**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**




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





For
      the
      fiscal year ended December 31, 2007




o  
TRANSITION
      REPORT PURSUANT TO 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 Registrant as Specified in its Charter)**









**Nevada**
            
            **86-0793960****(State
                or Other Jurisdiction**
            
            **(I.R.S.
                Employer Identification No.)****of
                Incorporation or Organization)****1140
                Pearl St.****Boulder,
                CO**
            
            **80302****(Address
                of Principal Executive Offices)**
            
            **(Zip
                Code)**




**(303)
      449-8279**


**(Registrant’s
      telephone number, including area code)**





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





**Title
                of each class**
            **Name
                of each exchange on which registered**None
            Not
                applicable





**Securities
      registered Pursuant to Section 12(g) of the Act:**





**Common
      Stock, par value $.001 per share**


**(Title
      of class)**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


YES o NO
x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange


Act.
      YES
oNO x




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. YES xNO o





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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      definition of “accelerated filer,” “large accelerated filer,” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer oAccelerated
      filer oNon-accelerated filer o Smaller
      reporting company x





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




As
      of
      June 29, 2007, the aggregate market value of voting and non-voting stock held
      by
      non-affiliates of the Registrant, based upon the last sale price of the
      Registrant’s Common Stock, par value $0.001 per share, reported on the OTC
      Bulletin Board on June 29, 2007, was $8,136,685.





As
      of
      March 28, 2008, there were outstanding 21,317,863 shares of the Registrant’s
      Common Stock, $0.001 par value. The Registrant also had outstanding as of such
      date, 2,466,971 shares of Series A convertible preferred stock, which were
      convertible into 7,400,913 shares of the Registrant's common stock. The
      issuer's common stock currently trades on the OTC Bulletin Board under the
      symbol "ICNS."









**Table
                  of Contents****Item**
              
              
              
              **Page****PART
                  I**1.
              
              Description
                  of Business
              
              11A.
              
              Risk
                  Factors
              
              91B.
              
              Unresolved
                  Staff Comments
              
              192.
              
              Description
                  of Property
              
              193.
              
              Legal
                  Proceedings
              
              204.
              
              Submission
                  of Matters To a Vote of Security Holders
              
              20**PART
                  II**5.
              
              Market
                  for Registrant's Common Equity, Related Stockholder Matters and
                  IssuerPurchases
                  of Equity Securities
              
              206.
              
              Selected
                  Financial Data
              
              217.
              
              Management's
                  Discussion and Analysis of Financial Condition and Results
                  ofOperations
              
              237A.
              
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              328.
              
              Financial
                  Statements and Supplementary Data
              
              329.
              
              Changes
                  in and Disagreements with Accountants on Accounting and
                  FinancialDisclosure
              
              329A.
              
              Controls
                  and Procedures
              
              329B.
              
              Other
                  Information
              
              33**PART
                  III**10.
              
              Directors,
                  Executive Officers and Corporate Governance
              
              3311.
              
              Executive
                  Compensation
              
              3412.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and
                  RelatedStockholder
                  Matters
              
              3913.
              
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              4114.
              
              Principal
                  Accountant Fees and Services
              
              41**PART
                  IV**15.
              
              Exhibits
                  and Financial Statement Schedules
              
              42









WHEN
        USED
        IN THIS REPORT, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR
        EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
        ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS
        TO DIFFER MATERIALLY FROM THOSE PROJECTED.
 
 OUR
        BUSINESS AND RESULTS OF OPERATIONS ARE AFFECTED BY A WIDE VARIETY OF FACTORS
        THAT COULD MATERIALLY AND ADVERSELY AFFECT US AND OUR ACTUAL RESULTS, INCLUDING,
        BUT NOT LIMITED TO: (1) THE AVAILABILITY OF ADDITIONAL FUNDS TO ENABLE US
        TO
        SUCCESSFULLY PURSUE OUR BUSINESS PLAN; (2) THE UNCERTAINTIES RELATED TO THE
        EFFECTIVENESS OF OUR TECHNOLOGIES AND THE DEVELOPMENT OF OUR PRODUCTS AND
        SERVICES; (3) OUR ABILITY TO MAINTAIN, ATTRACT AND INTEGRATE MANAGEMENT
        PERSONNEL; (4) OUR ABILITY TO COMPLETE THE DEVELOPMENT OF OUR PROPOSED PRODUCTS
        IN A TIMELY MANNER; (5) OUR ABILITY TO EFFECTIVELY MARKET AND SELL OUR PRODUCTS
        AND SERVICES TO CURRENT AND NEW CUSTOMERS; (6) OUR ABILITY TO NEGOTIATE AND
        MAINTAIN SUITABLE STRATEGIC PARTNERSHIPS AND CORPORATE RELATIONSHIPS; (7)
        THE
        INTENSITY OF COMPETITION; AND (8) GENERAL ECONOMIC CONDITIONS. AS A RESULT
        OF
        THESE AND OTHER FACTORS, WE MAY EXPERIENCE MATERIAL FLUCTUATIONS IN FUTURE
        OPERATING RESULTS ON A QUARTERLY OR ANNUAL BASIS, WHICH COULD MATERIALLY
        AND
        ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS AND
        STOCK
        PRICE.
 
 THESE
        FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE
        NO
        OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
        FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES
        AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED
        EVENTS.






**PART
        I**
  **ITEM
          1. DESCRIPTION OF BUSINESS**
 
 **General**
 
 We
          are a
          leading provider of complete Information Technology (“IT”) services and
          solutions to enterprise's and managed service providers in North America
          and
          Europe. Our complete solutions include hardware and software products,
          maintenance contracts, professional services, recurring managed services
          and
          capital financing solutions. We market our products and services to service
          providers and enterprise clients under the trade name Incentra Solutions.
 
 We
          believe our ability to deliver product and service solutions with a focus
          on
          storage infrastructure and management solutions to our customers differentiates
          us from most of our competitors. Mid-tier enterprise IT users are our primary
          target market. We target customers with annual IT expenditures of $5 million
          to
          $100 million. Our complete solution includes the following components:
 
 We
          resell
          hardware, software and third-party maintenance contracts acquired from
          various
          manufacturers and distributors to our customers throughout North America
          and
          Europe. We also provide professional services that include IT assessments,
          system design services, implementation, project management, engineering,
          and
          staff augmentation/outsourcing.
 
 We
          deliver managed 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 North America and Europe.
          As
          part of our managed services, we provide managed security services, managed
          disk
          services and managed backup services.
 
 Our
          proprietary GridWorks Operations Support System enables automated remote
          monitoring and management of full storage infrastructures. We provide these
          outsourcing solutions for customer monitoring and data protection needs
          under
          long-term contracts. Pursuant to these 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 provide value to our customers through
          improved operating effectiveness while reducing both operating costs and
          capital
          expenditures.
 
 Through
          our NOC, we also service both First Call and Enhanced First Call contracts.
          Under our First Call agreements we contract with our customers to support
          their
          equipment and software maintenance needs. When a customer experiences trouble
          with either their equipment or software, they call us as the first point
          of
          contact. In most cases, our technical staff is able to assess and triage
          the
          situation with limited downtime. If the situation is such that the problem
          cannot be resolved over the phone, we will dispatch the appropriate break/fix
          provider and monitor the situation.
 
 Under
          our
          Enhanced First call program, we add monitoring and proactive notification
          on
          covered systems, thereby providing the next level of support to our First
          Call
          customers. Through our NOC, we monitor covered assets through a secure,
          on-site
          data collection server. When an event triggers our monitors, we notify
          the
          customer and work towards the appropriate response. Enhanced First Call
          Services
          provide proactive, 24X7 monitoring without additional capital expenditure
          on our
          customers’ part.
  **Industry
          Trends**
 
 Gartner
          Dataquest (“Gartner”), a provider of statistics, forecasts and market analysis
          for the IT industry, 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% compounded
          annual
          growth rate (“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. The following chart details the estimated growth
          progression through 2010.
  1
  **Worldwide
                      Storage Services Forecast ( amounts in millions)****2008**
                  
                  **2009**
                  
                  **2010**
                  
                  **CAGR
                      %**Hardware
                      maintenance and support
                  
                  $10,497
                  
                  $10,921
                  
                  $11,380
                  
                  4.0%Software
                      support
                  
                  3,652
                  
                  4,100
                  
                  4,681
                  
                  11.5%Consulting
                  
                  4,327
                  
                  4,639
                  
                  4,943
                  
                  7.8%Development
                      and integration
                  
                  4,186
                  
                  4,447
                  
                  4,601
                  
                  5.7%IT
                      management
                  
                  6,518
                  
                  7,040
                  
                  7,369
                  
                  8.1%Total
                      worldwide
                  
                  $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, the number of IT personnel is projected by
          Industry
          Data Corporation to increase by only 10% annually. We expect the disparity
          between the growth in IT personnel 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 investments in data storage products
          and
          services and that spending in this area will become a larger percentage
          of
          companies’ total IT budget. We believe the following company 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 back-ups,
          quicker restoration of data and more 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 back-up 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* .
          Storage
          management software innovations continue to enter 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.
 
 *Virtualization.* Data
          Center operators and IT managers are increasingly utilizing a virtualization
          approach in the storage and server layers of their network infrastructure.
          The
          consolidation of devices and related operating and capital cost reductions
          create demand for professional services and products.
  2
  **Business
          Strategy**
 
 Our
          objective is to advance our position as a multi-vendor product and service
          solutions provider 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 service capabilities.  Our services delivery platform,
                  processes and support, are in place to provide services throughout
                  North
                  America and Europe.  Growth in higher-margin services should drive
                  much greater incremental cash flows and enable significant economies
                  of
                  scale.  We expect this growth to be achieved organically. We will
                  evaluate acquisition opportunities that will supplement our organic
                  growth. 
 ·
              *Growth
                  through Acquisition*.
                  Our acquisitions (six since February 2005) have expanded our customer
                  base, provided a large suite of products and services, expedited
                  the
                  development of a strong 65-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 positions 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
                  Service 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 service lines meet these expectations and will continue
                  to do
                  so as these products evolve. We are committed to continuous service
                  improvement through a formal research and software development
                  program
                  that is driven by customer input. We intend to continue to utilize
                  our
                  industry, customer and supplier relationships to keep abreast of
                  emerging
                  standards, protocols and application programming interfaces as
                  such trends
                  are introduced and gain market acceptance. 
 ·
              *Increase
                  Marketing and Direct Sales Efforts.*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. As we have grown, we qualify for significantly higher
                  levels of
                  marketing support from our manufacturers and distributors. We intend
                  to
                  use these resources on customer acquisition
                  activities.  3
  ·
              *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 increasingly burdensome compliance objectives. We help customers
          to deal economically with these challenges by providing a complete storage
          and
          IT management solution. Our complete solutions include products and third
          party
          maintenance contracts; professional services that include engineering,
          design
          and implementation; managed services that include remote monitoring, data
          management and maintenance services; and financing solutions. 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; 
 ·
              Pressure
                  to minimize IT staffing levels; and 
 ·
              Limited
                  capital or operating budgets. 
 Our
          customers are located in North America and Europe and are primarily Fortune
          2000
          Enterprises and mid-tier Enterprises, Data Center Operators and IT Service
          Providers.
  For
          the
          year ended December 31, 2007, aggregate revenues from customers located
          in
          Europe amounted to $7.7 million or 5% of revenue, while revenues from customers
          located in North America totaled $138.1 million or 95% of total revenue.
          For the
          year ended December 31, 2006, aggregate revenues from customers located
          in
          Europe amounted to $3.2 million or 5% of revenue, while revenues from customers
          located in North America totaled $63.4 million or 95% of total revenue.
          For the
          year ended December 31, 2005, aggregate revenues from customers located
          in
          Europe 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.
 
 *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 regional, national and
          multi-national providers requiring competitive data protection and management
          solutions and deep engineering and operations resources to support their
          core
          data center services. Representative customers include COLT, Terremark,
          Viawest,
          Quovadis and TeleCity .
 
 *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. We
          have
          provided complete solutions to a wide range of large and middle market
          customers, including Network Appliance, Inc., Accenture, Good Technology
          and
          Amlyn Pharmaceuticals. Other representative customers include Blue Cross/Blue
          Shield, Standard Insurance, Jack in the Box, Solar Turbines, Calyon Financial
          and Huron Consulting.
  4
  **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 (for which we have no continuing involvement
          or obligation). Service revenue includes professional services revenue,
          recurring managed service revenue and revenue from maintenance services
          managed
          by us.
 
 ***Products***
  *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. 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
                EMCHewlett-PackardHitachi Data Systems CorporationNetwork Appliance, Inc.Sun Microsystems,
                  Inc.
 Servers and Systems
                Dell
                  ComputerHewlett-PackardIBMSun Microsystems,
                  Inc.
 Tape Automation
                Quantum
                  CorporationSpectra Logic CorporationSun Microsystems, Inc.XiotechData Protection
                CommVault
                  SoftwareData DomainSymantec CorporationNetworking and Security
                Brocade Communications Systems,
                  Inc.Checkpoint SoftwareCisco SystemsJuniper NetworksSymantec Corporation
  ***Services***
 
 *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. These services are usually limited engagements performed under
          specific Statements of Work with our customers. Our engineering staff has
          broad
          expertise and has received appropriate certifications from our OEM partners.
          The
          services we provide include:
 
 ·
              Storage
                  and infrastructure assessments — providing independent feedback on the
                  health, performance and utilization of storage and systems infrastructure,
                  as well as a report card on 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.  5
  ·
              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. 
 Managed
          Services
 
 *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 imperative to customers’ IT and storage infrastructure. Services are sold
          under long-term recurring service contracts usually with terms of one to
          three
          years.
 
 *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, granular
          look into a customer’s infrastructure, providing 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 consists of 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, as follows:
  ·
              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 virtual system administration through
                  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. For Enhanced First Call,
          the
          support personnel in our NOC have the ability 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.
  6
  *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
          sell
          products and services directly to our customers. In certain cases we work
          with
          data center operators to coordinate their sales efforts relating to the
          sale of
          our managed storage services.
 
 At
          December 31, 2007, our direct sales force consisted of 65 direct sales
          people.
          Sales and marketing personnel are located at our offices in Broomfield,
          Colorado; San Diego, San Francisco, San Jose and Santa Clara, California;
          Boise,
          Idaho; Chicago, Illinois; Portland, Oregon; Dallas, Texas; Kirkland, Washington;
          Metuchen, New Jersey; Manhattan, New York, Conshohocken, Pennsylvania and
          London, England. 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.
 
 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. We earn marketing co-op 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 software development staff that designs and develops enhancements
          and
          improvements to our GridWorks OSS platform. 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.
 
 We
          seek
          to offer comprehensive storage services using our proprietary GridWorks
          OSS,
          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, 2007, 2006 and 2005, we incurred capitalizable
          software development costs totaling $0.8 million, $0.6 million and $0.6
          million,
          respectively. See Note 2 to Notes to Consolidated Financial Statements.
 
 **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.
  7
 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
          products 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, some within
          and
          some 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
          compete primarily with systems integrators and value added resellers such
          as
          Forsythe Technologies, Datalink Corporation, Agilysys and ePlus, Inc. In
          addition to these companies, we compete with many privately owned and regionally
          focused value added resellers. For managed services, our primary competition
          is
          our customers’ existing in-house staffing, except for remote storage services
          where we compete primarily with EMC and Iron Mountain.
 
 **Employees**
 
 As
          of
          December 31, 2007, we employed 265 people on a full-time basis, of which
          nine
          were executive management, 108 were in sales and marketing, 94 were in
          engineering and software development and 54 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.
 
 **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
          2004, we acquired all of the outstanding capital stock of MSI, also known
          as
“Incentra of CO” (the “Incentra of CO Acquisition”). The acquisition was
          accounted for as a reverse merger and MSI was deemed to be the acquirer
          for
          accounting purposes. On October 25, 2004, we changed our name to Incentra
          Solutions, Inc.
  8
 
 Since
          2005, we have made six strategic acquisitions of resellers of storage
          equipment. In connection with these acquisitions, we acquired all assets
          and
          liabilities of the business, primarily cash, accounts receivable and accounts
          payable and substantially all of the personnel of each business as
          follows:
 
 ·
              In
                  February 2005, we acquired all of the outstanding capital stock
                  of Star
                  Solutions of Delaware, Inc. (“Star”), a privately-held company. At the
                  time of acquisition, the business employed 45 personnel and was
                  geographically focused in southern California, Nevada and Arizona. 
 ·
              In
                  March 2005, we acquired all of the outstanding capital stock of
                  PWI
                  Technologies, Inc. (“PWI”), a privately-held company. At time of
                  acquisition, the business employed 33 personnel and was geographically
                  focused in the northwestern United States. 
 ·
              In
                  April 2006, we acquired all of the outstanding capital stock of
                  Network
                  Systems Technologies, Inc. (“NST”), a privately-held company. At the time
                  of acquisition, the business had 30 personnel, with an office located
                  in
                  Chicago, Illinois. . 
 ·
              In
                  September 2006, we acquired all of the outstanding capital stock
                  of
                  Tactix, Inc. (“Tactix”), a privately-held company. At the time of
                  acquisition, the business employed 18 personnel and was geographically
                  focused in the northwestern United States. 
 ·
              In
                  August 2007, we acquired all of the outstanding capital stock of
                  Helio
                  Solutions, Inc. (“Helio”), a privately-held company. At the time of
                  acquisition, the business employed 50 personnel and was geographically
                  focused in California and Arizona. 
 ·
              In
                  September 2007, we acquired all of the outstanding capital stock
                  of Sales
                  Strategies, Inc. (“SSI”), a privately-held company. At the time of
                  acquisition, the business employed 20 personnel and was geographically
                  focused in the New York metro area, eastern Pennsylvania and Denver,
                  Colorado. 
 In
          July
          2006, we sold to Genuity Capital Management Services, Inc. ("Genuity")
          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.
 
 The
          consolidated financial statements presented herein include the financial
          statements of the acquired companies from respective dates of their
          acquisitions.
 
 **ITEM
          1A. Risk Factors**
 
 *THE
          RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY RISKS WE FACE.
          THESE
          RISKS ARE THE RISKS WE CONSIDER TO BE SIGNIFICANT. WE MIGHT BE WRONG. THERE
          MAY
          BE RISKS THAT YOU VIEW DIFFERENTLY THAN WE DO, AND THERE MAYBE OTHER RISKS
          AND
          UNCERTAINTIES THAT ARE NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM
          IMMATERIAL, BUT THAT MAY IN FACT IMPAIR OUR BUSINESS OPERATIONS. IF ANY
          OF THE
          FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND
          FINANCIAL CONDITION COULD BE SERIOUSLY HARMED.*
 
 **OUR
          OPERATING HISTORY IS LIMITED, SO IT WILL BE DIFFICULT FOR YOU TO EVALUATE
          OUR
          BUSINESS IN MAKING AN INVESTMENT DECISION.**
 
 Although
          we were incorporated in 1995, we have a limited operating history. We commenced
          operations in our Incentra of CO line of business in August 2004 at which
          time
          we acquired ManagedStorage International, Inc., a Delaware corporation
          that
          commenced operations in March 2000. We are still in the early stages of
          our
          development, which makes the evaluation of our business operations and
          our
          prospects difficult. Before buying our common stock, you should consider
          the
          risks and difficulties frequently encountered by early stage companies.
          These
          risks and difficulties, as they apply to us in particular, include:
 
 ·
              our
                  need to expand the number of products we distribute and services
                  we offer; 
 ·
              our
                  ability to research, develop and successfully bring new technology
                  to the
                  market; 
 ·
              our
                  need to expand and increase the resale of storage and storage management
                  hardware and software; 
 ·
              potential
                  fluctuations in operating results and uncertain growth rates;  9
  ·
              limited
                  market acceptance of the products we distribute and services we
                  offer; 
 ·
              concentration
                  of our revenues in a limited number of market segments; 
 ·
              distribution
                  of our operations and revenues in the North American and European
                  markets; 
 ·
              our
                  dependence on our existing service customer base for recurring
                  revenue and
                  our ability to sustain it; 
 ·
              our
                  need to continue to develop and expand North American and European
                  markets;  ·
              our
                  need to expand our direct sales force; 
 ·
              our
                  need to expand our channel partner network; 
 ·
              our
                  need to continue to establish, secure and maintain key supplier
                  relationships; 
 ·
              our
                  need to manage rapidly expanding operations; 
 ·
              our
                  need to attract and train qualified personnel; 
 ·
              our
                  ability to successfully integrate our recent acquisitions, and
                  to retain
                  key personnel, customers and vendor relationships; 
 ·
              our
                  ability to successfully implement our acquisition strategy; 
 ·
              our
                  international operations and foreign currency exchange rate fluctuations; 
 ·
              our
                  limited existing capitalization; and 
 ·
              our
                  limited ability to raise new capital.  **WE
          HAVE INCURRED LOSSES SINCE INCEPTION AND WE MAY BE UNABLE TO ACHIEVE
          PROFITABILITY OR GENERATE POSITIVE CASH FLOW.**
 
 We
          incurred net losses applicable to common shareholders of $16.8 million
          in 2005,
          $5.5 million in 2006 and $11.9 million in 2007. In addition, cash used
          in
          continuing operations amounted to $2.5 million in 2005, $14.7 million in
          2006,
          and $6.3 million in 2007. If we continue to incur net losses or continue
          to
          require cash to support our operations in future periods, we may be unable
          to
          achieve one or more key elements of our business strategy, which include
          the
          following:
 ·
                increasing
                      the number of storage and storage management products we distribute
                      and
                      services we offer;
  ·
              successfully
                  implementing our acquisition strategy, including the integration
                  of our
                  recent acquisitions; 
 ·
              increasing
                  our sales and marketing activities, including the number of our
                  sales
                  personnel; 
 ·
              increasing
                  the number of markets into which we offer and sell products; 
 ·
              expanding
                  our reach to customers for resale of hardware and software and
                  sale of
                  managed storage services; or 
 ·
              acquiring
                  or developing additional product lines.  As
          of
          December 31, 2007, we had a working capital deficit of $13.4 million and
          a
          shareholders' deficit of $13.9 million. We may not achieve profitability
          if our
          revenues increase more slowly than we expect, or if operating expenses
          exceed
          our expectations or cannot be adjusted to compensate for lower than expected
          revenues. If we do achieve profitability, we may be unable to sustain or
          increase profitability on a quarterly or annual basis. Any of the factors
          discussed above could cause our stock price to decline. In addition, we
          procure
          products for resale from a limited number of distributors from which we
          heavily
          depend on availability of open credit lines, rebates and promotional funds.
           A disruption in our relationship with any of our primary distributors
          could have a material adverse impact on our operating results. In addition,
          borrowings under our revolving credit facility with Laurus Master Fund,
          Ltd.
          (“Laurus”) are supported by our trade receivables. A disruption in our business
          that results in a decline in sales and receivables could adversely impact
          our
          ability to utilize the Laurus revolving credit facility.
  10
  **REDEMPTION
          OBLIGATIONS UNDER OUR SERIES A PREFERRED STOCK MAY HAVE AN ADVERSE IMPACT
          ON OUR
          BUSINESS.**
 
 The
          Series A preferred shareholders have a right of redemption that matures on
          August 18, 2008. From that date forward, the shareholders have the right
          but not
          the obligation to demand redemption at a price equal to the greater of
          (i)
          $12.60 (subject to certain adjustments) per each share of Series A preferred
          stock (currently $31.5 million in the aggregate) plus an amount equal to
          all
          accumulated but unpaid dividends on each such share of Series A preferred
          stock
          or (ii) the fair market value of the common stock in to which the shares
          of
          Series A preferred stock is then convertible. We do not presently have
          sufficient cash to meet a redemption demand and our 2008 business plan
          does not
          provide for sufficient cash flow to meet a redemption demand, should one
          occur.
          The Series A preferred shareholders are not required to take any action
          and any
          request for redemption must be approved by 80% of the Series A preferred
          shareholders. However, if such a demand were to be made, an event of default
          may
          be deemed to have occurred under our debt agreements with Laurus due to
          a
          subjective acceleration clause. Laurus would have the right to demand repayment
          of all outstanding obligations due to Laurus and these obligations are
          senior to
          the rights of these Series A preferred shareholders.
 
 **OUR
          LIMITED OPERATING HISTORY AND RECENT ACQUISITIONS MAY MAKE IT DIFFICULT
          FOR US
          TO ACCURATELY FORECAST OUR OPERATING RESULTS.**
 
 Our
          planned expense levels are and will continue to be based in part on our
          expectations concerning future revenue, which is difficult to forecast
          accurately based on our stage of development and recent acquisitions. We
          may be
          unable to adjust spending in a timely manner to compensate for any unexpected
          shortfall in revenue. Our operating results may also be impacted significantly
          if we are unable to accurately forecast the revenues, gross margins and
          operating results of our lines of business, including those businesses
          we
          recently acquired. We may be unable to adjust spending in a timely manner
          to
          compensate for any unexpected shortfall in gross margin. In addition, we
          will
          incur costs to integrate and to develop and extract the synergies of the
          acquired businesses. If these expenses precede or are not rapidly followed
          by a
          corresponding increase in revenue, our business, operating results and
          financial
          condition may be materially and adversely affected.
 
 **CERTAIN
          OF THE MARKETS WE SERVE ARE RAPIDLY EVOLVING OR CHANGING.**
 
 We
          offer
          products and services to the emerging market of information technology
          and
          storage management. This market for our products and services is rapidly
          evolving. In addition, our products and services are new and based on emerging
          technologies. We also offer managed storage solutions to the enterprise
          and
          service provider markets, which also are rapidly evolving. As is typical
          in the
          case of new and rapidly evolving industries, demand and market acceptance
          for
          recently-introduced technology and products are subject to a high level
          of
          uncertainty. Broad acceptance of our products and services is critical
          to our
          success and ability to generate revenues from these markets. Acceptance
          of our
          products and services will be highly dependent on the functionality and
          performance of the products and services and our success with the initial
          implementation of our products and services. There can be no assurance
          that we
          will be successful in obtaining market acceptance of our technology, products
          and services.
 
 **OUR
          PRIMARY SOURCE OF WORKING CAPITAL IS DEPENDENT ON A BORROWING BASE CONSISTING
          OF
          TRADE RECEIVABLES.**
 
 Borrowings
          under our revolving credit facility with Laurus are supported by our trade
          receivables. A disruption in our business that results in a decline in
          sales and
          receivables could adversely impact our ability to utilize the Laurus revolving
          credit facility. Our borrowing capacity on our revolving line of credit
          was
          $20.0 million, of which, we had $4.3 million available, as of December
          31, 2007.
  11
  **IF
          OUR DATA STORAGE PRODUCTS OR THE SOFTWARE OR SYSTEMS UNDERLYING OUR DATA
          MANAGEMENT SERVICES CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS, WE
          COULD
          INCUR SIGNIFICANT UNEXPECTED EXPENSES AND LOSE SALES.**
 
 The
          software-based products and services we offer may contain undetected errors
          or
          defects when first introduced or as new versions are released. Introduction
          by
          us of software-based products and software-based services with reliability,
          quality or compatibility problems could result in reduced revenues,
          uncollectible accounts receivable, delays in collecting accounts receivable
          and
          additional costs. There can be no assurance that, despite testing by us
          or by
          our customers, errors will not be found in our software-based products
          or
          services after commencement of commercial deployment, resulting in product
          redevelopment costs, the loss of, or delay in, market acceptance and/or
          the
          inability to timely and effectively deliver our software-based services,
          such as
          our remote monitoring/management services. In addition, there can be no
          assurance that we will not experience significant product returns in the
          future.
          Any such event could have a material adverse effect on our business, financial
          condition or results of operations.
 
 **RAPID
          TECHNOLOGICAL CHANGES IN THE MARKETPLACE MAY ADVERSELY AFFECT OUR BUSINESS.**
 
 The
          information storage industry is subject to rapid technological change and
          new
          product introductions and enhancements. Our ability to remain competitive
          in
          this market may depend in part upon our ability to develop new and enhanced
          products or services and to introduce these products or services at competitive
          prices on a timely and cost-effective basis. In addition, new product or
          service
          introductions or enhancements by our competitors or the use of other
          technologies could cause a decline in sales or loss of market acceptance
          of our
          existing products and services. Our success in developing, introducing,
          selling
          and supporting new and enhanced products or services depends upon a variety
          of
          factors, including the timely and efficient completion of product design
          and
          development, and the timely and efficient implementation of production
          and
          conversion processes. Because new product development commitments may be
          made
          well in advance of sales, new product or service decisions must anticipate
          changes in the industries served. There can be no assurance that we will
          be
          successful in selecting, developing, manufacturing and marketing new products
          or
          services or in enhancing our existing products or services. Failure to
          do so
          successfully may adversely affect our business, financial condition and
          results
          of operations.
 
 **IF
          THE DATA STORAGE INDUSTRY FAILS TO DEVELOP COMPELLING NEW STORAGE TECHNOLOGIES,
          OUR STORAGE SOLUTIONS BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED.**
 
 Rapid
          and
          complex technological change, frequent new product introductions and evolving
          industry standards increase demand for our services. As a result, our future
          success depends in part on the data storage industry's ability to continue
          to
          develop leading-edge storage technology solutions. Our customers utilize
          our
          services in part because they know that newer technologies offer them
          significant benefits over the older technologies they are using. If the
          data
          storage industry ceases to develop compelling new storage solutions, or
          if a
          single data storage standard becomes widely accepted and implemented, it
          will be
          more difficult to sell new data storage systems to our customers.
 
 **THE
          MARKETS FOR STORAGE AND STORAGE MANAGEMENT PRODUCTS AND SERVICES ARE HIGHLY
          COMPETITIVE.**
 
 The
          markets in which we sell our products and services are highly competitive.
          Our
          primary competitors are information technology service providers, large
          accounting, consulting and other professional service firms, application
          service
          providers, packaged software vendors and resellers and service groups of
          computer equipment companies. We also experience competition from numerous
          smaller, niche-oriented and regionalized service providers. We expect our
          competitors to continue to improve the design and performance of their
          products.
          In addition, as the markets for our products and services grow, we expect
          new
          competitors to enter the market. There can be no assurance that our competitors
          will not develop enhancements to or future generations of competitive products
          or services that will offer superior price or performance features, or
          that new
          processes or technologies will not emerge that render our products or services
          less competitive or obsolete. Increased competitive pressure could lead
          to lower
          prices for our products or services, thereby adversely affecting our business
          and results of operations.
  12
  **COMPETITION
          IN THE MANAGED STORAGE SOLUTIONS MARKET COULD PREVENT US FROM INCREASING
          OR
          SUSTAINING OUR REVENUES, CASH FLOWS OR ACHIEVING PROFITABILITY.**
 
 A
          significant portion of our cash flows are derived from storage solution
          services
          that we provide to the enterprise and service provider markets. This market
          is
          rapidly evolving and highly competitive. As technologies change rapidly,
          we
          expect that competition will increase in the future. Current economic conditions
          have also increased competition for available business. We compete with
          independent storage system suppliers to the high-end market and numerous
          resellers, distributors and consultants. We also compete in the storage
          systems
          market with general-purpose computer suppliers. Many of our current and
          potential competitors in these markets have significantly greater financial,
          technical, marketing, purchasing and other resources than we do. As a result,
          they may respond more quickly to new or emerging technologies and changes
          in
          customer requirements, devote greater resources to the development, promotion
          and sale of products and deliver competitive products at lower end-user
          prices.
 
 Some
          of
          our current and potential competitors in the enterprise-class information
          storage market include our suppliers. We are not the exclusive supplier
          of any
          data storage product we offer. Instead, our suppliers market their products
          through other independent data storage solution providers, original equipment
          manufacturers and, often, through their own internal sales forces. We believe
          direct competition from our suppliers is likely to increase if, as expected,
          the
          data storage industry continues to consolidate. This consolidation would
          probably result in fewer suppliers with greater resources to devote to
          internal
          sales and marketing efforts. In addition, our suppliers have established
          and
          will probably continue to establish cooperative relationships with other
          suppliers and other data storage solution providers. These cooperative
          relationships are often intended to enable our suppliers to offer comprehensive
          storage solutions, which compete with those we offer. If our relationships
          with
          our suppliers become adversarial, it will be more difficult for us to stay
          ahead
          of industry developments and provide our customers with the type of service
          they
          expect from us.
 
 **FUTURE
          CHARGES DUE TO POSSIBLE IMPAIRMENTS OF ACQUIRED ASSETS MAY HAVE A MATERIAL
          ADVERSE AFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**
 
 A
          substantial portion of our assets is comprised of goodwill and other intangible
          assets, which may be subject to future impairment that would result in
          financial
          statement write-offs. Our recent acquisitions have resulted in significant
          increases in goodwill and other intangible assets. Goodwill and unamortized
          intangible assets, including acquired customer lists, were approximately
          $33.4
          million at December 31, 2007, representing approximately 38% of our total
          assets. If there is a material change in our business operations, the value
          of
          the intangible assets we have acquired could decrease significantly. On
          an
          ongoing basis and at least annually, we will evaluate, partially based
          on
          discounted expected future cash flows, whether the carrying value of such
          intangible assets may no longer be recoverable, in which case a charge
          to
          earnings may be necessary. Any future determination requiring the write-off
          of a
          significant portion of unamortized intangible assets, although not requiring
          any
          additional cash outlay, could have a material adverse affect on our financial
          condition and results of operations.
 
 **FLUCTUATIONS
          IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO DECLINE
          AND A
          DECLINE IN THE VALUE OF YOUR INVESTMENT.**
 
 Our
          quarterly operating results have varied significantly in the past and will
          likely fluctuate significantly in the future. Significant annual and quarterly
          fluctuations in our results of operations may be caused by, among other
          factors:
 
 ·
              the
                  volume of revenues we have generated; 
 ·
              the
                  timing of our announcements for the distribution of new products
                  or
                  services, and any such announcements by our competitors; 
 ·
              the
                  acceptance of the products we distribute and the services we offer
                  in the
                  marketplace; and 
 ·
              general
                  economic conditions.  13
  There
          can
          be no assurance that the level of revenues and profits, if any, achieved
          by us
          in any particular fiscal period will not be significantly lower than in
          other,
          including comparable, fiscal periods. We believe quarter-to-quarter comparisons
          of our revenues and operating results are not necessarily meaningful and
          should
          not be relied on as indicators of future performance. Operating expenses
          are
          based on management's expectations of future revenues and are relatively
          fixed
          in the short term. We plan to increase operating expenses to:
 
 ·
              expand
                  our product and service lines; 
 ·
              expand
                  our sales and marketing operations; 
 ·
              increase
                  our services and support capabilities; and 
 ·
              improve
                  our operational and financial systems.  If
          our
          revenues in a given quarter do not increase along with these expenses,
          our
          operating margins in such quarter will decline and our net income would
          be
          smaller or our losses would be larger than expected. It is possible that
          in some
          future quarter our operating results may be below the expectations of public
          market analysts or investors, which could cause a reduction in the market
          price
          of our common stock.
 
 **OUR
          PROPOSED GROWTH AND EXPANSION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
          BUSINESS.**
 
 We
          expect
          to expand our operations through the increase of our sales and marketing
          efforts, the building of strategic relationships with third parties, the
          expansion of our research and development activities, and the acquisition
          of
          complementary businesses or products. The anticipated growth could place
          a
          significant strain on our management and our operational and financial
          resources. Effective management of the anticipated growth will require
          expansion
          of our management and financial controls, hiring additional appropriate
          personnel as required, and development of additional expertise by existing
          management personnel. There can be no assurance that these or other measures
          we
          implement will effectively increase our capabilities to manage such anticipated
          growth or to do so in a timely and cost-effective manner. Management of
          growth
          is especially challenging for a company with a short operating history
          and
          limited financial resources, and the failure to effectively manage growth
          could
          have a material adverse effect on our results of operations. If the anticipated
          growth in revenue and cash flow is delayed or does not occur, these investments
          in growth and expansion could have a material adverse affect on our results
          of
          operations.
 
 **OUR
          GROWTH PLANS DEPEND ON OUR ABILITY TO HIRE AND RETAIN SCARCE TECHNICAL
          PERSONNEL.**
 
 Our
          future growth plans depend upon our ability to attract, retain and motivate
          qualified engineers with information storage solutions experience. If we
          fail to
          recruit and retain additional engineering personnel, we will experience
          greater
          difficulty realizing our growth strategy, which could negatively affect
          our
          business, financial condition and stock price.
 
 **INTERNAL
          CONTROL OVER FINANCIAL REPORTING MAY NOT EFFECTIVELY PREVENT OR DETECT
          MISSTATEMENTS BECAUSE OF INHERENT LIMITATIONS.**
 
 Effective
          internal controls are necessary for the company to provide reasonable assurance
          with respect to its financial reports and to effectively prevent fraud.
          If the
          company cannot provide reasonable assurance with respect to its financial
          reports and effectively prevent fraud, the company’s operating results could be
          affected. Pursuant to the Sarbanes-Oxley Act of 2002, the company is required
          to
          furnish a report by management on internal control over financial reporting,
          including management’s assessment of the effectiveness of such control. Internal
          control over financial reporting may not prevent or detect misstatements
          because
          of its inherent limitations, including the possibility of human error,
          the
          circumvention or overriding of controls, or fraud. Therefore, even effective
          internal controls can provide only a reasonable assurance with respect
          to the
          preparation and fair presentation of financial statements. In addition,
          projections of any evaluation of effectiveness of internal control over
          financial reporting to future periods are subject to the risk that the
          control
          may become inadequate due to changes in conditions, or that the degree
          of
          compliance with the policies or procedures may deteriorate. If we fail
          to
          maintain the adequacy of our internal controls, including any failure to
          implement required new or improved controls, or if we experience difficulties
          in
          the implementation of internal controls, our business and operating results
          could be harmed, we could fail to meet our financial reporting obligations,
          and
          there could be a material adverse effect on our stock price.
  14
  **FAILURE
          TO COMPLY WITH OUR VENDOR AGREEMENTS MAY RESULT IN OUR VENDOR(S) SIGNIFICANTLY
          LIMITING OR TERMINATING THEIR RELATIONSHIP WITH US THEREBY AFFECTING OUR
          ABILITY
          TO ACQUIRE AND SELL PRODUCTS TO OUR CUSTOMERS.**
 
 Our
          ability to purchase and sell products of our vendors is predicated on our
          compliance with vendor agreements currently in place. These agreements
          outline
          specific terms that, among other things, outline the technical competency
          requirements of our staff, geographic sales territories, and other certain
          restrictive conditions. Although we have instituted certain compliance
          procedures, no assurance can be given that there will not be any violation
          of
          specific terms of these agreements. If the company fails to comply with
          the
          terms of any of these agreements, our relationship with our vendor(s) could
          be
          restricted or even terminated and negatively impact our ability to sell
          certain
          products. The loss of our ability to purchase and sell certain products
          could
          have a material, negative affect on the company’s revenue and could adversely
          affect our financial condition. We are currently not aware of any agreements
          under which we are not compliant.
 
 **ACQUISITIONS
          COULD DIVERT MANAGEMENT'S TIME AND ATTENTION, DILUTE THE VOTING POWER OF
          EXISTING STOCKHOLDERS, AND HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.**
 
 As
          part
          of our growth strategy, we expect to continue to pursue the acquisition
          of
          complementary businesses and assets. Pursuit of acquisitions or integration
          of
          completed acquisitions could result in the diversion of time and personnel
          from
          our business. We also may issue shares of common stock or other securities
          in
          connection with acquisitions, which could result in the dilution of the
          voting
          power of existing stockholders and could dilute earnings per share. Any
          acquisitions would be accompanied by other risks commonly encountered in
          such
          transactions, including the following:
 ·
                difficulties
                      integrating the operations and personnel of acquired companies;
 ·
              the
                  additional financial resources required to fund the operations
                  of acquired
                  companies; 
 ·
              our
                  ability to support additional debt service
                  requirements; 
 ·
              the
                  potential disruption of our business; 
 ·
              our
                  ability to maximize our financial and strategic position by the
                  incorporation of acquired technology or businesses with our product
                  and
                  service offerings; 
 ·
              the
                  difficulty of maintaining uniform standards,
                  controls; 
 ·
              procedures
                  and policies; 
 ·
              the
                  potential loss of key employees of acquired companies; 
 ·
              the
                  impairment of employee and customer relationships as a result of
                  changes
                  in management; 
 ·
              future
                  impairment loss related to intangible assets and goodwill of acquired
                  companies; 
 ·
              significant
                  expenditures to consummate acquisitions; and 
 ·
              internal
                  control issues and related compliance with Section 404 of the
                  Sarbanes-Oxley Act of 2002. 
 As
          a part
          of our acquisition strategy, we expect to engage in discussions with various
          businesses respecting their potential acquisition. In connection with these
          discussions, we and each potential acquired business may exchange confidential
          operational and financial information, conduct due diligence inquiries,
          and
          consider the structure, terms and conditions of the potential acquisition.
          In
          certain cases, the prospective acquired business may agree not to discuss
          a
          potential acquisition with any other party for a specific period of time,
          may
          grant us certain rights in the event the acquisition is not completed,
          and may
          agree to take other actions designed to enhance the possibility of the
          acquisition. Potential acquisition discussions may take place over a long
          period
          of time, may involve difficult business integration and other issues, and
          may
          require solutions for numerous family relationships, management succession,
          and
          related matters. As a result of these and other factors, potential acquisitions
          that from time to time appear likely to occur may not result in binding
          legal
          agreements and may not be consummated. Our acquisition agreements may contain
          purchase price adjustments, rights of set-off, and other remedies in the
          event
          that certain unforeseen liabilities or issues arise in connection with
          an
          acquisition. These remedies, however, may not be sufficient to compensate
          us in
          the event that any unforeseen liabilities or other issues arise.
  15
  **WE
          MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS.**
 
 Our
          ability to compete effectively with other companies will depend, in part,
          on our
          ability to maintain the proprietary nature of our intellectual property.
          We rely
          on a combination of copyright, trademark and trade secret laws, confidentiality
          procedures and licensing arrangements to establish and protect our proprietary
          rights. Presently, we have no patents or pending patent applications covering
          our intellectual property. As part of our confidentiality procedures, we
          generally enter into non-disclosure agreements with our employees, distributors
          and corporate partners, and license agreements with respect to our software,
          documentation and other proprietary information. Despite these precautions,
          it
          may be possible for a third-party to copy or otherwise obtain and use our
          products or technology without authorization, or to develop similar technology
          independently. Policing unauthorized use of our products is difficult and,
          although we are unable to determine the extent to which piracy of our software
          products exists, software piracy can be expected to be a persistent problem.
 
 The
          defense and prosecution of copyright, trademark and patent suits may be
          both
          costly and time consuming, even if the outcome is favorable to our company.
          An
          adverse outcome could subject us to significant liabilities to third parties,
          require disputed rights to be licensed from third parties, or require us
          to
          cease selling certain of our products. We also will rely on unpatented
          proprietary technology and there can be no assurances that others may not
          independently develop the same or similar technology or otherwise obtain
          access
          to our proprietary technology. There can be no assurance that confidentiality
          agreements entered into by our employees and consultants, advisors and
          collaborators will provide meaningful protection for our trade secrets,
          know-how
          or other proprietary information in the event of any unauthorized use or
          disclosure of such trade secrets, know-how or other proprietary information.
 
 **THE
          LOSS OF THE SERVICES OF THOMAS P. SWEENEY III, OUR CHIEF EXECUTIVE OFFICER
          AND
          CHAIRMAN OF THE BOARD, COULD IMPAIR OUR ABILITY TO SUPPORT CURRENT OPERATIONS
          AND DEVELOP NEW BUSINESS AND TO RUN OUR BUSINESS
          EFFECTIVELY.**
 
 We
          are
          highly dependent on the services of Thomas P. Sweeney III, our Chief Executive
          Officer and Chairman of the Board. The loss of the services of Mr. Sweeney
          could
          have an adverse affect on our future operations. Our primary lender, Laurus,
          could consider a loss of the services of Mr. Sweeney to be a material adverse
          change in our affairs, and therefore an event of default. On April 2, 2007,
          the
          employment agreement with Mr. Sweeney was extended for three years, effective
          March 22, 2007. We do not currently maintain a key man life insurance policy
          insuring the life of Mr. Sweeney.
  **OUR
            LONG SALES CYCLE RELATED TO MANAGED SERVICES (OUTSOURCING CONTRACTS)
            MAY CAUSE
            FLUCTUATING OPERATING RESULTS, WHICH MAY ADVERSELY AFFECT OUR STOCK PRICE.**
 
 Our
            managed services sales cycle is typically long and unpredictable, making
            it
            difficult to plan our business. Current economic conditions have increased
            this
            uncertainty. Our long managed services sales cycle requires us to invest
            resources in potential projects that may not occur. Further, new product
            introductions, or the announcement of proposed new products, may delay
            our
            customers' decisions to invest in storage solutions we propose. Our long
            and
            unpredictable managed services sales cycle may cause us to experience
            significant fluctuations in our future annual and quarterly operating
            results.
            It can also result in delayed revenues, difficulty in matching revenues
            with
            expenses and increased expenditures. Our business, operating results
            or
            financial condition and stock price may suffer as a result of any of
            these
            factors.
  16
  **WE
            ARE RESTRICTED FROM PAYING DIVIDENDS ON OUR COMMON STOCK AND DO NOT INTEND
            TO DO
            SO IN THE FORESEEABLE FUTURE, WHICH COULD CAUSE THE MARKET PRICE OF OUR
            COMMON
            STOCK AND THE VALUE OF YOUR INVESTMENT TO DECLINE** .
 
 Provisions
            in our senior loan agreement prevent the holders of our common stock
            from
            receiving dividends out of funds legally available. 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. To date, we have not paid any cash dividends. Our board
            of
            directors does not intend to declare any cash dividends in the foreseeable
            future, but instead intends to retain all earnings, if any, for use in
            our
            business operations.
 
 **ANTI-TAKEOVER
            PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE IT DIFFICULT
            FOR A
            THIRD-PARTY TO ACQUIRE US.**
 
 We
            are a
            Nevada corporation. Anti-takeover provisions of Nevada law could make
            it more
            difficult for a third party to acquire control of our company, even if
            such
            change in control would be beneficial to stockholders. Our articles of
            incorporation provide that our board of directors may issue preferred
            stock
            without stockholder approval. The issuance of preferred stock could make
            it more
            difficult for a third-party to acquire us. All of the foregoing could
            adversely
            affect prevailing market prices for our common stock.
 
 **OUR
            COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.**
 
 The
            market price of our common stock is likely to be highly volatile as the
            stock
            market in general, and the market for small cap and micro cap technology
            companies in particular, has been highly volatile. During the past twelve
            months, our common stock has traded at prices ranging from $0.65 to $1.11
            per
            share. Investors may not be able to resell their shares of our common
            stock
            following periods of volatility because of the market's adverse reaction
            to
            volatility. We cannot assure you that our common stock will trade at
            the same
            levels of other stocks in our industry or that our industry stocks in
            general
            will sustain their current market prices. Factors that could cause such
            volatility may include, among other things:
 
 ·
                actual
                    or anticipated fluctuations in our quarterly operating results; 
 ·
                large
                    purchases or sales of our common stock; 
 ·
                announcements
                    of technological innovations; 
 ·
                changes
                    in financial estimates by securities analysts; 
 ·
                investor
                    perception of our business prospects; 
 ·
                conditions
                    or trends in the digital information asset management industry; 
 ·
                changes
                    in the market valuations of other such industry related companies; 
 ·
                the
                    acceptance of market makers and institutional investors of our
                    common
                    stock; and 
 ·
                worldwide
                    economic or financial conditions. 
 **SHARES
            OF COMMON STOCK ELIGIBLE FOR SALE IN THE PUBLIC MARKET MAY ADVERSELY**
 **AFFECT
            THE MARKET PRICE OF OUR COMMON STOCK.**
 
 Sales
            of
            substantial amounts of common stock by stockholders in the public market,
            or
            even the potential for such sales, may adversely affect the market price
            of our
            common stock and could impair our ability to raise capital by selling
            equity
            securities. As of December 31, 2007, approximately 12.0 million of the
            21.3
            million shares of common stock currently outstanding were freely transferable
            without restriction or further registration under the securities laws,
            unless
            held by "affiliates" of our company, as that term is defined under the
            securities laws. We also have outstanding, approximately 9.3 million
            shares
            (excluding 4,933,942 shares of common stock issuable upon conversion
            of our
            outstanding shares of Series A preferred stock) of restricted stock,
            as that
            term is defined in Rule 144 under the securities laws, that are eligible
            for
            sale in the public market, subject to compliance with the holding period,
            volume
            limitation and other requirements of Rule 144. Moreover, the exercise
            of
            outstanding options and warrants will result in additional outstanding
            shares of
            common stock and will create additional potential for sales of additional
            shares
            of common stock in the public market.
  17
  **EXERCISE
            OF OUTSTANDING WARRANTS HELD BY LAURUS MASTER FUND, LTD., VALENS U.S.
            FUND AND
            CALLIOPE CAPITAL CORPORATION (“LAURUS”) COULD SUBSTANTIALLY DILUTE OUR EARNINGS
            PER SHARE AND THE VOTING POWER OF EXISTING STOCKHOLDERS.**
 
 As
            of
            December 31, 2007, we have issued to Laurus on nine previous occasions,
            stock
            purchase warrants and a common stock option that are exercisable to purchase
            an
            aggregate of 6,343,247 shares of our common stock. The terms of our agreements
            with Laurus, allow beneficial ownership of greater than 9.99% of our
            outstanding
            common stock following 61 day notice of intent to exercise. The potential
            issuance of these additional shares could depress the market price of
            our common
            stock. The large number of shares that we may potentially issue to Laurus
            could
            result in the dilution of our earnings, if any, per share and the voting
            power
            of our existing stockholders.
 
 **FAILURE
            TO MEET SPECIFIC TIMETABLES ON FILING OR HAVING DECLARED EFFECTIVE OUR
            REGISTRATION STATEMENT COULD TRIGGER AN EVENT OF DEFAULT UNDER OR NOTE
            AGREEMENTS WITH LAURUS.**
  The
            provisions of our Registration Rights Agreements with Laurus place specific
            timetables on the filing and effectiveness of our Registration Statement.
            In the
            event we do not comply with those provisions, Laurus could consider this
            a
            breach of the Registration Rights Agreements which would then in turn
            create a
            breach of the note agreements with Laurus and trigger the event of default
            provisions therein.
 
 **CERTAIN
            RESTRICTIVE COVENANTS CONTAINED IN THE AGREEMENT WITH THE HOLDERS OF
            OUR SERIES
            A PREFERRED STOCK AND THE LAURUS CREDIT FACILITIES COULD NEGATIVELY IMPACT
            OUR
            ABILITY TO OBTAIN FINANCING FROM OTHER SOURCES.**
 
 Our
            credit facility with Laurus restricts us from obtaining additional secured
            debt
            financing in excess of $100,000 without their prior written approval,
            with
            certain exceptions. We also are restricted from issuing any shares of
            preferred
            stock without the prior approval of the Series A preferred stockholders
            and
            Laurus. To the extent that the Series A preferred stockholders and Laurus
            decline to approve a proposed secured or unsecured debt financing or
            issuance of
            preferred stock, we would be unable to obtain such financing without
            defaulting
            under our credit facility with Laurus and violating certain covenants
            in the
            agreement with the holders of our Series A preferred stock. In addition,
            subject
            to certain exceptions, we have granted to holders of our Series A preferred
            stock and Laurus rights of first refusal to purchase any additional debt
            or
            equity securities we may seek to issue to raise additional capital. The
            securities held by Laurus contain anti-dilution protections against the
            issuance
            of equity securities at a price per share that is less than the fixed
            conversion
            price or exercise price of our convertible note or stock purchase warrants
            held
            by Laurus. The right of first refusal and anti-dilution protections granted
            to
            holders of our Series A preferred stock and to Laurus could act as deterrents
            to
            third parties that may be interested in providing us debt financing or
            purchasing our equity securities. To the extent that such a financing
            is
            required for us to continue to conduct or expand our operations, these
            restrictions could have a material adverse affect on our operations or
            financial
            condition.
  18
 
 **AN
            ADVERSE CHANGE IN ECONOMIC CONDITIONS IN GENERAL, OR A DECLINE IN BUSINESS
            SPENDING COULD NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.**
 
 The
            market for our products is highly competitive. Adverse change in general
            economic conditions or a decline in business spending could result in
            an overall
            decline in demand for our products or services. Such a situation would
            result in
            increased competition, and could result in lower revenue and/or lower
            gross
            margin. In addition, we would experience greater difficulty realizing
            our growth
            strategy, which could negatively affect our business, financial condition
            and
            stock price.
  ITEM
            1B. UNRESOLVED STAFF
            COMMENTS
  Not
            applicable.
  **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 108,000 square feet of office space in 19 locations, including
            approximately 19,500 square feet of office space in Broomfield, Colorado.
            The
            Broomfield site houses our software development resources, engineering,
            NOC,
            information management systems and administrative functions.
 
 On
            August
            15, 2007, Incentra Solutions, Inc., in connection with the acquisition
            of Helio,
            assumed the future lease commitments on four leased properties. The properties
            are located in California and Arizona and have an aggregate office space
            of
            41,795 square feet with future lease commitments extending through December
            2017.
 
 On
            September 5, 2007, Incentra Solutions, Inc., in connection with the acquisition
            of SSI, assumed the future lease commitments on three additional leased
            properties. The properties are located in Massachusetts, Pennsylvania
            and New
            Jersey and have an aggregate office space of 4,100 square feet with future
            lease
            commitments extending through December 2010.
 
 At
            December 31, 2007, aggregate lease payments under all leases (including
            the
            leases as of the date of acquisition of the two companies acquired in
            August and
            September 2007) through the end of the lease terms were as follows:
  **Future
                        Lease****Square
                        Footage**
                    
                    **Commitment**Anchorage,
                        Alaska
                    
                    
                    819
                    
                    $
                    9,218San
                        Diego, California
                    
                    
                    4,724
                    
                    
                    306,806San
                        Francisco, California
                    
                    
                    2,800
                    
                    
                    -
                    
                    *San
                        Jose, California
                    
                    
                    25,820
                    
                    
                    363,321Santa
                        Clara, California
                    
                    
                    12,923
                    
                    
                    4,585,597Broomfield,
                        Colorado
                    
                    
                    19,426
                    
                    
                    2,170,856Boulder,
                        Colorado
                    
                    
                    5,000
                    
                    
                    -
                    
                    *Boise,
                        Idaho
                    
                    
                    2,543
                    
                    
                    54,000Chicago,
                        Illinois
                    
                    
                    400
                    
                    
                    23,160Lombard,
                        Illinois
                    
                    
                    11,324
                    
                    
                    635,955Sudbury,
                        Massachusetts
                    
                    
                    1,100
                    
                    
                    44,088Detroit,
                        Michigan
                    
                    
                    3,008
                    
                    
                    43,992Metuchen,
                        New Jersey
                    
                    
                    2,000
                    
                    
                    88,200Manhattan,
                        New York
                    
                    
                    614
                    
                    
                    -
                    
                    *Tigard,
                        Oregon
                    
                    
                    5,430
                    
                    
                    158,868Conshohocken,
                        Pennsylvania
                    
                    
                    1,000
                    
                    
                    63,000Richardson,
                        Texas
                    
                    
                    1,661
                    
                    
                    23,595Kirkland,
                        Washington
                    
                    
                    6,189
                    
                    
                    519,663London,
                        England
                    
                    
                    1,000
                    
                    
                    100,020Total
                    
                    
                    107,781
                    
                    $
                    9,190,339
 *
            No
            future lease commitments - lease arrangement is on a month to month basis
 
 We
            believe our current facilities are adequate for our existing operations
            and that
            all of our properties are adequately covered by insurance.
  19
  **ITEM
            3. LEGAL PROCEEDINGS**
 
 We
            are
            involved in various 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.
 
 **ITEM
            4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 None.
 
 **PART
            II**
 
 **ITEM
            5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND 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
                        BIDYEAR
                        ENDED DECEMBER 31, 2005First
                        Quarter
                    
                    $
                    3.10
                    
                    $
                    1.61Second
                        Quarter
                    
                    
                    2.80
                    
                    
                    0.51Third
                        Quarter
                    
                    
                    2.00
                    
                    
                    0.90Fourth
                        Quarter
                    
                    
                    1.90
                    
                    
                    0.85YEAR
                        ENDED DECEMBER 31, 2006First
                        Quarter
                    
                    $
                    1.40
                    
                    $
                    0.90Second
                        Quarter
                    
                    
                    1.65
                    
                    
                    1.05Third
                        Quarter
                    
                    
                    1.35
                    
                    
                    1.09Fourth
                        Quarter
                    
                    
                    1.24
                    
                    
                    0.92YEAR
                        ENDED DECEMBER 31, 2007First
                        Quarter
                    
                    $
                    1.11
                    
                    $
                    0.91Second
                        Quarter
                    
                    
                    1.02
                    
                    
                    0.85Third
                        Quarter
                    
                    
                    0.92
                    
                    
                    0.67Fourth
                        Quarter
                    
                    
                    1.01
                    
                    
                    0.65
  **Holders**
 
 At
            March
            21, 2008, there were approximately 300 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 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.
  20
  **Securities
            Authorized for Issuance Under Equity Compensation Plans**
 
 As
            of
            December 31, 2007, the following equity compensation plans were in
            effect:
 **EQUITY
                        COMPENSATION PLAN INFORMATION**Number
                        of
                    
                    
                    
                    Number
                        ofsecurities
                    
                    Weighted
                        average
                    
                    securitiesto
                        be issued
                    
                    exercise
                        price
                    
                    remainingupon exercise
                        of
                    
                    of
                        outstanding
                    
                    availableoutstanding
                        options,
                    
                    options,
                    
                    for
                        futurePlan
                        category
                    
                    warrants
                        and rights
                    
                    warrants
                        and rights
                    
                    issuanceEquity
                        compensationplans
                        approved bysecurity
                        holders
                    
                    
                    -
                    
                    
                    N/A
                    
                    
                    -Equity
                        compensationplans
                        not approved bysecurity
                        holders:2000
                        Incentra Option Plans
                    
                    
                    2,250,951
                    
                    $
                    1.95
                    
                    
                    183,3512006
                        Stock Option Plan
                    
                    
                    1,697,223
                    
                    $
                    1.11
                    
                    
                    52,777Total
                    
                    
                    3,948,174
                    
                    $
                    1.59
                    
                    
                    236,128
 Our
            equity incentive plans are more fully described in Part III herein and
            in Note
            11 to Notes to Consolidated Financial Statements.
 
 **ITEM
            6. SELECTED FINANCIAL DATA**
 
 The
            following selected consolidated financial data should be read in conjunction
            with the consolidated financial statements and notes thereto and “Management’s
            Discussion and Analysis of Financial Condition of Operations” appearing
            elsewhere in the Annual Report on Form 10K. The consolidated statements
            of
            operations and the consolidated balance sheet data for the years ended,
            and as
            of, December 31, 2007, 2006, 2005, 2004 and 2003 are derived from our
            audited
            consolidated financial statements. Due to the acquisitions made in 2005,
            2006
            and 2007, the comparability of the financial data reported in the following
            schedule has been materially affected.
  21
  **Year
                      ended December 31,****2007**
                  
                  **2006**
                  
                  **2005**
                  
                  **2004**
                  
                  **2003****(in
                      thousands except per share amounts)****STATEMENT
                      OF OPERATIONS DATA**Total
                      revenue
                  
                  $
                  145,775
                  
                  $
                  66,632
                  
                  $
                  37,935
                  
                  $
                  8,645
                  
                  $
                  9,811Gross
                      margin
                  
                  
                  30,200
                  
                  
                  14,258
                  
                  
                  8,151
                  
                  
                  2,854
                  
                  
                  2,859Operating
                      loss from continuing operations
                  
                  
                  (5,419
                  )
                  
                  (13,060
                  )
                  
                  (11,585
                  )
                  
                  (7,878
                  )
                  
                  (8,486
                  )(Loss)
                      income from discontinued operations, net of income taxes
                  
                  
                  (93
                  )
                  
                  16,004
                  
                  
                  (577
                  )
                  
                  (274
                  )
                  
                  -Net
                      loss
                  
                  $
                  (9,293
                  )
                  $
                  (2,833
                  )
                  $
                  (14,226
                  )
                  $
                  (10,438
                  )
                  $
                  (10,991
                  )Preferred
                      stock dividends and accretion of preferred stock discount
                  
                  
                  (2,617
                  )
                  
                  (2,617
                  )
                  
                  (2,617
                  )
                  
                  (1,339
                  )
                  
                  (1,744
                  )Net
                      loss applicable to common shareholders
                  
                  
                  (11,910
                  )
                  
                  (5,450
                  )
                  
                  (16,843
                  )
                  
                  (11,777
                  )
                  
                  (12,735
                  )Weighted
                      average common shares outstanding—basic and diluted
                  
                  
                  19,045
                  
                  
                  13,643
                  
                  
                  12,542
                  
                  
                  5,103
                  
                  
                  1,895Net
                      loss per common share—basic and dilutedLoss
                      from continuing operations
                  
                  $
                  (0.63
                  )
                  $
                  (1.57
                  )
                  $
                  (1.29
                  )
                  $
                  (2.26
                  )
                  $
                  (6.72
                  )Income
                      (loss) from discontinued operations
                  
                  
                  -
                  
                  
                  1.17
                  
                  
                  (0.05
                  )
                  
                  (0.05
                  )
                  
                  -Total
                  
                  $
                  (0.63
                  )
                  $
                  (0.40
                  )
                  $
                  (1.34
                  )
                  $
                  (2.31
                  )
                  $
                  (6.72
                  )**BALANCE
                      SHEET DATA (as of end of period)**Cash
                      and cash equivalents
                  
                  $
                  3,275
                  
                  $
                  977
                  
                  $
                  797
                  
                  $
                  2,462
                  
                  $
                  2,201Assets
                      held for sale
                  
                  
                  -
                  
                  
                  -
                  
                  
                  19,512
                  
                  
                  20,462
                  
                  
                  -Capitalized
                      software development costs, net
                  
                  
                  1,144
                  
                  
                  915
                  
                  
                  858
                  
                  
                  713
                  
                  
                  -Intangible
                      assets, net
                  
                  
                  2,953
                  
                  
                  2,301
                  
                  
                  730
                  
                  
                  -
                  
                  
                  1,671Goodwill
                  
                  
                  30,452
                  
                  
                  16,937
                  
                  
                  5,858
                  
                  
                  -
                  
                  
                  592Total
                      assets
                  
                  
                  88,176
                  
                  
                  45,818
                  
                  
                  37,883
                  
                  
                  28,677
                  
                  
                  13,564Long-term
                      obligations (including current installments)
                  
                  
                  30,583
                  
                  
                  9,317
                  
                  
                  11,371
                  
                  
                  4,005
                  
                  
                  19,990Liabilities
                      associated with assets held for sale
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,280
                  
                  
                  2,691
                  
                  
                  -Mandatorily
                      redeemable and convertible preferred stock
                  
                  
                  29,853
                  
                  
                  27,236
                  
                  
                  24,618
                  
                  
                  22,001
                  
                  
                  13,587Shareholders'
                      deficit
                  
                  
                  (13,918
                  )
                  
                  (12,623
                  )
                  
                  (13,217
                  )
                  
                  (5,023
                  )
                  
                  (23,035
                  )Cash
                      dividend declared per common share
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
  22
 **ITEM
            7. 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 Notes to 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.
  Revenue
              is recognized when all of the following criteria are met in accordance
              with
              principles of sales recognition in Staff Accounting Bulletin No. 104 ("SAB
              104"), "Revenue Recognition," issued by the staff as a revision to
              Staff
              Accounting Bulletin No. 101, "Revenue Recognition" (i) persuasive evidence
              of an agreement exists, (ii) delivery has occurred or services have
              been
              rendered, (iii) the sales price is fixed or determinable and (iv) collectibility
              is reasonably assured.
 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. The majority of our sales relate to products. 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;
            (iii)
            have the risks and rewards of ownership, including the risk of loss for
            collection, delivery or returns; and (iv) have latitude in establishing
            price
            with the customer.  For these transactions, we recognize revenues based on
            the gross amounts due from customers. If most of these criteria are not
            present,
            these transactions are recorded on a net basis.
 Revenues
              from product sales are recognized when shipped. Revenues from the resale
              of
              third-party maintenance agreements are recognized at the date of sale,
              as we
              have no continuing obligation or involvement with the associated services.
              Consulting revenues are recognized when the services are performed.
 Fees
            for
            First Call maintenance agreements are recognized using the straight-line
            method
            over the terms of the agreements. First Call maintenance is generally
            billed in
            advance, resulting in deferred revenue.
  Revenues
            from storage services are recognized at the time the services are provided
            and
            are billed on a monthly basis. Fees received for initial implementation
            services
            are deferred and recognized over the term of the agreement. Deferred
            revenue is
            recorded for amounts billed to customers for whom we have not yet performed
            the
            related services.
  *Software
            Development Costs.* We
            capitalize direct internal costs incurred 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 operations
            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.
  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.
  23
 
 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 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 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 had approximately
            $7.2
            million in property and equipment at December 31, 2007. As a result of
            the
            acquisitions we consummated in 2005, 2006 and 2007, we had approximately
            $3.0
            million in identifiable intangible assets at December 31, 2007. 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. The fair value of our reporting
            units
            used in determination of the goodwill impairment is evaluated using a
            discounted
            cash flow model considering future revenues, operating costs, a risk
            adjusted
            discount rate, historical performance and other pertinent factors. These
            estimates are judgmental in nature and often involve the use of significant
            estmates and assumptions. These estimates and assumptions could have
            a
            significant impact on whether or not an impairment charge is recognized
            and
            also the magnitude of any such charge. As a result of the acquisitions we
            completed in 2005, 2006 and 2007, we had approximately $30.5 million
            in goodwill
            at December 31, 2007.
  *Accounts
            Receivable* .
            We
            currently sell our products and services primarily throughout North America,
            with a small portion (5%) generated in Europe. We require credit applications
            from all new customers and establish appropriate credit limits prior
            to
            accepting associated purchase orders. We periodically review customer
            credits
            (financial condition and/or payment history) and established credit limits.
            We
            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 collection
            experience, 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.
  24
  The
            following is a breakdown of our revenues and long-lived assets by geographic
            area (in thousands):
 **North
                        America**
                    
                    **Europe***
                    
                    **Total**Year
                        Ended December 31, 2007Revenues
                    
                    $
                    138,120
                    
                    $
                    7,655
                    
                    $
                    145,775Long-lived
                        Assets, net
                    
                    
                    41,010
                    
                    
                    740
                    
                    
                    41,750Year
                        Ended December 31, 2006Revenues
                    
                    $
                    63,462
                    
                    $
                    3,170
                    
                    $
                    66,632Long-lived
                        Assets, net
                    
                    
                    22,356
                    
                    
                    862
                    
                    
                    23,218Year
                        Ended December 31, 2005Revenues
                    
                    $
                    35,837
                    
                    $
                    2,098
                    
                    $
                    37,935Long-lived
                        Assets, net
                    
                    
                    8,835
                    
                    
                    477
                    
                    
                    9,312
 *
            The
            geographic breakout by country is not practicable to obtain.
  For
            the
            years ended December 31, 2007 and 2006, no one customer accounted for
            more than
            10% of revenue. For the year ended December 31, 2005, one customer accounted
            for
            11% of total revenue. As of December 31, 2007, no one customer accounted
            for
            more then 10% of total accounts receivable. 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 accounts receivable.
 
 **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 North America
            and
            Europe. 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.
  25


From
      2006
      to 2007, revenues from continuing operations increased 54.3% to $145.8 million
      .
      The significant growth in revenue was a result of the added sales of products
      and services from two acquisitions completed in 2007 and organic growth from
      our
      existing business. On a pro forma basis, assuming that the two acquisitions
      in
      2007 occurred as of January 1, 2005, revenue for the years ended December 31,
      2007 increased to $222.7 million compared to $196.4 million in 2006 and $171.9
      million in 2005. For the years ended December 31, 2007, 2006 and 2005, we
      incurred a loss from continuing operations of $5.4 million, $13.1 million and
      $11.6 million, respectively. Included in the results for 2007 and 2006, are
      losses of $0.2 million and $3.0 million on early extinguishment of debt,
      respectively. Included in the loss for 2005 is an impairment loss of $4.2
      million related to the acquisition of Star.





For
      the
      three months ended December 31, 2007, we had an operating profit ( a non- GAAP
      measure) of $0.2 million, as compared to an operating loss of $2.5 million
      for
      the three months ending December 31, 2006. For the year ended December 31,
      2007
      and 2006 we incurred operating losses of $0.9 million and $8.9 million,
      respectively.




Operating
      profit or loss is defined as earnings before interest, taxes, depreciation
      and
      amortization, stock compensation and cumulative effect of changes in
      accounting principles. Although operating profit and loss 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 operating profit and loss 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 operating profit and loss provides
      useful information to the investor because operating profit and loss excludes
      significant non-cash interest and amortization charges related to our past
      financings that, when excluded, we believe produces more meaningful operating
      information. Operating profit and loss also excludes depreciation and
      amortization expenses, which are significant due to six acquisitions completed
      since 2004. 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 operating profit and loss to the most comparable
      GAAP financial measure net loss before deemed dividends and accretion on
      preferred stock is set forth below.


Operating
                  Profit and Loss ReconciliationAll
                  amounts in (000’s)**2007**
              
              
              **2006****Fourth**
                    **Quarter**
              
              
              **Third**
                  **Quarter**
              
              
              **Second**
                  **Quarter**
              
              
              **First**
                  **Quarter**
              
              
              **Fourth**
                  **Quarter**
              
              
              **Third**
                  **Quarter**
              
              
              **Second**
                  **Quarter**
              
              
              **First**
                  **Quarter**Loss
                  from continuing operations before accretion of preferred
                  stock
              
              $
              (2,360
              )
              $
              (1,854
              )
              $
              (2,681
              )
              $
              (2,305
              )
              $
              (3,862
              )
              $
              (6,792
              )
              $
              (3,681)
              
              $
              (4,502
              )Depreciation
                  and amortization
              
              
              891
              
              
              694
              
              
              687
              
              
              794
              
              
              566
              
              
              724
              
              
              556
              
              
              642Interest
                  expense, net (cash portion)
              
              
              917
              
              
              499
              
              
              319
              
              
              300
              
              
              240
              
              
              224
              
              
              574
              
              
              327Interest
                  expense (non-cash portion)
              
              
              500
              
              
              295
              
              
              503
              
              
              323
              
              
              295
              
              
              457
              
              
              471
              
              
              297Taxes
              
              
              -
              
              
              24
              
              
              24
              
              
              26
              
              
              -
              
              
              -
              
              
              -
              
              
              -Loss
                  on early extinguishment of debt
              
              
              25
              
              
              136
              
              
              -
              
              
              -
              
              
              -
              
              
              1,724
              
              
              -
              
              
              1,232Non-cash
                  stock-based compensation
              
              
              215
              
              
              323
              
              
              384
              
              
              439
              
              
              229
              
              
              523
              
              
              468
              
              
              367Operating
                  profit (loss)
              
              $
              188
              
              $
              117
              
              $
              (764
              )
              $
              (423
              )
              $
              (2,532
              )
              $
              (3,140
              )
              $
              (1,612)
              
              $
              (1,637
              )




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,
      2007, we invested $0.9 million in software development and $1.2 million in
      data
      storage infrastructure. 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, 2007, we completed two additional strategic
      acquisitions that we believe allow us to become a more complete solutions
      provider of IT infrastructure products and services.




26




**Results
      of Operations—Comparison of Years Ended December 31, 2007, 2006 and
      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.


All
                  amounts in (000's)**For
                  the years ended December 31,****2007**
              
              
              **2006**
              
              
              **2005**Product
                  sales
              
              $
              122,333
              
              $
              53,085
              
              $
              27,440Service
                  sales
              
              
              23,442
              
              
              13,547
              
              
              10,494Gross
                  margin-products
              
              $
              22,713
              
              $
              10,288
              
              $
              4,637Gross
                  margin-services
              
              
              7,487
              
              
              3,970
              
              
              3,513Product
                  gross profit as a percentage of product sales
              
              
              18.6
              %
              
              19.4
              %
              
              16.9
              %Service
                  gross profit as a percentage of service sales
              
              
              31.9
              %
              
              29.3
              %
              
              33.5
              %




**Revenue** .
      From
      2006 to 2007, total revenue from continuing operations increased 118.8% to
      $145.8 million. Revenue from the sale of products increased 130.4% to $122.3
      million and revenue from the delivery of services increased 73.0% to $23.4
      million. The increase in service revenue of $9.9 million was attributable to
      increases from organic growth in all service areas. The significant growth
      in
      revenue from 2006 to 2007 was a result of the added sales of products and
      services from the acquisitions of Helio in August 2007 and SSI in September
      2007, as well as organic growth from our existing business. From 2005 to 2006,
      total revenue from continuing operations increased 75.7% to $66.6 million.
      Revenue from the sale of products increased 93.5% to $53.1 million and revenue
      from the delivery of services increased 29.1% to $13.5 million. The significant
      growth in revenue from 2005 to 2006 was the result of adding sales of products
      and services from the acquisitions of NST in April 2006, and Tactix in September
      2006, as well as organic growth from our existing business.





From
      2006
      to 2007, revenues from customers in North America increased 117.6% to $138.1
      million and revenues from customers in Europe increased 141.5% to $7.7 million.
      From 2005 to 2006 revenues from customers in North America increased 77.1%
      to
      $63.5 million and revenues from customers in Europe increased 51.1% to $3.1
      million.





**Gross
      Margin.** From
      2006 to 2007, total gross margin from continuing operations increased 111.8%
      to
      $30.2 million. Product gross margin increased 120.8% to $22.7 million and
      service gross margin increased 88.6% to $7.5 million. From 2005 to 2006, total
      gross margin from continuing operations increased 74.9% to $14.3 million.
      Product gross margin increased 121.9% to $10.3 million and service gross margin
      increased 13.0% to $4.0 million. Gross margin, as a percentage of revenue,
      declined in 2007 over 2006 and 2006 over 2005 due to the large increases in
      product revenues in both years from acquisitions. Product revenues have lower
      gross margins than those for service revenues.





**Selling,
      General and Administrative Expenses** .
      Significant components of selling, general and administrative expenses
      ("SG&A") include salaries and related benefits for employees, general office
      expenses, professional fees, travel-related costs and facilities costs. From
      2006 to 2007, SG&A expenses increased 31.6% to $32.9 million. SG&A
      expenses for the year ended December 31, 2007 included $25.2 million in salaries
      and related benefits for employees, $3.2 million in general office expenses,
      $1.0 million in professional fees, $1.5 million for travel-related costs and
      $1.9 million in facilities costs. The increase in SG&A expenses from 2006 to
      2007 is a result of the acquisitions of Helio in September 2007 and SSI in
      August 2007, and the associated increase in personnel-related costs, as well
      as
      our investment in sales and marketing. In addition, we incurred higher sales
      commission expense, which was directly attributable to the increase in gross
      margins from sales of products and services. From 2005 to 2006, SG&A
      expenses increased 78.6% to $25.0 million. SG&A expenses for the year ended
      December 31, 2006 included $17.7 million in salaries and related benefits for
      employees,$2.3 million in general office expenses, $2.0 million in professional
      fees, $1.2 million for travel-related costs and $1.2 million in facilities
      costs. The increase in SG&A expenses from 2006 to 2007 was a direct result
      of our acquisitions of NST in April 2006 and Tactix in September 2006.




27




**Stock-based
      Compensation Expense.** From
      2006
      to 2007, stock-based compensation expense decreased 14% to $1.4 million. This
      decrease was primarily a result of the completion of expensing some large grants
      issued in 2004. From 2005 to 2006, stock-based compensation expense increased
      353% to $1.6 million. This increase was primarily due to our adoption of FAS
      123R in 2006.





**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 approximately $3.1 million, $2.5 million and $3.0 million for
      the
      years ended December 31, 2007, 2006 and 2005, respectively, of which $1.7
      million was included in cost of revenue in each of these years.





**Operating
      Loss from Continuing Operations.** For the
      years ended December 31, 2007, 2006 and 2005, we incurred a loss from continuing
      operations of $5.4 million, $13.1 million and $11.6 million, respectively.
      The
      decrease in the loss from contuning operations in 2007 over 2006, was due to
      an
      increase in gross margin and decreases in SG&A expenses. The loss for
      2005 included a loss on impairment of goodwill of $4.2 million. No similar
      loss
      was incurred in 2007 or 2006.





**Interest
      Expense.** Interest
      expense was $3.7 million, $2.9 million and $2.4 million for the years ended
      December 31, 2007, 2006 and 2005, respectively. Interest expense during 2007
      included cash interest costs of $2.0 million on notes payable and capital
      leases, and non-cash interest charges of $1.7 million, consisting of $1.1
      million related over 2006 amortization of debt discounts and $0.6 million
      related to warrants and amortization of financing costs. The increase in
      interest expense in 2007 over 2006 was due to the additional debt incurred
      related to our acquisitions of Helio and SSI. 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 and $0.7 million related
      to
      warrants and amortization of financing costs. The increase in interest expense
      in 2006 over 2005 was primarily due to additional debt incurred relating to
      our
      acquisition of NST. 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, $0.7 million related to warrants and amortization of financing costs
      and $0.2 million related to the beneficial conversion feature of a note issued
      to Laurus.





**Loss
      on Early Extinguishment of Debt.** For the
      year ended December 31, 2007, we recognized a $0.2 million loss on early
      extinguishment of debt relating to the refinancing of the 2006 Convertible
      Note.
      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 such 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.** For the
      years ended December 31, 2007 and 2006, other income amounts consisted primarily
      of investment income. For the year ended December 31, 2005, other income
      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 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 2007, 2006 and 2005 were minimal for each
      period.





**Income
      or Loss from Discontinued Operations, Net of Income Taxes.** In
      July
      2006, we sold substantially all of the assets of our Front Porch division.
      Operations of Front Porch prior to the sale have been accounted for as
      discontinued operations. For 2007, the loss from discontinued operations
      represents revenue associated with the earn-out provision of the sale and
      expenses associated with post-closing settlement of liabilities in excess of
      amounts previously recorded.





**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 years ended December 31, 2007, 2006 and 2005, we incurred net losses to
      applicable common shareholders of $11.9 million, $5.5 million and $16.8 million,
      respectively. The significant decrease in net loss applicable to common
      shareholders in 2006 was primarily due to the gain on the sale of Front Porch
      of
      $15.4 million, which was partially offset by the loss of $3.0 million incurred
      on the early extinguishment of debt.




28




**Liquidity
      and Capital Resources**





We
      finance our operations through cash on-hand, borrowings under our
      non-convertible revolving credit facility with Laurus, payment terms provided
      by
      our major suppliers and distributors, and equipment lease financing (see Note
      9
      to Notes to Consolidated Financial Statements for a description of our Notes
      Payable and Other Long-Term Obligations). During June 2007, the available
      revolving credit facility was increased from $10 million to $15 million, and
      increased again in December 2007 from $15 million to $20 million. As of December
      31, 2007, we had $4.3 million of available borrowing capacity under our
      revolving credit facility. Management believes that it has the ability to
      further increase the size of the existing revolving credit facility as there
      is
      sufficient collateral to support a higher level of borrowing availability.
      However, no assurance can be given that we will be successful in increasing
      the
      size of our revolving credit facility if and when we may need to. Accounts
      receivable, consisting primarily of trade accounts, increased to $37.1 million
      at December 31, 2007 compared to $16.1 million at December 31, 2006 as a result
      of the growth in revenue, primarily attributable to the acquisitions of Helio
      and SSI during August and September 2007. During 2007, the company received
      $2.5
      million that was being held in escrow associated with the sale of Front Porch,
      including $87,000 of interest. As of December 31, 2007 we had $0.5 million
      of
      available equipment financing under a committed leaseline facility.




For
      the
      years ended December 31, 2007, 2006 and 2005, net cash used in operating
      activities was $6.8 million, $11.8 million and $1.5 million, respectively.
      Cash
      used in operating activities also included an increase of $8.5 million in
      receivables from December 31, 2006 to December 31, 2007. This increase is mostly
      attributable to the acquisitions of Helio and SSI in 2007, as well as organic
      growth of revenues from existing business units.





For
      the
      year ended December 31, 2007, net cash used in investing activities was $9.1
      million, consisting primarily of cash paid for the acquisitions of Helio and
      SSI
      of $8.6 million, as well as receipts of escrowed funds related to the Front
      Porch sale of $2.5 million and purchases of equipment and capitalized software
      development costs of $2.9 million. For the year ended December 31, 2006, we
      used
      net cash of $10.8 million in investing activities from continuing operations,
      including $5.3 million to purchase NST and $3.0 million to acquire Tactix,
      and
      $2.5 million to purchase or develop computer software and equipment. For the
      year ending December 31, 2006, we had cash generated by discontinued operations,
      primarily due to the sale of Front Porch, amounting to $26.0 million. For the
      year ended December 31, 2005, we used net cash of $1.1 million in investing
      activities, of which, $1.4 million was used to purchase or develop computer
      software and equipment. In 2005 we had cash provided by investing activities
      of
      $1.7 million, representing cash acquired from the acquisitions of Star.and
      PWI.
      The net cash used in operating and investing activities was provided by cash
      on-hand and borrowings under the revolving credit facility and the 2007 Term
      Note.





As
      part
      of our business strategy, we completed six acquisitions from 2005 to 2007.
      No
      additional acquisitions are pending at the present time. Although we are
      experiencing success in the deployment of our marketing strategy for the sale
      and delivery of our complete IT 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, the maintenance of satisfactory agreements with our suppliers
      and
      distributors of products that we resell and general economic and business
      conditions, among other factors.





We
      believe 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 twelve months barring a redemption
      request from our Series A preferred stock shareholders. 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.





We
      have a
      working capital deficit of $13.4 million as of December 31, 2007. A significant
      component of the deficit is the $14.6 million balance outstanding on the 2006
      Facility. The 2006 Facility matures on February 26, 2009, and is subject to
      having sufficient trade receivable balances to support the associated borrowing
      base. Although this amount is not due in the current time period, EITF 95-22
      (as
      described in Note 9(A)) requires that any outstanding balance on the 2006
      Facility be disclosed as a current liability due to the credit facility having
      a
      subjective acceleration clause. In addition, working capital includes deferred
      revenue and expenses associated with the up-front billing and collection of
      First Call maintenance contracts and the associated deferral of the cost of
      maintenance. The net amount of deferred revenue and expense is a deferred credit
      of $1.7 million at December 31, 2007. Such amount does not represent a required
      use of working capital in the current period. Working capital adjusted for
      the
      items described is approximately $2.6 million. We believe this adjusted working
      capital balance is a more representative measure of net current assets available
      to fund operations.




29




At
      any
      time after August 18, 2008, holders of at least 80% of the outstanding shares
      of
      Series A preferred stock may elect to redeem all, but not less than all, of
      the
      outstanding shares currently amounting to $31,500,000. The holders are
      not required to take any action, and redemption request requires approval by
      80%
      of the holders. Presently there are four holders of the preferred shares, and
      in
      order to attain an 80% consensus, the three largest holders would need to agree.





Should
      there be a request for redemption, and should we not have the funds to meet
      the
      redemption, management believes the most immediate negative impact to our
      business arises from the terms of our debt agreements with Laurus. The debt
      agreements include certain events of default which would be triggered in the
      event we are unable to satisfy a redemption request. Should an event of default
      be triggered with Laurus, Laurus is entitled to a default rate interest of
      an
      additional 1.5% per month. In addition, Laurus would have the right to cease
      funding under our revolving credit facility and to assert an accelerated request
      for repayment, which would equal 125% of the total principal outstanding on
      both
      the revolving credit facility and $12 million term note, plus any accrued and
      unpaid interest. We currently do not have adequate funds available to satisfy
      a
      request for redemption, should one occur.





Due
      to
      Laurus’ senior position, our current liquidity position and considering our
      current business state and prospects for the future, management believes it
      is
      in the best interest of the holders to resolve the maturing redemption in a
      manner that neither creates an event of default with Laurus nor disrupts our
      business and allows it to continue to operate consistently with its 2008
      business plan.





Management
      is actively discussing a variety of options with the holders in regards to
      their
      redemption rights. Management’s strategy includes, but is not limited to,
      redeeming all or a portion of the Series A preferred shares by inducing the
      holders to convert to common shares, raising additional cash through issuance
      of
      common shares and/or additional debt to third-parties, restructuring the
      redemption requirement, or permitting the holders to sell their Series A
      preferred shares to third-parties. There can be no assurance that management
      will be successful in resolving the redemption rights of the holders, nor can
      there be any assurance that there will be no disruption to our business, either
      during the period in which management is pursuing a strategy to resolve the
      redemption rights (due to, among other things, distraction of management
      from day-to-day execution of the 2008 business plan), or subsequently.





**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.





Please
      see the discussion under “Liquidity and Capital Resources” for management’s
      plans regarding the August 18, 2008 redemption maturity associated with the
      Series A preferred stock.





Since
      inception, we have incurred substantial operating losses and have a working
      capital deficit of $13.4 million and a shareholders' deficit of $13.9 million
      at
      December 31, 2007. 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
      incurred a loss from continuing operations of $9.2 million for the year ended
      December 31, 2007, although the loss included certain non-cash expenses of
      approximately $6.2 million. Our 2008 operating plan, and the execution thereof,
      is focused on increasing revenue, controlling costs, and increasing cash flow.
      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,
      2008.




30




With
      our
      rate of organic growth and the addition of the two acquisitions that closed
      in
      the third quarter of 2007, we expect revenue for 2008 to be between $200 and
      $220 million. As a result, 2008 revenues are expected to be approximately 38%
      to
      52% higher than revenue in 2007. The company expects to achieve an operating
      profit for the full year in 2008. 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
      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 including capitalized
      software development costs of approximately $1.0 million during the twelve-month
      period ended December 31, 2008. 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.





**Contractual
      Commitments**





The
      following summarizes our contractual obligations and commitments as of December
      31, 2007:


**Contractual
                Obligations and Commitments**
              
              
              **Total**
              
              
              **Less
                    than**
                    **One
                      Year**
              
              
              **One
                    to**
                    **Three
                      Years**
              
              
              **Three
                    to Five**
                    **Years**
              
              
              **More
                    than**
                    **Five
                      Years**Notes
                  payable and other long-term obligations
              
              $
              26,116,633
              
              $
              2,179,973
              
              $
              23,925,431
              
              $
              11,229
              
              $
              -Operating
                  lease obligations
              
              
              4,632,322
              
              
              1,396,628
              
              
              1,900,698
              
              
              730,362
              
              
              604,634Capital
                  lease obligations
              
              
              7,807,369
              
              
              1,295,782
              
              
              1,372,913
              
              
              1,262,062
              
              
              3,876,612Total
                  Contractual Obligations andCommitments
              
              $
              38,556,324
              
              $
              4,872,383
              
              $
              27,199,042
              
              $
              2,003,653
              
              $
              4,481,246


**Recently
      Issued Accounting Pronouncements**





In
      December 2007, the FASB issued Statement of Financial Accounting Standard No.
      141 (R), “ *Business
      Combinations”* (“SFAS
      141(R)”) which becomes effective for fiscal periods beginning after December 15,
      2008. SFAS No. 141(R) requires all business combinations completed after
      the effective date to be accounted for by applying the acquisition method
      (previously referred to as the purchase method). Companies applying this method
      will have to identify the acquirer, determine the acquisition date and purchase
      price and recognize at their acquisition date fair values of the identifiable
      assets acquired, liabilities assumed, and any non-controlling interests in
      the
      acquiree. In the case of a bargain purchase the acquirer is required to
      reevaluate the measurements of the recognized assets and liabilities at the
      acquisition date and recognize a gain on that date if an excess remains. We
      are
      currently assessing the impact that the adoption of this statement may have
      on
      our consolidated financial statements.





In
      December 2007, the FASB issued SFAS No. 160, “ *Noncontrolling
      Interests in Consolidated Financial Statements, an Amendment of ARB
      51”* (“SFAS
      160”) which becomes effective for fiscal periods beginning after
      December 15, 2008. This statement amends ARB 51 to establish accounting and
      reporting standards for the non-controlling interest in a subsidiary and for
      the
      deconsolidation of a subsidiary. The statement requires ownership interests
      in
      subsidiaries held by parties other than the parent be clearly identified,
      labeled, and presented in the consolidated statement of financial position
      within equity, but separate from the parent’s equity. The statement also
      requires consolidated net income to be reported at amounts that include the
      amounts attributable to both the parent and the non-controlling interest with
      disclosure on the face of the consolidated statement of income, of the amounts
      of consolidated net income attributable to the parent and to the non-controlling
      interest. In addition this statement establishes a single method of accounting
      for changes in a parent’s ownership interest in a subsidiary that do not result
      in deconsolidation and requires that a parent recognize a gain or loss in net
      income when a subsidiary is deconsolidated. We do not expect the adoption of
      this statement to have a material impact on our consolidated financial
      statements.





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.




31




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 that the adoption of this statement may have on our consolidated
      financial statements.




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





Our
      primary market risk is related to changes in interest rates. Of our total
      outstanding debt of $26.1 million at December 31, 2007, $12.0 million is subject
      to a floating interest rate of the prime rate plus 2%, with a floor of 10%.
      The
      weighted average interest rate on this indebtedness was 10.0% at December 31,
      2007. An adverse change of 100 basis points in this rate would result in no
      additional annual interest expense as of December 31, 2007, due to the prime
      rate plus the index being below the floor of 10%.





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





The
      report of our independent registered public accounting firm and our consolidated
      financial statements and associated notes, which are included in this report
      beginning on page F-1, are herein incorporated by reference.





**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





None.





**ITEM
      9A. 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 2007 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





**Management’s
      Annual Report on Internal Control Over Financial Reporting.** Our
      management team is responsible for establishing and maintaining adequate control
      over financial reporting. Our internal control over financial reporting is
      a
      process designed to provide reasonable assurance regarding the reliability
      of
      financial reporting and the preparation of our financial statements for external
      purposes in accordance with generally accepted accounting principles. Internal
      control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f)
      promulgated under Securities Exchange Act of 1934, as amended (the Exchange
      Act).





As
      of
      December 31, 2007, management assessed the effectiveness of our internal control
      over financial reporting based on criteria for effective internal control over
      financial reporting established in *Internal
      Control - Integrated Framework* ,
      issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Based on this assessment, management has determined that our internal control
      over financial reporting as of December 31, 2007 is effective.





Excluded
      from this report are those internal controls over financial reporting of Helio,
      which we acquired in August, 2007, and SSI, which we acquired in September,
      2007, as it was not possible to conduct an assessment of these acquired
      businesses' internal control over financial reporting in the period between
      the
      consummation dates and the date of management's assessment. Helio represented
      $22.9 million of revenue, or 15.7% of consolidated revenue, and SSI represented
      $12.2 million of revenue, or 8.4% of consolidated revenue for the year ended
      December 31, 2007. As permitted by the Security and Exchange Commission,
      acquisitions that occur during the year for which management is reporting on
      internal controls over financial reporting, can be excluded from the report
      for
      a period not to extend beyond one year from the date of the acquisition. Thus,
      Helio and SSI will be included in the report for 2008.




32




This
      annual report does not include an attestation report of our independent
      registered public accounting firm regarding internal control over financial
      reporting. Management’s report was not subject to attestation by our independent
      registered public accounting firm pursuant to temporary rules of the Securities
      and Exchange Commission that permit us to provide only management’s report in
      this annual report.





**ITEM
      9B. OTHER INFORMATION**





None.





**PART
      III**





**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**





**Management
      and Board of Directors**





The
      following sets forth the name, age and position of each of our directors and
      executive officers as of March 21, 2008:


**Name**
              
              **Age**
              
              **Position(s)**Thomas
                  P. Sweeney III
              
              47
              
              Chairman
                  of the Board and Chief Executive OfficerShawn
                  O’Grady
              
              45
              
              President
                  and Chief Operating OfficerAnthony
                  DiPaolo
              
              48
              
              Chief
                  Financial OfficerMatthew
                  Richman
              
              37
              
              Chief
                  Corporate Development Officer and TreasurerJames
                  Wolfinger
              
              51
              
              DirectorCarmen
                  J. Scarpa
              
              43
              
              DirectorThomas
                  G. Hudson
              
              61
              
              DirectorDavid
                  E. Weiss
              
              64
              
              DirectorRobert
                  S. Kocol
              
              51
              
              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 1990 until 2003, Mr DiPaolo served in various senior
      management positions with two publicly-traded companies providing equipment
      financing and asset management services, including Chief Financial Officer
      responsibilities from 1997 until 2003.  Mr. DiPaolo has been a certified
      public accountant in the state of Colorado since 1982.




33




*Matthew
      Richman.* Mr.
      Richman has been our Chief Corporate Development Officer 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.





*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 31,2007, all Section
      16(a) filing requirements applicable to our officers, directors and 10%
      Shareholders were complied with except for: (i) David Condensa, a 10%
      shareholder has not filed a Form 3 covering 2,882,231 shares acquired in the
      acquisition of Helio.





**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
      11. 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, 2007. We refer to these
      executive officers as our named executive officers.




34


**SUMMARY
                  COMPENSATION TABLE**
  **Name
                  and Principal Position**
              
              
              **Year**
              
              
              **Salary**
              
              
              **Bonus**
              
              
              **Option**
                      **Awards**
                      **(1)**
              
              
              **All
                    Other**
                    **Compensation**
              
              
              **Total**Thomas
                  P. Sweeney III
              
              
              2007
              
              $
              318,462
              
              $
              51,102
              
              $
              512,340
              
              $
              -
              
              $
              881,904Chief
                  Executive Officer
              
              
              2006
              
              $
              300,000
              
              $
              478,750
              
              $
              786,170
              
              $
              -
              
              $
              1,564,920Shawn
                  O'Grady (2)
              
              
              2007
              
              $
              240,000
              
              $
              20,441
              
              $
              60,490
              
              $
              195,019
              
              $
              515,950President
                  & Chief Operating Officer
              
              
              2006
              
              $
              240,000
              
              $
              80,000
              
              $
              54,322
              
              $
              98,347
              
              $
              472,669Matthew
                  Richman
              
              
              2007
              
              $
              213,077
              
              $
              -
              
              $
              41,548
              
              $
              -
              
              $
              254,625Chief
                  Corporate Development Officer and Treasurer
              
              
              2006
              
              $
              196,666
              
              $
              271,613
              
              $
              14,187
              
              $
              -
              
              $
              482,466Anthony
                  DiPaolo
              
              
              2007
              
              $
              192,846
              
              $
              33,333
              
              $
              42,243
              
              $
              -
              
              $
              268,422Chief
                  Financial Officer
              
              
              2006
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -


(1)
            In
                accordance with applicable regulations the amounts listed in the
                Option
                Awards column represent the dollar amount recognized for financial
                statement reporting purposes with respect to the applicable year
                in
                accordance with SFAS 123(R). The value of such options disregards
                an
                estimate for forfeitures related to service-based vesting used by
                the
                Company for financial statement purposes. See footnote 2 in the Notes
                to
                Consolidated Financial Statements included with this report on Form
                10-K
                for assumptions made in the valuation of options. No options held
                by the
                named executives were forfeited during the
                year.





(2)
            All
                other compensation includes reimbursement for relocation
                costs.





**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, all 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 31, 2007, we entered into an extension of the employment agreement
      with
      Shawn O’Grady, dated October 10, 2005, for a period of two years ending on
      December 31, 2009. The annual salary was revised to $315,800 with a targeted
      annual bonus of $160,000. All other terms of the original agreement remain
      unchanged.





On
      May
      29, 2007, we entered into an employment agreement with Matthew Richman, our
      Chief Corporate Development Officer and Treasurer. The employment agreement
      provides that Mr. Richman will receive an annual base salary of $230,000, with
      a
      targeted annual bonus of up to $75,000.





On
      February 15, 2007, we entered into an employment agreement with Anthony DiPaolo,
      our current Chief Financial Officer. The employment agreement provides that
      Mr.
      DiPaolo will receive an annual base salary of $230,000. For the year ending
      December 31, 2007, Mr. DiPaolo was awarded a guaranteed bonus of $33,333 and
      will be eligible for a bonus of up to $100,000 based upon achievement of
      performance objectives.




35





**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, 2007:


**OUTSTANDING
                  EQUITY AWARDS AT FISCAL
                  YEAR-END**
  **Option
                  Awards****Number
                        of**
                        **Securities**
                        **Underlying**
                        **Unexercised**
              
              
              **Number
                          of**
                          **Securities**
                          **Underlying**
                          **Unexercised**
              
              
              **Option****Name**
              
              
              
              
              
              **Options**
                    **(#)**
                    **Exercisable**
              
              
              **Options**
                    **(#)**
                    **Unexercisable**
              
              
              **Exercise**
                      **Price**
                      **($)**
              
              
              **Option**
                      **Expiration**
                      **Date**Thomas
                  P. Sweeney III(1)
              
              
              151,009
              
              
              -
              
              $
              0.32
              
              
              February
                  13, 2013(2)
              
              
              82,500
              
              
              -
              
              $
              2.20
              
              
              March
                  16, 2014(3)
              
              
              1,023,700
              
              
              -
              
              $
              2.80
              
              
              August
                  18, 2014Matthew
                  Richman
              
              
              (4)
              
              
              50,000
              
              
              -
              
              $
              2.80
              
              
              January
                  8, 2013(5)
              
              
              42,500
              
              
              -
              
              $
              2.20
              
              
              March
                  16, 2014(6)
              
              
              19,167
              
              
              38,333
              
              $
              1.30
              
              
              May
                  4, 2016(7)
              
              
              -
              
              
              100,000
              
              $
              1.00
              
              
              April
                  26, 2017Shawn
                  O'Grady
              
              
              (8)
              
              
              100,000
              
              
              50,000
              
              $
              1.36
              
              
              October
                  17, 2015(9)
              
              
              16,667
              
              
              33,333
              
              $
              1.30
              
              
              May
                  4, 2016Anthony
                  DiPaolo
              
              
              (10)
              
              
              -
              
              
              175,000
              
              $
              1.05
              
              
              February
                  22, 2017




(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. The options became fully vested on August 18, 2004
                upon
                the merger with Incentra of CO.





(5)
            Granted
                March 16, 2004. The options became fully vested on August 18, 2004
                upon
                the merger with Incentra of CO.





(6)
            Granted
                May 4, 2006. Options vest over three years at the rate of 33% on
                each
                anniversary date thereafter.





(7)
            Granted
                April 26, 2007. Options vest over three years at the rate of 33%
                on each
                anniversary date thereafter.





(8)
            Granted
                October 17, 2005. Options vest over three years at the rate of 33%
                on each
                anniversary date thereafter.





(9)
            Granted
                May 4, 2006. Options vest over three years at the rate of 33% on
                each
                anniversary date thereafter.





(10)
            Granted
                February 22, 2007. Options vest over three years at the rate of 33%
                on
                each anniversary date thereafter.





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 Plan”) and one
      that was originally established by Incentra of CO (the “Incentra of CO Plan”).
      Each of these plans is 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.





**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.




36





The
      exercise price of non-statutory stock options may be equal to 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.





Under
      the
      Incentra Option Plan, 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.





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.





**Incentra
      of CO- 2000 Stock Option and Grant Plan**





Prior
      to
      our acquisition of ManagedStorage International, Inc. (also known as “Incentra
      of CO”), 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 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 171,800 shares
      of
      our common stock.




37





**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 received $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**James
                  Wolfinger (1)
              
              $
              30,000
              
              $
              22,385
              
              $
              -
              
              $
              52,385Thomas
                  G. Hudson (2)
              
              
              30,000
              
              
              9,227
              
              
              -
              
              
              39,227David
                  E. Weiss (3)
              
              
              30,000
              
              
              14,250
              
              
              -
              
              
              44,250Robert
                  S. Kocol (4)
              
              
              30,000
              
              
              7,630
              
              
              -
              
              
              37,630




(1)
            On
                August 5, 2004, Mr. Wolfinger was granted options to purchase 25,000
                shares of our common stock at $2.20 per share, of which, all have
                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
                33.3% on
                each anniversary date thereafter and will expire on May 4, 2016.
                On June
                22, 2007, Mr. Wolfinger was also granted options to purchase 20,000
                shares
                of our common stock at $0.99 per share. The options will vest over
                three
                years at the rate of 33.3% on each anniversary date thereafter and
                will
                expire on June 22, 2017.





(2)
            On
                December 14, 2005, Mr. Hudson was granted options to purchase 25,000
                shares of our common stock at $1.21 per share, of which, 16,667 have
                vested. The options will vest over three years at the rate of 33.3%
                on
                each anniversary date thereafter and will expire on December 14,
                2015. On
                June 22, 2007, Mr. Hudson was also granted options to purchase 10,000
                shares.





(3)
            On
                December 14, 2005, Mr. Weiss was granted options to purchase 25,000
                shares
                of our common stock at $1.21 per share, of which, 16,667 have 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 33.3%
                on each
                anniversary date thereafter and will expire on May 4, 2016. On June
                22,
                2007, Mr. Weiss was also granted options to purchase 20,000 shares
                of our
                common stock at $0.99 per share. The options will vest over three
                years at
                the rate of 33.3% on each anniversary thereafter and will expire
                on June
                22, 2017.





(4)
            On
                December 18, 2006, Mr. Kocol was granted options to purchase 25,000
                shares
                of our common stock at $1.10 per share, of which, 8,333 have vested.
                The
                options will vest over three years at the rate of 33.3% on each
                anniversary date thereafter and will expire on December 18,
                2016.





38





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





The
      following table sets forth information as of March 23, 2008 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:


**Number
                    of**
                    **Shares**
              
              **Percent
                  of****Name**
              
              **Title
                  of Class**
              
              **Beneficially**
                    **Owned
                      (1)**
              
              **Outstanding**
                    **Shares
                      (2) (3)**5%
                  BENEFICIAL OWNERSGreat
                  Hill Equity Partners, LP
              
              
              Common
                  Stock
              
              
              3,732,612
              
              
              16.23
              %
              
              (4
              )One
                  Liberty Square
              
              
              Series
                  A Preferred Stock
              
              
              843,170
              
              
              34.18
              %Boston,
                  MA 02109David
                  Condensa
              
              
              Common
                  Stock
              
              
              2,882,231
              
              
              13.52
              %
              
              (8
              )Tudor
                  Investment Corporation
              
              
              Common
                  Stock
              
              
              2,684,547
              
              
              11.51
              %
              
              (5
              )1275
                  King Street
              
              
              Series
                  A Preferred Stock
              
              
              1,004,405
              
              
              40.71
              %Greenwich,
                  CT 06831J.P.
                  Morgan Direct Venture
              
              
              Common
                  Stock
              
              
              2,330,797
              
              
              10.35
              %
              
              (6
              )Capital
                  Institutional Investors, LLC
              
              
              Series
                  A Preferred Stock
              
              
              602,775
              
              
              24.43
              %522
                  Fifth AvenueNew
                  York, NY 10036Laurus
                  Funds
              
              
              Common
                  Stock
              
              
              2,268,000
              
              
              9.99
              %
              
              (7
              )335
                  Madison AvenueNew
                  York, NY 10017Thomas
                  Kunigonis
              
              
              Common
                  Stock
              
              
              1,369,863
              
              
              6.43
              %
              
              (9
              )DIRECTORS
                  AND NAMEDEXECUTIVE
                  OFFICERSThomas
                  P. Sweeney III
              
              
              Common
                  Stock
              
              
              1,584,000
              
              
              7.00
              %
              
              (10
              )1140
                  Pearl Street
              
              
              Series
                  A Preferred Stock
              
              
              16,558
              
              
              *****Boulder,
                  CO 80302Matt
                  Richman
              
              
              Common
                  Stock
              
              
              225,780
              
              
              1.05
              %
              
              (11
              )Shawn
                  O'Grady
              
              
              Common
                  Stock
              
              
              162,729
              
              
              *****
              
              
              (12
              )Anthony
                  DiPaolo
              
              
              Common
                  Stock
              
              
              58,333
              
              
              *****
              
              
              (13
              )All
                  directors and executive
              
              
              Common
                  Stock
              
              
              2,840,394
              
              
              12.2
              %officers
                  as a group (9 persons)
              
              
              Series
                  A Preferred Stock
              
              
              16,558
              
              
              *****


*
      Constitutes less than 1%





(1)
            For
                the purposes of this table, a person is deemed to have “beneficial
                ownership” of any shares of capital stock that such person has the right
                to acquire within 60 days of March 21, 2008.


(2)
              All
                  percentages for common stock are calculated based upon a total
                  of
                  21,317,863 shares outstanding as of March 21, 2008, 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 21, 2008.


(3)
                  All
                      percentages for Series A preferred stock are calculated based
                      upon a total
                      of 2,466,971 shares outstanding as of March 21,
                      2008.
 
 (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 February 11,
                      2008 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”).
 39


(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.





(7)
            Represents
                888,970 shares of common stock owned of record by Laurus Funds, 6,133,857
                shares of common stock issuable upon exercise of various warrants
                held by
                Laurus Funds and its affiliates, and 209,390 shares of common stock
                issuable upon exercise of an option held by Laurus Funds and its
                affiliates. The Warrants and Option contain an issuance limitation
                prohibiting the Investors from exercising or converting those securities
                to the extent that such exercise would result in beneficial ownership
                by
                the Fund of more than 9.99% of the Shares then issued and outstanding
                (the
                “Issuance Limitation”). The issuance Limitation may be waived by the
                Investors upon at least 61 days prior notice to the Company and shall
                automatically become null and void following notice to the issuer
                of the
                occurrence and during the continuance of an event of default (as
                defined
                in and pursuant to the terms of the applicable instrument). In the
                case of
                the Option, the 61-day waiver notice may only be delivered at a time
                when
                no indebtedness of the issuer is outstanding to the investors of
                their
                affiliates.





(8)
            Represents
                2,882,231 shares of common stock owned of record by David
                Condensa.





(9)
            Represents
                1,369,863 shares of common stock owned of record by Thomas
                Kunigonis.





(10)
            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, 1,257,209 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.





40


(11)
            Represents
                60,429 shares of common stock owned of record by Mr. Richman, 1,184
                shares
                of common stock issuable upon exercise of a warrant held by Mr. Richman
                and 164,167 shares issuable upon the exercise of presently exercisable
                options held by Mr. Richman.





(12)
            Represents
                5,715 shares of common stock owned of record by Mr. O’Grady, 23,680 shares
                of common stock issuable upon exercise of a warrant held by Mr. O’Grady
                and 133,334 shares issuable upon the exercise of presently exercisable
                options held by Mr. O’Grady.





(13)
            Represents
                58,333 shares issuable upon the exercise of presently exercisable
                options
                held by Mr. DiPaolo.





See
      also
      "Equity Compensation Plan Information" in Item 5 of this Report for a discussion
      of securities authorized for issuance under our equity compensation
      plans.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





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
      7.00% 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 $206,321,
      $208,574 and $190,178 for the years ending December 31, 2007, 2006 and 2005,
      respectively. In 2008, we expect to incur leasing costs to Equity Pier of
      approximately $215,000.  The audit committee of the Board of Directors
      reviews and approves all material related party transactions.





**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 of the six 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.





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. The Board of Directors has determined that Messrs.
      Wolfinger and Kocol are audit committee financial experts.  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 our Board of Directors.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





The
      firm
      of GHP Horwath, P.C. has served as our independent registered public accounting
      firm since November 9, 2004. The following table sets forth the aggregate fees
      expected to be billed (2007) and billed (2006 and 2005)to us by GHP Horwath,
      P.C., for the years ended December 31, 2007, 2006 and 2005:


**2007**
              
              
              **2006**
              
              
              **2005**Audit
                  fees
              
              $
              380,000
              
              $
              297,000
              
              $
              212,000Audit-related
                  fees
              
              
              176,000
              
              
              14,000
              
              
              -Tax
                  fees
              
              
              -
              
              
              -
              
              
              -All
                  other fees
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              556,000
              
              $
              311,000
              
              $
              212,000
  41


Audit-related
      fees of $176,000 for the year ended December 31, 2007, consisted of $137,000
      of
      fees for audit services performed relating to the acquisition of Helio and
      $39,000 of fees relating to due diligence services performed by GHP Horwath,
      P.C. For the year ended December 31, 2006, audit-related fees of $14,000 were
      for due diligence services performed by GHP Horwath, P.C.





**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 our  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 in 2007 and 2006 and
      approved in 2005 by our Board of Directors.





**PART
      IV**





**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**





1.
            The
                consolidated financial statements of Incentra Solutions, Inc. filed
                as
                part of this report are listed in the Index to Consolidated Financial
                Statements and Financial Statement Schedule.





2.
            The
                financial statement schedule of Incentra Solutions, Inc. filed as
                part of
                this report is listed in the Index to Consolidated Financial Statements
                and Financial Statement Schedule. All other financial statement schedules
                are not required under the related instructions, or are inapplicable
                and
                therefore have been omitted.





3.
            The
                following exhibits are filed as part of this
                report:





42


**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).2.5
                
                Stock
                    Purchase Agreement, dated as of August 14, 2007, between Incentra
                    Solutions, Inc. and Paul Chopra (incorporated
                    by reference to Exhibit 10.7 of our Current Report of Form 8-K
                    filed on
                    August 23, 2007.)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).
  43
 **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).


44




**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).


45


**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).




46


**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, effective March 22, 2007, between Incentra Solutions,
                  Inc. and
                  Thomas P. Sweeney III10.49
              
              Employment
                  Agreement, effective May 29, 2007, between Incentra Solutions,
                  Inc. and
                  Matthew Richman (incorporated by reference to Exhibit 10.1 filed
                  with our
                  Current Report filed on May 31, 2007.)10.50
              
              Omnibus
                  Amendment, dated June 18, 2007, between Incentra Solutions, Inc.
                  and
                  Laurus Master Fund, Ltd. (incorporated by reference to Exhibit
                  10.1 filed
                  with our Current Report on Form 8-K filed on June 22,
                  2007.)10.51
              
              Common
                  Stock Purchase Warrant, dated as of June 18, 2007, executed by
                  our company
                  in favor of Laurus Master Fund, Ltd. (incorporated by reference
                  to Exhibit
                  10.2 filed with our Current Report on Form 8-K filed on June 22,
                  2007.)10.52
              
              Omnibus
                  Agreement, dated July 3, 2007, between Incentra Solutions, Inc.
                  and RAB
                  Special Situations (Master) Fund Limited (incorporated by reference
                  to
                  Exhibit 10.1 filed with our Current Report of Form 8- K filed on
                  July 10,
                  2007.)10.53
              
              Amendment
                  dated July 3, 2007 between Incentra Solutions, Inc. and Blueline
                  Capital
                  Partners II, LP (incorporated by reference to Exhibit 10.2 filed
                  with our
                  Current Report of Form 8-K filed on July 10, 2007.)10.54
              
              Common
                  Stock Purchase Warrant, dated July 5, 2007, between Incentra Solutions,
                  Inc. and Credit Suisse Client Nominees (UK) Limited (incorporated
                  by
                  reference to Exhibit 10.3 filed with our Current Report of Form
                  8-K filed
                  on July 10, 2007.)10.55
              
              Common
                  Stock Purchase Warrant, dated July 5, 2007, between Incentra Solutions,
                  Inc. and Credit Suisse Client Nominees (UK) Limited (incorporated
                  by
                  reference to Exhibit 10.3 filed with our Current Report of Form
                  8-K filed
                  on July 10, 2007.)10.56
              
              Helio
                  Merger Agreement, dated as of August 14, 2007, by and among Incentra
                  Solutions, Inc., Helio Acquisition Corp., Helio Solutions, Inc.,
                  and Dave
                  Condensa, as Shareholders’ Representative (incorporated by reference to
                  Exhibit 10.1 filed with our Current Report of Form 8-K on August
                  23,
                  2007.)10.57
              
              First
                  Amendment to Helio Merger Agreement, dated as of August 14, 2007,
                  between
                  Incentra Solutions, Inc., Incentra Helio Acquisition Corp., Helio
                  Solutions, Inc., and Dave Condensa, as Sharehoders’ Representative
                  (incorporated by reference to Exhibit 10.2 filed with our Current
                  Report
                  of Form 8-K on August
                  23, 2007.)


47




**Exhibit
                  Number**
              
              **Description**10.58
              
              Security
                  Agreement, dated as of August 16, 2007, between Incentra Solutions
                  and
                  subsidiaries and Dave Condensa, Bert Condensa, Dave Auerweck, Kevin
                  Hawkins and Terri Marine (incorporated by reference to Exhibit
                  10.3 filed
                  with our Current Report of Form 8-K on August 23,
                  2007.)10.59
              
              Second
                  Amendment to the Helio Merger Agreement, dated as of August 17,
                  2007,
                  between Incentra Solutions, Inc., Incentra Helio Acquisition Corp.,
                  Helio
                  Solutions, Inc., and Dave Condensa, as Shareholders’ Representative
                  (incorporated by reference to Exhibit 10.4 filed with our Current
                  Report
                  of Form 8-K on August 23, 2007.)10.60
              
              Registration
                  Rights Agreement, dated as of August 14, 2007, between Incentra
                  Solutions,
                  Inc. and Dave Condensa, Bert Condensa, Dave Auerweck, Kevin Hawkins,
                  Terri
                  Marine, and Paul Chopra (incorporated by reference to Exhibit 10.5
                  filed
                  with our Current Report of Form 8-K on August 23,
                  2007.)10.61
              
              Lock-up
                  and Voting Agreement, dated as of August 14, 2007, between Dave
                  Condensa,
                  Bert Condensa, Dave Auerweck, Kevin Hawkins, and Terri Marine
                  (incorporated by reference to Exhibit 10.6 filed with our Current
                  Report
                  of Form 8-K on August 23, 2007.)10.62
              
              Convertible
                  Promissory Note, dated as of August 14, 2007, issued by Incentra
                  Solutions, Inc. to Paul Chopra (incorporated by reference to Exhibit
                  10.8
                  filed with our Current Report of Form 8-K on August 23,
                  2007.)10.63
              
              Registration
                  Rights Agreement, dated as of August 14, 2007, between Incentra
                  Solutions,
                  Inc. and Paul Chopra (incorporated by reference to Exhibit 10.9
                  filed with
                  our Current Report of Form 8-K on August 23, 2007.)10.64
              
              Employment
                  Agreement, dated as of August 17, 2007, between Incentra Helio
                  Acquisition
                  Corp. and Dave Condensa (incorporated by reference to Exhibit 10.10
                  filed
                  with our Current Report of Form 8-K on August 23,
                  2007.)10.65
              
              Escrow
                  Agreement, dated as of August 14, 2007, between Incentra Solutions,
                  Inc.,
                  Incentra Helio Acquisition Corp., Helio Solutions, Inc. and Dave
                  Condensa,
                  as Shareholders’ Representative (incorporated by reference to Exhibit
                  10.11 filed with our Current Report of Form 8-K on August 23,
                  2007.)10.66
              
              Securities
                  Purchase Agreement, dated as of July 31, 2007, between Incentra
                  Solutions,
                  Inc. and Calliope Capital Corporation (incorporated by reference
                  to
                  Exhibit 10.12 filed with our Current Report of Form 8-K on August
                  23,
                  2007.)10.67
              
              Term
                  Note, dated as of July 31, 2007, between Incentra Solutions, Inc.
                  and
                  Calliope Capital Corporation (incorporated by reference to Exhibit
                  10.12
                  filed with our Current Report of Form 8-K on August 23,
                  2007.)10.68
              
              Common
                  Stock Purchase Warrant, dated as of July 31, 2007, by Incentra
                  Solutions,
                  Inc. in favor of Calliope Capital Corporation (incorporated by
                  reference
                  to Exhibit 10.13 filed with our Current Report of Form 8-K on August
                  23,
                  2007.)10.69
              
              Master
                  Security Agreement, dated as of July 31, 2007, by Incentra Solutions,
                  Inc.
                  in favor of Calliope Capital Corporation (incorporated by reference
                  to
                  Exhibit 10.15 filed with our Current Report of Form 8-K on August
                  23,
                  2007.)10.70
              
              Subsidiary
                  Guarantee, dated as of July 31, 2007, by Incentra Solutions, Inc.
                  in favor
                  of Calliope Capital Corporation (incorporated by reference to Exhibit
                  10.16 filed with our Current Report of Form 8-K on August 23,
                  2007.)
 10.71
              
              Registration
                  Rights Agreement, dated as of July 31, 2007, between Incentra Solutions,
                  Inc. and Calliope Capital Corporation (incorporated by reference
                  to
                  Exhibit 10.17 filed with our Current Report of Form 8-K on August
                  23,
                  2007.)


48


**Exhibit
                    Number**
                
                **Description**10.72
                
                Stock
                    Pledge Agreement, dated as of July 31, 2007, between Incentra
                    Solutions,
                    Inc., Managed Storage International, Inc., and Calliope Capital
                    Corporation (incorporated by reference to Exhibit 10.18 filed
                    with our
                    Current Report of Form 8-K on August 23, 2007.)10.73
                
                Grant
                    of Security Interest in IP, dated as of July 31, 2007, between
                    Incentra
                    Solutions, Inc., Managed Storage International, Inc. and Calliope
                    Capital
                    Corporation (incorporated by reference to Exhibit 10.19 filed
                    with our
                    Current Report of Form 8-K on August 23, 2007.)10.74
                
                Form
                    of Warrant issued to PageMill Partners, LLC (incorporated by
                    reference to
                    Exhibit 10.20 filed with our Current Report of Form 8-K on August
                    23,
                    2007.)10.75
                
                Registration
                    Rights Agreement, dated as of August 20, 2007, between Incentra
                    Solutions,
                    Inc. and PageMill Partners, LLC (incorporated by reference to
                    Exhibit
                    10.21 filed with our Current Report of Form 8-K on August 23,
                    2007.)10.76
                
                Sales
                    Strategies, Inc. Stock Purchase Agreement, dated as of August
                    31, 2007, by
                    and between Incentra Solutions, Inc. and Thomas G. Kunigonis,
                    Jr., as the
                    sole shareholder of Sales Strategies, Inc. (incorporated by reference
                    to
                    Exhibit 10.1 filed with our Current Report of Form 8-K on September
                    7,
                    2007.)10.77
                
                First
                    Amendment to Stock Purchase Agreement, dated as of August 31,
                    2007, by and
                    among Incentra Solutions, Inc. and Thomas G. Kunigonis, Jr.,
                    as the sole
                    shareholder of Sales Strategies, Inc. (incorporated by reference
                    to
                    Exhibit 10.2 filed with our Current Report of Form 8-K on September
                    7,
                    2007.)10.78
                
                Second
                    Amendment to Stock Purchase Agreement, dated as of September
                    5, 2007, by
                    and among Incentra Solutions, Inc. and Thomas G. Kunigonis, Jr.,
                    as the
                    sole shareholder of Sales Strategies, Inc. (incorporated by reference
                    to
                    Exhibit 10.3 filed with our Current Report of Form 8-K on September
                    7,
                    2007.)10.79
                
                Third
                    Amendment to Stock Purchase Agreement, dated as of September
                    5, 2007, by
                    and among Incentra Solutions, Inc. and Thomas G. Kunigonis, Jr.,
                    as the
                    sole shareholder of Sales Strategies, Inc. (incorporated by reference
                    to
                    Exhibit 10.4 filed with our Current Report of Form 8-K on September
                    7,
                    2007.)10.80
                
                Unsecured
                    Promissory Note, dated as of August 31, 2007, by and among Incentra
                    Solutions, Inc. and Thomas G. Kunigonis, Jr., as the sole shareholder
                    of
                    Sales Strategies, Inc. (incorporated by reference to Exhibit
                    10.5 filed
                    with our Current Report of Form 8-K on September 7,
                    2007.)10.81
                
                Registration
                    Rights Agreement, dated as of August 31, 2007, between Incentra
                    Solutions,
                    Inc., and Thomas G. Kunigonis, Jr., as the sole shareholder of
                    Sales
                    Strategies, Inc. (incorporated by reference to Exhibit 10.6 filed
                    with our
                    Current Report of Form 8-K on September 7, 2007.)10.82
                
                Escrow
                    Agreement, dated as of August 31, 2007, by and among Incentra
                    Solutions,
                    Inc., Thomas G. Kunigonis, Jr., as the sole shareholder of Sales
                    Strategies, Inc., and JPMorgan Chase Bank, N.A. as escrow agent
                    (incorporated by reference to Exhibit 10.7 filed with our Current
                    Report
                    of Form 8-K on September 7, 2007.)10.83
                
                Employment
                    Agreement, dated as of August 31, 2007, by and between Sales
                    Strategies,
                    Inc. and Thomas G. Kunigonis, Jr., as the sole shareholder of
                    Sales
                    Strategies, Inc. (incorporated by reference to Exhibit 10.8 filed
                    with our
                    Current Report of Form 8-K on September 7, 2007.)


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.





49





**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.




Incentra
              Solutions, Inc.Dated:
              March 31, 2008
            By:
            /s/ Thomas
              P.
              Sweeney IIIThomas
              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 DirectorThomas
                P. Sweeney III
              March
                31, 2008
            
            
            (principal
              executive officer) /s/ Anthony
              DiPaolo
            
            
            Chief
              Financial OfficerAnthony
                DiPaolo
              March
                31, 2008
            
            
            (principal
                financial and accounting officer)


/s/ James
              Wolfinger
            
            
            DirectorJames
                Wolfinger
              March
                31, 2008 /s/ Carmen
              J. Scarpa
            
            
            DirectorCarmen
                J. Scarpa
              March
                31, 2008 /s/ Thomas
              G. Hudson
            
            
            DirectorThomas
                G. Hudson
              March
                31, 2008 /s/ David
              E. Weiss
            
            
            DirectorDavid
                E. Weiss
              March
                31, 2008 /s/ Robert
              S. Kocol
            
            
            DirectorRobert
                S. Kocol
                March
                  31, 2008




50




**INCENTRA
                  SOLUTIONS, INC. AND SUBSIDIARIES**Index
                  to Consolidated Financial Statements and Financial Statement
                  ScheduleYears
                  Ended December 31, 2007, 2006 and 2005Table
                  of Contents
  **Page****Consolidated
                  Financial Statements**Report
                  of Independent Registered Public Accounting Firm
              
              F-1Consolidated
                  Balance Sheets as of December 31, 2007 and 2006
              
              F-2Consolidated
                  Statements of Operations for the years endedDecember
                  31, 2007, 2006 and 2005
              
              F-3Consolidated
                  Statements of Shareholders' Deficit and ComprehensiveLoss
                  for the years ended December 31, 2007, 2006 and 2005
              
              F-4Consolidated
                  Statements of Cash Flows for the years endedDecember
                  31, 2007, 2006 and 2005
              
              F-5Notes
                  to Consolidated Financial Statements
              
              F-7**Financial
                  Statement Schedule**Schedule
                  II - Valuation and Qualifying Accounts and Reserves for the years
                  endedDecember
                  31, 2007, 2006 and 2005
              
              
              S-1
  51








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors


Incentra
      Solutions, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Incentra Solutions,
      Inc.
      and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the
      related consolidated statements of operations, shareholders' deficit
      and comprehensive loss, cash flows and financial statement schedule
      for each of the years in the three-year period ended December 31, 2007. These
      consolidated financial statements and financial statement schedule are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these consolidated financial statements and financial statement
      schedule 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
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall consolidated 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, 2007 and 2006, and the results of their
      operations and their cash flows for each of the years in the three-year period
      ended December 31, 2007, in conformity with accounting principles generally
      accepted in the United States of America. Also in our opinion, the related
      financial statement schedule, when considered in relation to the basic
      consolidated financial statements taken as a whole, presents fairly, in all
      material respects, the information set forth therein.





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.





/s/
                GHP Horwath, P.C.Denver,
                ColoradoMarch
                28, 2008




F-1




**INCENTRA
        SOLUTIONS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
        BALANCE SHEETS**


**December
                  31,****2007**
              
              
              **2006****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              3,274,600
              
              $
              976,673Accounts
                      receivable, net of allowance for doubtful accounts of $380,913
                      and
                      $702,700 at December 31, 2007 and 2006, respectively
              
              
              37,137,811
              
              
              16,132,341Current
                  portion of deferred costs
              
              
              2,435,075
              
              
              1,128,061Other
                  current assets
              
              
              2,062,916
              
              
              4,056,661Total
                  current assets
              
              
              44,910,402
              
              
              22,293,736Property
                  and equipment, net
              
              
              7,201,027
              
              
              3,064,164Capitalized
                  software development costs, net
              
              
              1,143,831
              
              
              914,786Intangible
                  assets, net
              
              
              2,952,523
              
              
              2,301,267Goodwill
              
              
              30,452,152
              
              
              16,936,715Deferred
                  costs, net of current portion
              
              
              752,978
              
              
              182,315Other
                  assets
              
              
              762,732
              
              
              125,345**TOTAL
                  ASSETS**
              
              **$**
              **88,175,645**
              
              **$**
              **45,818,328****LIABILITIES
                  AND SHAREHOLDERS' DEFICIT**Current
                  liabilities:Current
                  portion of notes payable and other long-term obligations
              
              $
              16,879,609
              
              $
              7,816,156Current
                  portion of capital lease obligations
              
              
              765,625
              
              
              682,012Accounts
                  payable
              
              
              28,962,489
              
              
              14,190,079Accrued
                  expenses and other
              
              
              7,865,142
              
              
              5,562,154Current
                  portion of deferred revenue
              
              
              3,886,370
              
              
              1,974,090Total
                  current liabilities
              
              
              58,359,235
              
              
              30,224,491Notes
                  payable and other obligations, net of current portion
              
              
              9,237,024
              
              
              801,021Capital
                  lease obligations, net of current portion
              
              
              3,701,252
              
              
              18,062Deferred
                  revenue, net of current portion
              
              
              942,491
              
              
              161,999**TOTAL
                  LIABILITIES**
              
              
              **72,240,002**
              
              
              **31,205,573**Commitments
                  and contingenciesSeries
                      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
              
              
              29,853,466
              
              
              27,235,899Shareholders'
                  deficit:Preferred
                  stock, nonvoting, $.001 par value, 2,500,000 shares authorized,
                  none
                  issued
              
              
              -
              
              
              -Common
                      stock, $.001 par value, 200,000,000 shares authorized, 21,317,863
                      and
                      13,320,576 shares issued and outstanding at December 31, 2007
                      and 2006,
                      respectively
              
              
              21,318
              
              
              13,321Additional
                  paid-in capital
              
              
              130,830,866
              
              
              122,841,018Accumulated
                  deficit
              
              
              (144,770,007
              )
              
              (135,477,483
              )**TOTAL
                  SHAREHOLDERS' DEFICIT**
              
              
              **(13,917,823**
              **)**
              
              **(12,623,144**
              **)****TOTAL
                  LIABILITIES AND SHAREHOLDERS' DEFICIT**
              
              **$**
              **88,175,645**
              
              **$**
              **45,818,328**




See
        accompanying notes to consolidated financial statements.




F-2




**INCENTRA
        SOLUTIONS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
  **Years
                  Ended December 31,****2007**
              
              **2006**
              
              **2005**REVENUES:Products
              
              $
              122,332,650
              
              $
              53,084,909
              
              $
              27,440,335Services
              
              
              23,442,434
              
              
              13,547,245
              
              
              10,494,293**TOTAL
                  REVENUE**
              
              
              **145,775,084**
              
              
              **66,632,154**
              
              
              **37,934,628**Cost
                  of revenue;Products
              
              
              99,619,953
              
              
              42,796,950
              
              
              22,802,707Services
              
              
              15,954,666
              
              
              9,577,487
              
              
              6,980,887Total
                  cost of revenue
              
              
              115,574,619
              
              
              52,374,437
              
              
              29,783,594**GROSS
                  MARGIN**
              
              
              **30,200,465**
              
              
              **14,257,717**
              
              
              **8,151,034**Selling,
                  general and administrative expense
              
              
              32,893,970
              
              
              24,963,098
              
              
              13,985,133Stock-based
                  compensation expense
              
              
              1,360,551
              
              
              1,587,653
              
              
              349,711Depreciation
                  and amortization
              
              
              1,364,474
              
              
              767,342
              
              
              1,250,154Impairment
                  of goodwill
              
              
              -
              
              
              -
              
              
              4,151,45035,618,995
              
              
              27,318,093
              
              
              19,736,448**OPERATING
                  LOSS FROM CONTINUING OPERATIONS**
              
              
              **(5,418,530**
              **)**
              
              **(13,060,376**
              **)**
              
              **(11,585,414**
              **)**Other
                  income (expense):Interest
                  income
              
              
              42,816
              
              
              45,401
              
              
              3,598Interest
                  expense
              
              
              (3,700,370
              )
              
              (2,930,378
              )
              
              (2,424,218
              )Loss
                  on early extinguishment of debt
              
              
              (159,679
              )
              
              (2,956,606
              )
              
              -Other
                  (expense) income
              
              
              (26,546
              )
              
              42,426
              
              
              416,978Foreign
                  currency transaction gain (loss)
              
              
              63,194
              
              
              21,897
              
              
              (59,755
              )(3,780,585
              )
              
              (5,777,260
              )
              
              (2,063,397
              )**LOSS
                  FROM CONTINUING OPERATIONS**
              
              
              **(9,199,115**
              **)**
              
              **(18,837,636**
              **)**
              
              **(13,648,811**
              **)****(LOSS)
                  INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES**
              
              
              (93,409
              )
              
              628,472
              
              
              (576,746
              )**GAIN
                  ON SALE OF DISCONTINUED OPERATIONS, NET OF INCOME
                  TAXES**
              
              
              -
              
              
              15,376,014
              
              
              -**(LOSS)
                  INCOME FROM DISCONTINUED OPERATIONS**
              
              
              (93,409
              )
              
              16,004,486
              
              
              (576,746
              )**NET
                  LOSS**
              
              
              **(9,292,524**
              **)**
              
              **(2,833,150**
              **)**
              
              **(14,225,557**
              **)**Accretion
                  of convertible redeemable preferred stock to redemption
                  amount
              
              
              (2,617,566
              )
              
              (2,617,566
              )
              
              (2,617,566
              )**NET
                  LOSS APPLICABLE TO COMMON SHAREHOLDERS**
              
              **$**
              **(11,910,090**
              **)**
              **$**
              **(5,450,716**
              **)**
              **$**
              **(16,843,123**
              **)**Weighted
                  average number of common shares outstanding — basic and
                  diluted
              
              
              19,045,385
              
              
              13,643,447
              
              
              12,541,642Basic
                  and diluted net loss per share applicable to commonshareholders:Loss
                  from continuing operations
              
              $
              (0.63
              )
              $
              (1.57
              )
              $
              (1.29
              )Income
                  (loss) from discontinued operations
              
              
              -
              
              
              1.17
              
              
              (0.05
              )Net
                  loss per share—basic and diluted
              
              $
              (0.63
              )
              $
              (0.40
              )
              $
              (1.34
              )
  See
        accompanying notes to consolidated financial statements


F-3






**INCENTRA
                  SOLUTIONS, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE
                  LOSS****Years
                  ended December 31, 2007, 2006 and
                  2005**
 **Accumulated****Additional**
              
              **other****Common
                  stock**
              
              **paid-in**
              
              **comprehensive**
              
              **Accumulated****Shares**
              
              **Amount**
              
              ******capital**
              
              **income
                  (loss)**
              
              **deficit**
              
              **Total****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 Star (Note 3(F))
              
              
              1,261,756
              
              
              1,262
              
              
              3,135,102
              
              
              -
              
              
              -
              
              
              3,136,364Common
                  stock issued in acquisition of PWI (Note 3(G))
              
              
              841,934
              
              
              842
              
              
              1,683,026
              
              
              -
              
              
              -
              
              
              1,683,868Accretion
                  of convertible redeemable preferred stock to redemption
                  amount
              
              
              -
              
              
              -
              
              
              (2,617,566
              )
              
              -
              
              
              -
              
              
              (2,617,566
              )Exercise
                  of stock options
              
              
              453
              
              
              -
              
              
              134
              
              
              -
              
              
              -
              
              
              134Amortization
                  of stock-based compensation expense
              
              
              -
              
              
              -
              
              
              520,641
              
              
              -
              
              
              -
              
              
              520,641Reclassification
                  of derivative warrant to equity
              
              
              -
              
              
              -
              
              
              1,910,254
              
              
              -
              
              
              -
              
              
              1,910,254Warrant
                  issued to Laurus related to line of credit
              
              
              -
              
              
              -
              
              
              538,240
              
              
              -
              
              
              -
              
              
              538,240Conversion
                      of notes payable and accrued interest in exchange for common
                      stock
              
              
              716,669
              
              
              717
              
              
              994,114
              
              
              -
              
              
              -
              
              
              994,831Acquisition
                  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 NST (Note 3(D))
              
              
              1,034,483
              
              
              1,034
              
              
              1,303,449
              
              
              -
              
              
              -
              
              
              1,304,483Amortization
                  of stock-based compensation expense
              
              
              -
              
              
              -
              
              
              2,052,780
              
              
              -
              
              
              -
              
              
              2,052,780Accretion
                  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
              
              
              -
              
              
              -
              
              
              1,707,052Other
                  warrants issued
              
              
              -
              
              
              -
              
              
              96,421
              
              
              -
              
              
              -
              
              
              96,421Common
                  stock issued to investment advisor
              
              
              60,000
              
              
              60
              
              
              80,340
              
              
              -
              
              
              -
              
              
              80,400Common
                    stock issued in lieu of cash related to prepayment penalties
                    on
                    convertible notes
              
              
              34,863
              
              
              35
              
              
              48,765
              
              
              -
              
              
              -
              
              
              48,800Return
                    and retirement of common stock previously issued in acquisition
                    of Star
                    (Note 9(D))
              
              
              (1,135,580
              )
              
              (1,135
              )
              
              1,135
              
              
              -
              
              
              -
              
              
              -Warrants
                  issued related to convertible notes (Note 9 (C))
              
              
              -
              
              
              -
              
              
              651,474
              
              
              -
              
              
              -
              
              
              651,474Components
                  of comprehensive loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,833,150
              )
              
              (2,833,150
              )Foreign
                  currency translation reclassification adjustment for sale of
                  assets
              
              
              -
              
              
              -
              
              
              -
              
              
              103,235
              
              
              -
              
              
              103,235Total
                  comprehensive loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,729,915
              )**Balances
                  at December 31, 2006**
              
              
              **13,320,576**
              
              
              **13,321**
              
              
              **122,841,018**
              
              
              **-**
              
              
              **(135,477,483**
              **)**
              
              **(12,623,144**
              **)**Amortization
                  of stock-based compensation expense
              
              
              **-**
              
              
              **-**
              
              
              1,440,019
              
              
              -
              
              
              -
              
              
              1,440,019Accretion
                  of convertible redeemable preferred stock to redemption
                  amount
              
              
              -
              
              
              -
              
              
              (2,617,566
              )
              
              -
              
              
              -
              
              
              (2,617,566
              )Return
                      and retirement of common stock previously issued in acquisition
                      of
                      PWI
              
              
              (275,000
              )
              
              (275
              )
              
              (274,725
              )
              
              -
              
              
              -
              
              
              (275,000
              )Warrant
                  issued in connection with line of credit (Note 9(A))
              
              
              -
              
              
              -
              
              
              342,755
              
              
              -
              
              
              -
              
              
              342,755Proceeds
                  from exercise of employee stock options
              
              
              41,566
              
              
              41
              
              
              13,258
              
              
              -
              
              
              -
              
              
              13,299Issuance
                  of common stock for Helio acquisition (Note 3(A))
              
              
              6,000,000
              
              
              6,000
              
              
              4,554,000
              
              
              -
              
              
              -
              
              
              4,560,000Issuance
                  of common stock for SSI acquisition (Note 3(B))
              
              
              1,369,863
              
              
              1,370
              
              
              1,020,548
              
              
              -
              
              
              -
              
              
              1,021,918Cash-less
                  exercise of warrants
              
              
              860,858
              
              
              861
              
              
              (861
              )
              
              -
              
              
              -
              
              
              -Warrant
                  issued in connection with debt financing (Note 9(A))
              
              
              -
              
              
              -
              
              
              2,850,000
              
              
              -
              
              
              -
              
              
              2,850,000Warrant
                    issued in connection with Helio acquisition for consulting services
                    (Note
                    3(A))
              
              
              -
              
              
              -
              
              
              333,420
              
              
              -
              
              
              -
              
              
              333,420Warrant
                  issued in connection with line of credit (Note 9(A))
              
              
              
              
              
              
              
              
              329,000
              
              
              -
              
              
              -
              
              
              329,000Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (9,292,524
              )
              
              (9,292,524
              )**Balances
                  at December 31, 2007**
              
              
              **21,317,863**
              
              **$**
              **21,318**
              
              **$**
              **130,830,866**
              
              **$**
              **-**
              
              **$**
              **(144,770,007**
              **)**
              **$**
              **(13,917,823**
              **)**




See
        accompanying notes to consolidated financial statements.


F-4




**INCENTRA
                  SOLUTIONS, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**
 **Years
                  ended December 31,****2007**
              
              
              **2006**
              
              
              **2005**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (9,292,524
              )
              $
              (2,833,150
              )
              $
              (14,225,557
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Loss
                  (income) from discontinued operations, net of income taxes
              
              
              93,409
              
              
              (16,004,486
              )
              
              576,746Depreciation
              
              
              1,679,064
              
              
              1,532,665
              
              
              1,417,235Amortization
                  of intangible assets and software development costs
              
              
              1,386,650
              
              
              955,477
              
              
              1,561,389Amortization
                  of non-cash loan discount
              
              
              -
              
              
              -
              
              
              12,735Stock-based
                  compensation expense
              
              
              1,360,551
              
              
              1,587,653
              
              
              349,711Amortization
                  of debt issue costs
              
              
              1,621,100
              
              
              1,519,700
              
              
              1,610,030Non-cash
                  loss on early extinguishment of debt
              
              
              135,851
              
              
              1,622,344
              
              
              -Bad
                  debt expense
              
              
              56,314
              
              
              467,147
              
              
              58,333Loss
                  on disposal of assets
              
              
              -
              
              
              -
              
              
              45,774Impairment
                  of goodwill
              
              
              -
              
              
              -
              
              
              4,151,450Gain
                  on revaluation of derivative warrant liability
              
              
              -
              
              
              -
              
              
              (390,280
              )Changes
                  in operating assets and liabilities, net of business
                  acquisitions:Accounts
                  receivable
              
              
              (8,517,119
              )
              
              (4,547,390
              )
              
              3,638,615Other
                  current assets
              
              
              (215,012
              )
              
              (1,288,971
              )
              
              (154,675
              )Other
                  assets
              
              
              (127,448
              )
              
              (83,026
              )
              
              55,046Accounts
                  payable
              
              
              2,541,978
              
              
              641,040
              
              
              (1,596,084
              )Accrued
                  liabilities
              
              
              101,583
              
              
              370,364
              
              
              267,459Deferred
                  revenue
              
              
              2,884,878
              
              
              1,320,284
              
              
              98,090Net
                  cash used in continuing operations
              
              
              (6,290,725
              )
              
              (14,740,349
              )
              
              (2,523,983
              )Net
                  cash (used in) provided by discontinued operations
              
              
              (491,231
              )
              
              2,990,558
              
              
              1,051,120Net
                  cash used in operating activities
              
              
              (6,781,956
              )
              
              (11,749,791
              )
              
              (1,472,863
              )Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (2,037,036
              )
              
              (1,904,591
              )
              
              (778,118
              )Capitalized
                  software development costs
              
              
              (842,053
              )
              
              (588,629
              )
              
              (611,546
              )Proceeds
                  from sale of property and equipment
              
              
              -
              
              
              -
              
              
              2,808Cash
                  acquired in Star acquisition (Note 3(F))
              
              
              -
              
              
              -
              
              
              1,597,498Cash
                  acquired in PWI acquisition (Note 3(G))
              
              
              -
              
              
              -
              
              
              74,297Earnout
                  payment related to PWI acquisition (Note 3(G))
              
              
              -
              
              
              -
              
              
              (100,000
              )Cash
                  paid in NST acquisition (Note 3(D))
              
              
              -
              
              
              (5,256,173
              )
              
              -Cash
                  paid in Tactix acquisition (Note 3(E))
              
              
              -
              
              
              (3,001,103
              )
              
              -Cash
                  paid in Helio acquisition (Note 3(A))
              
              
              (4,808,913
              )
              
              -
              
              
              -Cash
                  paid in SSI acquisition (Note 3(B))
              
              
              (3,790,512
              )
              
              -
              
              
              -Other
              
              
              (102,421
              )
              
              12,044
              
              
              (2,966
              )Net
                  cash (used in) provided by continuing operations
              
              
              (11,580,935
              )
              
              (10,738,452
              )
              
              181,973Net
                  cash provided by (used in) discontinued operations
              
              
              2,500,000
              
              
              26,037,941
              
              
              (1,277,854
              )Net
                  cash (used in) provided by investing activities
              
              
              (9,080,935
              )
              
              15,299,489
              
              
              (1,095,881
              )Cash
                  flows from financing activities:Proceeds
                  on line of credit, net
              
              
              9,111,934
              
              
              290,492
              
              
              1,331,851Proceeds
                  from acquisition term notes
              
              
              12,000,000
              
              
              3,250,000
              
              
              -Proceeds
                  from convertible notes
              
              
              -
              
              
              2,410,000
              
              
              -(Repayments)
                  proceeds on lease line of credit, net
              
              
              -
              
              
              (144,975
              )
              
              195,036Proceeds
                  from exercise of employee stock options
              
              
              13,299
              
              
              -
              
              
              -Payment
                  of debt issue costs
              
              
              (685,000
              )
              
              -
              
              
              -Payments
                  on capital leases, notes payable and other long-term
                  liabilities
              
              
              (2,279,415
              )
              
              (9,278,893
              )
              
              (849,856
              )Other
              
              
              -
              
              
              -
              
              
              136Net
                  cash provided by (used in) continuing operations
              
              
              18,160,818
              
              
              (3,473,376
              )
              
              677,167Net
                  cash used in discontinued operations
              
              
              -
              
              
              -
              
              
              -Net
                  cash provided by (used in) financing activities
              
              
              18,160,818
              
              
              (3,473,376
              )
              
              677,167Effect
                  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 from continuing
                  operations
              
              
              289,158
              
              
              (28,952,177
              )
              
              (1,664,843
              )Net
                  increase (decrease) in cash and cash equivalents from discontinued
                  operations
              
              
              2,008,769
              
              
              29,131,734
              
              
              (294,973
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              2,297,927
              
              
              179,557
              
              
              (1,959,816
              )Cash
                  and cash equivalents at beginning of period:Continuing
                  operations
              
              
              976,673
              
              
              797,116
              
              
              2,461,959Discontinued
                  operations
              
              
              -
              
              
              311,526
              
              
              606,499Total
              
              
              976,673
              
              
              1,108,642
              
              
              3,068,458Cash
                  and cash equivalents at end of period:Continuing
                  operations
              
              
              3,274,600
              
              
              976,673
              
              
              797,116Discontinued
                  operations
              
              
              -
              
              
              -
              
              
              311,526Total
              
              $
              3,274,600
              
              $
              976,673
              
              $
              1,108,642


(continued)
  F-5




**INCENTRA
      SOLUTIONS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
        STATEMENTS OF CASH FLOWS (Continued)**


**December
                  31,****2007**
              
              **2006**
              
              **2005**Supplemental
                  disclosures of cash flow information:Cash
                  paid during the year for interest
              
              $
              2,036,454
              
              $
              1,410,678
              
              $
              801,454Supplemental
                  disclosures of non-cash investing and financing
                  activities:Net
                  liabilities assumed in Star acquisition, excluding cash (Note
                  3(F))
              
              
              -
              
              
              -
              
              
              620,176Net
                  assets acquired in PWI acquisition, excluding cash (Note
                  3(G))
              
              
              -
              
              
              -
              
              
              269,306Reclassification
                  of derivative liability to equity
              
              
              -
              
              
              -
              
              
              1,910,254Net
                  liabilities assumed in NST acquisition, excluding cash (Note 3(D))
              
              
              -
              
              
              992,653
              
              
              -Net
                  liabilities assumed in Tactix acquisition, excluding cash (Note
                  3(E))
              
              
              -
              
              
              1,046,964
              
              
              -Conversion
                  of notes payable, accrued interest and prepayment penalties in
                  exchange
                  for common stock
              
              
              -
              
              
              48,800
              
              
              994,831Net
                  assets acquired in Helio acquisition, excluding cash (Note
                  3(A))
              
              
              1,265,594
              
              
              -
              
              
              -Net
                  liabilities assumed in SSI acquisition, excluding cash (Note
                  3(B))
              
              
              446,537
              
              
              -
              
              
              -Debt
                  issued in NST acquisition (Note 3(D))
              
              
              -
              
              
              1,500,000
              
              
              -Debt
                  issued in Helio acquisition (Note 3(A))
              
              
              770,000
              
              
              -
              
              
              -Debt
                  issued in SSI acquisition (Note 3(B))
              
              
              250,000
              
              
              -
              
              
              -Purchases
                  of property and equipment included in accounts payable
              
              
              305,726
              
              
              462,681
              
              
              93,766See
                  accompanying notes to consolidated financial
                  statements.




F-6


Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements
 December
        31, 2007, 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." In 2005, 2006 and 2007 we completed six acquisitions: on February
      18, 2005, we acquired STAR Solutions of Delaware, Inc., a privately-held
      Delaware corporation (“Star”); on March 30, 2005, we acquired PWI Technologies,
      Inc., a privately-held Washington corporation (“PWI”); on April 13, 2006, we
      acquired Network System Technologies, Inc., a privately-held Illinois
      corporation (“NST”); on September 5, 2006, we acquired Tactix, Inc., a
      privately-held Oregon corporation (“Tactix”); on August 17, 2007, we acquired
      Helio Solutions, Inc., a privately-held California corporation (“Helio”) and on
      September 5, 2007, we acquired Sales Strategies, Inc. (d/b/a SSI Hubcity),
      a
      privately held New Jersey corporation (“SSI”). We have included the results of
      operations for the six acquisitions in our consolidated financial statements
      from their acquisition dates through December 31, 2007.





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
      are a
      leading provider of complete Information Technology (“IT”) services and
      solutions to enterprise's and managed service providers in North America and
      Europe. Our complete solutions include hardware and software products,
      maintenance contracts, professional services, recurring managed services and
      capital financing solutions. We market our products and services to service
      providers and enterprise clients under the trade name Incentra Solutions.




**Basis
      of Presentation**





The
      consolidated financial statements include Incentra Solutions, Inc. and its
      wholly-owned subsidiaries. All significant intercompany accounts and
      transactions have been eliminated in consolidation.





**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 $13.4 million and a shareholders' deficit of $13.9 million
      at
      December 31, 2007. 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
      incurred a loss from continuing operations of $9.2 million for the year ended
      December 31, 2007, although the loss included certain non-cash expenses of
      approximately $6.2 million. Our 2008 operating plan, and the execution thereof,
      is focused on increasing revenue, controlling costs, and increasing cash flow.
      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, 2008,
      barring a redemption request from our Series A preferred stock
      shareholders (Refer to Note 10).


At
        any
        time after August 18, 2008, holders of at least 80% of the outstanding shares
        of
        Series A Preferred stock may elect to redeem all, but not less than all,
        of the
        outstanding shares in the amount of $31,500,000. The holders are not required
        to
        take any action, and redemption request requires approval by 80% of the holders.
        Presently there are four holders of the preferred shares, and in order to
        attain
        an 80% consensus, the three largest holders would need to agree.
 
 Should
        there be a request for redemption, and should we not have the funds to meet
        the
        redemption, management believes the most immediate negative impact to our
        business arises from the terms of our debt agreements with Laurus (Refer
        to Note
        9). The debt agreements include certain events of default which would be
        triggered in the event we are unable to satisfy a redemption request. Should
        an
        event of default be triggered with Laurus, Laurus is entitled to default
        rate
        interest of an additional 1.5% per month. In addition, Laurus would have
        the
        right to cease funding under our revolving credit facility and to assert
        an
        accelerated request for repayment, which would equal 125% of the total principal
        outstanding on both the 2006 Facility and the 2007 Term Note (Refer to Note
        9(A)), plus any accrued and unpaid interest. We currently do not have adequate
        funds available to satisfy a request for redemption, should one
        occur.
 
 Due
        to
        Laurus’ senior position, our current liquidity position and considering our
        current business state and prospects for the future, management believes
        it is
        in the best interest of the holders to resolve the maturing redemption in
        a
        manner that neither creates an event of default with Laurus nor disrupts
        our
        business and allows us to continue to operate consistently with our 2008
        business plan.
 
 Management
        is actively discussing a variety of options with the holders in regards
        to their redemption rights. Management’s strategy includes, but is not
        limited to, redeeming all or a portion of the Series A preferred shares by
        inducing the holders to convert to common shares, raising additional cash
        through issuance of common shares and/or additional debt to third-parties,
        restructuring the redemption requirement, or permitting the holders to sell
        their Series A preferred shares to third-parties. There can be no assurance
        that
        management will be successful in resolving the redemption rights of the holders,
        nor can there be any assurance that there will be no disruption to our business,
        either during the period in which management is pursuing a strategy
        to resolve the redemption rights (due to, among other things,
        distraction of management from day-to-day execution of the 2008 business
        plan),
        or subsequently.




F-7


Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements (continued)
 December
        31, 2007, 2006 and 2005





**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’s presentation.





**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.




F-8


Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements (continued)
 December
        31, 2007, 2006 and 2005




**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 Star and PWI in 2005, we recorded goodwill of $6.2 million
        and
        $3.8 million, respectively. With the acquisitions of NST and Tactix in 2006,
        we
        recorded goodwill of $7.4 million and $3.5 million, respectively. With the
        acquisitions of Helio and SSI in 2007, we recorded goodwill of $8.5 million
        and
        $4.9 million, respectively. The fair value of our reporting units used in
        determination of the goodwill impairment is evaluated using a discounted
        cash
        flow model considering future revenues, operating costs, a risk adjusted
        discount rate, historical performance and other pertinent factors. These
        estimates are judgmental in nature and often involve the use of significant
        estimates and assumptions. These estimates and assumptions could have a
        significant impact on whether or not an impairment charge is recognized and
        also
        the magnitude of any such charge. As more fully discussed in Notes 3(F)
        operating profits and cash flows were lower than expected in the fourth quarter
        of 2005 for Star. 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 Star acquisition was impaired and
        accordingly recorded an impairment loss of $4.2 million. Our goodwill impairment
        tests performed during the fourth quarters of 2007 and 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.




In
      July
      2006, the Financial Accounting Standards Board (“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.
      We adopted FIN 48 on January 1, 2007. We did not have any unrecognized tax
      benefits and there was no effect on our financial condition or results of
      operations as a result of implementing FIN 48.




We
      file
      income tax returns in the U.S. federal and various state and foreign
      jurisdictions. We are subject to U.S. federal and state tax examinations from
      1996 through 2006. We do not believe there will be any material changes in
      our
      unrecognized tax positions over the next twelve months. We recognize
      interest and penalties accrued on any unrecognized tax benefits as a component
      of income tax expense. As of the date of adoption of FIN 48, we did not have
      any
      accrued interest or penalties associated with any unrecognized tax benefits,
      nor
      was any interest expense recognized during the year ended December 31,
      2007.





**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.




Revenue
        is recognized when all of the following criteria are met in accordance with
        principles of sales recognition in Staff Accounting Bulletin No. 104,
*Revenue Recognition*, issued by the staff as a revision to Staff
        Accounting Bulletin No. 101, *Revenue Recognition*: (i) persuasive
        evidence of an agreement exists, (ii) delivery has occurred or services have
        been rendered, (iii) the sales price is fixed or determinable and (iv)
        collectibility is reasonably assured.


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.
      The majority of our sales relate to products. 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; (iii) have the risks and
      rewards of ownership, including the risk of loss for collection, delivery or
      returns; and (iv) have latitude in establishing price with the
      customer. For these transactions, we recognize revenues based on the gross
      amounts due from customers. If most of these criteria are not present, these
      transactions are recorded on a net basis.





F-9


Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements (continued)
 December
        31, 2007, 2006 and 2005
  Revenues
        from product sales are recognized when shipped.
        Revenues from the resale of third-party maintenance agreements are recognized
        at
        the date of sale, as we have no continuing obligation or involvement with
        the
        associated services. Consulting revenues are recognized when the services
        are
        performed.


Fees
      for
      First Call maintenance agreements are recognized using the straight-line method
      over the terms of the agreements. First Call maintenance is generally billed
      in
      advance, resulting in deferred revenue.




Revenues
      from storage services are recognized at the time the services are provided
      and
      are billed on a monthly basis. Fees received for initial implementation services
      are deferred and recognized over the term of the agreement. Deferred revenue
      is
      recorded for amounts billed to customers for whom we have not yet performed
      the
      related services.




**Cost
      of Revenue**




Cost
      of
      revenue consists primarily of direct labor, cost of hardware and software
      products, depreciation ($1.1 million in 2007, $1.2 million in 2006 and $1.1
      million 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 $12,335, $45,723 and $60,586 for the years ended
      December 31, 2007, 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, 2007, 2006 and 2005, capitalized software development
      costs, which related primarily to enhancements to our GridWorks software
      solution were $0.8 million, $0.6 million and $0.6 million, respectively. For
      the
      years ended December 31, 2007, 2006 and 2005, $0.6 million, $0.5 million and
      $0.4 million, respectively, were charged to expense. As of December 31, 2007
      and
      2006, the unamortized portion of software development costs was $1.1 million
      and
      $0.9 million, respectively.





**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, which are usually 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.
      We
      currently transact business in Pounds Sterling and Euros. 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, 2007 and 2006, foreign currency transactions resulted
      in gains of $63,194 and $21,897, respectively, and a loss of $59,755 for the
      year ended December 31, 2005.




F-10


Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements (continued)
 December
        31, 2007, 2006 and 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 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 (14.7 million, 13.7 million and 13.2 million as of December 31, 2007,
      2006
      and 2005, respectively) have been omitted from the computations of diluted
      loss
      per share for the years ended December 31, 2007, 2006 and 2005 because the
      effect would be antidilutive. However, in accordance with SFAS 128 *Earnings
      Per Share*, we do consider warrants exercisable at $0.01 to be outstanding
      for determining common stock equivalents used to calculate basic earnings
      per share. 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 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 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.




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 2007, 2006 and 2005 were
      calculated using the following estimated weighted average
      assumptions:





F-11




Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements (continued)
 December
        31, 2007, 2006 and 2005


**2007**
              
              **2006**
              
              **2005**Stock
                  options granted
              
              
              1,305,700
              
              
              1,567,111
              
              
              456,450Weighted-average
                  exercise price
              
              $
              0.91
              
              $
              1.25
              
              $
              1.62Weighted-average
                  grant date fair value
              
              $
              0.73
              
              $
              1.07
              
              $
              1.11Assumptions:Expected
                  volatility
              
              
              98
              %
              
              112
              %
              
              112
              %Expected
                  term (in years)
              
              
              6
                  Years
              
              
              6
                  Years
              
              
              3
                  YearsRisk-free
                  interest rate
              
              
              4.35
              %
              
              4.82
              %
              
              4.06
              %Dividend
                  yield
              
              
              -
              
              
              -
              
              
              -





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 93% of our options will actually vest. 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 from continuing operations 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 from continuing operations before accretion on
      preferred stock and net income per weighted average common share for years
      ended
      December 31, 2007 and 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:




**Year
                  Ended****December
                  31, 2005**Loss
                  from continuing operations before accretion on preferred stock,
                  as
                  reported
              
              $
              (13,649
              )Add
                  stock-based compensation expense included in reported net loss,
                  net of
                  tax
              
              
              350Deduct
                  total stock-based employee compensation expense determined under
                  the
                  fair-value based method for all awards, netof
                  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
              )





F-12


Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements (continued)
 December
        31, 2007, 2006 and 2005




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
      equivalents, accounts receivable, and accounts payable, approximate fair value
      due to the short term nature of these instruments. The carrying values of notes
      payable and other non-current obligations approximate fair values based upon
      market rates currently available us.





**Concentrations
      of Credit Risk**





We
      currently sell our products and services primarily throughout North America,
      with only a small portion (approximately 5%) generated in Europe. We require
      credit applications from all new customers and establish appropriate credit
      limits prior to accepting associated purchase orders. We periodically review
      customer credits (financial condition and/or payment history) and established
      credit limits. We 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
      collection experience, 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, 2007, aggregate revenues from customers located in
      Europe amounted to $7.7 million or 5% of revenue, while revenues from customers
      located in North America totaled $138.1 million or 95% of total revenue. For
      the
      year ended December 31, 2006, aggregate revenues from customers located in
      Europe 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 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
      years ended December 31, 2007 and 2006, no one customer accounted for more
      than
      10% of total revenue. For the year ended December 31, 2005, one customer
      accounted for 16% of total revenue. As of December 31, 2007 no one customer
      accounted for more then 10% of total accounts receivable. As of December 31,
      2006, one customer represented over 10% of total accounts receivable.




**North
                  America**
              
              **Europe***
              
              **Total**Year
                  Ended December 31, 2007Revenues
              
              $
              138,120
              
              $
              7,655
              
              $
              145,775Long-lived
                  Assets, net
              
              
              41,010
              
              
              740
              
              
              41,750Year
                  Ended December 31, 2006Revenues
              
              $
              63,462
              
              $
              3,170
              
              $
              66,632Long-lived
                  Assets, net
              
              
              22,356
              
              
              862
              
              
              23,218Year
                  Ended December 31, 2005Revenues
              
              $
              35,837
              
              $
              2,098
              
              $
              37,935Long-lived
                  Assets, net
              
              
              8,835
              
              
              477
              
              
              9,312
 *
        The
        geographic breakout by country is not practicable to obtain.




As
      of
      December 31, 2007 and 2006, one vendor that the Company purchases products
      for
      resale from, accounted for approximately 51% and 18%, respectively, of accounts
      payable. Management believes other vendors are available that could provide
      similar products to the Company for resale on comparable terms. A change in
      vendors, however, could cause a possible disruption of sales if it were to
      occur.




Our
      ability to purchase and sell products of our vendors
      is predicated on our compliance with vendor agreements currently in place.
      These
      agreements outline specific terms that, among other things, outline the
      technical competency requirements of our staff, geographic sales territories,
      and other certain restrictive conditions. Although we have instituted certain
      compliance procedures, no assurance can be given that there will not be any
      violation of specific terms of these agreements. If the company fails to comply
      with the terms of any of these agreements, our relationship with our vendor(s)
      could be restricted or even terminated and negatively impact our ability to
      sell
      certain products. The loss of our ability to purchase and sell certain products
      could have a material, negative affect on the company’s revenue and could
      adversely affect our financial condition. We are currently not aware of any
      agreements under which we are not compliant.




**Recently
      Issued Accounting Pronouncements**





In
      December 2007, the FASB issued Statement of Financial Accounting Standard No.
      141(R), “ *Business
      Combinations”* (“SFAS
      141(R)”) which will become effective for fiscal periods beginning after December
      15, 2008. SFAS No. 141(R) requires all business combinations completed
      after the effective date to be accounted for by applying the acquisition method
      (previously referred to as the purchase method). Companies applying this method
      will have to identify the acquirer, determine the acquisition date and purchase
      price and recognize at their acquisition date fair values of the identifiable
      assets acquired, liabilities assumed, and any non-controlling interests in
      the
      acquiree. In the case of a bargain purchase the acquirer is required to
      reevaluate the measurements of the recognized assets and liabilities at the
      acquisition date and recognize a gain on that date if an excess remains. We
      are
      currently assessing the impact that the adoption of this statement may have
      on
      our consolidated financial statements.




F-13




Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements (continued)
 December
        31, 2007, 2006 and 2005


In
      December 2007, the FASB issued SFAS No. 160, “ *Noncontrolling
      Interests in Consolidated Financial Statements, an Amendment of ARB
      51”* (“SFAS
      160”) which will become effective for fiscal periods beginning after
      December 15, 2008. This statement amends ARB 51 to establish accounting and
      reporting standards for the non-controlling interest in a subsidiary and for
      the
      deconsolidation of a subsidiary. The statement requires ownership interests
      in
      subsidiaries held by parties other than the parent be clearly identified,
      labeled, and presented in the consolidated statement of financial position
      within equity, but separate from the parent’s equity. The statement also
      requires consolidated net income to be reported at amounts that include the
      amounts attributable to both the parent and the non-controlling interest with
      disclosure on the face of the consolidated statement of income, of the amounts
      of consolidated net income attributable to the parent and to the non-controlling
      interest. In addition this statement establishes a single method of accounting
      for changes in a parent’s ownership interest in a subsidiary that do not result
      in deconsolidation and requires that a parent recognize a gain or loss in net
      income when a subsidiary is deconsolidated. We do not expect the adoption of
      this statement to have a material impact on our consolidated financial
      statements.





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 that the adoption of this statement may have on our consolidated
      financial statements.




**3.
      Acquisitions**




Since
      February 2005, we have completed six 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 relationships 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 Helio**





On
      August
      17, 2007 (the "Helio Closing Date"), we acquired all of the outstanding capital
      stock of Helio, a provider of IT and secure data center solutions to mid-tier
      enterprises and Fortune 1000 companies located in San Jose, California pursuant
      to a Stock Purchase Agreement, dated as of August 14, 2007 (the "Helio Stock
      Purchase Agreement"). The results of Helio are included in our consolidated
      financial statements beginning on August 17, 2007.




F-14





Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements (continued)
 December
        31, 2007, 2006 and 2005


The
      purchase price for Helio was approximately $11.4 million, which consisted of
      $5.0 million in cash (of which $750,000 was placed in escrow to secure certain
      indemnification obligations and any required working capital adjustments),
      the
      issuance of 6,000,000 shares of our common stock valued at $4,560,000 (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 three-year
      unsecured convertible promissory note in the amount of $770,000 (the "Helio
      Note") to one of the former Helio shareholders (Refer to Note 9(E)). We also
      paid investment banking fees and other fees totaling approximately $742,500.
      In
      addition, we issued a five-year warrant to our investment banking firm to
      purchase 600,000 shares of our common stock at a price of $0.80 per share.
      The
      warrant was valued at $333,420 using the Black-Scholes model. The Helio Stock
      Purchase Agreement contains an earn-out provision pursuant to which certain
      of
      the former Helio shareholders may receive additional unregistered shares of
      our
      common stock and cash based upon Helio achieving certain levels of EBITDA (as
      defined in the Helio Stock Purchase Agreement). The earn-out provisions provide
      that the continuing shareholders can earn up to $15 million (we will recover
      1,000,000 of the common shares issued at the closing out of any earn-out shares
      earned before any additional shares are granted) in additional consideration
      over the next three years based on the achievement of EBITDA greater than a
      minimum threshold of $2.0 million, $2.5 million and $3.0 million for the first,
      second and third twelve-month periods after closing, respectively. The amount
      is
      payable dollar for dollar up to a maximum amount of $5.0 million per year.
      However, in the event EBITDA does not exceed the previously mentioned minimum
      thresholds in any of the next three years, there shall be no earn-out payable
      for that year. The earn-out is payable 50% in cash and 50% in stock of our
      company, the number of common shares to be calculated using a price per share
      of
      $1.00 in the first year, the greater of $1.00 or 90% of the fair market value
      of
      our company’s stock at the beginning of the second year for year two, and the
      greater of $2.00 or 90% of the fair market value of our company’s stock at the
      beginning of the third year for year three. There is also a “catchup” adjustment
      mechanism at the end of the three year period if in any of the three years
      the
      shareholders do not receive an earn-out payment as a result of not achieving
      the
      minimum EBITDA in that year.





Concurrently
      with the consummation of the acquisition, we granted certain registration rights
      to the former Helio shareholders 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 Helio Stock Purchase Agreement. Pursuant to the registration
      rights agreements, at any time after August 14, 2009, the former shareholders
      have a demand registration right and piggy-back rights to require us to register
      under the Securities Act such shares of our common stock issued in the
      acquisition.





We
      also
      entered into a lock-up and voting agreement with certain former shareholders
      as
      of the closing date. Under such agreement, the former shareholders agreed not
      to
      sell or transfer the shares they received pursuant to the Helio Stock Purchase
      Agreement until after August 2009, with certain exceptions, as defined in the
      Helio Stock Purchase Agreement. The former shareholders also agreed to vote
      at
      least half of the shares issued and outstanding to them for any resolutions
      proposed by the Board of Directors, approved by Thomas P. Sweeney III and
      submitted to a vote by our shareholders.





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





F-15


Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements (continued)
 December
        31, 2007, 2006 and 2005


Cash
                  and cash equivalents
              
              $
              937,272Accounts
                  receivable
              
              
              8,422,699Other
                  current assets
              
              
              2,151,191Property
                  and equipment
              
              
              3,729,237Other
                  assets
              
              
              69,365Goodwill
              
              
              8,504,239Customer
                  relationships (5-year life)
              
              
              700,000Current
                  liabilities
              
              
              (9,582,127
              )Capital
                lease obligation building
              
              
              (3,489,772)Other
                  liabilities
              
              
              (34,999
              )Total
                  purchase price
              
              $
              11,407,105




The
        purchase price allocation is not considered final as of the date of this
        report
        as we, along with our independent valuation advisors, are still reviewing
        all of
        the underlying assumptions and calculations used in the allocation and
        finalizing any working capital adjustments. However, we believe the final
        purchase price allocation will not be materially different than presented
        herein.
 
 **(B)
        Acquisition of SSI**
 
 On
        September 5, 2007 (the "SSI Closing Date"), we acquired all of the outstanding
        capital stock of SSI, a provider of IT and secure data center solutions to
        mid-tier enterprises and Fortune 1000 companies located in Metuchen, New
        Jersey,
        pursuant to a Stock Purchase Agreement, dated as of August 31, 2007 (the
        "SSI
        Stock Purchase Agreement"). The results of SSI are included in our consolidated
        financial statements beginning on September 1, 2007.
 
 The
        SSI
        stock purchase price was approximately $6.5 million, which consisted of $4.75
        million in cash (of which $475,000 was placed in escrow to secure certain
        indemnification obligations), the issuance of 1,369,863 unregistered shares
        of
        our common stock valued at $1,021,918 (based on an average of the closing
        prices
        of our common stock during the seven-day periods before and after the
        acquisition date) and an unsecured promissory note in the amount of $250,000
        (the “SSI Note”) to the former owner of SSI (Refer to Note 9(F)). We also paid
        investment banking and other fees totaling approximately
        $489,000.
  The
        SSI
        Purchase Agreement contains an earn-out provision which provides that the
        former
        owner can earn up to $3.0 million in additional consideration based on the
        achievement of EBITDA greater than a minimum threshold of $1.5 million, in
        each
        of the three twelve calendar month periods following the closing date and
        beginning on October 1, 2007. Annual EBITDA must be $2.0 million or greater
        to
        achieve full payout in each measurement period. The amount is payable two
        dollars for each one dollar that EBITDA is in excess of $1.5 million up to
        a
        maximum amount of $1.0 million in earn-out per measurement period. However,
        in
        the event EBITDA does not exceed $1.5 million in any of one of the individual
        measurement periods, there shall be no earn-out payable for that particular
        measurement period. The earn-out is payable 33% in cash and 67% in unregistered
        shares of common stock of our company and shall be paid within ninety days
        after
        the end of the applicable measurement period. The number of shares to be
        issued
        shall be determined by dividing two-thirds of the total measurement period
        earn
        out payment by the per share fair market value of our common stock. The per
        share fair market value of our unregistered common stock shall be the average
        closing price of our common stock, as reported on Bloomberg L.P. on the
        Principal Market, for the five consecutive trading days ending on the last
        day
        of the applicable measurement period.
  If
        EBITDA
        for any of the individual measurement periods is less than $2.0 million and
        the
        aggregate EBITDA for the three measurement periods is greater than $4.5 million,
        we will re-measure the earn-out amount payable based upon the three measurement
        periods’ aggregate EBITDA amount, less $4.5 million, multiplied by two, less the
        actual measurement period earn-out payments already paid, subject to the
        maximum
        payment of $3.0 million. Any earn-out payable upon such re-measurement shall
        be
        payable 33% in cash and 67% in stock of our company. The number of shares
        of our
        common stock to be issued shall be determined by dividing two-thirds of the
        adjusting earn-out payment by the per share fair market value of our common
        stock as determined using the average closing price of our common stock,
        as
        reported on Bloomberg L.P. on the Principal Market, for the five consecutive
        trading days ending on the last day of the third measurement
        period.
  If
        the
        aggregate EBITDA over the three measurement periods exceeds $6.0 million
        dollars, the former owner shall be entitled to receive a bonus earn-out payment
        equal to 50% of the amount by which aggregate EBITDA over the three measurement
        periods exceeds $6.0 million dollars. The bonus earn-out payment shall be
        payable 33% in cash and 67% in shares of common stock of our company. The
        number
        of shares of our common stock to be issued shall be determined using the
        formula
        described above.
  F-16
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
 
 Concurrently
        with the consummation of the acquisition, we granted certain registration
        rights
        to the former owner 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 SSI Stock Purchase Agreement. Pursuant to the registration rights agreement,
        at any time after August 31, 2009, the former shareholder has a demand
        registration right and piggy-back rights to require us to register under
        the
        Securities Act such shares of our common stock issued in the
        acquisition.
 
 The
        following represents the preliminary purchase price allocation at the date
        of
        the SSI acquisition:
 Cash
                    and cash equivalents
                
                $
                1,451,706Accounts
                    receivable
                
                
                4,213,004Other
                    assets
                
                
                5,169Goodwill
                
                
                4,908,967Customer
                    relationships (5-year life)
                
                
                600,000Current
                    liabilities
                
                
                (4,664,710
                )Total
                    purchase price
                
                $
                6,514,136
  The
        purchase price allocation is not considered final as of the date of this
        report
        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)
        Pro Forma Results**
 
 The
        following unaudited pro forma financial information presents our combined
        results of operations as if the acquisitions of Helio and SSI, as described
        above, had occurred as of the beginning of the periods presented below. The
        unaudited pro forma financial information is not intended to represent or
        be
        indicative of the consolidated results of operations that would have been
        reported by us had the acquisitions been completed as of the beginning of
        the
        periods presented, and should not be taken as representative of our future
        consolidated results of operations or financial condition. Unaudited pro
        forma
        results were as follows for the years ended December 31, 2007, 2006 and
        2005:
  **For
                    the years ended December 31,****2007**
                
                **2006**
                
                **2005****(Unaudited)**
                
                **(Unaudited)**
                
                **(Unaudited)**Revenues
                
                $
                222,669,467
                
                $
                196,445,235
                
                $
                171,885,735Loss
                    from continuing operations
                
                
                (8,181,421
                )
                
                (18,187,882
                )
                
                (13,312,808
                )(Loss)
                    gain from discontinued operations
                
                
                (93,409
                )
                
                16,004,486
                
                
                (576,746
                )Net
                    loss applicable to common shareholders
                
                
                (10,892,396
                )
                
                (4,800,962
                )
                
                (16,507,120
                )Net
                    (loss) income per share - basic and diluted, pro forma:From
                    continuing operations
                
                $
                (0.45
                )
                $
                (1.00
                )
                $
                (0.81
                )From
                    discontinued operations
                
                
                -
                
                
                0.77
                
                
                (0.02
                )Total
                    net loss per share-basic and diluted, pro forma
                
                $
                (0.45
                )
                $
                (0.23
                )
                $
                (0.83
                )
  F-17
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
  **(D)
        Acquisition of NST**
 
 On
        April
        13, 2006 (the "NST Closing Date"), we acquired all of the outstanding capital
        stock of NST, 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 NST Closing Date (the "NST Stock Purchase Agreement"). The
        results of operations of NST are included in our consolidated financial
        statements beginning on April 1, 2006.
 
 The
        consideration paid for NST 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 "NST Note"). (Refer to Note 9(B)). In addition, the NST Stock
        Purchase Agreement contains an earn-out provision pursuant to which Transitional
        Management Consultants, Inc. ("TMC"), a newly-formed corporation owned by
        the
        former NST shareholder, may receive additional unregistered shares of our
        common
        stock based upon certain levels of EBITDA (as defined in the NST Stock Purchase
        Agreement) achieved by NST 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 NST’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 NST 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. We expect
        that
        the full amount of shares issuable under the earn-out provision will be earned
        on the two year anniversary date and will be issued soon thereafter. 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 NST 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 NST Stock Purchase Agreement until after April 13,
        2008, with certain exceptions, as defined in the NST 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 NST 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
        30
        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.
        These monthly payments are same recorded as expense. 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 NST during the twelve 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. A total of $150,000
        was
        paid to
        TMC
        under the consulting agreementduring 2007 and recorded as additional
        purchase price of NST, based on the relevent
        facts and circumstances pertaining to the agreement to provide consideration
        to
        TMC based on the future earings of NST. We consider factors involving terms
        of
        continuing employment, reasons for contingent payment provisions and the
        formula
        used for determining contingent consideration. We expect that A total of
        the full bonus will be achieved for the period ending March 31,
        2008.
 
 In
        connection with our acquisition of NST, we paid investment banking fees to
        a
        third party of $475,000 and legal fees and other costs of approximately
        $100,000.
 
 F-18
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
  The
        following represents the final purchase price allocation:
 Cash
                    and cash equivalents
                
                $
                885,555Accounts
                    receivable
                
                
                3,305,963Other
                    current assets
                
                
                30,885Property
                    and equipment
                
                
                136,036Goodwill
                
                
                7,620,378Customer
                    relationships (5-year life)
                
                
                1,500,000Current
                    liabilities
                
                
                (4,465,537
                )Total
                    purchase price
                
                $
                9,013,280
  **(E)
        Acquisition of Tactix**


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 was paid pursuant to a working capital adjustment to the Sellers,
        pro
        rata, following the Tactix Closing Date.
 
 In
        connection with our acquisition of Tactix, we paid investment banking fees
        to a
        third party of $300,000 and legal fees and other costs of approximately $40,000.
  The
        following represents the final purchase price allocation:
 Cash
                      and cash equivalents
                  
                  $
                  915,005Accounts
                      receivable
                  
                  
                  2,502,508Property
                      and equipment
                  
                  
                  86,370Goodwill
                  
                  
                  3,560,798Customer
                      relationships (5-year life)
                  
                  
                  515,600Other
                      non-current assets
                  
                  
                  28,322Current
                      liabilities
                  
                  
                  (3,664,161
                  )Total
                      purchase price
                  
                  $
                  3,944,442
 **(F)
        Acquisition of Star**
 
 On
        February 18, 2005 (the “Star Closing Date”), we acquired all of the outstanding
        capital stock of Star. The acquisition was effected pursuant to an Agreement
        and
        Plan of Merger (the “Star Merger Agreement”). The results of operations of Star
        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”) (Refer to Note 9(D)). 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 Star, 1,135,580 were subsequently returned
        to us following the settlement of a dispute with the former shareholder of
        Star.
        (Refer to Note 9(D)).
 
 F-19
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
 The
        following represents the purchase price allocation:
 Cash
                    and cash equivalents
                
                $
                1,597,498Other
                    current assets
                
                
                824,998Property
                    and equipment
                
                
                20,909Other
                    assets
                
                
                7,005Goodwill
                
                
                6,177,686Customer
                    relationships (5-year life)
                
                
                540,000Current
                    liabilities
                
                
                (1,473,088
                )Total
                    purchase price
                
                $
                7,695,008
  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 $4.2 million was charged to
        income
        in the fourth quarter of 2005.
 
 **(G)
        Acquisition of PWI**
 
 On
        March
        30, 2005 (the “PWI Closing Date”), we acquired all of the outstanding capital
        stock of PWI. The acquisition was effected pursuant to a Stock Purchase
        Agreement, dated as of the PWI Closing Date (the “PWI Stock Purchase
        Agreement”). The results of PWI are included in our consolidated financial
        statements beginning on April 1, 2005.
 
 The
        purchase price of PWI consisted of $2,350,000 in cash and 841,934 shares
        of our
        common stock valued at $1,683,868 (based upon the market price three days
        before
        and after the acquisition date). In addition, during the year ended December
        31,
        2005, the former PWI shareholders achieved a partial earn out of $100,000
        which
        was paid to them in cash. As a result of the earn-out payment, the purchase
        price (goodwill) was increased by $100,000. We paid approximately $250,000
        in
        investment banking fees in connection with the transaction.
 
 The
        following represents the purchase price allocation:
 Cash
                    and cash equivalents
                
                $
                74,297Other
                    current assets
                
                
                7,009,601Property
                    and equipment
                
                
                173,610Other
                    assets
                
                
                28,010Goodwill
                
                
                3,831,534Customer
                    relationships (5-year life)
                
                
                310,000Current
                    liabilities
                
                
                (6,877,351
                )Other
                    liabilities
                
                
                (64,564
                )Total
                    purchase price
                
                $
                4,485,137
  F-20
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
  In
          March
          2007, we executed a Settlement Agreement (the “Agreement”) between us and the
          former PWI shareholders related to certain assets and liabilities that
          existed
          at the PWI Closing Date. As part of the acquisition of
          PWI in
          March 2005, we acquired receivables amounting to $453,114 from certain
          companies
          affiliated with the former PWI 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 PWI shareholders were obligated by the PWI Stock Purchase
          Agreement to indemnify us against certain liabilities in excess of an agreed
          amount that might arise after the PWI 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 PWI shareholders returned to us, 275,000 shares of our common stock
        issued to them as part of the purchase price of PWI. The Agreement provides
        that
        the former PWI shareholders are obligated to repurchase some or all of the
        shares at a price of $2.25 per share by March 9, 2008 in the event the former
        PWI shareholders successfully prevail in a litigation matter that arose in
        a
        separate company that they owned. There were certain conditions that were
        required then, that allowed them to buy the stock back prior to March 9,
        2008.
        This requirement has expired subsequent to December 31, 2007. The former
        PWI
        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 2010. Mutual releases were
        executed as part of the Agreement. ****
 
 **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. In June
        2007,
        $1.5 million plus accrued interest, was released from escrow. The remaining
        $1.0
        million plus additional accrued interest, was collected during October
        2007.
 
 In
        addition to the purchase price payable at the closing, we may receive up
        to $5.0
        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 $5.0 million in the aggregate. We have
        accrued and included in other current assets $0.7 million under this earn-out
        provision at December 31, 2007.
 
 A
        gain of
        approximately $15.4 million was realized on the sale after expenses and fees
        of
        approximately $3.5 million and a provision for income taxes of $0.3 million.
  The
        operating results from discontinued operations for the years ending December
        31,
        2007, 2006 and 2005 were as follows:
 **2007**
                
                **2006**
                
                **2005**Total
                    revenues
                
                $
                -
                
                $
                9,444,577
                
                $
                12,897,308Cost
                    of revenues
                
                
                -
                
                
                3,357,505
                
                
                4,723,376Gross
                    profit
                
                
                -
                
                
                6,087,072
                
                
                8,173,932Operating
                    expenses
                
                
                -
                
                
                5,510,702
                
                
                8,626,919Operating
                    income (loss)
                
                
                -
                
                
                576,370
                
                
                (452,987
                )Other
                    (loss) income
                
                
                (93,409
                )
                
                52,102
                
                
                345,275(Loss)
                    income before income taxes
                
                
                (93,409
                )
                
                628,472
                
                
                (107,712
                )Income
                    tax expense
                
                
                -
                
                
                -
                
                
                (469,034
                )Net
                    (loss) income
                
                $
                (93,409
                )
                $
                628,472
                
                $
                (576,746
                )
  F-21
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
  **5.
        Property and Equipment**
 
 Property
        and equipment consisted of the following as of December 31, 2007 and
        2006:
 **2007**
                
                **2006**Computer
                    equipment
                
                $
                5,469,465
                
                $
                5,258,510Software
                
                
                2,195,460
                
                
                2,078,616Building
                    and equipment held under captial lease
                
                
                6,063,289
                
                
                1,234,163Leasehold
                    improvements
                
                
                147,576
                
                
                119,540Vehicles
                
                
                69,114
                
                
                -Office
                    furniture and equipment
                
                
                230,084
                
                
                185,19214,174,988
                
                
                8,876,021Less
                    accumulated depreciation
                
                
                6,973,961
                
                
                5,811,857Total
                
                $
                7,201,027
                
                $
                3,064,164
  Depreciation
        expense for the years ended December 31, 2007, 2006 and 2005 was $1.7
        million, $1.5 million and $1.4 million, respectively.
  As
        of
        December 31, 2007 and 2006, there was $0.9 million and $0.3 million of
        accumulated depreciation relating to assets held under capital lease,
        respectively.
 
 **6.
        Intangible Assets**
 
 Intangible
        assets consist of acquired customer relationships/bases which are being
        amortized over five-year terms and are as follows as of December 31, 2007
        and 2006:
 **2007**
                
                **2006**Gross
                    carrying amount
                
                $
                4,165,600
                
                $
                2,865,600Less
                    accumulated amortization
                
                
                1,213,077
                
                
                564,333Total
                
                $
                2,952,523
                
                $
                2,301,267
  Amortization
        expense of customer relationships for the years ended December 31, 2007,
        2006
        and 2005 was $0.6 million, $0.4 million and $0.9 million, respectively.
        Estimated amortization expense for each of the five succeeding years is as
        follows:
 Year
                    ending December 31:2008
                
                $
                815,9402009
                
                
                815,9402010
                
                
                674,9282011
                
                
                420,9362012
                
                
                224,779Total
                
                $
                2,952,523
  F-22
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
  **7.
          Accrued Expenses and Other**
  Accrued
        expenses and other consist of the following as of December 31, 2007 and
        2006:
 **2007**
                
                **2006**Wages,
                    benefits and payroll taxes
                
                $
                4,393,219
                
                $
                2,753,587Professional
                    fees
                
                
                163,564
                
                
                280,492Customer
                    deposits
                
                
                61,911
                
                
                364,796Taxes,
                    other than income taxes
                
                
                1,434,077
                
                
                738,210Deferred
                    rent
                
                
                219,657
                
                
                143,490Due
                    to shareholders of acquired companies
                
                
                302,584
                
                
                233,567Interest
                    payable
                
                
                374,380
                
                
                145,564Other
                    accrued payables
                
                
                915,750
                
                
                902,448Total
                
                $
                7,865,142
                
                $
                5,562,154
  **8.
        Commitments and Contingencies**
  We
        are
        involved in various 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 and prorated bonus upon termination with us.
 
 We
        lease
        facilities and equipment under non-cancelable capital and operating leases.
        Rental expense relating to operating leases was $1.6 million, $1.1 million
        and
        $0.8 million for the years ended December 31, 2007, 2006 and 2005,
        respectively. Certain of the operating lease agreements have renewal provisions,
        which range from month to month to 84-month terms.
 
 With
        our
        acquisition of Helio in August 2007, we assumed a liability for Helio’s office
        facilities in Santa Clara, California. The building was recorded under a
        capitalized lease arrangement with a remaining liability of $3.5 million
        outstanding as of the Helio acquisition date. The lease is payable in monthly
        installments at an implicit interest rate of 13% and expires in December
        2017.
        The total lease liability outstanding as of December 31, 2007 was $3.5 million,
        of which, $0.5 million is due within one year.
 
 In
        December 2007, we entered into a capital lease agreement to lease various
        pieces
        of equipment from an outside-party. The lease requires 20 monthly payments
        of
        principal and interest of $35,683, beginning in December 2007, with final
        payment being due in July 2009. The total lease liability outstanding as
        of
        December 31, 2007 was $0.6 million, of which, $0.4 million is due within
        one
        year.
  F-23
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
  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 December
          31, 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 of 15%. The total lease
          liability outstanding as of December 31, 2007 was $0.4 million, of which,
          all is
          due within one year.
 
 Future
        minimum lease payments as of December 31, 2007 are as follows:
 **Capital**
                
                **Operating**Year
                    ending December 31:2008
                
                $
                1,295,782
                
                $
                1,396,6282009
                
                
                812,977
                
                
                1,113,0432010
                
                
                559,936
                
                
                787,6552011
                
                
                586,299
                
                
                397,6922012
                
                
                675,763
                
                
                332,670Thereafter
                
                
                3,876,612
                
                
                604,634Total
                    minimum lease payments
                
                
                7,807,369
                
                $
                4,632,322Less
                    amounts representing interest
                
                
                (3,340,492
                )Present
                    value of minimum lease payments
                
                $
                4,466,877
 **9. 
          **Notes
          Payable and Other Long-Term
          Obligations****
 
 The
        following is a summary of our notes payable and other long-term obligations
        as
        of December 31, 2007 and 2006:
 **2007**
                
                **2006**Laurus
                    revolving line of credit (A)
                
                $
                14,639,700
                
                $
                5,378,114Laurus
                    convertible note (A)
                
                
                -
                
                
                1,108,2542007
                    term note (A)
                
                
                9,466,667
                
                
                -Incentra
                    MW note (B)
                
                
                175,926
                
                
                873,645Convertible
                    notes (C)
                
                
                850,000
                
                
                1,228,392Helio
                    note (E)
                
                
                712,500
                
                
                -SSI
                    note (F)
                
                
                230,628
                
                
                -Other
                    obligations
                
                
                41,212
                
                
                28,77226,116,633
                
                
                8,617,177Less
                    current portion
                
                
                16,879,609
                
                
                7,816,156Non-current
                    portion
                
                $
                9,237,024
                
                $
                801,021
  Future
        minimum payments as of December 31, 2007, excluding any discounts, are as
        follows:
 Year
                    ending December 31:2008
                
                $
                3,370,7952009*
                
                
                19,471,9402010
                
                
                6,857,3432011
                
                
                11,2292012
                
                
                -Thereafter
                
                
                -Total
                
                $
                29,711,307
  *
        The
        total outstanding balance on the Laurus revolving line of credit of $14.6
        million, is classified as current pursuant to EITF 95-22, as discussed
        below.
  F-24
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
 **(A)
          **Laurus
          Convertible Note, Line of Credit and 2007 Term
          Note****
 
 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%. Included in the loss on early extinguishment
        of debt for the year ended December 31, 2006, was $1.2 million related to
        the
        refinancing of the prior revolving credit facility. In June 2007, the available
        revolving credit line on the 2006 Facility was increased from $10 million
        to $15
        million. In consideration for the increase, we issued Laurus a common stock
        purchase warrant to purchase 360,000 shares of our common stock at an exercise
        price of $0.01 per share. The warrant was valued at $343,000 using the
        Black-Scholes model and is being amortized to earnings as additional interest
        expense over the term of the debt (through February 2009). On December
        28, 2007, the available revolving credit line on the 2006 Facility was
        increased from $15 million to $20 million. In consideration for the increase,
        we
        issued Laurus a common stock purchase warrant to purchase 350,000 shares
        of our
        common stock at an exercise price of $0.01 per share and the interest rate
        was
        changed to a fixed rate of 10%. Pursuant
        to a Registration Rights Agreement dated as of December 28, 2007, between
        us and
        Laurus, we are obligated to file a registration statement on or before April
        11,
        2008 to register the resale of the shares of our common stock underlying
        the
        warrant and use our best efforts to have the registration statement declared
        effective not later than June 25, 2008.The warrant was valued at
        $329,000 using the Black-Scholes model and is being amortized to earnings
        as
        additional interest expense over the term of the debt (through February 2009).
        As of December 31, 2007 and 2006, outstanding borrowings under the 2006 Facility
        were $15.7 million ($14.6 million net of debt discounts) and $6.3 million
        ($5.4 million net of debt discounts), respectively. We had $4.3 million of
        available borrowings under the 2006 Facility as of December 31,
        2007.
 
 The
        2006
        Facility requires a lockbox arrangement whereby all receipts are 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 which was due May 31, 2009 in the principal
        amount of $1,750,000 (the "2006 Term Note") and a secured convertible term
        note
        which was 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. On August
        17, 2007, we entered into a new financing agreement with Calliope Capital
        Corporation, an affiliate of Laurus, in which we issued a $12 million promissory
        note (the “2007 Term Note”). Proceeds from the 2007 Term Note were used to pay
        off the $932,000 balance outstanding on the 2006 Convertible Note as of August
        17, 2007, as well as to fund the acquisitions of Helio and SSI (see Note
        3(A)
        and 3(B)). The 2007 Term Note bears interest at the prime rate plus 2.0%,
        subject to a floor of 10% (10% at December 31, 2007), and initially required
        four months of interest only payments followed by twenty-six monthly
        principal payments of $285,714 commencing on February 1, 2008 with any remaining
        unpaid principal and interest due on July 31, 2010. On December 28, 2007,
        we
        entered into a letter agreement that amended the terms of the 2007 Term Note
        to
        defer certain monthly principal payments of $285,714. Originally scheduled
        to
        begin February 1, 2008, these monthly payments will now begin June 1, 2008,
        thereby deferring $1,142,857 from 2008 until the maturity date of July 31,
        2010.
        In connection with the 2007 Term Note, we issued to Laurus, a warrant to
        purchase 3,750,000 shares of our common stock at a price of $0.01 per share,
        expiring July 31, 2027. The warrant was valued at $2,850,000 using the
        Black-Scholes model and is being amortized to earnings as additional interest
        expense over the term of the debt. We also paid $415,000 in loan fees on
        the
        2007 Term Note. These fees are also being amortized over the term of the
        note.
  F-25
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
  In
        connection with our financings with Laurus, we have issued to Laurus, warrants
        to purchase up to 6,133,857 shares of our common stock at prices ranging
        from
        $.001 to $5.00 per share. The warrants expire between May 1, 2008 and July
        31,
        2027. In addition, an option to purchase 1,071,478 shares of our common stock
        at
        $.001 per share was issued to Laurus in connection with the 2006 Facility.
        The
        option expires in February 2026. During August 2007, Laurus
        exercised 860,858 options. Using the Black-Scholes model, the value of all
        warrants and the option issued to Laurus approximated $5.2 million, which
        is
        being amortized to earnings as additional interest expense over the term
        of the
        related indebtedness. The unamortized balance of these deferred costs was
        $3.6
        million and $1.1 million at December 31, 2007 and December 31, 2006,
        respectively. Borrowings outstanding at December 31, 2007 and 2006 are reported
        net of the deferred financing costs associated with these
        borrowings.
 
 Our
        indebtedness to Laurus is collateralized 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)
        **NST
        Note****
 
 Pursuant
        to the NST Stock Purchase Agreement discussed in Note 3(D), we issued an
        unsecured promissory note for $1,500,000 to the selling stockholder of NST
        (the
        "NST Note") which is payable in eight installments and matures on March 1,
        2008.
 
 The
        NST
        Note accrues interest at an annual rate of 0.5%. The NST Note was discounted
        by
        $109,300 to reflect a fair value rate of interest of 8.75%. The note required
        eight equal quarterly payments of principal and interest in the amount of
        $190,190. As of December 31, 2007, seven such payments were made. Subsequent
        to
        December 31, 2007, we paid all remaining principal and interest on the note
        on
        March 1, 2008.
 
 **(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 2006, along with accrued interest
        of
        $34,535 and prepayment penalties amounting to $84,800 were paid in
        stock.
 
 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 had initial
        maturity dates in June and July 2007. **** During
        July 2007, the maturity dates were extended to December 31, 2007. All other
        terms of the Convertible Notes remain unchanged. On December 31, 2007, we
        made a
        principal payment of $500,000 reducing the outstanding balance to $850,000.
        Subsequent to December 31, 2007, we paid the remaining outstanding balance
        on
        the Convertible Notes of $850,000, in January 2008.
 
 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 has been fully amortized to interest expense
        through the initial maturity date (June 2007).
 
 F-26
 
 Incentra
        Solutions, Inc. and Subsidiaries
 Notes
        to
        Consolidated Financial Statements (continued)
 December
        31, 2007, 2006 and 2005


**(D)
        Star Note**
 
 As
        part
        of the acquisition of Star in February 2005, we issued an unsecured convertible
        promissory note for $2,500,000 to the selling stockholder of Star (the "Star
        Note") that was payable in ten installments and matured 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.
 
 On
        July
        28, 2006, we entered into a Letter Agreement, as amended on July 31, 2006,
        with
        the former principal stockholder of Star, 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 Star 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)
        Helio Note**
 
 Pursuant
        to the Helio Stock Purchase Agreement discussed in Note 3(A), we issued an
        unsecured convertible promissory note for $770,000 to a selling shareholder
        of
        Helio. The Helio Note bears interest at 8.0% and is payable in twelve equal
        quarterly installments of principal and interest of $79,800, the first payment
        which was made November 14, 2007, and maturing on August 14, 2010. The Helio
        Note allows the shareholder to convert, at any time, the remaining principal
        balance into shares of our common stock at a price of $1.00 per share (which
        exceeded the market price of our common stock on the date the note was issued).
        The Helio Note provides that all unpaid principal and accrued interest shall,
        at
        the option of the holder and without notice, become immediately due and payable
        upon the occurrence of an event of default (as defined in the Helio Note).
        Any
        outstanding balance on the Helio Note can be prepaid, without penalty, at
        any
        time.
 
 **(F)
        SSI Note**
 
 Pursuant
        to the SSI Stock Purchase Agreement discussed in Note 3(B), we issued an
        unsecured promissory note for $250,000 to the selling shareholder of SSI.
        The
        SSI Note bears interest at 5.25% and is payable in twelve equal quarterly
        installments of principal and interest of $22,653, the first payment which
        was
        made December 1, 2007, and maturing on September 1, 2010. The SSI Note provides
        that all unpaid principal and accrued interest shall, at the option of the
        holder and without notice, become immediately due and payable upon the
        occurrence of an event of default (as defined in the SSI Note). Any outstanding
        balance on the SSI Note can be prepaid, without penalty, at any
        time.
 
 **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 an approximately three-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. On or after August 18, 2008, the holders
        of
        at least 80% of the Series A Preferred shares may elect to have us redeem
        the
        Series A Preferred shares 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
        pre-emptive rights with respect to subsequent issuances of securities by
        us
        (subject to certain exceptions).
  F-27
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
 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. Our agreements with Laurus prohibit the declaration or
        payment of dividends on our common stock unless we obtain their written consent.
        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**
 
 As
        of
        December 31, 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 Plan”) and one that was originally established by Incentra of CO (the
“Incentra of CO Plan”). Each of these plans is 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.
  In
        January 2008, the Board of Directors approved the 2008 Equity Incentive Plan
        (the "2008 Plan"). Under the 2008 Plan, which is subject to stockholder
        approval, the Company is to reserve an aggregate of 4,000,000 shares of common
        stock exclusively for issuance. In addition, in January 2008, the Board of
        Directors approved an employee stock purchase plan (the "2008 ESSP"). Under
        the
        2008 ESSP, which is subject to stockholder approval, the Company is to reserve
        1,000,000 shares of common stock exclusively for issuance.
  **The
        2006 Plan and the 2000 Plan**
 
 The
        2006
        Plan and the 2000 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 2000 Plan. Both plans
        provide for awards with a maximum term of 10 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 and non-statutory stock options. In addition,
        the 2000 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-28
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
  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
        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.
 
 Under
        the
        2000 Plan, 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
        2000
        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
        2000
        Plan will be determined by the Board of Directors at its discretion at the
        time
        of the grant. SARs granted under the 2000 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.
 
 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
        Plan.
 
 **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. 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 171,800 at
        December 31, 2007. 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 in
        the event 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-29
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
  A
        summary
        of all activity in the three employee Stock Option Plans is as
        follows:
 
 **Weighted****Number**
              
              **average****of
                  options**
              
              **exercise
                  price**Balance,
                  January 1, 2005
              
              
              2,048,661
              
              $
              2.91Granted
              
              
              456,450
              
              
              1.62Exercised
              
              
              (454
              )
              
              0.30Forfeited
              
              
              (71,105
              )
              
              2.18Balance,
                  December 31, 2005
              
              
              2,433,552
              
              
              2.70Granted
              
              
              1,567,111
              
              
              1.25Exercised
              
              
              (458
              )
              
              0.32Forfeited
              
              
              (716,405
              )
              
              2.02Balance,
                  December 31, 2006
              
              
              3,283,800
              
              
              1.91Granted
              
              
              1,305,700
              
              
              0.91Exercised
              
              
              (41,566
              )
              
              0.32Forfeited
              
              
              (599,760
              )
              
              1.97Balance,
                  December 31, 2007
              
              
              3,948,174
              
              $
              1.59




**Outstanding
                  options**
              
              **Exercisable
                  options****Weighted**
              
              
              
              
              
              **Weighted****average**
              
              
              
              
              
              **average****remaining**
              
              **Weighted**
              
              **Shares**
              
              **remaining**
              
              **Weighted****Shares
                  under**
              
              **contractual**
              
              **average**
              
              **currently**
              
              **contractual**
              
              **average****Exercise
                    price**
              
              **option**
              
              **life
                  (years)**
              
              **exercise
                  price**
              
              **exercisable**
              
              **life
                  (years)**
              
              **exercise
                  price**$0.01
                  - $1.00
              
              
              1,177,966
              
              
              8.99
              
              $
              0.79
              
              
              163,966
              
              
              5.12
              
              $
              0.32$1.01
                  - $2.00
              
              
              1,471,640
              
              
              8.49
              
              
              1.21
              
              
              479,339
              
              
              8.25
              
              
              1.25$2.00
                  - $3.00
              
              
              1,243,600
              
              
              6.53
              
              
              2.72
              
              
              1,238,633
              
              
              6.53
              
              
              2.72$3.00
                  +
              
              
              54,968
              
              
              6.76
              
              
              3.21
              
              
              53,796
              
              
              6.77
              
              
              3.213,948,174
              
              
              8.00
              
              $
              1.59
              
              
              1,935,734
              
              
              6.84
              
              $
              2.17


**Weighted****Weighted**
              
              **average****Number**
              
              **average**
              
              **grant
                  date****of
                  options**
              
              **exercise
                  price**
              
              **fair
                  value**Non-vested
                  options, January 1, 2007
              
              
              1,808,802
              
              $
              1.54
              
              $
              1.76Granted
              
              
              1,305,700
              
              
              0.91
              
              
              0.73Vested
              
              
              (699,843
              )
              
              1.79
              
              
              1.45Forfeited
              
              
              (402,219
              )
              
              1.53
              
              
              1.26Non-vested
                  options, December 31, 2007
              
              
              2,012,440
              
              $
              1.03
              
              $
              0.84




As
        of
        December 31, 2007, there was a total of $1.0 million in 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 2.14 years. The total fair value of
        shares vested during the years ended December 31, 2007 and 2006 were
        approximately $1.0 million and $0.3 million, respectively. The weighted average
        grant date fair value of options granted during the years ended December
        31,
        2005 and 2006 were $0.73 and $1.07 per option, respectively. The intrinsic
        value of vested options and options expected to vest was not material at
        December 31, 2007. The total intrinsic value of options exercised was also
        not
        material for the years ended December 31, 2007, 2006 and
        2005.
 
 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
        a post
        termination exercise period of 90 days to 365 days from the date of sale
        of
        Front Porch. This acceleration and modification of terms was accounted for
        in
        accordance with SFAS 123R, resulting in additional expense of $0.4 million
        being
        recorded during the fourth quarter of 2006, which is included as a reduction
        in
        the gain from the sale of discontinued operations. All options expired without
        being exercised.
  F-30
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
 **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. All warrants granted in 2007 had
        an
        exercise price of $0.01 and therefore the fair value was determined as the
        difference between the market price of our common stock at the grant date
        and
        the exercise price. All warrants outstanding at December 31, 2007 are
        exercisable.
 
 At
        December 31, 2007, we had the following warrants outstanding for the purchase
        of
        our common stock:
 **Weighted****average****Total**
                
                **remaining**
                
                **Weighted****Warrants**
                
                **contractual**
                
                **average****Exercise
                      price**
                
                **Outstanding**
                
                **life
                    (years)**
                
                **exercise
                    price**$0.001
                    - $0.01
                
                
                4,898,131
                
                
                19.42
                
                $
                0.01$0.8
                    - $1.40
                
                
                1,330,688
                
                
                3.72
                
                
                1.11$2.60
                    - $5.00
                
                
                1,330,350
                
                
                3.93
                
                
                3.567,559,169
                
                
                13.93
                
                $
                0.83
 At
        December 31, 2007, we had the following warrants outstanding for the purchase
        of
        our Series A Convertible Preferred Stock:
 **Number
                    of**
                
                **Exercise****Description**
                
                **Expiration
                    Date**
                
                **Shares
                    Issuable**
                
                **Price**Issued
                    to lease holder in connection with equipment lease
                    facility
                
                
                November
                    20, 2010
                
                
                6,954
                
                $
                6.02Issued
                    in exchange for services in financing transaction
                
                
                January
                    10, 2008
                
                
                26,075
                
                
                10.35Total
                    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 Internal
        Revenue
        Code. In May 2007, we began matching employee contributions at 100% of the
        first
        25% contributed. The amount is equal to a percentage determined annually
        by a
        Board of Directors’ resolution. For the year ended December 31, 2007, our total
        matching contributions were $151,000.
 
 Employee
        contributions are 100% vested. Contributions made by us are 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, with
        grandfathering for prior service with Incentra and any other acquired company.
 
 F-31
 Incentra
          Solutions, Inc. and Subsidiaries
 Notes
          to
          Consolidated Financial Statements (continued)
 December
          31, 2007, 2006 and 2005
 **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 2007, 2006 and 2005. Total costs incurred under the leasing
        arrangement and associated expenses (utilities, supplies and insurance) in
        2007,
        2006 and 2005 amounted to $206,321, $208,574 and $190,178, respectively.
  **15.
        Income Taxes**
 
 The
        domestic and foreign components of loss before income taxes for the years
        ended
        December 31, 2007, 2006 and 2005 are as follows:
 **2007**
                
                **2006**
                
                **2005**Domestic
                
                $
                (9,199,115
                )
                $
                (18,837,636
                )
                $
                (13,648,811
                )Discontinued
                    operations
                
                
                (93,409
                )
                
                16,327,807
                
                
                (107,712
                )Total
                
                $
                (9,292,524
                )
                $
                (2,509,829
                )
                $
                (13,756,523
                )
 
 For
        the
        year ended December 31, 2007, we did not record any income tax expense for
        discontinued operations. 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 2007, 2006 or 2005.
 
 The
        income tax provision of $323,321 for the year ended December 31, 2006 was
        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.
 
 We file
        income tax returns in the U.S. federal jurisdiction, and various states and
        foreign jurisdictions. We are no longer subject to U.S. federal, state, and
        local, or non-U.S. income tax examinations by tax authorities for the years
        before 1996, due to the passage of time under statute.
 
 The
        reconciliation between the federal statutory tax rate and the effective tax
        rate
        on losses from continuing operations for 2007, 2006 and 2005 is as
        follows:
 **2007**
                
                **2006**
                
                **2005**Expected
                    tax benefit of federal stautory rate
                
                
                (34.00
                )%
                
                (35.00
                )%
                
                (35.00
                )%Increase
                    (reduction) resulting from:State
                    taxes, net of federal benefit
                
                
                (5.50
                )%
                
                (4.23
                )%
                
                (2.45
                )%Effect
                    of permanent differences
                
                
                6.00
                %
                
                5.00
                %
                
                17.66
                %Valuation
                    allowance and other
                
                
                33.50
                %
                
                34.23
                %
                
                19.79
                %Effective
                    income tax rate
                
                
                0.00
                %
                
                0.00
                %
                
                0.00
                %
  At
        December 31, 2007, approximately $100.7 million of federal and $84.9 million
        of
        state operating loss carryforwards were available to offset future taxable
        income through the year 2027. 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, and subsequent acquisitions in 2005, 2006 and 2007,
        there may be impairments or limitations on the utilization of our net
        operating loss carry forwards in certain circumstances.
  F-32
 Incentra
            Solutions, Inc. and Subsidiaries
 Notes
            to
            Consolidated Financial Statements (continued)
 December
            31, 2007, 2006 and 2005
 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, 2007 and 2006:
 **2007**
                
                **2006**Deferred
                    tax assets:Accrued
                    liabilities and other
                
                $
                854,187
                
                $
                595,719Allowance
                    for bad debt
                
                
                150,471
                
                
                280,658Stock-based
                    compensation
                
                
                537,456
                
                
                1,067,119Intangible
                    assets
                
                
                21,531
                
                
                -Net
                    operating loss carryforwards
                
                
                39,127,278
                
                
                38,797,565Gross
                    deferred tax assets
                
                
                40,690,923
                
                
                40,741,061Deferred
                    tax liabilities:Property
                    and equipment
                
                
                (406,701
                )
                
                (96,829
                )Intangible
                    assets
                
                
                -
                
                
                (8,181
                )Gross
                    deferred tax liabilities
                
                
                (406,701
                )
                
                (105,010
                )Net
                    deferred tax assets before valuation allowance
                
                
                40,284,222
                
                
                40,636,051Valuation
                    allowance
                
                
                (40,284,222
                )
                
                (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.
  F-33
 Incentra
            Solutions, Inc. and Subsidiaries
 Notes
            to
            Consolidated Financial Statements (continued)
 December
            31, 2007, 2006 and 2005
 
 **16.
        Quarterly Financial Data (Unaudited)**
  The
        unaudited summarized quarterly financial data for the years ended December
        31, 2007 and 2006, presented below, in the opinion of management, reflects
        all adjustments which are of a normal and recurring nature necessary to present
        fairly the results of operations for the periods presented.
  From
        2005
        through 2007, we have made acquisitions of various companies and the financial
        results of these acquired companies are included in our quarterly financial
        data
        from respective acquisition dates. See Note 3 for information regarding these
        business acquisitions.
 **2007
                      (Unaudited)**
                
                **2006
                      (Unaudited)****Fourth**
                
                **Third**
                
                **Second**
                
                **First**
                
                **Fourth**
                
                **Third**
                
                **Second**
                
                **First****Quarter**
                
                **Quarter**
                
                **Quarter**
                
                **Quarter**
                
                **Quarter**
                
                **Quarter**
                
                **Quarter**
                
                **Quarter****(in
                    thousands, except per share amounts)**Total
                    revenues
                
                $
                53,632
                
                $
                36,361
                
                $
                30,809
                
                $
                24,973
                
                $
                24,082
                
                $
                16,088
                
                $
                18,102
                
                $
                8,360Total
                    cost of revenue
                
                
                43,017
                
                
                28,503
                
                
                24,918
                
                
                19,137
                
                
                18,284
                
                
                12,796
                
                
                14,696
                
                
                6,598Gross
                    margin
                
                
                10,615
                
                
                7,858
                
                
                5,891
                
                
                5,836
                
                
                5,798
                
                
                3,292
                
                
                3,406
                
                
                1,762Operating
                    expenses
                
                
                11,569
                
                
                8,770
                
                
                7,747
                
                
                7,533
                
                
                9,072
                
                
                7,744
                
                
                6,084
                
                
                4,418Operating
                    loss from continuing operations
                
                
                (954
                )
                
                (912
                )
                
                (1,856
                )
                
                (1,697
                )
                
                (3,274
                )
                
                (4,452
                )
                
                (2,678
                )
                
                (2,656
                )Other
                    expenses
                
                
                (1,406
                )
                
                (942
                )
                
                (825
                )
                
                (608
                )
                
                (588
                )
                
                (2,340
                )
                
                (1,003
                )
                
                (1,846
                )Loss
                    from continuing operations
                
                
                (2,360
                )
                
                (1,854
                )
                
                (2,681
                )
                
                (2,305
                )
                
                (3,862
                )
                
                (6,792
                )
                
                (3,681
                )
                
                (4,502
                )Income
                    (loss) from discontinued operations,net
                    of income taxes
                
                
                (109
                )
                
                (3
                )
                
                5
                
                
                14
                
                
                29
                
                
                15,576
                
                
                (466
                )
                
                865Net
                    income (loss) applicable to common shareholders
                
                $
                (3,122
                )
                $
                (2,511
                )
                $
                (3,332
                )
                $
                (2,945
                )
                $
                (4,487
                )
                $
                8,130
                
                $
                (4,801
                )
                $
                (4,293
                )Basic
                    and diluted net income (loss) per loss per shareapplicable
                    to common shareholders:Loss
                    from continuing operations
                
                $
                (0.12
                )
                $
                (0.15
                )
                $
                (0.26
                )
                $
                (0.22
                )
                $
                (0.34
                )
                $
                (0.54)
                
                $
                (0.31
                )
                $
                (0.38
                )Income
                    (loss) from discontinued operations
                
                
                *
                
                
                *
                
                
                *
                
                
                *
                
                
                *
                
                
                1.14
                
                
                (0.03
                )
                
                0.06Total
                
                $
                (0.12
                )
                $
                (0.15
                )
                $
                (0.26
                )
                $
                (0.22
                )
                $
                (0.34
                )
                $
                0.60
                
                $
                (0.34
                )
                $
                (0.32
                )Weighted-average
                        number of common shares outstanding—basic
                        and
                        diluted
                
                
                26,067
                
                
                16,821
                
                
                13,075
                
                
                13,250
                
                
                13,321
                
                
                13,663
                
                
                14,239
                
                
                13,327
  *
          Amount
          is less than $0.01 per share.
 F-34
 Incentra
            Solutions, Inc. and Subsidiaries
 
 The
        Financial Statement Schedule II - VALUATION AND QUALIFYING ACCOUNTS AND
        RESERVES is filed as part of this Annual Report on Form 10-K.
 **SCHEDULE
                    II****VALUATION
                    AND QUALIFYING ACCOUNTS AND RESERVES****Years
                    Ended December 31, 2007, 2006 and
                    2005**
  **Balance
                    at**
                
                **Charged
                    to**
                
                
                
                **Balance
                    at****beginning
                    of**
                
                **costs
                    and**
                
                
                
                **end
                    of****period**
                
                **expenses**
                
                **Deductions
                    (a)**
                
                **period****Year
                    Ended December 31, 2007**Allowance
                    for doubtful accounts
                
                $
                702,700
                
                $
                56,314
                
                $
                (378,101
                )
                $
                380,913**Year
                    Ended December 31, 2006**Allowance
                    for doubtful accounts
                
                
                209,015
                
                
                467,147
                
                
                26,538
                
                
                702,700**Year
                    Ended December 31, 2005**Allowance
                    for doubtful accounts
                
                
                244,679
                
                
                58,333
                
                
                (93,997
                )
                
                209,015
 (a)
        Bad
        debt write-offs and charges to the allowance, net of other adjustments,
        recoveries, reclassifications and exchange rate differences
  S-1