 514,089 |  | 
|                                                            |  |                                                                                                       |  |                                                                                     |  |                                                                        |  |   |      |  |  |  |  |         |  | 
|                                                           
|Total                                                       |  |                                                                                                       |  | 3,283,800                                                                           |  |                                                                        |  | $ | 1.91 |  |  |  |  | 944,593 |  | 
|                                                            |  |                                                                                                       |  |                                                                                     |  |                                                                        |  |   |      |  |  |  |  |         |  | 

| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Total
  number of securities remaining available for future issuance represents
  2,262,500 shares reserved for issuance under our 2000 Incentra Option Plan,
  less options outstanding.                     
| |                                                                                                                                                                                                                   
| | (b)
  Represents options to purchase unregistered shares of our common stock
  pursuant to grants under the Incentra of CO 2000 Stock Option and Grant Plan.
  There will be no additional grants under such plan.
| |                                                                                                                                                                                                                   
| | (c) Total
  number of securities remaining available for future issuance represents
  1,750,000 shares reserved for issuance under our 2006 Stock Option Plan, less
  options outstanding.                        

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 and Estimates

Our
significant accounting policies are described in Note 2 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, accounting for software development costs, stock-based
compensation, accounting for obligations and instruments potentially settled in
shares of our common stock, impairment of goodwill, intangibles and other
long-lived assets and concentrations of risk related to customers.

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
apply the provisions of Emerging Issues Task Force (EITF) Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent. Our
application of EITF 99-19 includes evaluation of the terms of customer
contracts relative to a number of criteria that management considers in making
its determination with respect to gross versus net reporting of revenue for
transactions with customers. Managements criteria for making these judgments
place particular emphasis on determining the primary obligor in a transaction
and which party bears general inventory risk. We purchase and resell hardware,
software and third-party maintenance contracts. In these transactions, we (i)
act as principal; (ii) take title to

12

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the products;
and (iii) have the risks and rewards of ownership, including the risk of loss
for collection, delivery or returns. For these transactions, we recognize
revenues based on the gross amounts due from customers.

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.

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 agreement. 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 are recognized when shipped. Revenues from the resale of
third-party maintenance agreements are recognized at the date of sale, which
generally approximates the commencement date of the service contract.
Consulting revenues are recognized when the services are performed.

Prior
to the disposition of Front Porch on July 31, 2006, we licensed software under
license agreements and provided professional services, including training, installation,
consulting and maintenance. License fee revenues were recognized when a license
agreement had been signed, the software product had been shipped, the fees were
fixed and determinable, collection was reasonably assured and no significant
vendor obligations remained.

Prior
to the disposition of Front Porch on July 31, 2006, we allocated revenue to
each component of a contract based on objective evidence of its fair value, as
established by management. Because licensing of software generally is 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.

Software Development Costs

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 three years.

Stock-Based Compensation

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R Share-Based Payment, (SFAS 123R), which addresses the accounting for
share-based payment transactions. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using APB No. 25 and
generally requires instead that such transactions be accounted and recognized
in the statement of income based on their fair value. Application of SFAS 123R
requires the use of significant estimates, including expected volatility,
expected term, risk-free interest rate and forfeiture rate. SFAS 123R was
effective for us beginning January 1, 2006. The impact on our operating results
and other information related to stock-based compensation upon adopting SFAS
123R are included in Note 2 to our Consolidated Financial Statements.

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 for periods prior to
2006.

For
periods prior to 2006, we 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 was measured as the

13

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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.

Accounting for Obligations and Instruments
Potentially Settled in our Capital Stock

We
account for obligations and instruments potentially to be settled in our
capital 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, primarily as these relate to
warrants issued to Laurus.

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. For contracts initially classified as equity, we 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 Goodwill, Intangibles and Other
Long-Lived Assets

Long-lived,
tangible and intangible assets that do not have indefinite lives, such as
property and equipment and acquired customer relationships, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We have approximately
$3.1 million in property and equipment at December 31, 2006. As a result of the
acquisitions we consummated in 2006 and 2005, we have approximately $2.3
million in identifiable intangible assets at December 31, 2006. Determination
of recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the 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 amount 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 profitability and cash flows. As a
result of the acquisitions we consummated in 2005 and 2006, we have
approximately $16.9 million in goodwill at December 31, 2006.

With
the acquisition of Incentra of CA in February 2005, we recorded goodwill of
$6,177,686. 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. 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.

Concentration of RiskCustomers and
Geographic

We
currently sell our products and services primarily throughout North America,
with only a small portion (less than 5%) generated in 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 a specific customers 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.

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

14

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|                               |  |                 |        |              |   |       |  |   |        | 
|------------------------------ |  | --------------- | ------ | ------------ | - | ----- |  | - | ------ | 
|                               |  | North
  America |        | Europe/Asia* |   | Total | 
|                               |  |                 |        |              |   |       | 
|                               |  |                 |        |              |   |       |  |   |        | 
|Year Ended December 31,
  2006 |  |                 |        |              |   |       |  |   |        | 
|Revenues                       |  | $               | 63,462 |              | $ | 3,170 |  | $ | 66,632 | 
|Long-lived Assets, net         |  |                 | 22,356 |              |   | 862   |  |   | 23,218 | 
|                               |  |                 |        |              |   |       |  |   |        | 
|Year Ended December 31,
  2005 |  |                 |        |              |   |       |  |   |        | 
|Revenues                       |  | $               | 35,837 |              | $ | 2,098 |  | $ | 37,935 | 
|Long-lived Assets, net         |  |                 | 8,835  |              |   | 477   |  |   | 9,312  | 

*The geographic breakout by
country is not practible to obtain.

During
2006, no customer represented more than 10% of revenues. During 2005, one customer
represented 16% of revenues.

General

When
used in this discussion, the word 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 operating 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 and continued
enhancement of our 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, vendor
relationships 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.

Any
forward-looking statements herein 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.

We
supply a broad range of IT products and services to enterprises and service
providers. We market our products and services to service providers and
enterprise clients under the trade name Incentra Solutions. We deliver complete
IT solutions and 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.
We provide data protection solutions and services that ensure that our
customers data is backed-up and recoverable and meets internal data retention
compliance policies. Our remote monitoring and management services are
delivered from our 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. We deliver these services
worldwide using our proprietary GridWorks Operations Support System, which
enables automated remote monitoring and management of complete storage
infrastructures and back-up applications. We provide 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.

For
the year ended December 31, 2006, revenues increased 75.7% to $66.6 million
from $37.9 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 2006 and organic growth from our existing business.
On a pro forma basis, assuming that the two acquisitions in 2006 occurred as of January 1, 2005, revenue
for the year ended December 31, 2006 increased to $90.0 million compared to $79.1 million in the previous
year. The increase is attributed to higher product and service revenues from Incentra MW and Incentra
NW compared to the prior year.

For the year ended December 31, 2006, our loss from continuing operations was
$18.8 million, as compared to a loss from continuing operations of $13.6
million for the prior year. Included in the results for 2006 is a loss of $3.0
million on early extinguishment of debt. Included in the loss for 2005 is an
impairment loss of $4.2 million related to the acquisition of Incentra of CA.

15

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For
the year ended December 31, 2006, excluding the gain of $15.4 million from discontinued operations, we incurred an adjusted EBITDA1 loss of $8.9
million compared to an adjusted EBITDA loss of $3.7 million for the prior year.
The adjusted EBITDA loss for 2006 excludes from our loss from continuing
operations the impact of non-cash stock option compensation expense of $1.6
million, a loss of $3.0 million on early extinguishment of debt, net interest
expense of $2.9 million and depreciation and amortization expense of $2.5
million. The adjusted EBITDA loss for 2005 excludes an impairment loss on
goodwill of $4.2 million, depreciation and amortization expense of $3.0 million
and net interest expense of $2.4 million. The adjusted EBITDA loss for 2005
also includes the add back of $0.4 million of non-cash compensation expense
compared to $1.6 million in 2006 following the adoption of SFAS 123R effective
January 1, 2006.

We
continue to invest in hardware and the development of our software and in data
storage and other infrastructure equipment. During the year ended December 31,
2006, we invested $0.6 million in software development and $2.4 million in data
storage infrastructure.

We
continue to expand our product and service offerings in an effort to position
our company as a provider of a wide range of services and products and to
further solidify our leading market position. We also continue to increase the
number of products we have available for resale to our customers, both directly
and through existing channel partners. We introduced the sales of managed
services along with our sales of storage products and professional services
directly to enterprise customers. We also believe we can increase our sales of
managed services by introducing these services to the customers of our acquired
businesses. We believe our professional services business will be enhanced as
we leverage our engineering resources across our entire customer base.

During
the year ended December 31, 2006, we completed two additional strategic
acquisitions that we believe allowed us to become a more complete solutions
provider of IT infrastructure products and services.

---

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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 Incentra CO.
  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 
  All amounts in (000s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                                      |  |                                   |         |      |    |        |  
|--------------------------------------------------------------------- |  | --------------------------------- | ------- | ---- | -- | ------ | -
|                                                                      |  | For the years ending December 31, |        
|                                                                      |  |                                   |        
|                                                                      |  | 2006                              |         | 2005 |   
|                                                                      |  |                                   |         |      |   
|Loss
  from continuing operations before accretion of preferred stock |  | ($                                | 18,838  | )    | ($ | 13,649 | )
|Depreciation
  and amortization                                       |  |                                   | 2,488   |      |    | 2,991  |  
|Loss on
  impairment of goodwill                                      |  |                                   |        |      |    | 4,151  |  
|Interest,
  net (cash portion)                                        |  |                                   | 1,365   |      |    | 810    |  
|Interest
  expense (non-cash portion)                                 |  |                                   | 1,520   |      |    | 1,610  |  
|                                                                      |  |                                   |         |      |    |        |  
|EBITDA
  loss from continuing operations                              |  |                                   | (13,465 | )    |    | (4,087 | )
|                                                                      |  |                                   |         |      |    |        |  
|Loss on
  early extinguishment of debt                                |  |                                   | 2,957   |      |    |       |  
|Non-cash
  stock based compensation                                   |  |                                   | 1,588   |      |    | 350    |  
|                                                                      |  |                                   |         |      |    |        |  
|                                                                      |  |                                   |         |      |    |        |  
|EBITDA loss from continuing operations, as adjusted                   |  | ($                                | 8,920   | )    | ($ | 3,737  | )
|                                                                      |  |                                   |         |      |    |        |  

16

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Results of OperationsYear Ended December 31, 2006 Compared
to the Year Ended December 31, 2005

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 are believed 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.

Revenue.
Total revenue from continuing operations for
the year ended December 31, 2006 increased $28.7 million, or 75.7%, to $66.6
million compared to total revenue of $37.9 million for the year ended December
31, 2005. Revenue from the sale of products increased $25.7 million, or 93.8%,
to $53.1 million compared to revenue of $27.4 million for the prior year. This
increase was attributable to the additional revenues resulting from our
acquisitions of Network Systems Technologies, Inc. (also known as Incentra
MW) in April and Tactix, Inc. in September. Revenue from the delivery of
services increased $3.0 million, or 28.6%, to $13.5 million compared to $10.5
million for the prior year. The increase in service revenue resulted primarily
from the additional service revenues we received from the two acquisitions that
we completed in fiscal 2006.

For
the year ended December 31, 2006, revenues from customers in North America totaled
$63.5 million, or 95% of total revenues compared to $35.8 million, or 94% of
total revenue for 2005. For the year ended December 31, 2006, the portion of
our revenues that was derived from the European and Asian markets increased to
$3.2 million, or 5% of total revenues, compared to $2.1 million, or 6% of total
revenues, in 2005.

Gross
Margin. Total gross
margin from continuing operations for the year ended December 31, 2006
increased $6.1 million to $14.3 million, or 21.5% of total revenue, as compared
to gross margin of $8.2 million, or 21.6% of total revenue, for the comparable
prior-year period. Product gross margin for the year ended December 31, 2006
totaled $10.3 million, or 19.4% of product revenue compared to $4.6 million, or
16.9%, for the prior-year period. Service gross margin for the year ended
December 31, 2006 totaled $4.0 million, or 29.3%, of service revenue compared to
$3.5 million, or 33.5%, for the prior-year period.

Selling,
General, and Administrative Expenses. Selling, general and administrative (SG&A) expenses from
continuing operations for the year ended December 31, 2006 increased by
approximately $12.3 million to $26.6 million from $14.3 million for 2005.
SG&A expenses for the year ended December 31, 2006 included $19.3 million
in salaries and related benefits for employees not directly related to the
production of revenue, $2.3 million in general office expenses, $2.0 million in
professional fees, $1.2 million for travel-related costs, $1.2 million in
facilities costs and $0.6 million in bad debt expense. SG&A expenses of
$14.3 million for the prior year ending December 31, 2005 included $9.7 million
in salaries and related benefits for employees not directly related to the
production of revenue, $1.8 million in general office expenses, $1.3 million in
professional fees, $0.6 million in travel-related costs, $0.8 million of
facilities costs and $0.1 million of bad debt expense. The increase in SG&A
expenses during the year ended December 31, 2006 was a direct result of our
acquisitions of Incentra MW and Tactix, as well as increased investment in
sales and engineering resources. In addition, in 2006, our adoption of FAS 123R
resulted in an increase of $1.2 million in non-cash stock option compensation
expense. This expense was included in the salaries and related benefits
category of expenses.

Depreciation
and Amortization.
Amortization expense consists of amortization of acquired customer
relationships, capitalized software development costs and other intangible
assets. Depreciation expense consists of depreciation of furniture, equipment,
software and improvements. Depreciation and amortization expense from continuing
operations was

17

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approximately $2.5 million
and $3.0 million for the years ended December 31, 2006 and 2005, respectively,
of which $1.7 million was included in cost of revenue in each year.

Operating
Loss from Continuing Operations. For the year ended December 31, 2006, we incurred a loss from
continuing operations of $13.1 million as compared to a loss from continuing
operations of $11.6 million for the year ended December 31, 2005. The loss for
2005 included a loss on impairment of goodwill of $4.2 million. No similar loss
was incurred in 2006. Excluding the loss on impairment of goodwill, the operating
loss from continuing operations increased by $5.6 million. This was primarily due
to increased SGA expenses of $12.2 million being only partially offset by increased
gross margin of $6.1 million.

Interest
Expense. Interest
expense was $2.9 million for the year ended December 31, 2006 compared to $2.4
million for the year ended December 31, 2005. Interest expense during 2006
included cash interest costs of $1.4 million on notes payable and capital
leases, and non-cash interest charges of $1.5 million, consisting of $0.8
million related to amortization of debt discounts, $0.3 million related to
warrants and $0.4 million related to amortization of financing costs. Interest
expense for 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 a note
issued to Laurus Master Fund, Ltd. (Laurus) and $0.4 million related to
amortization of financing costs

Loss
on Early Extinguishment of Debt. For the year ended December 31, 2006, we incurred a $3.0 million loss
on the early extinguishment of debt. The refinancing of our 2005 credit
facility with Laurus in the first quarter of 2006 was accounted for as an early
extinguishment of debt. A loss of $1.2 million was recorded in connection with
this debt extinguishment, which included $0.4 million for an early termination
fee and $0.1 million in costs associated with the refinancing. In addition,
significant repayment of long-term debt occurred during the third quarter of
2006. In connection with such repayment, we incurred $0.8 million in prepayment
penalties, and $0.9 million in deferred financing costs were written-off. No
similar refinancings or early debt extinguishment occurred in 2005.

Other
Income and Expense.
Other income was approximately $0.1 million for the year ended December 31,
2006 as compared to other income of approximately $0.4 million for the prior
year. Other income for 2005 included $0.3 million of income resulting from the
reassessment of the value of contracts recorded under EITF 00-19 for
outstanding warrants and $0.1 million of investment income was derived from
leased equipment to customers and gains from sales of fixed assets.

Foreign
Currency Transaction Gain or Loss. We conduct business in various countries outside the United States in
which the functional currency of the country is not the U. S. dollar. The
effects of exchange rate fluctuations in remeasuring foreign currency
transactions for the years ended December, 2006 and 2005 were minimal for each
period.

Income
or Loss from Discontinued Operations. In July 2006, we sold the assets of Front Porch and have accounted for
the operations of Front Porch prior to such sale as discontinued operations.
During the year ended December 31, 2006, income from discontinued operations
was $0.6 million for the 7-month period ended July 31, 2006
as compared to a loss from discontinued operations for the
year ended December 31, 2005 of $0.6 million. The difference in earnings was
primarily due to improved operating results and decreased income tax expense in
2006 on the income generated by our former Front Porch division in France.

Gain
on Sale of Discontinued Operations. The sale of Front Porch during 2006 generated a gain of $15.4 million.

Net
Loss Applicable to Common Shareholders. During the year ended December 31, 2006, we
incurred a net loss applicable to common shareholders of $5.5 million as compared
to a net loss applicable to common shareholders of $16.8 million for the prior
year ended December 31, 2005. The significant decrease in net loss applicable
to common shareholders for 2006 was primarily due to the gain on the sale of
Front Porch of $15.4 million.

Liquidity and Capital Resources

At
December 31, 2006, we had $1.0 million of cash and cash equivalents. Issuance
of convertible debt and equity securities, borrowings under a revolving line of
credit and proceeds from the sale of Front Porch have each been a principal
source of liquidity for us in the year ended December 31, 2006.

On
February 6, 2006, in connection with our execution of a new security agreement,
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

18

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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%). The maximum
principal amount outstanding under the 2006 Revolver Note cannot exceed 90% of
the combined eligible accounts receivable of our U.S. operations. As of
December 31, 2006, outstanding borrowings under the 2006 Facility amounted to
$6.3 million.

The 2006 Facility requires a lockbox arrangement, which requires all
receipts to be swept daily to reduce borrowings outstanding under the 2006
Facility. This arrangement, combined with a Subjective Acceleration Clause
(SAC) in the 2006 Facility, cause the 2006 Facility to be classified as a
current liability, per guidance in the EITF 95-22, Balance Sheet Classification
of Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement.

On
March 31, 2006, we consummated a private placement pursuant to which we issued
a secured convertible term note due May 31, 2009 in the principal amount of
$1,500,000 (the 2006 Convertible Note) and a secured term note due May 31,
2009 in the principal amount of $1,750,000 (the 2006 Term Note). Funding of
$3.25 million under the 2006 Term Note and the 2006 Convertible Note was
completed on April 13, 2006 and was used to fund part of the cash portion of
the purchase price of our acquisition of Incentra MW. The 2006 Term Note was
repaid on July 31, 2006. The 2006 Convertible Note remains outstanding, is
being repaid according to terms and had an outstanding balance of $1.1 million
at December 31, 2006.

In
May and June 2006, we entered into a Note Purchase Agreement (the Purchase
Agreement) with twelve accredited individuals and three institutional
investors (collectively, the Purchasers), pursuant to which we issued and
sold unsecured convertible term notes (the Convertible Notes) in the
aggregate principal amount of $2,410,000. Of this amount, $1,060,000 was repaid
to the twelve non-institutional purchasers in September 2006. The remaining
Convertible Notes have a principal amount of $1,350,000. The Convertible Notes
bear interest at an annual rate of 12% (subject to certain adjustments) and
mature on June 6, 2007. Absent early redemption (at our option and without
penalty), the Convertible Notes and any accrued interest are convertible, at
the option of the Purchasers, into shares of our common stock at a fixed conversion
price of $1.40 per share. We have the right to convert all or any portion of
the then unpaid and accrued interest on the remaining Convertible Notes into
shares of our common stock at the then-effective conversion price of such
Convertible Notes. In connection with issuance of the Convertible Notes in May
and June 2006, we also issued to the Purchasers five-year warrants (the
Warrants) to purchase an aggregate of 570,688 shares of our common stock, at
an exercise price $1.40 per share.

On
July 31, 2006, we completed the sale of substantially all of the assets of
Front Porch. Proceeds from the sale amounted to $33 million in cash with a
potential earn out of an additional $5 million. We received $30.5 million in
cash at closing, which is net of an escrow of $2.5 million that is expected to
be released in 2007 following the settlement of any indemnification claims that
may arise during the one-year period following the sale. With the proceeds (net
of fees of the sale), we paid off the remaining principal balance and accrued
interest on all amounts due Laurus with the exception of the 2006 Convertible
Note. The repayment of these notes also included prepayment penalties amounting
to approximately $0.8 million.

In
July 2006 we reached an agreement with the former owner of Incentra of CA to
settle an arbitration award. Pursuant to the settlement, we paid the former
owner $505,000 on execution of the agreement and $1,875,000 on August 2, 2006,
and the former owner returned to us all 1,135,580 shares of our common stock
issued to him in the acquisition of Incentra of CA and cancelled the $2.5
million promissory note issued to him in February 2005.

On
April 13, 2006, in connection with the acquisition of Incentra MW, we paid approximately
$6.0 million in cash and issued a note in the amount of $1.5 million to the former
shareholder of Incentra MW. On  September 5, 2006,
we acquired Tactix for approximately $4.0 million in cash, including fees.

As
of December 31, 2006, we had current assets of $22.3 million. These assets were
primarily derived from our operations and acquisitions in 2006. Long-term
assets of $23.5 million consist of $2.3 million of intangible assets resulting
from the acquisitions of Incentra of CA, Incentra NW and Incentra MW, $16.9
million of goodwill resulting from the acquisitions of Incentra of CA, Incentra
NW, Incentra MW, allianceSoft and Tactix, $3.1 million of property and
equipment, $0.9 million of capitalized software development costs and $0.3
million of, including assets.

Current
liabilities of $30.2 million at December 31, 2006 consist of $14.2 million of
accounts payable; $1.8 million of deferred revenue, $5.7 million of accrued
expenses; and $8.5 million of the current portion of notes payable, other
long-term obligations and capital leases.

Our
working capital deficit was $7.9 million as of December 31, 2006, which included
$6.3 million under a revolving credit agreement which matures on February 9, 2009.

We
used net cash of $14.7 million in operating activities of our continuing
operations during the year ended December 31, 2006. Of this total, $11.1
million resulted from cash used in continuing operations and $3.6 from
increased working capital, excluding the increase in working capital arising
from acquisitions. We used net cash of $10.7 million in

19

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investing activities from
continuing operations during the year ended December 31, 2006, including $2.5
million to purchase or develop computer software and equipment, $5.2 million to
purchase Incentra MW and $3.0 million to acquire Tactix and allianceSoft. Cash
generated by discontinued operations, primarily due to the sale of Front Porch,
amounted to $26.0 million. Financing activities from continuing operations used
net cash of $3.5 million during the year ended December 31, 2006 to repay
long-term indebtedness.

As
part of our business strategy, we have completed four significant acquisitions
and will continue to evaluate new acquisitions during the next 12 months. Although
we completed the sale of Front Porch, which provided a significant amount of
cash, and we are experiencing success in the deployment of our marketing
strategy for the sale and delivery of our 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.

Our
management believes our cash and cash equivalents, available borrowings under
the 2006 Facility and cash flow from operations and non-operating sources will
provide us with sufficient capital resources to fund our operations, debt
service requirements, and working capital needs for the next 12 months. There
can be no assurances that we will 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 that 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.

Exclusive
of any acquisitions, we expect revenue in 2007 to increase to between $110 million and $120 million, or approximately 65% to 80% higher,
than revenue in 2006. In addition, we expect to generate positive cash flow for 2007. However, there can be no
assurance that we will achieve the projected revenue amount or that we will generate positive cash flow for the year.
Our
actual financial results may differ materially from our stated plan of
operations. Factors that may cause a change from our plan of operations to vary
include, without limitation, decisions of our management and board of directors
not to pursue our 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 expenditures and extend vendor
payments for additional cash flow flexibility.

We
expect capital expenditures to be approximately $2.0 million and capitalized
software development costs to be approximately $1.0 million during the 12-month
period ended December 31, 2007. 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.

Managements Plans

We
are subject to various risks and uncertainties frequently encountered by
companies in the early stages of development, particularly companies in the
rapidly evolving market for technology-based products and services. Such risks
and uncertainties include, but are not limited to, our limited operating
history, need for additional capital, a volatile business and technological
environment, an evolving business model, and the management of expected growth.
To address these risks, we must, among other things, gain access to capital in
amounts and on terms acceptable to us, maintain and increase our customer base,
implement and successfully execute our business strategy, continue to enhance
our technology, provide superior customer service, and attract, retain and
motivate qualified personnel. There can be no assurance that we will be
successful in addressing such risks.

Since
inception, we have incurred substantial operating losses and have a working
capital deficit of $7.9 million and a shareholders deficit of $12.6 million as of
December 31, 2006. We have funded these deficiencies by utilizing our existing
working capital, lines of credit and long-term borrowings. We anticipate that
we will continue to fund our business from existing lines of credit and from
increasing cash flows from our business operations. However, no assurance can
be given that we will be successful in increasing cash flow from operations.
Realization of our investment in property and equipment and other long-lived
assets is dependent upon achieving positive operating cash flows. If we do not
achieve and maintain such positive operating cash flows, our long-lived assets
could be considered impaired, resulting in a significant impairment charge to
operations.

20

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Our
2007 operating plan, and the execution thereof, is focused on increasing
revenue, controlling costs, and conserving cash. However, there can be no
assurance that we will be able to meet the operational and financial
requirements of our operating plan. We believe that our cash and cash
equivalents, working capital and access to current and potential lenders will
provide sufficient capital resources to fund our operations, debt service
requirements, and working capital needs at least through December 31, 2007.

We
incurred a loss from continuing operations of $18.8 million for the year ended
December 31, 2006, although the loss included certain non-cash expenses of
approximately $7.7 million.

We believe that cash flows from operations
will provide our primary source of operating capital, as the operations
acquired over the past two years continue to generate cash. In August 2007, we expect
approximately $2.5 million in cash related to the sale of Front Porch to be released
from escrow and available for use in our operations. In addition, we expect to
continue to have significant amounts available to us under our revolving line
of credit with Laurus.

Recently Issued Accounting Pronouncements

In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities  Including an amendment to FASB
Statement No. 115. This statement permits companies to choose to measure many
financial instruments and other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurement of accounting for financial instruments. The fair value option
established by this statement permits all entities to measure eligible items at
fair value at specified election dates. This statement is effective as of the
beginning of an entitys first fiscal year that begins after November 15, 2007.
We are currently assessing the impact that adoption of SFAS No. 159 may have on
our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement. This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. We are currently
assessing the impact of the adoption of SFAS No. 157 may have on our
consolidated financial statements.

In
September 2006, the SEC issued SAB No. 108 in order to eliminate the diversity
of practice surrounding how public companies quantify financial statement
misstatements. In SAB No. 108, the SEC staff established an approach that
requires quantification of financial statement misstatements based on the
effects of the misstatements on each of the companys financial statements and
the related financial statement disclosures. SAB No. 108 is effective for
fiscal years ending after November 15, 2006. SAB No. 108 did not have an impact
to our consolidated financial statements.

In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (FIN
48). FIN 48 requires that a position taken or expected to be taken in a tax
return be recognized in the financial statements when it is more likely than
not (i.e. a likelihood of more than fifty percent) that the position would be
sustained upon examination by tax authorities. A recognized tax position is then
measured at the largest amount of benefit that is greater than fifty percent
likely of being realized upon ultimate settlement. Upon adoption, the
cumulative effect of applying the recognition and measurement provisions of FIN
48, if any, shall be reflected as an adjustment to the opening balance of
retained earnings. The effective date of this interpretation is for fiscal
years beginning after December 15, 2006. We are currently in the process of
evaluating the impact of this interpretation on our consolidated financial
statements.

21

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ITEM 7. FINANCIAL STATEMENTS

The
report of our independent registered public accounting firm and our
consolidated financial statements and associated notes are included in 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 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.

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 2006 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.

ITEM 8B. OTHER INFORMATION

On
April 2, 2007, the employment agreement of Thomas P. Sweeney III, our Chairman of the Board and Chief Executive Officer,
was extended effective March 22, 2007 for three years with a revised annual salary of $325,000 and a
targeted annual bonus of $300,000. In addition, the new agreement continues to require us to pay the
insurance premiums under Mr. Sweeneys existing life insurance policy and
includes 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).

22

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PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS CONTROL
PERSONS; AND CORPORATE GOVERNANCE 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 April 2, 2007:

| |                       |  |     |  |                                        
| | --------------------- |  | --- |  | ---------------------------------------
| | Name                  |  | Age |  | Position(s)                            
| |                       |  |     |  |                                        
| | Thomas P. Sweeney III |  | 46  |  | Chairman of the Board and
  Chief      
| |                       |  |     |  | Executive Officer                      
| | Shawn OGrady         |  | 44  |  | President and Chief
  Operating Officer
| | Anthony DiPaolo       |  | 48  |  | Chief Financial Officer                
| | Matthew Richman       |  | 36  |  | Senior Vice President 
  Corporate    
| |                       |  |     |  | Development and Treasurer              
| | James Wolfinger       |  | 50  |  | Director                               
| | Carmen J. Scarpa      |  | 42  |  | Director                               
| | Thomas G. Hudson      |  | 60  |  | Director                               
| | David E. Weiss        |  | 63  |  | Director                               
| | Robert S. Kocol       |  | 50  |  | 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. (also known as Incentra
of CO), 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 Incentra
of CO. 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, Mr. OGrady 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.

Anthony
DiPaolo. Mr. DiPaolo
has served as our Chief Financial Officer since February 2007. From 2001 until
he joined our company, he served as the President, Chief Executive Officer and
Chief Financial Officer of Mediacell, Inc., a provider of wireless broadband
data network services. From 2000 until 2003, he served as interim Chief
Financial Officer of PDS Financial Corporation, a publicly-traded company that
provides financing and asset management services to the gaming industry.

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.

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 Incentra of CO. From 1996 through September 2002, Mr. Wolfinger was the
President of MCI WorldCom Wireless.

23

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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 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.

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.

Robert
S. Kocol. Mr. Kocol
has served on our Board of Directors since December 2006. From 1998 until 2005,
he served as Corporate Vice President and Chief Financial Officer of Storage
Technology Corporation, a provider of storage solutions for digitized data that
was acquired in August 2005 by Sun Microsystems, Inc. He served in other
capacities at Storage Technology Corporation since 1991.

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 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, 2006,
all Section 16(a) filing requirements applicable to our officers, directors and
10% Shareholders were complied with, except:

| |                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Thomas G. Hudson, a
  director, was late in filing an initial statement of ownership on Form 3 of
  options to purchase 25,000 shares of common stock;                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                  
| | (ii) Walter Hinton, our
  Chief Technology Officer until his resignation on January 26, 2007, was late
  in filing a statement of changes in beneficial ownership on Form 4 for the
  acquisition of 12,527 shares of common stock and the disposition of a
  convertible note convertible into 3,752 shares of common stock that was
  repaid by our Company;   
| |                                                                                                                                                                                                                                                                                                                                                                  
| | (iii) Paul McKnight, our
  Chief Financial Officer until his resignation on February 14, 2007, was late
  in filing a statement of changes in beneficial ownership on Form 4 denoting
  the acquisition of 286 shares of common stock and the disposition of a
  convertible note convertible into 3,752 shares of common stock that was
  repaid by our Company;
| |                                                                                                                                                                                                                                                                                                                                                                  
| | (iv) Shawn OGrady, our
  President and Chief Operational Officer, was late in filing a statement of
  changes in beneficial ownership on Form 4 for the acquisition of 5,715 shares
  of common stock and the disposition of a convertible note convertible into
  71,429 shares of common stock that was repaid by our Company;                                
| |                                                                                                                                                                                                                                                                                                                                                                  
| | (v) Matthew Richman, our
  Senior Vice President and Treasurer, was late in filing a statement of
  beneficial ownership on Form 4 for the acquisition of 286 shares of common
  stock and the disposition of a convertible note convertible into 3,752 shares
  which was repaid by our Company;                                                                
| |                                                                                                                                                                                                                                                                                                                                                                  
| | (vi) Thomas P. Sweeney,
  III, our Chief Executive Officer, was late in filing a statement of changes
  in beneficial ownership on Form 4 for the acquisition and subsequent
  disposition of a convertible note convertible into 71,429                                                                                                                         

24

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | shares of common stock and
  a common stock purchase warrant good for the purchase of 23,648 shares of
  common stock;                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (vii) David E. Weiss, a
  director, was late in filing an initial statement of beneficial ownership on
  Form 3 for the acquisition of options to purchase 25,000 shares of common
  stock;                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (viii) James A. Wolfinger,
  a director, was late in filing an initial statement of beneficial ownership
  on Form 3 for the acquisition of 59,524 shares of common stock, options to
  purchase 25,000 shares of common stock and options to purchase 20,000 shares
  of common stock; Mr. Wolfinger was also late in filing a statement of change
  of beneficial ownership relating to the disposition of 321,429 shares of
  common stock in relation to a convertible note which was repaid by the
  Company.

Code of Conduct

At
a meeting of our board of directors on August 21, 2006, we adopted a Code of Conduct
effective as of that date and which applies to all employees of our company.

ITEM 10. EXECUTIVE COMPENSATION

Compensation

The
following Summary Compensation Table sets forth the compensation of our (i)
principal executive officer, (ii) our two most highly compensated executive
officers other than our principal executive officer and (iii) an additional
individual for whom disclosure would have been required but for the fact that
he was not serving as an executive officer at December 31, 2006. We refer to
these executive officers as our named executive officers.

SUMMARY COMPENSATION TABLE

|                                                                                 |  |      |      |            |   |           |  |                           |         |                                |   |             |  |   |         |  |   |           | 
|-------------------------------------------------------------------------------- |  | ---- | ---- | ---------- | - | --------- |  | ------------------------- | ------- | ------------------------------ | - | ----------- |  | - | ------- |  | - | --------- | 
|Name and Principal Position                                                      |  | Year |      | Salary ($) |   | Bonus ($) |  | Option
  Awards
  ($) (1) |         | All Other
  Compensation
  ($) |   | Total
  ($) | 
|                                                                                 |  |      |      |            |   |           |  |                           |         |                                |   |             | 
|Thomas P. Sweeney III (2)Chief Executive
  Officer                               |  |      | 2006 |            | $ | 300,000   |  | $                         | 503,750 |                                | $ | 786,170     |  | $ | 226,744 |  | $ | 1,816,664 | 
|                                                                                 |  |      |      |            |   |           |  |                           |         |                                |   |             |  |   |         |  |   |           | 
|Michael Knaisch (3) 
  President of Front Porch Digital Division until July 2006 |  |      | 2006 |            | $ | 126,875   |  | $                         | 638,550 |                                | $ | 123,783     |  | $ |        |  | $ | 889,208   | 
|                                                                                 |  |      |      |            |   |           |  |                           |         |                                |   |             |  |   |         |  |   |           | 
|Paul McKnight (4) 
  Chief Financial Officer                                     |  |      | 2006 |            | $ | 210,000   |  | $                         | 215,550 |                                | $ | 59,649      |  | $ | 225,000 |  | $ | 710,199   | 
|                                                                                 |  |      |      |            |   |           |  |                           |         |                                |   |             |  |   |         |  |   |           | 
|Walter Hinton (5) 
  Chief Technology Officer                                    |  |      | 2006 |            | $ | 225,000   |  | $                         | 28,800  |                                | $ | 70,221      |  | $ | 246,000 |  | $ | 570,021   | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The amounts listed in the
  Option Awards column are the amounts of compensation costs recognized in 2006
  for financial reporting purposes related to awards in the current and prior
  fiscal years, excluding the effect of certain forfeiture assumptions as
  discussed in Note 2 of the Notes to Consolidated Financial Statements
  included elsewhere in this report. No options held by the named executives
  were forfeited during the year.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (2) | All other compensation
  includes $208,574 related to office space and other occupancy costs in a
  building leased from an affiliate of Mr. Sweeney in which our executive
  offices are located and $9,500 for a life insurance policy for whom the
  beneficiary is other than Incentra Solutions, Inc. In addition, we reimbursed
  Mr. Sweeney or paid on his                                                                                      

25

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | behalf certain expenses
  amounting to $8,670 for various outings, conferences, memberships and other
  expenses of a personal nature.                                                                                                                                                                                                                                                                                                                            
| |    
| | (3) | Mr. Knaisch served as
  President of our Front Porch Division until July 31, 2006 when the assets of
  the division were sold. As part of the sale, Mr. Knaisch terminated his
  employment with us on that date and was appointed to an executive position
  with the buyer of the division.                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (4) | Mr. McKnight served as our
  Chief Financial Officer until his resignation on February 14, 2007. Mr.
  McKnight continues to be employed by us in a non-executive position. Upon
  termination of his employment with us in any capacity, Mr. McKnight will
  continue to receive a salary and other benefits over the ensuing 12-month
  period in accordance with the terms of his employment agreement, which amount
  is included in All Other Compensation.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (5) | Mr. Hinton served as our
  Chief Technology Officer until his employment was terminated on January 26, 2007. He will
  continue to receive a salary and other benefits for the ensuing 12-month
  period in accordance with the terms of his employment agreement, which amount
  is included in All Other Compensation.                                                                                                                                        

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 included a provision for the issuance of options to purchase
up to 1,023,700 shares of our common stock at $2.80 per share, which options
were granted, of which 682,467 are exercisable. On

April 2, 2007, the employment agreement was extended effective March 22, 2007
for three years with a
revised annual salary of $325,000 and a targeted annual bonus of $300,000. In
addition, the new agreement continues to require us to pay the insurance
premiums under Mr. Sweeneys existing life insurance policy and includes
severance provisions for the payment of one-years 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 21, 2004, we entered into an at-will employment agreement with Paul
McKnight, our Chief Financial Officer at that time. Mr. McKnights employment
agreement contained the following provisions: an 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; and 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 resigned as our Chief
Financial Officer on February 14, 2007 and will receive his full salary and
group health plan benefits for 12 months following termination.

On
December 21, 2004, we entered into an at-will employment agreement with Walter
Hinton, our Chief Technology Officer at that time. Mr. Hintons employment
agreement contained the following provisions: an 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 resigned as of Chief
Technical Officer on January 26, 2007 and will receive his full salary and
group health plan benefits for 12 months following termination.

Equity Incentive Plans

The
following table sets forth information for each of the named executive officers
regarding the number of shares subject to both exercisable and unexercisable
stock option awards as of December 31, 2006:

26

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

|                      |     |               |                                                                                 |         |                                                                                   |  |                                 |  |                            |  |  |  |   |      |  |  |                    
|--------------------- | --- | ------------- | ------------------------------------------------------------------------------- | ------- | --------------------------------------------------------------------------------- |  | ------------------------------- |  | -------------------------- |  |  |  | - | ---- |  |  | -------------------
|                      |     | Option Awards
|                      |     |              
|Name                  |     |               | Number of
  Securities
  Underlying
  Unexercised
  Options
  (#)
  Exercisable |         | Number of
  Securities
  Underlying
  Unexercised
  Options
  (#)
  Unexercisable |  | Option
  Exercise
  Price
  ($) |  | Option
  Expiration
  Date
|                      |     |               |                                                                                 |         |                                                                                   |  |                                 |  |                           
|Thomas P. Sweeney III | (1) |               |                                                                                 | 113,257 |                                                                                   |  |                                 |  | 37,752                     |  |  |  | $ | 0.32 |  |  | February
  13, 2013
|                      | (2) |               |                                                                                 | 55,000  |                                                                                   |  |                                 |  | 27,500                     |  |  |  | $ | 2.20 |  |  | March
  16, 2014   
|                      | (3) |               |                                                                                 | 682,467 |                                                                                   |  |                                 |  | 341,233                    |  |  |  | $ | 2.80 |  |  | August
  18, 2014  
|                      |     |               |                                                                                 |         |                                                                                   |  |                                 |  |                            |  |  |  |   |      |  |  |                    
|Paul McKnight         | (1) |               |                                                                                 | 7,588   |                                                                                   |  |                                 |  |                           |  |  |  | $ | 0.32 |  |  | February
  13, 2013
|                      | (4) |               |                                                                                 | 20,000  |                                                                                   |  |                                 |  |                           |  |  |  | $ | 2.80 |  |  | January
  8, 2013  
|                      | (5) |               |                                                                                 | 33,333  |                                                                                   |  |                                 |  | 16,667                     |  |  |  | $ | 3.20 |  |  | November
  17, 2014
|                      | (6) |               |                                                                                 |        |                                                                                   |  |                                 |  | 72,278                     |  |  |  | $ | 1.30 |  |  | May
  4, 2016      
|                      |     |               |                                                                                 |         |                                                                                   |  |                                 |  |                            |  |  |  |   |      |  |  |                    
|Walter Hinton         | (7) |               |                                                                                 | 25,232  |                                                                                   |  |                                 |  | 8,410                      |  |  |  | $ | 0.32 |  |  | February 13, 2013  
|                      | (7) |               |                                                                                 | 46,667  |                                                                                   |  |                                 |  | 23,333                     |  |  |  | $ | 3.20 |  |  | November 17, 2014  
|                      |     |               |                                                                                 |        |                                                                                   |  |                                 |  | 46,358                     |  |  |  | $ | 1.30 |  |  | May 4, 2016        

| |     |                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------
| | (1) | Granted April 24, 2002. Options vest over four years at
          the rate of 25% on each anniversary date thereafter.  
| |     |                                                                                                                         
| | (2) | Granted March 16, 2004. Options vest over three years at
          the rate of 33% on each anniversary date thereafter. 
| |     |                                                                                                                         
| | (3) | Granted August 18, 2004. Options vest over three years
          at the rate of 33% on each anniversary date thereafter.
| |     |                                                                                                                         
| | (4) | Granted January 8, 2003 and were 100% vested on date of
          grant.                                                
| |     |                                                                                                                         
| | (5) | Granted November 17, 2004 and vest over three years at
          the rate of 33% on each anniversary date thereafter.   
| |     |                                                                                                                         
| | (6) | Granted May 4, 2006 and vest over three years at the rate
          of 33% on each anniversary date thereafter.         
| |     |                                                                                                                         
| | (7) | Mr. Hintons employment with our company was terminated
          on January 26, 2007.                                  

We
currently have three equity incentive plans. One plan was established by us in
2006 (the Incentra Solutions, Inc. 2006 Stock Option Plan or the 2006 Plan),
one plan that was originally established by us in 2000 (the 2000 Incentra
Option Plan) and one that was originally established by Incentra of CO (the
Incentra of CO Plan). Each of these plans is

27

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described below. Except as
set forth in an individual agreement, none of our plans contain any provisions
for the acceleration of vesting of options in the event of a change of control
of our company or for cancellation and reissuance of options previously
granted.

2006 Plan

In
May 2006, we adopted the 2006 Plan for the purpose of attracting, retaining and
maximizing the performance of executive officers and key employees and
consultants. We have reserved 1,750,000 shares of our common stock for issuance
under the 2006 Plan. The 2006 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 Coda of 1986, as amended, and non-statutory stock options. The
2006 Plan is administered by the Compensation Committee of the Board of
Directors. 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 2006 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.

2000 Incentra Option Plan

In
May 2000, we adopted the 2000 Incentra Option Plan. We have reserved 2,265,000
shares for issuance under the Incentra Option Plan. The 2000 Incentra Option
Plan has a term of ten years. The 2000 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
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 2000 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
2000 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 2000
Incentra Option Plan at the time of the grant. SARs granted under the 2000
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 has not
granted any SARs and does not have any present plans to do so.

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 2000 Incentra
Option Plan. At this time, the Board of Directors has not granted, and does not
have any present plans to grant, restricted shares of common stock.

Incentra of CO 2000 Stock Option and Grant Plan

Prior
to our acquisition of ManagedStorage International, Inc. (also known as
Incentra of CO), which was accounted for as a reverse merger, Incentra of CO
adopted and administered its 2000 Stock Option and Grant Plan (the Incentra of
CO Plan) for its employees, directors, consultants and other key persons. As a
result of such acquisition, no additional grants will be made under the
Incentra of CO Plan. However, outstanding stock options previously issued
pursuant to the Incentra of

28

---



CO Plan may be exercised for
unregistered shares of our common stock. As provided in the Incentra of CO
acquisition agreements, upon the exercise of any outstanding options issued
under the Incentra of CO Plan, we will issue 0.3089 shares of our unregistered
shares of common stock for each share of Incentra of CO common stock that would
have been issuable upon the exercise of such options. Currently, there are
outstanding under the Incentra of CO Plan options to purchase 215,893 shares of
our common stock.

Non-qualified Deferred Compensation

We
do not maintain any non-qualified defined contribution plans or other deferred
compensation plans. The Compensation Committee may elect to provide our
officers and other employees with non-qualified defined contribution or
deferred compensation benefits if the Compensation Committee determines that
doing so is in our best interests.

Compensation of Directors

Non-employee
directors receive $2,500 per month for their services (with the exception of
Mr. Carmen J. Scarpa who receives no remuneration), and all directors receive
reimbursement for their reasonable out-of-pocket expenses incurred in attending
meetings of the Board. The following table sets forth compensation information
for each non-employee member of the Board.

DIRECTOR COMPENSATION

|                        |  |                                     |   |                     |  |                                |  |             |        |  |  |  |   |       |  |  |   |        | 
|----------------------- |  | ----------------------------------- | - | ------------------- |  | ------------------------------ |  | ----------- | ------ |  |  |  | - | ----- |  |  | - | ------ | 
|Name                    |  | Fees Earned or
  Paid in Cash
  ($) |   | Option Awards
  ($) |  | All Other
  Compensation
  ($) |  | Total
  ($) |       
|                        |  |                                     |   |                     |  |                                |  |             |       
|Patrick Whittingham (1) |  |                                     | $ | 30,000              |  |                                |  | $           | 16,898 |  |  |  | $ | 794   |  |  | $ | 47,692 | 
|James Wolfinger (2)     |  |                                     | $ | 30,000              |  |                                |  | $           | 19,322 |  |  |  | $ | 1,303 |  |  | $ | 50,625 | 
|Carmen J. Scarpa        |  |                                     | $ |                    |  |                                |  | $           |       |  |  |  | $ |      |  |  | $ |       | 
|Thomas G. Hudson (3)    |  |                                     | $ | 30,000              |  |                                |  | $           | 6,998  |  |  |  | $ |      |  |  | $ | 36,998 | 
|David E. Weiss (4)      |  |                                     | $ | 30,000              |  |                                |  | $           | 9,421  |  |  |  | $ | 372   |  |  | $ | 39,793 | 
|Robert S. Kocol (5)     |  |                                     | $ |                    |  |                                |  | $           | 272    |  |  |  | $ |      |  |  | $ | 272    | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Mr.
  Whittingham resigned from our board of directors effective December 1, 2006.
  At that date, options to purchase 45,000 shares of our common stock (of which
  16,667 were vested) were outstanding. The vested options to purchase the shares
  will expire on November 30, 2007.                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (2) | As of
  December 31, 2006, Mr. Wolfinger has options granted on August 5, 2004 to
  purchase 25,000 shares of our common stock at $2.20 per share, of which
  16,667 were vested. The options will expire on August 5, 2014. On May 4,
  2006, Mr. Wolfinger was granted options to purchase 20,000 shares of our
  common stock at $1.30 per share. The options will vest over three years at
  the rate of 33% on each anniversary date thereafter and will expire on May 4,
  2016.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (3) | As of
  December 31, 2006, Mr. Hudson has options granted on December 14, 2005 to
  purchase 25,000 shares of our common stock at $1.21 per share, of which 8,333
  were vested. The options will vest over three years at the rate of 33% on
  each anniversary date thereafter and will expire on December 14, 2015.                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (4) | As of
  December 31, 2006, Mr. Weiss has options granted on December 14, 2005 to
  purchase 25,000 shares of our common stock at $1.21 per share, of which 8,333
  were vested. The option will expire on December 14, 2015. On May 4, 2006, Mr.
  Weiss was granted options to purchase 10,000 shares of our common stock at
  $1.30 per share. The options will vest over three years at the rate of 33% on
  each anniversary date thereafter and will expire on May 4, 2016.      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (5) | As of
  December 31, 2006, Mr. Kocol has options granted on December 18, 2006 to
  purchase 25,000 shares of our common stock at $1.10 per share. The options
  will vest over three years at the rate of 33% on each anniversary date
  thereafter and will expire on December 18, 2016.                                                                                                                                                                                             

29

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

The following table sets
forth information as of March 23, 2007 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:

|  |                                              |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|- | -------------------------------------------- |  | ------------------------ |  | --------------------------------------------------------------- |  | --------- | ----------------------------------------------------- |  |  | ---- | - | ----
|  | 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                   |  | Common Stock             |  |                                                                 |  | 2,330,797 |                                                       |  |  | 16.0 | % | (6) 
|  | Capital
          Institutional              |  | Series A Preferred Stock |  |                                                                 |  | 602,775   |                                                       |  |  | 24.4 | % |     
|  | Investors,
          LLC                     |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | 522 Fifth Avenue                             |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | New York, NY 10036                           |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  |                                              |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | Joseph Graziano                              |  | Common Stock             |  |                                                                 |  | 1,063,878 |                                                       |  |  | 8.0  | % | (7) 
|  | 2050-80 Finley Road                          |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | Lombard, IL 60148                            |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  |                                              |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | RAB Special Situations (Master) Fund Limited |  | Common Stock             |  |                                                                 |  | 1,020,422 |                                                       |  |  | 7.2  | % | (8) 
|  | P.O. Box 908 GT                              |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | Walker House Mary Street                     |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | George Town, Cayman Islands                  |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  |                                              |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | DIRECTORS AND NAMED                          |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | EXECUTIVE
            OFFICERS               |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  |                                              |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | Thomas P. Sweeney III                        |  | Common Stock             |  |                                                                 |  | 1,242,828 |                                                       |  |  | 8.7  | % | (9) 
|  | 1140 Pearl
          Street                  |  | Series A Preferred Stock |  |                                                                 |  | 16,558    |                                                       |  |  |      | * |     
|  | Boulder,
          CO 80302                  |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  |                                              |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | James Wolfinger                              |  | Common Stock             |  |                                                                 |  | 189,417   |                                                       |  |  | 1.4  | % | (10)
|  | Walter Hinton                                |  | Common Stock             |  |                                                                 |  | 93,684    |                                                       |  |  |      | * | (11)
|  | Paul McKnight                                |  | Common Stock             |  |                                                                 |  | 86,715    |                                                       |  |  |      | * | (12)
|  | Thomas G. Hudson                             |  | Common Stock             |  |                                                                 |  | 8,333     |                                                       |  |  |      | * | (13)
|  | David E. Weiss                               |  | Common Stock             |  |                                                                 |  | 8,333     |                                                       |  |  |      | * | (14)
|  | Carmen J. Scarpa                             |  |                         |  |                                                                 |  |          |                                                       |  |  |     |   | (5) 
|  | Robert S. Kocol                              |  |                         |  |                                                                 |  |          |                                                       |  |  |     |   |     
|  |                                              |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     
|  | All directors and executive                  |  | Common Stock             |  |                                                                 |  | 1,898,648 |                                                       |  |  | 12.8 | % |     
|  | officers as a group (11 persons)             |  | Series A Preferred Stock |  |                                                                 |  | 16,558    |                                                       |  |  |      | * |     
| 
|* | Constitutes
          less than 1%           |  |                          |  |                                                                 |  |           |                                                       |  |  |      |   |     

30

---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (2) | All
  percentages for common stock are calculated based upon a total of 13,320,576
  shares outstanding as of March 23, 2007, 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, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (3) | All
  percentages for Series A preferred stock are calculated based upon a total of
  2,466,971 shares outstanding as of March 23, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (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. In his capacity as a director, Mr. Scarpa represents Tudors
  interest in our Company. However, Mr. Scarpa specifically disclaims
  beneficial ownership of the shares of common stock beneficially owned by such
  entity.                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (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.

31

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| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (7)  | Share information is furnished in reliance on the Form
          3 dated April 24, 2006 and on Form 4 dated September 19, 2006 filed
          by the person named herein with the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                  
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (8)  | Share information is furnished in reliance on Schedule
          13G/A filed on February 14, 2007. Represents 212,000 shares of common
          stock owned of record, 607,142 shares of common stock issuable upon
          conversion of a convertible note and interest thereon, and 201,280
          shares of common stock issuable upon exercise of a warrant.                                                                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (9)  | Represents 122,443 shares of common stock owned of record
          by Equity Pier LLC, of which Mr. Sweeney is the founder and managing
          member, 147,552 shares of common stock owned of record by Mr. Sweeney,
          23,680 shares issuable upon exercise of a warrant held by Mr. Sweeney,
          915,976 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.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (10) | Represents 59,524 shares of common stock owned of record
          by Mr. Wolfinger, 106,560 shares of common stock issuable upon exercise
          of a warrant held by Mr. Wolfinger and 23,333 shares of common stock
          issuable upon the exercise of presently exercisable options held by
          Mr. Wolfinger.                                                                                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (11) | Represents 12,191 shares of common stock owned of record
          by Mr. Hinton, 1,184 shares of common stock issuable upon exercise
          of a warrant held by Mr. Hinton and 80,309 shares issuable upon the
          exercise of presently exercisable options held by Mr. Hinton. Mr. Hinton
          terminated his employment with us on January 26, 2007. All of the options
          are exercisable through April 26, 2007.                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (12) | Represents 520 shares of common stock owned of record by
          Mr. McKnight, 1,184 shares of common stock issuable upon exercise of
          a warrant held by Mr. McKnight and 85,011 shares issuable upon the
          exercise of presently exercisable options held by Mr. McKnight. Mr.
          McKnight resigned as our Chief Financial Officer on February 14, 2007
          and continues to be employed by us in a non-executive capacity.                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (13) | Represents 8,333 shares issuable upon the exercise of presently
          exercisable options held by Mr. Hudson.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (14) | Represents 8,333 shares of common stock issuable upon the
          exercise of presently exercisable options held by Mr. Weiss.                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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 8.7%
of our outstanding common stock. Since 2004, we have leased office space from
Equity Pier. Total costs incurred under the leasing arrangement and associated
expenses (utilities, supplies and insurances) amounted to approximately
$208,574 and $190,178 for the years ending December 31, 2006 and 2005,
respectively. In 2007, we expect to incur leasing costs to Equity Pier of
approximately $215,000.

Independence of the Board of Directors

The
board of directors has adopted Nasdaqs standards for determining the
independence of its members and believes that it interprets these requirements
conservatively. In applying these standards, the board of directors considers
commercial, industrial, banking, consulting, legal, accounting, charitable and
familial relationships, among others, in assessing the independence of
directors, and must disclose any basis for determining that a relationship is
immaterial. The board of directors has determined that a majority of its
members, namely Messrs. Kocol, Hudson, Weiss, and Wolfinger, are independent
directors within the meaning of such Nasdaq independence standards in terms of
independence from management, such members constituting four (4) of the six (6)
members of the board of directors. In making these independence determinations,
the board of directors did not exclude from consideration as immaterial any
relationship potentially compromising the independence of any of the above
directors.

32

---



Messrs.
Wolfinger and Kocol comprise the audit committee of the board of directors, and
Messrs. Wolfinger and Scarpa comprise the compensation committee of the board of
directors. Mr. Weiss is chairman of the corporate governance and nominating
committee. All members of the board of directors are committee members for
policy and procedure issues. All non-management directors are invited to attend
all executive meetings of the board of directors. Messrs. Sweeney and Scarpa
(due to his relationship with Tudor Investment Corporation, a beneficial owner
of more than 5% of our common stock) are the two non-independent members of the
board of directors. Mr. Kocol replaced Mr. Patrick Whittingham as a member of
our board of directors in 2006 and as a member of the audit committee.

ITEM 13. EXHIBITS

The
exhibits required by this Item are set forth on the Exhibit Index attached
hereto.

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
aggregate fees billed and expected to be billed by GHP Horwath, P.C. for the audit of our 2006 financial statements (including out-of-pocket
fees incurred in connection with these services) included in our annual report on Form 10-KSB, the reviews of our financial
statements included in our quarterly reports on Form 10-QSB for our fiscal year ended December 31, 2006 and for procedures
performed in connection with providing consents for various registration statements are approximately $297,000. For the year
ended December 31, 2005, the aggregate audit fees billed by GHP Horwath, P.C. for these services were $212,000.

Audit-Related Fees

The
aggregate fees billed by GHP Horwath, P.C. in fiscal 2006 and fiscal 2005 (including out-of-pocket fees incurred in connection
with these services) for audit-related services were $14,000 and zero, respectively. In 2006, GHP Horwath, P.C. performed due
diligence services which comprised these fees.

Tax Fees

There
were no tax fees billed by GHP Horwath, P.C. in fiscal 2006 or 2005.

All Other Fees

There were no other fees billed by GHP Horwath, P.C. in fiscal 2006 or 2005.

Board of Directors Pre-Approval

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

33

---



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
  2, 2007 | 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/Date              |  |                                                | Title | 
|                            |  |                                                |       | 
|                            |  |                                               
|/s/ Thomas
  P. Sweeney III |  | Chief
  Executive Officer and Director        
|                            |  | (principal
  executive officer)               
|Thomas P.
  Sweeney III     |  |                                               
|April 2,
  2007             |  |                                               
|                            |  |                                               
|/s/ Anthony
  DiPaolo       |  | Chief
  Financial Officer                     
|                            |  | (principal
  financial and accounting officer)
|Anthony
  DiPaolo           |  |                                               
|April 2,
  2007             |  |                                               
|                            |  |                                               
|/s/ James
  Wolfinger       |  | Director                                      
|                            |  |                                               
|James
  Wolfinger           |  |                                               
|April 2,
  2007             |  |                                               
|                            |  |                                               
|/s/ Carmen
  J. Scarpa      |  | Director                                      
|                            |  |                                               
|Carmen J.
  Scarpa          |  |                                               
|April 2,
  2007             |  |                                               
|                            |  |                                               
|/s/ Thomas
  G. Hudson      |  | Director                                      
|                            |  |                                               
|Thomas G.
  Hudson          |  |                                               
|April 2,
  2007             |  |                                               
|                            |  |                                               
|/s/ David E.
  Weiss        |  | Director                                      
|                            |  |                                               
|David E.
  Weiss            |  |                                               
|April 2,
  2007             |  |                                               
|                            |  |                                               
|/s/ Robert
  S. Kocol       |  | Director                                      
|                            |  |                                               
|Robert S. Kocol             |  |                                               
|April 2,
  2007             |  |                                               

34

---



EXHIBIT INDEX

|               |      |             |                                                                                                                                                                                                                                                                                              
|-------------- | ---- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |      | 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).                         
|               |      |             |                                                                                                                                                                                                                                                                                              
|               | 2.2  |             | Stock
  Purchase Agreement, dated as of April 13, 2006, by and between our company
  and Network System Technologies, Inc. (incorporated by reference to Exhibit
  2.1 filed with our Current Report on Form 8-K filed on April 17, 2006).                                                   
|               |      |             |                                                                                                                                                                                                                                                                                              
|               | 2.3  |             | Purchase
  Agreement, dated as of July 31, 2006, by and between our company, Managed
  Storage International, Inc., FPD Acquisition Corporation and 1706045 Ontario
  Limited (incorporated by reference to Exhibit 2.1 filed with our Current
  Report on Form 8-K filed on August 3, 2006).
|               |      |             |                                                                                                                                                                                                                                                                                              
|               | 2.4  |             | Stock
  Purchase Agreement, dated as of September 1, 2006, by and between our company
  and the shareholders of Tactix, Inc. (incorporated by reference to Exhibit
  2.1 filed with our Current Report on Form 8-K filed on September 11, 2006).                                             
|               |      |             |                                                                                                                                                                                                                                                                                              
|               | 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 the same 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).                                                                                                  

35

---



|               |       |             |                                                                                                                                                                                                                                                                                           
|-------------- | ----- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |       | Description
|               |       |            
|               |       |            
|               | 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).                                     
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.3  |             | 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).           
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.4  |             | 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).              
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.5  |             | 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).                                          
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.6  |             | 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).
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.7  |             | 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).                                           
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.8  |             | 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).                                                 
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.9  |             | 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).                                                       
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.10 |             | 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).                                                      
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.11 |             | 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).                                                              
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.12 |             | 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).                                                                  
|               |       |             |                                                                                                                                                                                                                                                                                           
|               | 10.13 |             | 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).                                                                  

36

---



|               |       |             |                                                                                                                                                                                                                                                                                                
|-------------- | ----- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |       | Description
|               |       |            
|               |       |            
|               | 10.14 |             | 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).                                                       
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.15 |             | 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).                  
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.16 |             | 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).
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.17 |             | 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).                                                                        
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.18 |             | 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).                                                
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.19 |             | 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).                                                                         
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.20 |             | 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).                                                       
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.21 |             | 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).                                                              
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.22 |             | 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).                                
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.23 |             | 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).                                                 
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.24 |             | 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.)                                                                    
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.25 |             | 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).                                                        
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.26 |             | 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).                                                
|               |       |             |                                                                                                                                                                                                                                                                                                
|               | 10.27 |             | Secured
  Convertible Term Note, dated as of March 31, 2006, by Incentra Solutions,
  Inc. in favor of Laurus Master Fund, Ltd. (Incorporated by reference to
  Exhibit 10.57 filed with our Annual Report on Form 10-KSB for the period
  ended December 31, 2005, filed on April 4, 2006).   

37

---



|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|-------------- | ----- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |       | Description
|               |       |            
|               |       |            
|               | 10.28 |             | Common Stock
  Purchase Warrant, dated as of March 31, 2006, issued by our company to Laurus
  Master Fund, Ltd. (Incorporated by reference to Exhibit 10.59 filed with our
  Annual Report on Form 10-KSB for the period ended December 31, 2005, filed on
  April 4, 2006).                                                                                                    
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.29 |             | Registration
  Rights Agreement, dated as of March 31, 2006, by and between our company and
  Laurus Master Fund, Ltd. (Incorporated by reference to Exhibit 10.60 filed
  with our Annual Report on Form 10-KSB for the period ended December 31, 2005,
  filed on April 4, 2006).                                                                                              
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.30 |             | 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. (Incorporated by reference to
  Exhibit 10.61 filed with our Annual Report on Form 10-KSB for the period
  ended December 31, 2005, filed on April 4, 2006).
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.31 |             | Promissory
  Note, dated April 13, 2006, by our company in favor of Joseph J. Graziano
  (incorporated by reference to Exhibit 10.1 filed with our Current Report on
  Form 8-K filed on April 17, 2006).                                                                                                                                                                        
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.32 |             | Registration
  Rights Agreement, dated as of April 13, 2006, by and between our company and
  Joseph J. Graziano (incorporated by reference to Exhibit 10.2 filed with our
  Current Report on Form 8-K filed on April 17, 2006).                                                                                                                                                
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.33 |             | Registration
  Rights Agreement, dated as of April 13, 2006, by and between our company and
  Transitional Management Consultants, Inc. (incorporated by reference to
  Exhibit 10.3 filed with our Current Report on Form 8-K filed on April 17,
  2006).                                                                                                                       
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.34 |             | Consulting
  and Subcontractor Agreement, dated as of April 13, 2006, by and between our
  company, Network System Technologies, Inc. and Transitional Management
  Consultants, Inc. (incorporated by reference to Exhibit 10.4 filed with our
  Current Report on Form 8-K filed on April 17, 2006).                                                                           
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.35 |             | Lock-Up
  Agreement, dated as of April 13, 2006, by and between our company and Joseph
  J. Graziano (incorporated by reference to Exhibit 10.5 filed with our Current
  Report on Form 8-K filed on April 17, 2006).                                                                                                                                                            
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.36 |             | Joinder
  Agreement, dated as of April 13, 2006, by Network System Technologies, 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 April 17, 2006).                                                                                                                                     
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.37 |             | 2006 Stock
  Option Plan of Incentra Solutions, Inc, (incorporated by reference to Exhibit
  10.1 filed with our Quarterly Report on Form 10-QSB for the period ended
  March 31, 2006).                                                                                                                                                                                         
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.38 |             | Note
  Purchase Agreement, dated as of May 19, 2006, by and among our company and
  the purchasers executing a joinder agreement thereto (incorporated by
  reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on
  May 23, 2006).                                                                                                                        
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.39 |             | Form of
  Convertible Term Note, dated as of May 19, 2006, executed by our company
  (incorporated by reference to Exhibit 10.2 filed with our Current Report on
  Form 8-K filed on May 23, 2006).                                                                                                                                                                              
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.40 |             | Form of
  Common Stock Purchase Warrant to purchase shares of common stock, dated as of
  May 19, 2006 (incorporated by reference to Exhibit 10.3 filed with our
  Current Report on Form 8-K filed on May 23, 2006).                                                                                                                                                            
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.41 |             | Registration
  Rights Agreement, dated as of May 19, 2006, between our company and the
  purchasers executing a joinder agreement thereto (incorporated by reference
  to Exhibit 10.4 filed with our Current Report on Form 8-K filed on May 23,
  2006).                                                                                                                       
|               |       |             |                                                                                                                                                                                                                                                                                                                                                                                  
|               | 10.42 |             | Form of
  Convertible Term Note (incorporated by reference to Exhibit 10.1 filed with
  our Current Report on Form 8-K filed on June 30, 2006).                                                                                                                                                                                                                                  

38

---



|               |       |             |                                                                                                                                                                                                                                                                                                  
|-------------- | ----- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |       | Description
|               |       |            
|               |       |             |                                                                                                                                                                                                                                                                                                  
|               | 10.43 |             | Form of
  Common Stock Purchase Warrant to purchase shares of common stock
  (incorporated by reference to Exhibit 10.2 filed with our Current Report on
  Form 8-K filed on June 30, 2006).                                                                                                     
|               |       |             |                                                                                                                                                                                                                                                                                                  
|               | 10.44 |             | Registration
  Rights Agreement, dated as of June 26, 2006, between our company, RAB
  American Opportunities Fund Limited, RAB Investment Funds plc and Blue Line
  Partners LLP (incorporated by reference to Exhibit 10.3 filed with our
  Current Report on Form 8-K filed on June 30, 2006).
|               |       |             |                                                                                                                                                                                                                                                                                                  
|               | 10.45 |             | Letter
  Agreement, dated July 27, 2006, between our company and Alfred Curmi
  (incorporated by reference to Exhibit 10.1 filed with our Current Report on
  Form 8-K filed on August 3, 2006).                                                                                                 
|               |       |             |                                                                                                                                                                                                                                                                                                  
|               | 10.46 |             | Amendment to
  Letter Agreement, dated July 27, 2006, between our company and Alfred Curmi
  (incorporated by reference to Exhibit 10.2 filed with our Current Report on Form
  8-K filed on August 3, 2006).                                                                                    
|               |       |             |                                                                                                                                                                                                                                                                                                  
|               | 10.47 |             | Employment
  Agreement, effective February 14, 2007, between Incentra Solutions, Inc. and
  Anthony DiPaolo (incorporated by reference to Exhibit 10.1 filed with our
  Current Report on Form 8-K filed on February 20, 2007).                                                                  
|               |       |             |                                                                                                                                                                                                                                                                                                  
|               | 10.48 |             | Employment Agreement Extension
        for Thomas P. Sweeney III.                                                                                                                                                                                                                                
|               |       |             |                                                                                                                                                                                                                                                                                                  
|               | 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.                                                                                                                                                                                      

39

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements

Years Ended December 31, 2006 and 2005

Table of Contents

|                                                                                                                                  |      |    
|--------------------------------------------------------------------------------------------------------------------------------- | ---- | ---
|                                                                                                                                  | Page
|                                                                                                                                  |     
|                                                                                                                                  |      |    
|Report of Independent Registered Public
  Accounting Firm                                                                         |      | F-1
|                                                                                                                                  |      |    
|Consolidated Balance Sheet as of December
  31, 2006                                                                              |      | F-2
|                                                                                                                                  |      |    
|Consolidated Statements of Operations for
  the years ended December 31, 2006 and 2005                                            |      | F-3
|                                                                                                                                  |      |    
|Consolidated Statements of Convertible
  Redeemable Preferred Stock for the years ended December 31, 2006 and 2005                |      | F-4
|                                                                                                                                  |      |    
|Consolidated Statements of Shareholders
  Deficit and Comprehensive Income (Loss) for the years ended December 31, 2006 and 2005 |      | F-5
|                                                                                                                                  |      |    
|Consolidated Statements of Cash Flows for
  the years ended December 31, 2006 and 2005                                            |      | F-6
|                                                                                                                                  |      |    
|Notes to Consolidated Financial
Statements                                                                                        |      | F-8

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, 2006, and the related
consolidated statements of operations, convertible redeemable preferred stock,
shareholders deficit and comprehensive income (loss), and cash flows for each of the
years in the two-year period ended December 31, 2006.  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, 2006, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.

As discussed
in Notes 1 and 4 to the consolidated financial statements, on July 31, 2006,
the Company sold substantially all of the assets of Front Porch Digital, Inc.,
a wholly-owned subsidiary of the Company.

As discussed
in Note 2 to the consolidated financial statements, effective January 1, 2006,
the Company adopted Statement of Financial Accounting Standards No. 123R,
Share-Based Payment.

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

April 2, 2007

F-1

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEET
December 31, 2006

|                                                                                                                                                                               |  |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | ------------ | -
|ASSETS                                                                                                                                                                         |  |   |              |  
|Current assets:                                                                                                                                                                |  |   |              |  
|Cash and cash equivalents                                                                                                                                                      |  | $ | 976,673      |  
|Accounts receivable, net of allowance for doubtful
accounts of
  $702,700                                                                                                      |  |   | 16,132,341   |  
|Other current assets                                                                                                                                                           |  |   | 5,184,722    |  
|                                                                                                                                                                               |  |   |              |  
|Total current assets                                                                                                                                                           |  |   | 22,293,736   |  
|                                                                                                                                                                               |  |   |              |  
|Property and equipment, net                                                                                                                                                    |  |   | 3,064,164    |  
|Capitalized software development costs, net                                                                                                                                    |  |   | 914,786      |  
|Intangible assets, net                                                                                                                                                         |  |   | 2,301,267    |  
|Goodwill                                                                                                                                                                       |  |   | 16,936,715   |  
|Other assets                                                                                                                                                                   |  |   | 307,660      |  
|                                                                                                                                                                               |  |   |              |  
|TOTAL ASSETS                                                                                                                                                                   |  | $ | 45,818,328   |  
|                                                                                                                                                                               |  |   |              |  
|                                                                                                                                                                               |  |   |              |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                                          |  |   |              |  
|Current liabilities:                                                                                                                                                           |  |   |              |  
|Current portion of notes payable, capital leases
and other long-term
  obligations                                                                                             |  | $ | 8,498,168    |  
|Accounts payable                                                                                                                                                               |  |   | 14,190,079   |  
|Accrued expenses and other                                                                                                                                                     |  |   | 5,760,859    |  
|Current portion of deferred revenue                                                                                                                                            |  |   | 1,775,385    |  
|                                                                                                                                                                               |  |   |              |  
|Total current liabilities                                                                                                                                                      |  |   | 30,224,491   |  
|                                                                                                                                                                               |  |   |              |  
|Notes payable, capital leases and other long-term obligations, net of
  current portion                                                                                        |  |   | 819,083      |  
|Deferred revenue, net of current portion                                                                                                                                       |  |   | 161,999      |  
|                                                                                                                                                                               |  |   |              |  
|TOTAL LIABILITIES                                                                                                                                                              |  |   | 31,205,573   |  
|                                                                                                                                                                               |  |   |              |  
|                                                                                                                                                                               |  |   |              |  
|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 |  |   | 27,235,899   |  
|                                                                                                                                                                               |  |   |              |  
|                                                                                                                                                                               |  |   |              |  
|Shareholders deficit:                                                                                                                                                         |  |   |              |  
|Preferred stock, nonvoting, $.001 par value,
2,500,000 shares
  authorized, none issued                                                                                        |  |   |             |  
|Common stock, $.001 par value, 200,000,000 shares
authorized,
  13,320,576 shares issued and outstanding                                                                       |  |   | 13,321       |  
|Additional paid-in capital                                                                                                                                                     |  |   | 122,841,018  |  
|Accumulated deficit                                                                                                                                                            |  |   | (135,477,483 | )
|                                                                                                                                                                               |  |   |              |  
|TOTAL SHAREHOLDERS DEFICIT                                                                                                                                                    |  |   | (12,623,144  | )
|                                                                                                                                                                               |  |   |              |  
|                                                                                                                                                                               |  |   |              |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                                    |  | $ | 45,818,328   |  
|                                                                                                                                                                               |  |   |              |  

See accompanying Notes to Consolidated Financial Statements.

F-2

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                           |  |                         |             |      |   |             |  
|-------------------------------------------------------------------------- |  | ----------------------- | ----------- | ---- | - | ----------- | -
|                                                                           |  | Year Ended December 31, |            
|                                                                           |  |                         |            
|                                                                           |  | 2006                    |             | 2005 |  
|                                                                           |  |                         |             |      |  
|                                                                           |  |                         |             |      |   |             |  
|REVENUES:                                                                  |  |                         |             |      |   |             |  
|Products                                                                   |  | $                       | 53,084,909  |      | $ | 27,440,335  |  
|Services                                                                   |  |                         | 13,547,245  |      |   | 10,494,293  |  
|                                                                           |  |                         |             |      |   |             |  
|TOTAL REVENUE                                                              |  |                         | 66,632,154  |      |   | 37,934,628  |  
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|Cost of revenue:                                                           |  |                         |             |      |   |             |  
|Products                                                                   |  |                         | 42,796,950  |      |   | 22,802,707  |  
|Services                                                                   |  |                         | 9,577,487   |      |   | 6,980,887   |  
|                                                                           |  |                         |             |      |   |             |  
|Total cost of revenue                                                      |  |                         | 52,374,437  |      |   | 29,783,594  |  
|                                                                           |  |                         |             |      |   |             |  
|GROSS MARGIN                                                               |  |                         | 14,257,717  |      |   | 8,151,034   |  
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|Selling, general and administrative                                        |  |                         | 26,550,751  |      |   | 14,334,844  |  
|Depreciation and amortization                                              |  |                         | 767,342     |      |   | 1,250,154   |  
|Impairment of goodwill                                                     |  |                         |            |      |   | 4,151,450   |  
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         | 27,318,093  |      |   | 19,736,448  |  
|                                                                           |  |                         |             |      |   |             |  
|OPERATING LOSS FROM CONTINUING OPERATIONS                                  |  |                         | (13,060,376 | )    |   | (11,585,414 | )
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|Other income (expense)                                                     |  |                         |             |      |   |             |  
|Interest income                                                            |  |                         | 45,401      |      |   | 3,598       |  
|Interest expense                                                           |  |                         | (2,930,378  | )    |   | (2,424,218  | )
|Loss on early extinguishment of debt                                       |  |                         | (2,956,606  | )    |   |            |  
|Other income                                                               |  |                         | 42,426      |      |   | 416,978     |  
|Foreign currency transaction gain (loss)                                   |  |                         | 21,897      |      |   | (59,755     | )
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         | (5,777,260  | )    |   | (2,063,397  | )
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|LOSS FROM CONTINUING OPERATIONS                                            |  |                         | (18,837,636 | )    |   | (13,648,811 | )
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF
  INCOME TAXESNote 4   |  |                         | 628,472     |      |   | (576,746    | )
|                                                                           |  |                         |             |      |   |             |  
|GAIN ON SALE OF DISCONTINUED OPERATIONS, NET OF
  INCOME TAXESNote 4      |  |                         | 15,376,014  |      |   |            |  
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|INCOME (LOSS) FROM DISCONTINUED OPERATIONS                                 |  |                         | 16,004,486  |      |   | (576,746    | )
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|NET LOSS                                                                   |  |                         | (2,833,150  | )    |   | (14,225,557 | )
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|Accretion of convertible redeemable preferred stock to redemption
  amount |  |                         | (2,617,566  | )    |   | (2,617,566  | )
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                                 |  | $                       | (5,450,716  | )    | $ | (16,843,123 | )
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|Weighted average number of common shares outstanding - basic and
  diluted |  |                         | 13,643,447  |      |   | 12,541,642  |  
|                                                                           |  |                         |             |      |   |             |  
|                                                                           |  |                         |             |      |   |             |  
|Basic and diluted net loss per share applicable to common
  shareholders:  |  |                         |             |      |   |             |  
|Loss from continuing operations                                            |  | $                       | (1.57       | )    | $ | (1.29       | )
|Income (loss) from discontinued
operations                                 |  |                         | 1.17        |      |   | (0.05       | )
|                                                                           |  |                         |             |      |   |             |  
|Net loss per sharebasic and diluted                                       |  | $                       | (0.40       | )    | $ | (1.34       | )
|                                                                           |  |                         |             |      |   |             |  

See accompanying Notes to Consolidated Financial Statements

F-3

---



INCENTRA SOLUTIONS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED
STOCK
Years ended December 31, 2006 and 2005

|                                                                                    |  |        |           |        |   |            | 
|----------------------------------------------------------------------------------- |  | ------ | --------- | ------ | - | ---------- | 
|                                                                                    |  | Shares |           | Amount |  
|                                                                                    |  |        |           |        |  
|Balance at January 1, 2005                                                          |  |        | 2,466,971 |        | $ | 22,000,767 | 
|                                                                                    |  |        |           |        |   |            | 
|Accretion of Series A convertible redeemable preferred stock to
redemption
  amount |  |        |          |        |   | 2,617,566  | 
|                                                                                    |  |        |           |        |   |            | 
|                                                                                    |  |        |           |        |   |            | 
|Balance at December 31, 2005                                                        |  |        | 2,466,971 |        |   | 24,618,333 | 
|                                                                                    |  |        |           |        |   |            | 
|Accretion of Series A convertible redeemable preferred stock to
redemption
  amount |  |        |          |        |   | 2,617,566  | 
|                                                                                    |  |        |           |        |   |            | 
|                                                                                    |  |        |           |        |   |            | 
|Balance at December 31, 2006                                                        |  |        | 2,466,971 |        | $ | 27,235,899 | 
|                                                                                    |  |        |           |        |   |            | 

See accompanying Notes to Consolidated
Financial Statements

F-4

---



INCENTRA SOLUTIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT AND
COMPREHENSIVE INCOME (LOSS) 
Years ended December 31, 2006 and 2005

|                                                                                                                   |  |              |            |                              |   |                                                     |       |   |             |   |   |          |   |   |              |   |   |             |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | ---------------------------- | - | --------------------------------------------------- | ----- | - | ----------- | - | - | -------- | - | - | ------------ | - | - | ----------- | -
|                                                                                                                   |  |              |            | Additional
  paid-in capital |   | Accumulated
  other
  comprehensive
  income (loss) |       |   |             |   |  
|                                                                                                                   |  |              |            |                              |   | Accumulated
  deficit                               |       |   |            
|                                                                                                                   |  | Common stock |            |                              |   |                                                     | Total |  
|                                                                                                                   |  |              |            |                              |   |                                                     |       |   |             |   |   |          |  
|                                                                                                                   |  | Shares       |            | Amount                       |   |                                                     |       |   |             |   |   |          |  
|                                                                                                                   |  |              |            |                              |   |                                                     |       |   |             |   |   |          |  
|                                                                                                                  
|Balances at January 1, 2005                                                                                        |  |              | 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 of Delaware, Inc.) (Note 3(E)) |  |              | 1,261,756  |                              |   | 1,262                                               |       |   | 3,135,102   |   |   |         |   |   |             |   |   | 3,136,364   |  
|Common stock issued in acquisition of                                                                              |  |              |            |                              |   |                                                     |       |   |             |   |   |          |   |   |              |   |   |             |  
|PWI Technologies, Inc. (also known as Incentra NW) (Note
3(F))                                                     |  |              | 841,934    |                              |   | 842                                                 |       |   | 1,683,026   |   |   |         |   |   |             |   |   | 1,683,868   |  
|Accretion of convertible redeemable preferred stock to redemption
  amount                                         |  |              |           |                              |   |                                                    |       |   | (2,617,566  | ) |   |         |   |   |             |   |   | (2,617,566  | )
|Exercise of 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 | )
|                                                                                                                   |  |              |            |                              |   |                                                     |       |   |             |   |   |          |   |   |              |   |   |             |  
|                                                                                                                   |  |              |            |                              |   |                                                     |       |   |             |   |   |          |   |   |              |   |   |             |  
|Balances at December 31, 2005                                                                                      |  |              | 13,326,810 |                              |   | 13,327                                              |       |   | 119,517,168 |   |   | (103,235 | ) |   | (132,644,333 | ) |   | (13,217,073 | )
|                                                                                                                   |  |              |            |                              |   |                                                     |       |   |             |   |   |          |   |   |              |   |   |             |  
|Common stock issued in acquisition of Network Systems Technologies,
  Inc. (also known as Incentra MW) (Note 3(A)) |  |              | 1,034,483  |                              |   | 1,034                                               |       |   | 1,303,449   |   |   |         |   |   |             |   |   | 1,304,483   |  
|Amortization of stock-based compensation expense (Note 2)                                                          |  |              |           |                              |   |                                                    |       |   | 2,052,780   |   |   |         |   |   |             |   |   | 2,052,780   |  
|Accretion of convertible redeemable preferred stock to redemption
  amount                                         |  |              |           |                              |   |                                                    |       |   | (2,617,566  | ) |   |         |   |   |             |   |   | (2,617,566  | )
|Warrants and option issued to Laurus (Note 9(A))                                                                   |  |              |           |                              |   |                                                    |       |   | 1,707,052   |   |   |         |   |   |             |   |   | 1,707,052   |  
|Warrants issued in acquisition of allianceSoft (Note 3(C))                                                         |  |              |           |                              |   |                                                    |       |   | 96,421      |   |   |         |   |   |             |   |   | 96,421      |  
|Common stock issued to investment advisor                                                                          |  |              | 60,000     |                              |   | 60                                                  |       |   | 80,340      |   |   |         |   |   |             |   |   | 80,400      |  
|Common stock issued in lieu of cash related to prepayment penalties
  on convertible notes                         |  |              | 34,863     |                              |   | 35                                                  |       |   | 48,765      |   |   |         |   |   |             |   |   | 48,800      |  
|Return and retirement of common stock previously issued in
  acquisition of Incentra of CA (Note 9(D))             |  |              | (1,135,580 | )                            |   | (1,135                                              | )     |   | 1,135       |   |   |         |   |   |             |   |   |            |  
|Warrants issued related to convertible notes (Note 9 (C))                                                          |  |              |           |                              |   |                                                    |       |   | 651,474     |   |   |         |   |   |             |   |   | 651,474     |  
|Components of comprehensive loss:                                                                                  |  |              |            |                              |   |                                                     |       |   |             |   |   |          |   |   |              |   |   |             |  
|Net loss                                                                                                           |  |              |           |                              |   |                                                    |       |   |            |   |   |         |   |   | (2,833,150   | ) |   | (2,833,150  | )
|Foreign currency translation reclassification adjustment for sale of
  assets                                      |  |              |            |                              |   |                                                     |       |   |             |   |   | 103,235  |   |   |              |   |   | 103,235     |  
|                                                                                                                   |  |              |            |                              |   |                                                     |       |   |             |   |   |          |   |   |              |   |   |             |  
|Total comprehensive loss                                                                                           |  |              |           |                              |   |                                                    |       |   |            |   |   |         |   |   |             |   |   | (2,729,915  | )
|                                                                                                                   |  |              |            |                              |   |                                                     |       |   |             |   |   |          |   |   |              |   |   |             |  
|                                                                                                                   |  |              |            |                              |   |                                                     |       |   |             |   |   |          |   |   |              |   |   |             |  
|Balances at December 31, 2006                                                                                      |  |              | 13,320,576 |                              | $ | 13,321                                              |       | $ | 122,841,018 |   | $ |         |   | $ | (135,477,483 | ) | $ | (12,623,144 | )
|                                                                                                                   |  |              |            |                              |   |                                                     |       |   |             |   |   |          |   |   |              |   |   |             |  

See accompanying Notes to Consolidated
Financial Statements.

F-5

---



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

|                                                                                                                                      |  |                            |             |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----------- | ---- | - | ----------- | -
|                                                                                                                                      |  | Years
  ended December 31, |            
|                                                                                                                                      |  |                            |            
|                                                                                                                                      |  | 2006                       |             | 2005 |  
|                                                                                                                                      |  |                            |             |      |  
|Cash flows from operating activities:                                                                                                 |  |                            |             |      |   |             |  
|Net loss                                                                                                                              |  | $                          | (2,833,150  | )    | $ | (14,225,557 | )
|Adjustments to reconcile net loss to net cash
  used in continuing operating activities:                                              |  |                            |             |      |   |             |  
|(Income) loss from discontinued operations,
  net of income taxes                                                                     |  |                            | (16,004,486 | )    |   | 576,746     |  
|Depreciation                                                                                                                          |  |                            | 1,532,665   |      |   | 1,417,235   |  
|Amortization of intangible assets and
  software development costs                                                                    |  |                            | 955,477     |      |   | 1,561,389   |  
|Amortization of non-cash loan discount                                                                                                |  |                            |            |      |   | 12,735      |  
|Stock-based compensation expense                                                                                                      |  |                            | 1,587,653   |      |   | 349,711     |  
|Non-cash interest expense                                                                                                             |  |                            | 1,519,700   |      |   | 1,610,030   |  
|Non-cash loss on early extinguishment of
  debt                                                                                       |  |                            | 1,622,344   |      |   |            |  
|Bad debt expense                                                                                                                      |  |                            | 467,147     |      |   | 58,333      |  
|Loss on disposal of assets                                                                                                            |  |                            |            |      |   | 45,774      |  
|Impairment of goodwill                                                                                                                |  |                            |            |      |   | 4,151,450   |  
|Gain on revaluation of derivative warrant
  liability                                                                                 |  |                            |            |      |   | (390,280    | )
|Changes in operating assets and
  liabilities, net of business acquisitions:                                                          |  |                            |             |      |   |             |  
|Accounts receivable                                                                                                                   |  |                            | (4,547,390  | )    |   | 3,638,615   |  
|Other current assets                                                                                                                  |  |                            | (1,288,971  | )    |   | (154,675    | )
|Other assets                                                                                                                          |  |                            | (83,026     | )    |   | 55,046      |  
|Accounts payable                                                                                                                      |  |                            | 641,040     |      |   | (1,596,084  | )
|Accrued liabilities                                                                                                                   |  |                            | 370,364     |      |   | 267,459     |  
|Deferred revenue                                                                                                                      |  |                            | 1,320,284   |      |   | 98,090      |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|Net cash used in continuing operations                                                                                                |  |                            | (14,740,349 | )    |   | (2,523,983  | )
|Net cash provided by discontinued
  operations                                                                                        |  |                            | 2,990,558   |      |   | 1,051,120   |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|Net cash used in operating activities                                                                                                 |  |                            | (11,749,791 | )    |   | (1,472,863  | )
|                                                                                                                                      |  |                            |             |      |   |             |  
|Cash flows from investing activities:                                                                                                 |  |                            |             |      |   |             |  
|Purchases of property and equipment                                                                                                   |  |                            | (1,904,591  | )    |   | (778,118    | )
|Capitalized software development costs                                                                                                |  |                            | (588,629    | )    |   | (611,546    | )
|Proceeds from sale of property and
  equipment                                                                                        |  |                            |            |      |   | 2,808       |  
|Cash acquired in Incentra of CA acquisition
  (Note 3(E))                                                                             |  |                            |            |      |   | 1,597,498   |  
|Cash acquired in Incentra NW acquisition                                                                                              |  |                            |            |      |   | 74,297      |  
|Earnout payment related to Incentra NW
  acquisition (Note 3(F))                                                                      |  |                            |            |      |   | (100,000    | )
|Cash paid in acquisition of Incentra MW
  (Note 3(A))                                                                                 |  |                            | (5,256,173  | )    |   |            |  
|Cash paid in acquisition of Tactix (Note
  3(B))                                                                                      |  |                            | (3,001,103  | )    |   |            |  
|Cash paid to acquire assets of allianceSoft
  (Note 3(C))                                                                             |  |                            | (49,848     | )    |   |            |  
|Maturities of short-term investments                                                                                                  |  |                            |            |      |   | (2,058      | )
|Other                                                                                                                                 |  |                            | 61,892      |      |   | (908        | )
|                                                                                                                                      |  |                            |             |      |   |             |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|Net cash (used in) provided by continuing
  operations                                                                                |  |                            | (10,738,452 | )    |   | 181,973     |  
|Net cash provided by (used in) by
  discontinued operations, including proceeds from sale, net of expenses, of
  $26,954,659 (Note 4) |  |                            | 26,037,941  |      |   | (1,277,854  | )
|                                                                                                                                      |  |                            |             |      |   |             |  
|Net cash provided by (used in) investing
  activities                                                                                 |  |                            | 15,299,489  |      |   | (1,095,881  | )
|                                                                                                                                      |  |                            |             |      |   |             |  
|Cash flows from financing activities:                                                                                                 |  |                            |             |      |   |             |  
|Proceeds on line of credit, net                                                                                                       |  |                            | 290,492     |      |   | 1,331,851   |  
|Proceeds from acquisition term notes                                                                                                  |  |                            | 3,250,000   |      |   |            |  
|Proceeds from convertible notes                                                                                                       |  |                            | 2,410,000   |      |   |            |  
|(Payments) proceeds on lease line of
  credit, net                                                                                    |  |                            | (144,975    | )    |   | 195,036     |  
|Payments on capital leases, notes payable
  and other long-term liabilities                                                           |  |                            | (9,278,893  | )    |   | (849,856    | )
|Other                                                                                                                                 |  |                            |            |      |   | 136         |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|Net cash (used in) provided by continuing
  operations                                                                                |  |                            | (3,473,376  | )    |   | 677,167     |  
|Net cash (used in) provided by discontinued
  operations                                                                              |  |                            |            |      |   |            |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|Net cash (used in) provided by financing activities                                                                                   |  |                            | (3,473,376  | )    |   | 677,167     |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|Effect of exchange rate changes on cash and
  cash equivalents (related to discontinued operations)                                   |  |                            | 103,235     |      |   | (68,239     | )
|                                                                                                                                      |  |                            |             |      |   |             |  
|Net increase (decrease) in cash and cash
  equivalents                                                                                |  |                            | 179,557     |      |   | (1,959,816  | )
|                                                                                                                                      |  |                            |             |      |   |             |  
|Cash and cash equivalents at beginning of
  period:                                                                                   |  |                            |             |      |   |             |  
|Continuing operations                                                                                                                 |  |                            | 797,116     |      |   | 2,461,959   |  
|Discontinued operations                                                                                                               |  |                            | 311,526     |      |   | 606,499     |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|Total                                                                                                                                 |  |                            | 1,108,642   |      |   | 3,068,458   |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|Cash and cash equivalents at end of period:                                                                                           |  |                            |             |      |   |             |  
|Continuing operations                                                                                                                 |  |                            | 976,673     |      |   | 797,116     |  
|Discontinued operations                                                                                                               |  |                            |            |      |   | 311,526     |  
|                                                                                                                                      |  |                            |             |      |   |             |  
|Total                                                                                                                                 |  | $                          | 976,673     |      | $ | 1,108,642   |  
|                                                                                                                                      |  |                            |             |      |   |             |  

(continued)

F-6

---



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

|                                                                                                      |  |                            |           |      |   |           | 
|----------------------------------------------------------------------------------------------------- |  | -------------------------- | --------- | ---- | - | --------- | 
|                                                                                                      |  | Years
  ended December 31, |          
|                                                                                                      |  |                            |          
|                                                                                                      |  | 2006                       |           | 2005 |  
|                                                                                                      |  |                            |           |      |  
|                                                                                                      |  |                            |           |      |   |           | 
|Supplemental disclosures of
  cash flow information:                                                  |  |                            |           |      |   |           | 
|Cash paid during the year for interest                                                                |  | $                          | 1,410,678 |      | $ | 801,454   | 
|                                                                                                      |  |                            |           |      |   |           | 
|Supplemental disclosures of
  non-cash investing and financing activities:                            |  |                            |           |      |   |           | 
|Net liabilities acquired in Incentra of CA acquisition, excluding
cash
  (Note 3(E))                  |  |                            |           |      |   | 620,176   | 
|Net assets acquired in Incentra NW acquisition, excluding cash (Note
  3(F))                          |  |                            |           |      |   | 269,306   | 
|Net liabilities acquired in Incentra MW acquisition, excluding cash
  (Note 3(A))                     |  |                            | 992,653   |      |   |           | 
|Net liabilities acquired in Tactix acquisition, excluding cash (Note
  3(B))                          |  |                            | 1,046,964 |      |   |           | 
|Net assets acquired in allianceSoft acquisition, excluding cash (Note
  3(C))                         |  |                            | 44,000    |      |   |           | 
|Purchases of property and equipment in accounts payable                                               |  |                            | 462,681   |      |   | 93,766    | 
|Conversion of notes payable, accrued interest and prepayment penalties
  in exchange for common stock |  |                            | 48,800    |      |   | 994,831   | 
|Reclassification of derivative liability to equity                                                    |  |                            |           |      |   | 1,910,254 | 

See accompanying Notes to Consolidated Financial Statements.

F-7

---



Incentra Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements 
December 31, 2006 and 2005

|                  | 
|----------------- | 
|1.   Organization

Incentra
Solutions, Inc. (which is referred to herein together with its subsidiaries as
we, us or our) was organized and incorporated in the state of Nevada. Our
common stock trades on the Over-the-Counter Bulletin Board under the trading
symbol ICNS. Since 2004, we have completed five acquisitions: 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); on March 30,
2005, we acquired PWI Technologies, Inc. (also known as Incentra NW), a
privately-held Washington corporation; on April 13, 2006, we acquired Network
Systems Technologies, Inc., a privately-held Illinois corporation (also known
as Incentra MW); on August 25, 2006, we acquired the assets of allianceSoft,
Inc., a privately-held Michigan corporation (allianceSoft); and on September
5, 2006, we acquired Tactix, Inc., a privately-held Oregon corporation
(Tactix).

On
July 31, 2006, we completed the sale of substantially all of the assets of
Front Porch Digital, Inc. (Front Porch). The sale included all of the
outstanding capital stock of our wholly-owned subsidiary in France, Front Porch
Digital International, S.A.S. Front Porch provided archive solutions to
broadcasters and media companies. Refer to Note 4.

We
market our complete storage solutions to service providers and enterprise
clients under the trade name Incentra Solutions. All of our subsidiaries offer
comprehensive storage services, including professional services, hardware/software
procurement and resale, financing solutions, maintenance support services
(first call) for third-party hardware and software maintenance, managed storage
solutions, software and remote monitoring and 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. Our remote monitoring and management services
are delivered from our 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. Solutions are
sold primarily to enterprise customers in the financial services, government,
hospitality, retail, security, healthcare and manufacturing sectors. Our
customers are primarily located in North America, Europe, Asia and the Pacific
Rim.

We
deliver these services utilizing our proprietary GridWorks Operations Support
System, which enables automated remote monitoring and management of complete
storage infrastructures and back-up applications. We provide 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.

Basis of Presentation

The
consolidated financial statements include Incentra Solutions, Inc. and its
wholly-owned subsidiaries, ManagedStorage International, Inc. (also known as
Incentra of CO), which is based in Broomfield, Colorado, and Incentra of COs
wholly-owned subsidiaries, ManagedStorage UK, Inc. which is based in London,
England and Seabrook Technologies, Inc., which is based in Broomfield,
Colorado; Incentra of CA, which is based in San Diego, California; Incentra NW,
which is based in Kirkland, Washington; Incentra MW, which is based in Lombard,
Illinois; Incentra Solutions of the NE, Inc. (formerly known as Front Porch);
and Tactix, Inc., which is based in Portland, Oregon from the dates of the
respective acquisitions through December 31, 2006. As a result of the asset
sale discussed above and in Note 4, the operations of Front Porch have been
reclassified and are presented retroactively from January 1, 2005 onward as
discontinued operations. Seabrook Technologies, Inc. did not have any operating
activities during the years ended December 31, 2006 and 2005. All significant
intercompany accounts and transactions have been eliminated in consolidation.

F-8

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued)
December 31, 2006 and 2005

| | 
| | 

1.   Organization
  (continued)

We
are subject to various risks and uncertainties frequently encountered by
companies in the early stages of development, particularly companies in the
rapidly evolving market for technology-based products and services. Such risks
and uncertainties include, but are not limited to, our limited operating
history, need for additional capital, a volatile business and technological
environment, an evolving business model, and the management of expected growth.
To address these risks, we must, among other things, gain access to capital in
amounts and on terms acceptable to us, maintain and increase our customer base,
implement and successfully execute our business strategy, continue to enhance
our technology, provide superior customer service, and attract, retain and
motivate qualified personnel. There can be no assurance that we will be
successful in addressing such risks.

We
incurred a loss from continuing operations of $18.8 million for the year ended
December 31, 2006, which includes certain non-cash expenses of approximately
$7.7 million. Since inception, we have incurred substantial operating losses
and negative cash flows from operations. We have a working capital deficit of
$7.9 million and a shareholders deficit of $12.6 million at December 31, 2006.
We have funded these deficiencies by utilizing our existing working capital,
lines of credit and long-term borrowings. We anticipate that we will continue to
fund our business from existing lines of credit and from increasing cash flows
from our business operations. However, no assurance can be given that we will
be successful in increasing cash flow from operations. Realization of our
investment in property and equipment and other long-lived assets is dependent
upon achieving positive operating cash flows. If we do not achieve and maintain
such positive operating cash flows, our long-lived assets could be considered
impaired, resulting in a significant impairment charge to operations.

We believe that cash flows from operations
will provide our primary source of operating capital, as the operations
acquired over the past two years continue to generate cash. In August 2007, we
expect approximately $2.5 million in cash related to the sale of Front Porch to
be released from escrow and available for use in our operations. In addition,
we expect to continue to have significant amounts available to us under our
revolving line of credit with Laurus.

Our
2007 operating plan, and the execution thereof, is focused on increasing
revenue, controlling costs, and conserving cash. However, there can be no
assurance that we will be able to meet the operational and financial
requirements of our operating plan. However, we believe that our cash and cash
equivalents, working capital and access to current and potential lenders will
provide sufficient capital resources to fund our operations, debt service
requirements, and working capital needs at least through December 31, 2007.

| | 
| | 

2.   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 us. We believe these estimates of fair value are
reasonable. Other significant estimates made by us include those related to
fair values of acquired goodwill and intangible assets, as well as property and
equipment (including assumptions and estimates used in evaluating these assets
for impairment), 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-9

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

2. 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.

Property and Equipment

Property
and equipment have been recorded at the estimated fair value at the acquisition
date, including assets acquired through acquisition of subsidiaries. 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

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 at least annually in the fourth quarter each year or more frequently
if other indicators of impairment arise.

With
the acquisitions of Incentra MW, allianceSoft and Tactix in 2006, we recorded
goodwill of $7,444,212, $102,269 and $3,532,464, respectively. With the
acquisitions of Incentra of CA and Incentra NW in 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
3(E), 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. Our goodwill impairment tests during the fourth quarter of 2006
resulted in no impairment.

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 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

We
apply the provisions of Emerging Issues Task Force (EITF) Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent. Our
application of EITF 99-19 includes evaluation of the terms of customer
contracts

F-10

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

2. Summary of Significant Accounting Policies (continued)

relative to a number of
criteria that management considers in making its determination with respect to
gross versus net reporting of revenue for transactions with customers. Managements
criteria for making these judgments place particular emphasis on determining
the primary obligor in a transaction and which party bears general inventory
risk. We purchase and resell hardware, software and third-party maintenance
contracts. In these transactions, we (i) act as principal; (ii) take title to
the products; and (iii) have the risks and rewards of ownership, including the
risk of loss for collection, delivery or returns (which have not been significant).
For these transactions, we recognize revenues based on the gross amounts due from customers.

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.

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 are recognized when shipped. Revenues from the resale of
third-party contracts are recognized at the date of sale, which generally
approximates the commencement of the service contract. Consulting revenues are
recognized when the services are performed.

Prior
to the disposition of Front Porch on July 31, 2006, we licensed software under
license agreements and provided professional services, including training,
installation, consulting and maintenance. License fee revenues were recognized
when a license agreement was signed, the software product had been
shipped, the fees were fixed and determinable, collection was reasonably assured,
and no significant vendor obligations remained.

Prior
to the disposition of Front Porch on July 31, 2006, we allocated 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.

Cost of Revenue

Cost
of revenue consists primarily of direct labor, cost of hardware and software products, depreciation
($1,189,904 in 2006 and $1,091,321 in 2005), 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 $45,723 and $60,586 for the years ended December 31,
2006 and 2005, 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. Our GridWorks
software product is used internally for providing services to our customers and
is also marketed separately 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 anticipated future revenues for the
product, but with an annual amortization amount at least equal to the
straight-line amortization over an estimated economic life of three years.

For
the years ended December 31, 2006 and 2005, capitalized software development
costs, which related primarily to enhancements to our GridWorks software
solution were $588,629 and $611,546, respectively. For the years ended

F-11

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

2. Summary of Significant Accounting Policies (continued)

December 31, 2006 and 2005,
$532,144 and $407,206, respectively, were charged to expense. As of December
31, 2006, the unamortized portion of software development costs was $914,786.

Deferred Loan Costs

Deferred
loan costs, included in other non-current assets, are amortized over the term
of the related loan using the straight-line method (1 to 3 years).

Foreign Currency Transactions

We
are subject to foreign exchange transaction exposure when we transact business
in a currency other than our own functional currency, which is the U.S. dollar.
The effects of exchange rate fluctuations in remeasuring foreign currency
transactions are recorded at the date the transaction is settled with a third
party. For the years ended December 31, 2006 and 2005, foreign currency
transactions resulted in a gain of $21,897 in 2006 and a loss of $59,755 in 2005.

Accounting For Obligations and Instruments Potentially
Settled in Our 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

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. Due to our net losses for the periods presented, shares from the
assumed conversion of outstanding warrants, options, convertible preferred
stock and convertible debt (13.7 million and 13.2 million as of December 31,
2006 and 2005, respectively) have been omitted from the computations of diluted
loss per share for the years ended December 31, 2006 and 2005 because the
effect would be antidilutive.

On
April 12, 2005, our Board of Directors 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 our financial
statements have been adjusted to reflect the post-reverse split amounts.

Stock-Based Compensation

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123
(revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No.
95, Statement of Cash Flows. Generally, the approach in SFAS 123R is similar
to the approach described in SFAS 123, Accounting for Stock-Based
Compensation (SFAS 123). However, SFAS 123R requires all share-based payments
to employees, including grants of employee stock options, to be recognized in
the income statement based on their fair values at the date of grant. Pro forma
disclosure is no longer an alternative.

On
January 1, 2006 (the first day of our 2006 fiscal year), we adopted SFAS 123R
using the modified prospective method as permitted under SFAS 123R. Under this
transition method, compensation cost recognized in 2006 includes: (a)
compensation cost for all share-based payments granted prior to but not yet
vested as of December 31, 2005, based on the

F-12

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

2. Summary of Significant Accounting Policies (continued)

grant-date
fair value estimated in accordance with the provisions of SFAS 123, and (b)
compensation cost for all share-based payments granted subsequent to December
31, 2005, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R. In accordance with the modified prospective method of
adoption, our results of operations and financial position for prior periods
have not been restated. In connection with our adoption of SFAS 123R, we
applied the provisions of Staff Accounting Bulletin No. 107 (SAB 107), which
was issued by the Securities and Exchange Commission (SEC) to provide
interpretive guidance regarding application of SFAS 123R.

The
adoption of SFAS 123R on January 1, 2006 had the following impact on our
results for the year ended December 31, 2006: net loss before accretion on
preferred stock increased $1.3 million and net loss per weighted average
common share outstandingbasic and diluted increased by $0.12 per share.

We
use the Black-Scholes option pricing model to calculate the grant date fair
value of an award. The fair value of options granted in 2006 and 2005 were
calculated using the following estimated weighted average assumptions:

| |                                          |  |         |           |         |   |         |  
| | ---------------------------------------- |  | ------- | --------- | ------- | - | ------- | -
| |                                          |  | 2006    |           | 2005    |  
| |                                          |  |         |           |         |  
| | Stock options granted                    |  |         | 1,567,111 |         |   | 456,450 |  
| | Weighted-average exercise
  price        |  | $       | 1.25      |         | $ | 1.62    |  
| | Weighted-average grant date
  fair value |  | $       | 1.07      |         | $ | 1.11    |  
| | Assumptions:                             |  |         |           |         |   |         |  
| | Expected volatility                      |  |         | 112       | %       |   | 112     | %
| | Expected term (in years)                 |  | 6 Years |           | 3 Years |  
| | Risk-free interest rate                  |  |         | 4.82      | %       |   | 4.06    | %
| | Dividend yield                           |  |         | 0         | %       |   | 0       | %

All
of our employee options vest over three years, which is considered to be the
requisite service period. We use the graded vesting attribution method to
recognize expense for all options granted prior to the adoption of SFAS 123R.
Upon adoption of SFAS 123R on January 1, 2006, we changed to the straight-line
attribution method to recognize expense for options granted after December 31,
2005. The expense associated with the unvested portion of the pre-adoption
grants will continue to be expensed using the graded vesting attribution
method.

The
amount of stock-based compensation recognized during a period is based on the
value of the portion of the awards that are ultimately expected to vest. SFAS
123R requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. The term forfeitures is distinct from cancellations or
expirations and represents only the unvested portion of the surrendered
option.

We
currently expect, based on an analysis of historical forfeitures that
approximately 85% of our options will actually vest, and therefore have applied
a forfeiture rate of 5% per year to all unvested options as of December 31,
2006. This analysis will be re-evaluated periodically and the forfeiture rate
will be adjusted as necessary. Ultimately, the actual expense recognized over
the vesting period will only be for those shares that vest.

Expected
volatilities are based on the historical volatility of the price of our common
stock. The expected term of options is derived based on the sum of the vesting
term plus the original option term, divided by two.

The
following table details the effect on net loss before accretion on preferred
stock and net loss per weighted average common share outstanding had
stock-based compensation been recorded for the year ended December 31, 2005
based on the fair-value method under SFAS 123. The reported and pro forma net
income before accretion on preferred stock and net income per weighted average
common share for year ended December 31, 2006 are the same since stock-based
compensation expense was calculated under the provisions of SFAS 123R. All
amounts except per share amounts in thousands:

F-13

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

2. Summary of Significant Accounting Policies (continued)

|                                                                                                                                 |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | -
|Loss from continuing operations before accretion on on preferred
  stock, as reported                                            |  | $ | (13,649 | )
|Add stock-based compensation expense included in reported net loss,
  net of tax                                                 |  |   | 350     |  
|Deduct total stock-based employee compensation expense determined
  under the fair-value based method for all awards, net of tax |  |   | (1,599  | )
|                                                                                                                                 |  |   |         |  
|                                                                                                                                 |  |   |         |  
|Pro forma net loss from continuing operations before accretion on
  preferred stock                                              |  |   | (14,898 | )
|                                                                                                                                 |  |   |         |  
|Loss from discontinued operations, net of income taxes                                                                           |  |   | (577    | )
|                                                                                                                                 |  |   |         |  
|                                                                                                                                 |  |   |         |  
|Pro forma net loss                                                                                                               |  | $ | (15,475 | )
|                                                                                                                                 |  |   |         |  
|                                                                                                                                 |  |   |         |  
|Net loss per weighted average common share outstandingBasic and
  dilutedpro forma                                             |  | $ | (1.44   | )
|                                                                                                                                 |  |   |         |  
|                                                                                                                                 |  |   |         |  
|Net loss per weighted average common share outstanding-Basic and
  diluted-as reported                                           |  | $ | (1.34   | )
|                                                                                                                                 |  |   |         |  
|                                                                                                                                 |  |   |         |  

Refer
to Note 11 for additional disclosures pertaining to the details of our stock
option plans, including summaries of stock option activity under each of the
plans.

Financial Instruments

The
carrying amounts of financial instruments held by us, which include cash and cash
equivalents, 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.

Concentrations of Credit Risk

We
sell our products and services throughout the United States, Europe and Japan.
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 a specific customers 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, 2006, aggregate revenues from customers located in
Europe, Asia and the Pacific Rim amounted to $3.2 million or 5% of revenue,
while revenues from customers located in North America totaled $63.5 million or
95% of total revenue. For the year ended December 31, 2005, aggregate revenues
from customers located in Europe, Asia and the Pacific Rim amounted to $2.1
million or 6% of total revenue, while revenues from customers located in North
America totaled $35.8 million or 94% of total revenue.

For
the year ended December 31, 2006, no one customer accounted for more than 10%
of revenue. As of December
31, 2006, one customer represented over 10% of total accounts receivable. For the year
ended December 31, 2005, one customer accounted for 16% of total revenues.

F-14

---



Incentra
Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

2. Summary of Significant Accounting Policies (continued)

|                               |  |               |   |              |  |       |  |   |       |  |  |   |        | 
|------------------------------ |  | ------------- | - | ------------ |  | ----- |  | - | ----- |  |  | - | ------ | 
|                               |  | North America |   | Europe/Asia* |  | Total | 
|                               |  |               |   |              |  |       | 
|                               |  |               |   |              |  |       |  |   |       | 
|Year Ended
  December 31, 2006 |  |               |   |              |  |       |  |   |       | 
|Revenues                       |  |               | $ | 63,462       |  |       |  | $ | 3,170 |  |  | $ | 66,632 | 
|Long-lived Assets, net         |  |               |   | 22,356       |  |       |  |   | 862   |  |  |   | 23,218 | 
|                               |  |               |   |              |  |       |  |   |       |  |  |   |        | 
|Year Ended
  December 31, 2005 |  |               |   |              |  |       |  |   |       |  |  |   |        | 
|Revenues                       |  |               | $ | 35,837       |  |       |  | $ | 2,098 |  |  | $ | 37,935 | 
|Long-lived Assets, net         |  |               |   | 8,835        |  |       |  |   | 477   |  |  |   | 9,312  | 

| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | The
  geographic breakout by country is not practible to obtain.

Recently Issued Accounting Pronouncements

In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities  Including an amendment to FASB
Statement No. 115. This statement permits companies to choose to measure many
financial instruments and other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement of accounting for financial instruments. The fair value option
established by this statement permits all entities to measure eligible items at
fair value at specified election dates. This statement is effective as of the
beginning of an entitys first fiscal year that begins after November 15, 2007.
We are currently assessing the impact that adoption of SFAS No. 159 may have on
our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement. This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. We are currently
assessing the impact of the adoption of SFAS No. 157 may have on our
consolidated financial statements.

In
September 2006, the SEC issued SAB No. 108 in order to eliminate the diversity
of practice surrounding how public companies quantify financial statement
misstatements. In SAB No. 108, the SEC staff established an approach that
requires quantification of financial statement misstatements based on the
effects of the misstatements on each of the companys financial statements and
the related financial statement disclosures. SAB No. 108 is effective for
fiscal years ending after November 15, 2006. SAB No. 108 did not have an impact
to our consolidated financial statements.

In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (FIN
48). FIN 48 requires that a position taken or expected to be taken in a tax
return be recognized in the financial statements when it is more likely than
not (i.e. a likelihood of more than fifty percent) that the position would be
sustained upon examination by tax authorities. A recognized tax position is
then measured at the largest amount of benefit that is greater than fifty
percent likely of being realized upon ultimate settlement. Upon adoption, the
cumulative effect of applying the recognition and measurement provisions of FIN
48, if any, shall be reflected as an adjustment to the opening balance of
retained earnings. The effective date of this interpretation is for fiscal
years beginning after December 15, 2006. We are currently in the
process of evaluating the impact of this interpretation on its consolidated
financial statements.

|                | 
|--------------- | 
|3. Acquisitions | 

Since
February 2005, we have completed four significant acquisitions as part of our
strategy to significantly expand the size of our operations from both a financial
and geographic standpoint. The primary reasons for the acquisitions included the
addition of service offerings in new markets (specifically, increased opportunities
to directly market our proprietary software and services), generate growth in the
value-added reseller area of our business, develop deeper relationshiips with major
suppliers to our markets, and realize potential operational savings. As the primary
reasons for these acquisitions were not related to the tangible assets of the
businesses acquired, the purchase prices were in excess of the fair value of the
net assets acquired or net liabilities assumed. Goodwill is derived when the net
purchase price is greater than the value of the tangible and intangible assets
acquired less the liabilities assumed. Goodwill is not expected to be deductible
for income tax purposes.

(A) Acquisition of Incentra MW

On
April 13, 2006 (the Incentra MW Closing Date), we acquired all of the
outstanding capital stock of Incentra MW, a value-added reseller of storage and
networking products and services located in Chicago, Illinois pursuant to a Stock
Purchase Agreement, dated as of the Incentra MW Closing Date (the Incentra MW
Stock Purchase Agreement). The results of operations of Incentra MW are
included in our consolidated financial statements beginning on April 1, 2006.

F-15

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

3. Acquisitions (continued)

The
consideration paid for Incentra MW was approximately $8.3 million, which
consisted of $5.5 million in cash, the issuance of 1,034,483 shares of our
common stock valued at $1,304,483 (based on an average of the closing prices of
our common stock during the seven-day periods before and after the acquisition
date) and the issuance of a two-year unsecured promissory note in the amount of
$1.5 million (the Incentra MW Note). (Refer to Note 9(B)). In addition, the
Incentra MW Stock Purchase Agreement contains an earn-out provision pursuant to
which Transitional Management Consultants, Inc. (TMC), a newly-formed
corporation owned by the former Incentra MW shareholder, may receive additional
unregistered shares of our common stock based upon certain levels of EBITDA (as
defined in the Incentra MW Stock Purchase Agreement) achieved by Incentra MW
during the twenty-four month period ending March 31, 2008. The maximum number
of shares issuable under the earn-out is 1,120,690 shares (subject to customary
adjustments for stock splits, stock dividends and similar transactions) if
Incentra MWs EBITDA is $4 million or greater during such period and provided
certain other conditions are met. In addition, TMCs right to receive the
earn-out described above is subject to the continued performance of consulting
services by the former shareholder through TMC to us through March 31, 2008,
with certain exceptions set forth in the Incentra MW Stock Purchase Agreement.
If the services terminate prior to such date, TMC may under certain
circumstances receive a pro-rated portion of the earn-out amount. The cash
required for the acquisition was provided by additional borrowings under our
existing line of credit and two newly-issued term notes from Laurus Master
Fund, Ltd. (Laurus). (Refer to Note 9(A)).

Concurrently
with the consummation of the acquisition, we granted certain registration rights
to the former owner and TMC with respect to the shares of our common stock
issued in the acquisition and the shares issuable under the earn-out provision
contained in the Incentra MW Stock Purchase Agreement. Pursuant to the
registration rights agreement, at any time after April 13, 2008, the holder has
a demand registration right to require us to register under the Securities Act
such shares of our common stock issued in the acquisition. The agreement also
provides that, after April 13, 2008, the holder shall have piggy-back
registration rights with respect to such shares.

We
also entered into a lock-up agreement with the former shareholder. Under such
agreement, the former shareholder agreed not to sell or transfer the shares he
received pursuant to the Incentra MW Stock Purchase Agreement until after April
13, 2008, with certain exceptions, as defined in the Incentra MW Stock Purchase
Agreement.

In
connection with the consummation of the acquisition, we entered into a
consulting and subcontractor agreement (the Consulting Agreement) with TMC
under which TMC is to provide consulting services to us relating to the
business of Incentra MW and is to receive a monthly fee of $24,251. The
agreement has a two-year term and provides that TMC may terminate the agreement
for any reason upon thirty days prior written notice and that we may
terminate the agreement, for cause (as defined in the Consulting Agreement), at
any time upon written notice to TMC. In addition, TMC has the right to earn an
annual cash bonus based upon certain levels of EBITDA (as defined in the
Consulting Agreement) achieved by Incentra MW during the 12 months ended
March 31, 2007 and 2008. The maximum annual bonus amount is equal to $150,000
plus 25% of the amount by which EBITDA exceeds $2 million during the relevant
annual period. TMCs right to receive the bonus described above is subject to
the continued performance of consulting services by TMC to us through the end
of each such period, with certain exceptions. Any amounts paid in the future
under the bonus provisions of the Consulting Agreement would be recorded as an
expense during the period and not affect the purchase price of Incentra MW.

In
connection with our acquisition of Incentra MW, we paid investment banking fees
to a third party of $475,000. Legal fees and other costs of approximately
$100,000 were also paid in connection with the acquisition.

The
following represents the final purchase price allocation:

|                                       |  |   |            |  
|-------------------------------------- |  | - | ---------- | -
|Cash and
  cash equivalents            |  | $ | 885,555    |  
|Accounts
  receivable                  |  |   | 3,305,963  |  
|Other
  current assets                 |  |   | 30,885     |  
|Property and
  equipment               |  |   | 136,036    |  
|Goodwill                               |  |   | 7,444,212  |  
|Customer
  relationships (5-year life) |  |   | 1,500,000  |  
|Current
  liabilities                  |  |   | (4,465,537 | )
|                                       |  |   |            |  
|                                       |  |   |            |  
|Total
  purchase price                 |  | $ | 8,837,114  |  
|                                       |  |   |            |  

F-16

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

3. Acquisitions (continued)

(B) Acquisition of Tactix, Inc.

On
September 5, 2006 (the Tactix Closing Date), we acquired all of the
outstanding capital stock (the Tactix Stock) of Tactix, a value-added
reseller of information technology products and services, headquartered in
Portland, Oregon. The acquisition was effected pursuant to a Stock Purchase
Agreement, effective as of September 5, 2006 (the Stock Purchase Agreement),
by and between our company and the stockholders of Tactix (collectively, the
Sellers). The results of operations of Tactix are included in our
consolidated financial statements beginning on September 1, 2006.

The
consideration paid for the Tactix Stock was approximately $3.6 million, of
which approximately $3.2 million was paid in cash on the Tactix Closing Date
and $360,000 (subject to reduction pursuant to a working capital adjustment)
shall be paid to the Sellers, pro rata, following the Tactix Closing Date. As
of March 23, 2007, we have paid $233,000 to the former Tactix shareholders
pursuant to the holdback, with the final adjustment expected
to be finalized in 2007.

In
connection with our acquisition of Tactix, we paid investment banking fees to a
third party of $300,000. Legal fees and other costs of approximately $40,000
were also paid in connection with the acquisition.

The
following represents the preliminary purchase price allocation:

| |                                        |  |   |            |  
| | -------------------------------------- |  | - | ---------- | -
| | Cash and cash equivalents              |  | $ | 915,005    |  
| | Accounts receivable                    |  |   | 2,502,508  |  
| | Property and equipment                 |  |   | 86,370     |  
| | Goodwill                               |  |   | 3,532,464  |  
| | Customer relationships
  (5-year life) |  |   | 515,600    |  
| | Other non-current assets               |  |   | 28,322     |  
| | Current liabilities                    |  |   | (3,664,161 | )
| |                                        |  |   |            |  
| |                                        |  |   |            |  
| | Total purchase price                   |  | $ | 3,916,108  |  
| |                                        |  |   |            |  

The
purchase price allocation is not considered final as of December 31, 2006 as
we, along with our independent valuation advisors, are still reviewing all of
the underlying assumptions and calculations used in the allocation. However, we
believe the final purchase price allocation will not be materially different
than presented herein.

(C) Acquisition of allianceSoft, Inc.

On
August 25, 2006, we acquired all of the assets of allianceSoft, Inc., a
value-added reseller of information technology products and services, located
in Detroit, Michigan. The results of operations of allianceSoft are included in
our consolidated financial statements beginning on August 25, 2006. The
aggregate purchase price for allianceSoft was $65,000 in cash plus an earn-out
provision for the first two years whereby the former owner can receive
additional cash and unregistered shares of our common stock if certain
performance targets are achieved. In addition, we issued a warrant to the former
owner of allianceSoft to purchase 100,000 shares of our common stock at $1.40
per share. The warrant was valued at $96,000 using the Black-Scholes model.
Therefore, the total purchase price (including legal fees of $6,000) was
$167,000. The excess of the purchase price over net assets acquired was
$102,000 and is included in goodwill.

(D) Pro Forma Results

The
following unaudited pro forma financial information presents our combined
results of operations as if the acquisitions described above had occurred as of
the beginning of the periods presented, January 1, 2006 and 2005. 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, January 1, 2006 and 2005, 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,
2006 and 2005:

F-17

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

3. Acquisitions (continued)

|                                                                  |  |                                    |             |             |   |             |  
|----------------------------------------------------------------- |  | ---------------------------------- | ----------- | ----------- | - | ----------- | -
|                                                                  |  | For the
  years ended December 31, |            
|                                                                  |  |                                    |            
|                                                                  |  | 2006                               |             | 2005        |  
|                                                                  |  |                                    |             |             |  
|                                                                  |  | (Unaudited)                        |             | (Unaudited) |  
|                                                                  |  |                                    |             |             |   |             |  
|Revenues                                                          |  | $                                  | 89,996,299  |             | $ | 79,107,137  |  
|Loss from continuing operations                                   |  |                                    | (18,003,913 | )           |   | (14,209,813 | )
|Income (loss) from discontinued operations,
  net of income taxes |  |                                    | 628,474     |             |   | (576,746    | )
|Gain on sale of
discontinued operations,
  net of income taxes    |  |                                    | 15,376,014  |             |   |            |  
|Net loss applicable to common
shareholders                        |  |                                    | (4,616,992  | )           |   | (17,404,126 | )
|                                                                  |  |                                    |             |             |   |             |  
|Net earnings (loss) per share - basic and
  diluted, pro forma:   |  |                                    |             |             |   |             |  
|From continuing operations                                        |  | $                                  | (1.51       | )           | $ | (1.35       | )
|From discontinued operations                                      |  |                                    | 1.17        |             |   | (0.04       | )
|                                                                  |  |                                    |             |             |   |             |  
|                                                                  |  |                                    |             |             |   |             |  
|Total loss per sharebasic and diluted,
  pro forma               |  | $                                  | (0.34       | )           | $ | (1.39       | )
|                                                                  |  |                                    |             |             |   |             |  

(E) 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.

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. Of
the 1,261,756 shares of our common stock issued to the former shareholder of Incentra of CA,
1,135,580 were subsequently returned to us following settlement of a dispute with the former
shareholder of Incentra of CA. (Refer to Note 9(D)).

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:

|                                       |  |   |            |  
|-------------------------------------- |  | - | ---------- | -
|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 an impairment loss of $4,151,450 was charged to income
in the fourth quarter of 2005.

F-18

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

3. Acquisitions (continued)

(F) Acquisition of Incentra NW

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

The
purchase price of Incentra NW 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, during the year
ended December 31, 2005, the former Incentra NW 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. We
paid approximately $250,000 in investment banking fees in connection with the
transaction.

Concurrent
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 Incentra NW 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.

The
following represents the purchase price allocation:

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

In March 2007, we executed
a Settlement Agreement (the Agreement) between us and the former Increntra NW shareholders related to certain assets and liabilities that existed
at the Incentra NW Closing Date. As part of the acquisition of Incentra NW in March 2005, we acquired receivables amounting to $453,114 from certain companies
affiliated with the former Incentra NW shareholders. Of this total, $70,000 was to be paid not later than May 15, 2005 and the remainder by March 31, 2006.
We did not receive payment by either date, and as a result, a provision for doubtful accounts has been recorded against these receivables as of December 31, 2006.
In addition, the former Incentra NW shareholders were obligated by the Incentra NW Stock Purchase Agreement to indemnify us against certain liabilities in
excess of an agreed amount that might arise after the Incentra NW Closing Date. Subsequent to that date, $82,149 was due to us under the indemnification
provisions of the Incentra Stock Purchase Agreement.

In full settlement of these amounts and pursuant to the Agreement,
in March 2007 the former Incentra NW shareholders returned to us 275,000 shares of our common stock issued to them as part of the purchase price of
Incentra NW. The Agreement provides that the former Incentra NW shareholders are obligated to repurchase some or all of the shares at a price of
$2.25 per share by March 2008 in the event the former Incentra NW shareholders successfully prevail in a patent infringement claim that existed
prior to the Incentra NW Closing Date in an Incentra NW-affiliated company. Any future benefits of this claim were retained by the former
Incentra NW shareholders. In the event that the claim is not settled by March 9, 2008, the former Incentra NW shareholders have the option,
but are not obligated, to purchase up to 275,000 shares at a price of $2.25 per share until March 2011. Mutual releases were executed as part of the Agreement.

F-19

---



|
|

Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

4. Sale of Front Porch Digital, Inc. and Discontinued Operations

On
July 31, 2006, we sold substantially all of the assets of our broadcast and
  media operations, Front Porch, to FPD Acquisition Corporation, a newly-formed
  Delaware corporation (FPD), and 1706045 Ontario Limited, an Ontario
  corporation (Ontario and collectively with FPD, the Buyers), each owned by
  Genuity Capital Management Services, Inc., pursuant to the terms of the
  Purchase Agreement (the Purchase Agreement), dated as of July 31, 2006, among
  our company, Incentra of CO and the Buyers. The material assets owned and
  operated by Front Porch, all of which were transferred to the Buyers in the
  sale, included, without limitation, all of the outstanding capital stock of
  Front Porch International SAS, its wholly-owned French subsidiary, its
  DIVArchive and Bitscream software and all intellectual property rights
  associated with that software and all tangible personal property, contracts and
  accounts receivable relating to Front Porchs business.

The
purchase price was $33 million. Of such purchase price, $30.5 million was
received in cash at the closing and $2.5 million was placed in escrow for one
year to secure payment of any indemnification claims (as defined in the
Purchase Agreement) the Buyers may have against us following the closing. This
amount is expected to be released from escrow in August 2007 and is therefore
included in other current assets at December 31, 2006.

In
addition to the purchase price payable at the closing, we may receive up to $5
million pursuant to an earn-out provision. Under the terms of the earn-out, we
are entitled to receive an amount equal to 5% of Front Porchs gross software
sales, net of customer discounts, for each of the years ending December 31,
2006, 2007 and 2008, not to exceed $5 million in the aggregate.
We have accrued and included in other current assets $286,040 under this
earn-out provision at December 31, 2006.

A
gain of approximately $15.4 million was realized on the sale after expenses and
fees of approximately $3.4 million and a provision for income taxes of $0.3
million.

The
operating results from discontinued operations for the years ending December
31, 2006 and 2005 were as follows:

|                                    |  |                           |           |      |   |            |  
|----------------------------------- |  | ------------------------- | --------- | ---- | - | ---------- | -
|                                    |  | Year Ended
  December 31, |          
|                                    |  |                           |          
|                                    |  | 2006                      |           | 2005 |  
|                                    |  |                           |           |      |  
|                                    |  |                           |           |      |   |            |  
|Total revenues                      |  | $                         | 9,444,577 |      | $ | 12,897,308 |  
|Cost of revenues                    |  |                           | 3,357,505 |      |   | 4,723,376  |  
|                                    |  |                           |           |      |   |            |  
|Gross profit                        |  |                           | 6,087,072 |      |   | 8,173,932  |  
|Operating expenses                  |  |                           | 5,510,702 |      |   | 8,626,919  |  
|                                    |  |                           |           |      |   |            |  
|Operating income (loss)             |  |                           | 576,370   |      |   | (452,987   | )
|Other income                        |  |                           | 52,102    |      |   | 345,275    |  
|                                    |  |                           |           |      |   |            |  
|Income (loss) before income
  taxes |  |                           | 628,472   |      |   | (107,712   | )
|Income tax expense                  |  |                           |          |      |   | (469,034   | )
|                                    |  |                           |           |      |   |            |  
|                                    |  |                           |           |      |   |            |  
|Net income (loss)                   |  | $                         | 628,472   |      | $ | (576,746   | )
|                                    |  |                           |           |      |   |            |  

5. Property and Equipment

Property
and equipment consisted of the following as of December 31, 2006:

|                                 |  |   |           | 
|-------------------------------- |  | - | --------- | 
|Computer equipment               |  | $ | 6,492,675 | 
|Software                         |  |   | 2,078,616 | 
|Leasehold improvements           |  |   | 119,540   | 
|Office furniture and
  equipment |  |   | 185,192   | 
|                                 |  |   |           | 
|                                 |  |   | 8,876,023 | 
|Less accumulated
  depreciation  |  |   | 5,811,859 | 
|                                 |  |   |           | 
|                                 |  | $ | 3,064,164 | 
|                                 |  |   |           | 

Depreciation
expense for the years ended December 31, 2006 and 2005 was $1,532,665 and
$1,417,235, respectively.

Included
in property and equipment is equipment under capital lease with a cost of
$1,234,163 and accumulated depreciation of $272,052 at December 31, 2006.

F-20

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

6. Intangible Assets

Intangible
assets consist of acquired customer relationships/bases  which are being amortized
over a five-year term and are as follows as of December 31, 2006:

|                                |  |   |           | 
|------------------------------- |  | - | --------- | 
|Incentra of CO                  |  | $ | 2,599,714 | 
|Incentra MW                     |  |   | 1,500,000 | 
|Incentra of
  CA                |  |   | 540,000   | 
|Incentra NW                     |  |   | 310,000   | 
|Tactix                          |  |   | 515,600   | 
|                                |  |   |           | 
|                                |  |   | 5,465,314 | 
|Less
  accumulated amortization |  |   | 3,164,047 | 
|                                |  |   |           | 
|                                |  |   |           | 
|Intangible
  assets, net        |  | $ | 2,301,267 | 
|                                |  |   |           | 

Amortization
expense of customer relationships for the years ended December 31, 2006 and
2005 was $423,237 and $903,188, respectively. Estimated amortization expense for
each of the five succeeding years is as follows:

|                         |  |   |           | 
|------------------------ |  | - | --------- | 
|Year ending December 31: |  |   |           | 
|2007                     |  | $ | 573,124   | 
|2008                     |  |   | 573,124   | 
|2009                     |  |   | 573,124   | 
|2010                     |  |   | 432,108   | 
|2011                     |  |   | 149,787   | 
|                         |  |   |           | 
|                         |  |   |           | 
|                         |  | $ | 2,301,267 | 
|                         |  |   |           | 

7. Accrued expenses and other

Accrued
expenses and other consist of the following as of December 31, 2006:

|                                    |  |   |           | 
|----------------------------------- |  | - | --------- | 
|Wages,
  benefits and payroll taxes |  | $ | 2,619,452 | 
|Professional
  fees                 |  |   | 199,492   | 
|Customer
  deposits                 |  |   | 364,796   | 
|Taxes, other
  than income taxes    |  |   | 514,487   | 
|Deferred
  rent                     |  |   | 143,490   | 
|Other
  accrued payables            |  |   | 1,919,142 | 
|                                    |  |   |           | 
|                                    |  |   |           | 
|                                    |  | $ | 5,760,859 | 
|                                    |  |   |           | 

8. Commitments and Contingencies

We
are involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on our consolidated results of operations,
financial position or cash flows. Accordingly, no provision has been made for
any estimated losses with regard to such matters.

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

F-21

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

8. Commitments and Contingencies (continued)

We
lease facilities and equipment under non-cancelable capital and operating
leases. Rental expense relating to operating leases was $1,069,357 and $823,979
for the years ended December 31, 2006 and 2005, respectively. Certain of the
operating lease agreements have renewal provisions, which range from month-to-month
to 24-month terms.

Future
minimum lease payments as of December 31, 2006 are as follows:

|                                        |  |         |         |           |   |           | 
|--------------------------------------- |  | ------- | ------- | --------- | - | --------- | 
|                                        |  | Capital |         | Operating |  
|                                        |  |         |         |           |  
|                                        |  |         |         |           |   |           | 
|Year ending
  December 31:              |  |         |         |           |   |           | 
|2007                                    |  | $       | 721,449 |           | $ | 1,052,347 | 
|2008                                    |  |         | 26,401  |           |   | 620,012   | 
|2009                                    |  |         |        |           |   | 386,039   | 
|2010                                    |  |         |        |           |   | 312,943   | 
|2011 and thereafter                     |  |         |        |           |   | 46,015    | 
|                                        |  |         |         |           |   |           | 
|                                        |  |         |         |           |   |           | 
|Total minimum lease payments            |  |         | 747,850 |           | $ | 2,417,356 | 
|                                        |  |         |         |           |   |           | 
|                                        |  |         |         |           |   |           | 
|Less amounts representing interest      |  |         | (47,776 | )         |   |           | 
|                                        |  |         |         |           |   |           | 
|                                        |  |         |         |           |   |           | 
|Present value of minimum lease payments |  | $       | 700,074 |           |   |           | 
|                                        |  |         |         |           |   |           | 

9. Notes Payable, Capital Leases, and Other Long-Term Obligations

The
following is a summary of our long-term debt as of December 31, 2006:

|                                                 |  |   |           | 
|------------------------------------------------ |  | - | --------- | 
|Laurus
  convertible note and line of credit (A) |  | $ | 6,486,368 | 
|Incentra MW note (B)                             |  |   | 873,645   | 
|Convertible
  notes (C)                         |  |   | 1,228,392 | 
|STAR note
  (D)                                  |  |   |          | 
|Capital
  leases (E)                             |  |   | 700,074   | 
|Other
  obligations                              |  |   | 28,772    | 
|                                                 |  |   |           | 
|                                                 |  |   | 9,317,251 | 
|Less current
  portion                           |  |   | 8,498,168 | 
|                                                 |  |   |           | 
|                                                 |  |   |           | 
|Long-term
  portion                              |  | $ | 819,083   | 
|                                                 |  |   |           | 

All
of the long-term debt classified as non-current at December 31, 2006 matures in
2008.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|(A) | Laurus Convertible Note and Line of Credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|    | On
  February 6, 2006, we entered into a 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 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 plus 1%, subject to a floor of 7%. The initial draw under the
  2006 Facility was $5.8 million and was used to repay indebtedness under a
  prior revolving loan facility with Laurus. As of December 31, 2006,
  outstanding borrowings under the 2006 Facility amounted to $6.3 million, and
we had $3.7 million of available borrowings under the 2006 Facility.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|    | The
  2006 Facility requires a lockbox arrangement, which requires all receipts to
  be swept daily to reduce borrowings outstanding under the 2006 Facility. This
  arrangement, combined with a Subjective Acceleration Clause (SAC) in the
  2006 Facility, cause the 2006 Facility to be classified as a current
  liability, per guidance in EITF 95-22, Balance Sheet Classification of
  Borrowings Outstanding under Revolving Credit Agreements that Include Both a
  Subjective Acceleration Clause and a Lock-Box Arrangement.                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|    | 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 $1,750,000 (the 2006 Term Note) and a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-22

---



Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

9. Notes Payable, Capital Leases, and Other Long-Term Obligations (continued)

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | secured
  convertible term note due May 31, 2009 in the principal amount of $1,500,000
  (the 2006 Convertible Note). The 2006 Term Note was repaid on July 31,
  2006. The 2006 Convertible Note provides for monthly payments of interest at
  a rate per annum equal to the prime rate plus 2%, subject to a floor of 9%.
  Monthly amortization of the principal amount of the 2006 Convertible Note
  commenced on August 1, 2006 at the rate of $46,875 per month. The principal
  and any earned but unpaid interest on the 2006 Convertible Note are
  convertible into shares of our common stock at a fixed conversion price of
  $1.40 per share, subject to certain standard antidilution adjustments. The
  conversion price exceeded the market price of our common stock on the date
  the 2006 Convertible Note was issued. At December 31, 2006, an amount of $1.3
  million was outstanding under the 2006 Convertible Note.                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | In
  connection with our financings with Laurus, we have issued to Laurus warrants
  to purchase up to 1,673,857 shares of our common stock at prices ranging from
  $.001 to $5.00 per share. The warrants expire between May 1, 2008 and March
  31, 2026. In addition, an option to purchase 1,071,428 shares of our common
  stock at $.001 per share was issued to Laurus in connection with the 2006
  Facility. The option expires on February 26, 2026 and is subject to certain
  volume limitations regarding exercise and sale of our common stock. Using the
  Black-Scholes model, the value of all warrants and the option issued to
  Laurus in 2006 approximated $1.7 million and is being amortized to earnings
  as additional interest expense over the term of the related indebtedness. The
  unamortized balance of these deferred costs was $1.1 million at December 31,
  2006. Borrowings outstanding at December 31, 2006 under the 2006 Facility and
  the 2006 Convertible Note were net of the deferred financing costs associated
  with these borrowings.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | On
  July 31, 2006, we repaid to Laurus $4.5 million in outstanding principal
  amounts related to two term loans in advance of scheduled payments, and $9.2
  million on the 2006 Facility. Prepayment penalties and write-offs of the
  unamortized balances of deferred financing costs and debt discounts amounted
  to $1.6 million and are included in the loss on early extinguishment of debt
  in our statement of operations. Also included in the loss on early
  extinguishment of debt for the year ended December 31, 2006 is $1.2 million
  related to the refinancing of the prior revolving credit facility in February
  2006.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Our
  indebtedness to Laurus is secured by substantially all of our assets and is
  accompanied by substantially similar agreements governing registration
  rights, standard events of default provisions, typical remedies available to
  Laurus in the event of default, restrictions on the payment of dividends and
  other provisions standard in these types of arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(B) | Incentra
  MW Note                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Pursuant
  to the Incentra MW Stock Purchase Agreement discussed in Note 3(A), we issued
  an unsecured promissory note for $1,500,000 to the selling stockholder of NST
  (the Incentra MW Note) which is payable in eight installments and matures
  on March 1, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The
  Incentra MW Note accrues interest at an annual rate of 1/2%. The Incentra MW
  Note was discounted by $109,300 to reflect a fair value rate of interest of
  8.75%. We are required to make eight equal payments of principal and interest
  in the amount of $190,190, the first payments of which were paid on July 15,
  September 1 and December 1, 2006, and the five remaining payments being due
  on the first day of March, June, September and December, 2007 and on March 1,
  2008. The Incentra MW Note further provides that all unpaid principal and
  accrued interest shall become immediately due and payable upon the occurrence
  of an event of default (as defined in the Incentra MW Note). Such events of
  default include, among others, the occurrence either of the following events:
  (i) our failure to make payment when due, subject to a five (5) day notice
  and cure period or (ii) our failure to observe, keep or comply with any
  provision or requirement contained in the Incentra MW Stock Purchase
  Agreement.                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(C) | Convertible
  Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | In
  May and June 2006, we entered into a Note Purchase Agreement (the Purchase
  Agreement) with twelve accredited individual investors and three
  institutional investors (collectively, the Purchasers), pursuant to which
  we issued and sold unsecured convertible term notes (the Convertible Notes)
  in the aggregate principal amount of $2,410,000. Of this amount, $1,060,000
  was repaid to the twelve accredited investors in September                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-23

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Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

9. Notes Payable, Capital Leases, and Other Long-Term Obligations (continued)

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 2006, along
  with accrued interest of $34,535 and prepayment penalties amounting to
  $84,800. The latter amount is included in loss on early extinguishment of
  debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The
  remaining Convertible Notes have a principal amount of $1,350,000, bear
  interest at an annual rate of 12% (subject to certain adjustments) and mature
  on June 6, 2007 when all principal and accrued interest are due. Absent early
  redemption (at our option and without penalty), the Convertible Notes and any
  accrued interest are convertible, at the option of the Purchasers, into fully
  paid and nonassessable shares of our common stock at a fixed conversion price
  of $1.40 per share (as adjusted for stock splits, stock dividends and the like,
  the Conversion Price). The Conversion Price exceeded the market price of
  our common stock on the date the Convertible Notes were issued. We have the
  right to convert all or any portion of the then unpaid and accrued interest
  on the remaining Convertible Notes into shares of our common stock at the
  then-effective conversion price of such Convertible Notes, if the average
  closing price of our common stock on the applicable market for the five (5)
  consecutive trading days immediately preceding the date of conversion is
  greater than or equal to one hundred twenty-five percent (125%) of the
  conversion price; provided there is an effective registration statement
  covering the resale of the shares issuable upon conversion of such
  Convertible Notes.   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | In
  connection with the issuance of the Convertible Notes, we also issued to the
  Purchasers warrants (the Warrants) to purchase an aggregate of 570,688
  shares of our common stock, at an exercise price $1.40 per share (subject to
  adjustment for stock splits, stock dividends and the like) expiring in May
  and June, 2011. Based upon the Black-Scholes model, we determined the value
  of all Warrants issued to be $651,474, which is being amortized over the term
  of the related Convertible Notes beginning in May 2006. In connection with
  the repayment of $1,060,000 in September 2006, $167,212 of the remaining
  unamortized value of the related Warrants was written off and included in the
  loss on early extinguishment of debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Pursuant
  to the terms of a Registration Rights Agreement between us and the
  non-institutional Purchasers, after May 19, 2007 and upon the request of 51%
  of these Purchasers, and as soon as practicable, we are obligated to file a
  resale registration to register the resale of shares of our common stock
  (the Registrable Securities) issuable upon exercise of the Warrants (with
  certain exceptions). If, at any time after May 19, 2007, we decide to
  register any of our equity securities or other securities convertible into
  equity securities, we must notify each of these Purchasers and include any
  Registrable Securities as such Purchaser may request, in such registration
  statement. Registration rights for the Convertible Notes issued to the three
  institutional Purchasers required us to register by September 26, 2006 for
  resale under the Securities Act the shares of our common stock issuable to
  them upon conversion of the Convertible Notes or upon exercise of the
  Warrants. We intend to file a registration statement on Form S-1 in 2007 in
  satisfaction of this requirement. Our inability to file the registration
  statement by the deadline does not represent an event of default on the
  Convertible Notes, and we will not incur any penalties for having failed to
  file the registration statement.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The
  Convertible Notes and Warrants issued to the three institutional Purchasers
  include a weighted-average anti-dilution provision and a limitation on the
  number shares for which the Convertible Note and Warrants maybe converted or
  exercised. Pursuant to such limitation, a holder may not convert its
  Convertible Note nor exercise its Warrant if, as a result of such conversion
  or exercise, the number of shares of our common stock such holder would
  beneficially own exceeds the difference between (i) 9.99% of the then-issued
  and outstanding shares of our common stock and (ii) the number of shares of
  our common stock beneficially owned by such holder and/or such holders
  affiliates (as defined under Rule 144 of the Securities Act of 1933, except
  upon (i) 61 days prior notice from such holder to us or (ii) upon the
  occurrence and continuance of an event of default under the Purchase
  Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(D) | STAR Note                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | As
  part of the acquisition of Incentra of CA in February 2005, we issued an
  unsecured convertible promissory note for $2,500,000 to the selling
  stockholder of Incentra of CA (the STAR Note) that was payable in ten
  installments and was due to mature on August 1, 2007. The STAR Note provided
  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. 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. Our failure to
  make the scheduled payment and any subsequent payments constituted an event
  of default.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-24

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Incentra Solutions, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements(continued) 
December 31, 2006 and 2005

9. Notes Payable, Capital Leases, and Other Long-Term Obligations (continued)

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | On
  July 28, 2006, we entered into a Letter Agreement, as amended on July 31,
  2006, with the former principal stockholder of Incentra of CA, pursuant to
  which we settled all claims and disputes with the former principal
  stockholder that arose from our claimed adjustment of the purchase price paid
  in connection with our acquisition of Incentra of CA in February 2005.
  Pursuant to the Letter Agreement, as amended, we paid the former principal
  stockholder $2,380,000, of which $505,000 was paid upon execution of the
  Letter Agreement and $1,875,000 was paid on August 2, 2006. As part of the
  settlement, the former principal stockholder returned to us all of the
  1,135,580 shares of our common stock issued to him in the acquisition and
  cancelled the $2.5 million promissory note issued to him in February 2005.
  The shares returned to us were retired at par value and are no longer
  outstanding. The shares returned were accounted for as a capital transaction
  and accordingly, no gain was recorded in connection with the return of these
  shares.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(E) | Capital
  Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | In
  November 2003, we entered into a capital lease line of credit agreement (the
  Lease Line) for $1,500,000 with a third-party lender. Subsequent to that
  date, we entered into four amendments to the Lease Line which enabled us to
  draw an additional $2.0 million in total on the line for purchases through
  February, 28, 2007. The amendments also grant to us a call option to purchase
  the equipment from the lessor. The terms of the Lease Line (as amended) are
  for lease terms of 12-15 months with interest rates ranging from 14.964% to
  15%. At December 31, 2006, the unpaid balance on the Lease Line was $661,662,
  of which, all but $18,062 is due in 2007.                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

10. Series A Convertible Redeemable Preferred Stock and Common Stock

In
connection with the acquisition of Incentra CO on August 18, 2004, 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. As the carrying value of the Series A
Preferred Shares is less than the redemption amount, we are accreting the
difference so that the carrying value will equal the redemption amount of $31.5
million at the earliest date the holders can elect to redeem the shares. 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 preemptive rights with respect to subsequent issuances of
securities by us (subject to certain exceptions).

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 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.

11. Employee Stock Option Plans

We
currently have three employee stock option plans  one plan that was originally
established under Incentra of CO (the Incentra of CO Plan), a plan that was
originally established under Front Porch (the Incentra Option Plan), and the
Incentra Solutions, Inc. 2006 Stock Option Plan (the 2006 Plan), which was
adopted on May 4, 2006. As of the date of the Incentra of CO acquisition, we
adopted the Incentra Option Plan.

The 2006 Plan and the Incentra Option Plan

The
2006 Plan and the Incentra Option Plan provide for the granting of options to
key employees, officers and certain individuals to purchase shares of our
common stock. We currently have reserved 1,750,000 and 2,262,500 shares of
common stock, respectively, for issuance under the 2006 Plan and the Incentra
Option Plan. Both plans have a term of ten years and provide for the grant of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. In addition, the Incentra Option Plan
provides for the granting of non-statutory stock options, stock appreciation
rights and restricted stock awards. Both plans are administered by our Board of
Directors.

F-25

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Incentra Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements(continued)
December 31, 2006 and 2005

11. Employee Stock Option Plans (continued)

The
exercise price of non-statutory stock options may be equal to or more or less
than 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%
of the fair market value of shares of common stock on the date of the grant
(not less than 110% of the fair market value on the date of grant in the case
of incentive stock options granted to employees who hold more than 10% of the
voting power of our common stock).

Options
granted under the plans 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 10% of the voting power of the our common stock) and generally
vest on a graded scale over a three-year period, 33.3% per year. 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 vested immediately or
contained accelerated vesting, or vest on a graded scale over three years,
33.3% per year, 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 the 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

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Incentra Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements(continued)
December 31, 2006 and 2005

11. Employee Stock Option Plans (continued)

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

|                           |  |                     |           |                                     |   |      | 
|-------------------------- |  | ------------------- | --------- | ----------------------------------- | - | ---- | 
|                           |  | Number
  of options |           | Weighted
  average
  exercise price |  
|                           |  |                     |           |                                     |  
|                           |  |                     |           |                                     |   |      | 
|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 | 
|Granted                    |  |                     | 50,000    |                                     |   | 1.11 | 
|Exercised                  |  |                     |          |                                     |   |     | 
|Forfeited                  |  |                     | (435,020  | )                                   |   | 4.16 | 
|                           |  |                     |           |                                     |   |      | 
|Balance, December 31, 2006 |  |                     | 1,831,996 |                                     | $ | 2.54 | 
|                           |  |                     |           |                                     |   |      | 

|                 |            |                         |  |                                                             |           |                                     |  |                                  |      |                                     |  |  |   |      |  |  |  |           |  |  |   |      |  | 
|---------------- | ---------- | ----------------------- |  | ----------------------------------------------------------- | --------- | ----------------------------------- |  | -------------------------------- | ---- | ----------------------------------- |  |  | - | ---- |  |  |  | --------- |  |  | - | ---- |  | 
|                 |            |                         |  | 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 | 
|                 |            |                         |  |                                                             |           |                                     |  |                                  |      |                                     |  |  |  
|$                | 1.11-1.60  |                         |  |                                                             | 296,380   |                                     |  |                                  | 8.90 |                                     |  |  | $ | 1.29 |  |  |  | 82,127    |  |  | $ | 1.32 |  | 
|                 | 2.10-2.90  |                         |  |                                                             | 1,357,517 |                                     |  |                                  | 7.47 |                                     |  |  |   | 2.70 |  |  |  | 948,017   |  |  |   | 2.70 |  | 
|                 |            |                         |  |                                                             |           |                                     |  |                                  |      |                                     |  |  |   |      |  |  |  |           |  |  |   |      |  | 
|                 | 3.20-40.00 |                         |  |                                                             | 178,099   |                                     |  |                                  | 7.90 |                                     |  |  |   | 3.40 |  |  |  | 119,066   |  |  |   | 3.50 |  | 
|                 |            |                         |  |                                                             |           |                                     |  |                                  |      |                                     |  |  |   |      |  |  |  |           |  |  |   |      |  | 
|                 |            |                         |  |                                                             | 1,831,996 |                                     |  |                                  | 7.74 |                                     |  |  |   | 2.54 |  |  |  | 1,149,210 |  |  |   | 2.69 |  | 
|                 |            |                         |  |                                                             |           |                                     |  |                                  |      |                                     |  |  |   |      |  |  |  |           |  |  |   |      |  | 

A summary of
all activity in the 2006 Plan is as follows:

|                           |  |                     |           |                                     |   |       |  
|-------------------------- |  | ------------------- | --------- | ----------------------------------- | - | ----- | -
|                           |  | Number
  of options |           | Weighted
  average
  exercise price |  
|                           |  |                     |           |                                     |  
|                           |  |                     |           |                                     |  
|Balance, December 31, 2005 |  |                     |          |                                     | $ |      |  
|Granted                    |  |                     | 1,517,111 |                                     |   | 1.25  |  
|Exercised                  |  |                     |          |                                     |   |      |  
|Forfeited                  |  |                     | (281,200  | )                                   |   | (1.30 | )
|                           |  |                     |           |                                     |   |       |  
|Balance, December 31, 2006 |  |                     | 1,235,911 |                                     | $ | 1.24  |  
|                           |  |                     |           |                                     |   |       |  

|                 |   |                       |  |                                                             |                     |                                     |                     |                                  |  |                                     |  |  |  |   |      |  |  |  |  |   |  |  |  |   |      |  | 
|---------------- | - | --------------------- |  | ----------------------------------------------------------- | ------------------- | ----------------------------------- | ------------------- | -------------------------------- |  | ----------------------------------- |  |  |  | - | ---- |  |  |  |  | - |  |  |  | - | ---- |  | 
|                 |   |                       |  |                                                             | 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 | 
|                 |   |                       |  |                                                             |                     |                                     |                     |                                  |  |                                     | 
|                 |   |                       |  |                                                             |                     |                                     |                     |                                  |  |                                     |  |  |  |   |      |  |  |  |  |   |  |  |  |   |      |  | 
|                 | $ | 1.30                  |  |                                                             |                     | 923,411                             |                     |                                  |  | 9.3                                 |  |  |  | $ | 1.30 |  |  |  |  |  |  |  |  | $ | 1.30 |  | 
|                 |   | 1.08                  |  |                                                             |                     | 272,500                             |                     |                                  |  | 9.7                                 |  |  |  |   | 1.08 |  |  |  |  |  |  |  |  |   | 1.08 |  | 
|                 |   | 1.05                  |  |                                                             |                     | 15,000                              |                     |                                  |  | 9.9                                 |  |  |  |   | 1.05 |  |  |  |  |  |  |  |  |   | 1.05 |  | 
|                 |   | 1.10                  |  |                                                             |                     | 25,000                              |                     |                                  |  | 10.0                                |  |  |  |   | 1.10 |  |  |  |  |  |  |  |  |   | 1.10 |  | 
|                 |   |                       |  |                                                             |                     |                                     |                     |                                  |  |                                     |  |  |  |   |      |  |  |  |  |   |  |  |  |   |      |  | 
|                 |   |                       |  |                                                             |                     | 1,235,911                           |                     |                                  |  | 9.4                                 |  |  |  |   | 1.24 |  |  |  |  |   |  |  |  |   | 1.24 |  | 
|                 |   |                       |  |                                                             |                     |                                     |                     |                                  |  |                                     |  |  |  |   |      |  |  |  |  |   |  |  |  |   |      |  | 

F-27

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Incentra Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements(continued)
December 31, 2006 and 2005

11. Employee Stock Option Plans (continued)

Summaries
of option activity under both the Incentra Option Plan and the 2006 Plan as of
December 31, 2006, changes during the twelve months then ended, and status of
non-vested options are presented below:

|                                      |  |                     |           |                                       |   |                                         |  |  |      | 
|------------------------------------- |  | ------------------- | --------- | ------------------------------------- | - | --------------------------------------- |  |  | ---- | 
|                                      |  | Number of
  Options |           | Weighted
  Average
  Exercise
  Price |   | Weighted
  Average
  Contractual
  Life | 
|                                      |  |                     |           |                                       |   |                                         | 
|                                      |  |                     |           |                                       |   |                                         |  |  |      | 
|Balance January 1, 2006               |  |                     | 2,217,016 |                                       | $ | 2.92                                    |  |  | 8.50 | 
|Granted                               |  |                     | 1,567,111 |                                       |   | 1.25                                    |  |  | 9.38 | 
|Exercised                             |  |                     |          |                                       |   |                                        |  |  |     | 
|Forfeited                             |  |                     | (716,220  | )                                     |   | 3.03                                    |  |  | 8.11 | 
|                                      |  |                     |           |                                       |   |                                         |  |  |      | 
|                                      |  |                     |           |                                       |   |                                         |  |  |      | 
|Balance December 31, 2006             |  |                     | 3,067,907 |                                       | $ | 2.04                                    |  |  | 9.36 | 
|                                      |  |                     |           |                                       |   |                                         |  |  |      | 
|                                      |  |                     |           |                                       |   |                                         |  |  |      | 
|Vested balance at December
  31, 2006 |  |                     | 1,149,209 |                                       | $ | 2.69                                    |  |  | 7.55 | 
|                                      |  |                     |           |                                       |   |                                         |  |  |      | 

|                                          |  |  |           |   |   |      |  |                                              |      | 
|----------------------------------------- |  |  | --------- | - | - | ---- |  | -------------------------------------------- | ---- | 
|                                          |  |  |           |   |   |      |  | Weighted
  Average
  Grant Date
  Fair Value |     
|                                          |  |  |           |   |   |      |  |                                              |     
|                                          |  |  |           |   |   |      |  |                                              |      | 
|Non-vested options January
  1, 2006      |  |  | 1,379,524 |   | $ | 2.42 |  | $                                            | 0.52 | 
|Granted                                   |  |  | 1,567,111 |   |   | 1.25 |  |                                              | 1.07 | 
|Vested                                    |  |  | (580,731  | ) |   | 2.50 |  |                                              | 0.48 | 
|Forfeited                                 |  |  | (447,206  | ) |   | 1.68 |  |                                              | 1.09 | 
|                                          |  |  |           |   |   |      |  |                                              |      | 
|                                          |  |  |           |   |   |      |  |                                              |      | 
|Non-vested options at
  December 31, 2006 |  |  | 1,918,698 |   | $ | 1.61 |  | $                                            | 0.85 | 
|                                          |  |  |           |   |   |      |  |                                              |      | 

As
of December 31, 2006, there was $1.9 million of total unrecognized compensation
expense related to the non-vested, share-based compensation arrangements
granted under the plans. That cost is expected to be recognized over a
weighted-average period of 1.79 years. The total fair value of shares vested
during the year ended December 31, 2006 was approximately $250,000. The
intrinsic value of outstanding options was not material at December 31, 2006.

During the fourth quarter of 2006,
we accelerated the vesting of 224,218 options issued to certain former employees
of Front Porch. In addition, we modified the terms of 493,410 options issued to certain
former employees of Front Porch from an exercise period of 90 days to 365 days from the date of
the sale of Front Porch. This acceleration and modification of terms was accounted for
in accordance with SFAS 123R resulting in an additional expense of $392,543 being recorded during
the fourth quarter of 2006, which is included as a reduction in the gain from the sale
of discontinued operations.

The Incentra of CO Plan

Prior
to the Incentra of CO acquisition, Incentra of CO adopted and administered the
Incentra of CO Plan for its employees, directors, consultants and other key
persons. In connectio n with the Incentra of CO acquisition, no additional
grants will be made under this plan; however, outstanding stock options issued
pursuant to this plan may be exercised for unregistered common shares. As
provided in the Incentra of CO acquisition agreement, upon the exercise of any
outstanding options issued under this plan, we will issue 0.3089 shares of
common stock for each share of Incentra of CO 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
Incentra of CO Plan pursuant to options previously granted is 215,893 at
December 31, 2006. 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 Incentra of CO Plan, 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 our common stock, 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 plan provisions, the contractual
life of all such options is no greater than ten years. Upon our adoption of SFAS 123R
on January 1, 2006, substantially all outstanding options under The Incentra of
Co Plan were fully vested.

F-28

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Incentra Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements(continued)
December 31, 2006 and 2005

11. Employee Stock Option Plans (continued)

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

|                           |  |                     |         |                                     |   |      | 
|-------------------------- |  | ------------------- | ------- | ----------------------------------- | - | ---- | 
|                           |  | Number
  of options |         | Weighted
  average
  exercise price |  
|                           |  |                     |         |                                     |  
|Balance, December 31, 2004 |  |                     | 219,601 |                                     | $ | 0.50 | 
|Granted                    |  |                     |        |                                     |   |     | 
|Exercised                  |  |                     | (454    | )                                   |   | 0.30 | 
|Forfeited                  |  |                     | (2,611  | )                                   |   | 0.26 | 
|                           |  |                     |         |                                     |   |      | 
|Balance, December 31, 2005 |  |                     | 216,536 |                                     |   | 0.45 | 
|Granted                    |  |                     |        |                                     |   |     | 
|Exercised                  |  |                     | (458    | )                                   |   | 0.32 | 
|Forfeited                  |  |                     | (185    | )                                   |   | 1.54 | 
|                           |  |                     |         |                                     |   |      | 
|Balance, December 31, 2006 |  |                     | 215,893 |                                     | $ | 0.45 | 
|                           |  |                     |         |                                     |   |      | 

|                 |  |                       |         |                                                             |  |                                     |  |                                  |       |                                     |  |         |  |   |       | 
|---------------- |  | --------------------- | ------- | ----------------------------------------------------------- |  | ----------------------------------- |  | -------------------------------- | ----- | ----------------------------------- |  | ------- |  | - | ----- | 
|                 |  | 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 | 
|                 |  |                       |         |                                                             |  |                                     |  |                                  |       |                                     | 
|0.32             |  |                       | 206,581 |                                                             |  | 6.12                                |  | $                                | 0.32  |                                     |  | 206,581 |  | $ | 0.32  | 
|3.24             |  |                       | 9,282   |                                                             |  | 7.12                                |  |                                  | 3.24  |                                     |  | 5,433   |  |   | 3.24  | 
|16.20            |  |                       | 30      |                                                             |  | 5.31                                |  |                                  | 16.19 |                                     |  | 30      |  |   | 16.19 | 
|                 |  |                       |         |                                                             |  |                                     |  |                                  |       |                                     |  |         |  |   |       | 
|                 |  |                       | 215,893 |                                                             |  | 6.16                                |  |                                  | 0.45  |                                     |  | 212,044 |  |   | 0.40  | 
|                 |  |                       |         |                                                             |  |                                     |  |                                  |       |                                     |  |         |  |   |       | 

12. Warrants

In
determining the fair value of warrants granted in 2006 and 2005, we utilized
the Black-Scholes valuation model with the following weighted average
assumptions: dividend yield of 0%, risk free interest rate of 4.82%, expected
volatility of 113%, and expected lives of seven years.

At December
31, 2006, 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 noteholder                                     |  |                 | December
  31, 2007 |                             |  |                  | 22,500    |  |  | $ | 1.00  | 
|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  | 
|Issued to Laurus in connection with debt
issuance        |  |                 | March
  31, 2026    |                             |  |                  | 417,857   |  |  | $ | 0.001 | 
|Issued to noteholders                                    |  |                 | May
  19, 2011      |                             |  |                  | 251,008   |  |  | $ | 1.40  | 
|Issued to noteholders                                    |  |                 | June
  6, 2011      |                             |  |                  | 319,680   |  |  | $ | 1.40  | 
|Issued in connection with acquisition of
allianceSoft    |  |                 | August
  25, 2011   |                             |  |                  | 100,000   |  |  | $ | 1.40  | 
|                                                         |  |                 |                     |                             |  |                  |           |  |  |   |       | 
|Total warrants outstanding                               |  |                 |                     |                             |  |                  | 2,551,669 |  |  |   |       | 
|                                                         |  |                 |                     |                             |  |                  |           |  |  |   |       | 

F-29

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Incentra Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements(continued)
December 31, 2006 and 2005

12. Warrants (continued)

At December
31, 2006, we had the following warrants outstanding for the purchase of our
Series A Convertible Preferred Stock:

|                                                                     |  |                   |                     |                               |  |                  |        |  |  |   |       | 
|-------------------------------------------------------------------- |  | ----------------- | ------------------- | ----------------------------- |  | ---------------- | ------ |  |  | - | ----- | 
|Description                                                          |  | Expiration
  Date |                     | Number
  of
  Shares Issuable |  | Exercise
  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 100% 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). We leased office space
from Equity Pier in 2006 and 2005. Total costs incurred under the leasing
arrangement and associated expenses (utilities, supplies and insurance)
amounted to $208,574 and $190,178, respectively.

During
2004, a former director of our company entered into a consulting agreement with
us to provide consulting services in the broadcast industry. The agreement
began on June 1, 2004 and expired on May 31, 2005. During 2005, we paid the
director $13,274 in consulting fees and expenses.

There
were no amounts payable under either arrangement at December 31, 2006.

15. Income Taxes

The
domestic and foreign components of loss before income taxes for the years ended
December 31, 2006 and 2005 are as follows:

|                                  |  |      |             |      |   |             |  
|--------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                  |  | 2006 |             | 2005 |  
|                                  |  |      |             |      |  
|Domestic                          |  | $    | (18,837,636 | )    | $ | (13,648,811 | )
|Discontinued
          Operations |  |      | 16,327,807  |      |   | (107,712    | )
|                                  |  |      |             |      |   |             |  
|Total                             |  | $    | (2,509,829  | )    | $ | (13,756,523 | )
|                                  |  |      |             |      |   |             |  

For
the years ended December 31, 2006 and 2005, we recorded income tax expense of
$323,321 and $469,034, respectively, related to discontinued operations. For
2006, the expense was solely related to the gain on the sale of the
discontinued operations. We did not record any income tax expense related to
continuing operations for either 2006 or 2005.

The
income tax provision of $323,321 for the year ended December 31, 2006 is
classified as a current payable. For the year ended December 31, 2005, we
recorded deferred foreign income tax expense of $469,034 related to our French
subsidiary, which is included in discontinued operations.

F-30

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Incentra Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements(continued)
December 31, 2006 and 2005

15. Income Taxes (continued)

The
reconciliation between the federal statutory tax rate and the effective tax
rate on losses from continuing operations for 2006 and 2005 is as follows:

|                                                |  |      |        |      |  |        |   
|----------------------------------------------- |  | ---- | ------ | ---- |  | ------ | --
|                                                |  | 2006 |        | 2005 | 
|                                                |  |      |        |      | 
|Expected tax benefit of federal stautory
  rate |  |      | (35.00 | )%   |  | (35.00 | )%
|Increase (reduction) resulting from:            |  |      |        |      |  |        |   
|State taxes, net of federal
benefit             |  |      | (4.65  | )%   |  | (2.45  | )%
|Effect of permanent
differences                 |  |      | 2.05   | %    |  | 17.66  | % 
|Valuation allowance and other                   |  |      | 37.60  | %    |  | 19.79  | % 
|                                                |  |      |        |      |  |        |   
|Effective income tax rate                       |  |      | 0.00   | %    |  | 0.00   | % 
|                                                |  |      |        |      |  |        |   

At
December 31, 2006, approximately $80.4 million of federal and $77.2 million of
state operating loss carryforwards were available to offset future taxable
income through the year 2026. These net operating loss carryforwards begin to
expire in 2011. 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
our 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.

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.

Significant
components of our deferred tax assets and liabilities for federal and state
income taxes consist of the following as of December 31, 2006:

|                                                   |  |   |             |  
|-------------------------------------------------- |  | - | ----------- | -
|Deferred tax assets:                               |  |   |             |  
|Accrued liabilities                                |  | $ | 595,719     |  
|Allowance for bad debt                             |  |   | 280,658     |  
|Stock-based compensation                           |  |   | 1,067,119   |  
|Capital loss
carryforwards                         |  |   | 6,079,122   |  
|Net operating loss
carryforwards                   |  |   | 32,718,443  |  
|                                                   |  |   |             |  
|Gross deferred tax assets                          |  |   | 40,741,061  |  
|                                                   |  |   |             |  
|                                                   |  |   |             |  
|Deferred tax liabilities:                          |  |   |             |  
|Property and
equipment                             |  |   | (96,829     | )
|Intangible assets                                  |  |   | (8,181      | )
|                                                   |  |   |             |  
|Gross deferred tax liabilities                     |  |   | (105,010    | )
|                                                   |  |   |             |  
|                                                   |  |   |             |  
|Net deferred tax assets before valuation
allowance |  |   | 40,636.051  |  
|                                                   |  |   |             |  
|Valuation allowance                                |  |   | (40,636,051 | )
|                                                   |  |   |             |  
|                                                   |  |   |             |  
|Deferred tax assets (liabilities),
net             |  | $ |            |  
|                                                   |  |   |             |  

We
have recorded a valuation allowance against the entire deferred tax asset, as
we do not consider the realization of this asset to be more likely than not.
The valuation allowance increased by $2,315,591 during the year ended December
31, 2006.

F-31

---