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

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

                  For the Fiscal Year Ended: December 31, 2004

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

                  For the Transition Period from           to
                                                 ---------    ---------

                             Commission File Number:

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

                 Nevada                                    86-0793960
----------------------------------------       ------------------------------
      (State or other jurisdiction                      (IRS Employer
   of incorporation or organization)                 Identification No.)

           1140 Pearl Street
           Boulder, Colorado                                80302
----------------------------------------       ------------------------------
(Address of principal executive offices)                  (Zip Code)

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

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

                                      None
          ------------------------------------------------------------
                                (Title of Class)

                                 Not Applicable
          ------------------------------------------------------------
                   (Name of each exchange on which registered)

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

                          Common Stock, par value $.001
          ------------------------------------------------------------
                                (Title of Class)

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

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

<PAGE>


Revenues for the fiscal year ended December 31, 2004 were $13.3 million.

The  aggregate  market  value of shares of the  Company's  common  stock held by
non-affiliates  as of March 22, 2005 was $11,410,253  based upon the average bid
and asked prices of the issuer's common stock on the OTC Bulletin Board on March
22, 2005.  Shares of common stock held by each executive officer or director and
by each  person who  beneficially  owns more than 5% of the  outstanding  common
stock have been excluded in that such persons may under certain circumstances be
deemed  to  be  affiliates.  This  determination  of  affiliate  status  is  not
necessarily  a  conclusive  determination  of  affiliate  status  for any  other
purpose.

As of March 22,  2005,  there  were  117,677,534  shares of common  stock of the
Company outstanding.  The Company also had outstanding as of such date 2,466,971
shares of Series A  convertible  preferred  stock  which were  convertible  into
49,339,420  shares of the  Company's  common  stock.  The issuer's  common stock
currently trades on the OTC Bulletin Board under the symbol "ICEN".

Transitional Small Business Disclosure Format (Check one):  Yes      No  X
                                                                ---     ---

<PAGE>


         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.

         THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS ARE AFFECTED BY A WIDE
VARIETY OF FACTORS THAT COULD  MATERIALLY  AND ADVERSELY  AFFECT THE COMPANY AND
ITS ACTUAL  RESULTS,  INCLUDING,  BUT NOT  LIMITED TO: (1) THE  AVAILABILITY  OF
ADDITIONAL FUNDS TO ENABLE THE COMPANY TO SUCCESSFULLY PURSUE ITS BUSINESS PLAN;
(2) THE UNCERTAINTIES RELATED TO THE EFFECTIVENESS OF THE COMPANY'S TECHNOLOGIES
AND THE DEVELOPMENT OF ITS PRODUCTS AND SERVICES;  (3) THE COMPANY'S  ABILITY TO
MAINTAIN,  ATTRACT AND INTEGRATE  MANAGEMENT  PERSONNEL;  (4) THE ABILITY OF THE
COMPANY TO COMPLETE THE DEVELOPMENT OF ITS PROPOSED PRODUCTS IN A TIMELY MANNER;
(5) THE  COMPANY'S  ABILITY  TO  EFFECTIVELY  MARKET AND SELL ITS  PRODUCTS  AND
SERVICES TO CURRENT AND NEW  CUSTOMERS;  (6) THE COMPANY'S  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, THE COMPANY MAY EXPERIENCE MATERIAL  FLUCTUATIONS IN
FUTURE OPERATING RESULTS ON A QUARTERLY OR ANNUAL BASIS,  WHICH COULD MATERIALLY
AND ADVERSELY AFFECT ITS BUSINESS,  FINANCIAL  CONDITION,  OPERATING RESULTS AND
STOCK PRICE.

         THESE FORWARD-LOOKING  STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. THE
COMPANY  UNDERTAKES  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.

<PAGE>


                                    PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

     Incentra  Solutions,  Inc. is a leading provider of complete  solutions for
enterprise's  data protection needs. We supply a broad range of storage products
and storage  management  services to  broadcasters,  enterprises and information
technology service providers  worldwide.  We market our products and services to
broadcasters  under the trade name Front Porch  Digital  ("Front  Porch") and to
service  providers and enterprise  clients under the trade names  ManagedStorage
International  ("MSI"),  STAR Solutions  ("STAR") and PWI Technologies  ("PWI").
Front Porch provides unique  software and  professional  services  solutions for
digital archive  management to broadcasters  and media  companies.  MSI provides
outsourced  storage  solutions,  including  engineering,  hardware  and software
procurement  and remote storage  operations  services.  STAR and PWI are leading
systems  integrators  which  provide  Information  Technology  ("IT")  products,
professional  services and outsourcing solutions to enterprise customers located
primarily in the western United States.

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

     o    Hardware and software products and services

     o    Outsourcing  solutions - Automated/remote  monitoring,  management and
          maintenance services

     o    Professional services - engineering/operations/IT help desk

     o    Capital/financing solutions

     Through  Front Porch,  we provide a software and  management  solution that
enables  searching,   browsing,  editing,  storage  and  on-demand  delivery  of
media-rich  content in nearly any digital format.  Our complete  digital archive
solution includes our proprietary  software bundled with professional  services,
hardware/software procurement and resale, remote monitoring/management services,
complete support for our proprietary  software  solutions and first call support
for third-party hardware and software maintenance.  Our software converts audio,
video, images, text and data into digital formats for ease of use and archiving.
With more than 90 installations  worldwide, our DIVArchive software solution has
become one of the leading digital archive management applications among European
and Asian broadcast and media  companies,  and is gaining an increasing share of
the North American market. Front Porch's DIVArchive and transcoding applications
provide the essential  integration layer within the digital content creation and
broadcast environments. All of Front Porch's products were built on intelligent,
distributed  architecture.  As a result,  Front Porch's  archive  management and
transcoding  solutions  are  flexible,  scalable,  easily  upgradeable,  failure
resilient  and  integratable  with  leading   automation  and  asset  management
applications.

     Through  MSI,  we  deliver   comprehensive   storage  services,   including
professional  services,  third-party  hardware/software  procurement and resale,
financing  solutions,  remote  monitoring/management  services  and  first  call
support  for  third-party  hardware  and  software  maintenance.  MSI focuses on
providing data protection solutions and services that ensure that its customers'
data is backed-up and recoverable  and meets internal data retention  compliance
policies. MSI's remote monitoring and management services are delivered from its
Storage  Network  Operations  Center  ("NOC")  in  Broomfield,  Colorado,  which
monitors and manages a wide  spectrum of diverse  storage  infrastructures  on a
24x7 basis  throughout  the United  States,  United  Kingdom,  the  Netherlands,


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<PAGE>


Bermuda and Japan.  MSI delivers this service  worldwide  using its  proprietary
GridWorks  Operations Support System,  which enables automated remote monitoring
and management of complete storage infrastructures and back-up applications. MSI
provides  outsourcing   solutions  for  customer  data  protection  needs  under
long-term contracts. Customers pay on a monthly basis for storage services based
on the number of assets managed and/or the volume of storage assets utilized. We
believe customers  benefit from improved  operating  effectiveness  with reduced
operating costs and reductions in capital expenditures.

     Through  STAR  and  PWI,  we  deliver  complete  IT  solutions,   including
professional  services,  third-party  hardware/software  procurement and resale,
financing  solutions  and the  sale  and  delivery  of first  call  support  for
third-party hardware and software maintenance  (including help desk operations).
Solutions are sold primarily to enterprise  customers in the financial services,
government, hospitality, retail, security, healthcare and manufacturing sectors.
With offices and sales personnel located primarily throughout the western United
States, these recently acquired entities are a cornerstone to our North American
expansion plans.


INDUSTRY TRENDS

     International Data Corporation  ("IDC") estimates data growth at a compound
rate of approximately  50% annually through 2007. We believe that because of the
ongoing growth in the creation and storage of data and the increasing  strategic
importance of having data available,  secure and  recoverable,  the data storage
markets in which we compete will continue to expand. We also believe this growth
will include an accelerating  growth rate in the demand for services,  including
data  management  and  monitoring  solutions.  Total  spending  for data storage
products  and  services  in 2003  was  estimated  by IDC at $31  billion  and is
expected by IDC to exceed $34 billion by 2005. IT departments are faced with the
challenges of rapidly  expanding amounts of data to manage,  increasing  demands
for  availability for day-to-day  business and to meet regulatory  requirements,
and  increasing  and more  stringent  compliance  and  governmental  regulations
regarding data storage,  integrity and recoverability.  Conversely, IT headcount
is projected by IDC to increase by only 10% annually,  which should increase the
need  for  organizations  to  improve  storage  management  productivity  and to
evaluate outsourced  management  solutions to accommodate the increasing demands
being placed on the  organization.  We believe  companies will consolidate their
storage   infrastructures   and   implement   enhanced   software   and  service
capabilities, such as storage area network management,  virtualization,  storage
resource management and outsourcing  automated storage monitoring and management
services.

     Excluding hardware infrastructure, IDC estimates that worldwide revenue for
backup and  archive  software  solutions  in 2003  totaled  $2.4  billion and is
expected to grow to an  estimated  $3.0 billion in 2008,  or at a 4.1%  compound
annual  growth  rate.  In  Europe,  our  largest  market for  archive  software,
Datamontior reports that European sales of archive software are expected to grow
at a Compound Annual Growth Rate of 42% through 2008. The total market in Europe
for  complete  archive  and  digital  workflow  solutions,   including  hardware
infrastructure,  (the  broadcast  value  chain)  is  estimated  at $2.6  billion
currently and is expected to grow to $3.6 billion by 2008, or a Compound  Annual
Growth Rate of 8.4%.  Datamonitor  estimates that today only 15% of broadcasters
in  Europe  have  converted  to a  fully-digital  environment.  Based  upon  our
experience in the industry,  we believe the rate of adoption in North America is
no greater than that in Europe, and likely significantly lower. Accordingly,  we
believe  that  opportunities  for the  sale of  complete  archive  solutions  to
broadcasters making the conversion to a fully-digital  environment will continue
to accelerate in 2005 and beyond.  We also believe our business strategy to grow
archive software sales as part of our complete solution offering,  incorporating
our  proprietary  storage  management  and  monitoring  services,   professional
services  and  third-party  hardware  and software  solutions,  will  accelerate
revenue growth and increase profitability.

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<PAGE>

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

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

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

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

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

     CONTINUED  MIGRATION TO NETWORKED STORAGE  INFRASTRUCTURES.  We expect that
     through a variety of storage  networking  technologies,  organizations will
     attain shared  (consolidated)  storage  capabilities.  Consolidated storage
     benefits  include  increased   flexibility  in  implementing  and  managing
     storage,  increased storage device utilization levels,  improved quality of
     service, reduced administration costs and increased operational efficiency.

     EVOLUTION AWAY FROM LARGE,  MONOLITHIC  STORAGE  SYSTEMS TO MODULAR STORAGE
     SYSTEMS.  We expect that many  organizations will implement modular storage
     systems as compared to large, monolithic storage systems.  Smaller versions
     of their high-end, full-featured counterparts,  modular disk systems enable
     organizations to  cost-effectively  implement  storage,  while enjoying the
     performance and functionality of large, enterprise systems.

BUSINESS STRATEGY

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


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<PAGE>

     o    GROWTH THROUGH ACQUISITION.  Our acquisitions (two since January 2005,
          one in 2004) have expanded our customer  base,  provided a large suite
          of products and  services,  expedited the  development  of a strong 27
          person sales force, added management  talent,  created a platform from
          which to extract  revenue  synergies  among our  various  product  and
          service   offerings,   and  provided   excellent   opportunities   for
          consolidation/cost  reduction.  We believe the storage  management and
          services industry is highly fragmented and that there are many smaller
          storage  product  and  software/services   providers  with  successful
          product offerings that are seeking merger or acquisition  partners. We
          intend  initially  to  seek  acquisition   candidates  that  have  the
          following  characteristics:  a large  portion  of  product  sales  are
          generated  from  storage  solutions  and  that  represent  most  major
          manufacturers,  strong professional services organizations,  recurring
          service   revenues  and  strong  sales,   engineering  and  management
          personnel.   Our  initial  focus  for  acquisition  candidates  is  on
          candidates  with  facilities  and  targeted  customers  located in the
          United States.

     o    STRATEGIC ALLIANCES.  We intend to supplement our marketing efforts by
          aligning   ourselves  with  complementary   solutions   providers  and
          technology  partners.  Strategic  alliances  also  will  assist  us in
          keeping pace with technological developments of the major software and
          hardware  vendors and, in certain  instances,  provide us with product
          development  services. We have entered into strategic alliances with a
          number of leading providers of storage products and storage management
          solutions  that  often  include  co-marketing  and  technology-sharing
          arrangements and provide us access to a large existing  customer base.
          Through  similar  alliances,  we expect to gain  greater  exposure and
          acceptance of our products and services.

     o    OFFER COMPLETE DIGITAL ARCHIVE SOLUTIONS TO BROADCASTERS.  Through the
          sale of our  complete  digital  archive  solutions  (three  sold since
          inception in  mid 2004,  each generating  approximately  $1 million in
          revenue),  we intend to capture an increasing  portion of the total IT
          spending of our broadcast  customers and position ourselves for follow
          on sales and services.  A complete digital archive solution  includes:
          Archive Software, Archive Servers, Transcoders, Professional Services,
          and Storage  Hardware and Maintenance.  Historically,  Front Porch has
          focused  on  offering  only  the  archive  software  component  of the
          complete  digital archive  solution with limited  participation in the
          other areas. We estimate that archive  software  comprises only 10-15%
          of the total spending of a broadcast  customer for a complete  digital
          archive  solution.  By  increasing  its  penetration  into these other
          areas, Front Porch believes it will generate significant  increases in
          revenue and gross  margin as these  untapped  components  comprise the
          vast majority of a customer's total spending. We believe by leveraging
          Front Porch's longstanding customer relationships, the dominant market
          position  of  Front  Porch's  DIVArchive   solutions,   Front  Porch's
          world-class customer list of broadcast entities and its reputation for
          superior service and support, Front Porch will be able to successfully
          capture an  increasingly  larger  portion of our  customers'  total IT
          budget.

     o    OFFER COMPLETE DATA PROTECTION  SOLUTIONS.  A complete data protection
          solution includes storage resource management,  back-up  applications,
          storage  hardware,  professional  services,  operations  and financing
          solutions.  Historically,  MSI  has  been  focused  on the  operations
          component  of the  complete  data  protection  solution  with  limited
          participation  in the other  areas.  We estimate  that the  operations
          component comprises only 10-15% of the total spending of an enterprise
          or service provider customer for a complete data protection  solution.
          We  believe  our  GridWorks  proprietary   monitoring  and  management
          solutions  position us to offer a superior and more  complete  storage


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          and data  protection  solution  to our  customers  than that  which is
          currently offered by our competitors.

     o    NEW  PRODUCT  DEVELOPMENT.  We intend to continue to produce a quality
          software product and service  solution that meets client  expectations
          in   terms   of   functionality,    flexibility,   procurement   cost,
          implementation  cost and  ongoing  maintenance  cost.  We believe  our
          storage  and  digital  archive  management  product  lines  meet these
          expectations and will continue to do so as these products  evolve.  We
          are committed to  continuous  product  improvement  through a software
          development  program  that is  driven by  industry  focus  groups  and
          customer  input.  We intend  to  continue  to  utilize  our  industry,
          customer  and  supplier  relationships  to keep  abreast  of  emerging
          standards,  protocols and application  programming  interfaces as such
          trends are introduced and gain market acceptance.

     o    INCREASE  MARKETING  AND  DIRECT  SALES  EFFORTS.   Our  direct  sales
          organization  is  organized  into sales teams that are assigned to our
          operating  units.  We intend to  leverage  our  successes  by devoting
          significant  marketing  and direct  sales  resources  to  cross-market
          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.

     o    FOSTER A CULTURE OF  EXCELLENCE  AND  CUSTOMER  SERVICE.  We intend to
          continue  to  employ  rigorous  recruiting,  training  and  evaluation
          practices  to  help us  attract  and  retain  employees  who  dedicate
          themselves to delivering  outstanding products and consulting services
          to our customers. We have emphasized the creation of an environment of
          excellence  and  customer  services  and  believe  our  commitment  to
          excellence  will  continue  to provide  new  customer  referrals  from
          satisfied customers that have used our products and services.

CUSTOMERS

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

     o    Total storage is increasing 50% annually

     o    New technologies require integration across platforms

     o    Increasing levels of external and internal compliance policies

     o    Staffing is projected to grow only 10%

     o    Limited capital or operating expenses

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

BROADCAST, MEDIA AND ENTERTAINMENT

          Our  customer  base in the  broadcast  industry  includes  some of the
largest  and  best-known  entities  worldwide,   including  Comcast,   Discovery
Networks, A&E Television Networks, Rainbow Networks Communications, Inc., Public
Broadcasting System (PBS), Microsoft  Corporation,  Canal +, Playboy Television,
Walt  Disney  Company,  Chum  Television,  Oxygen,  BBC  Broadcast,  Bayerischer


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<PAGE>


Rundfunk, Turner Entertainment Networks Asia, Sony Pictures,  Telecinco,  France
3,  SKY  Perfect  TV,  Eastern  Television/Taiwan,   TV  Azteca,  Central  China
Television,  Seven Networks and MTV  Networks-Europe.  Many of the customers are
served in multiple locations worldwide.


DATACENTER OPERATORS AND IT SERVICE PROVIDERS

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


FORTUNE 2000 ENTERPRISES AND MID MARKET

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


     During 2004, a  significant  portion of our revenues  were derived from the
European and Asian  geographic  markets.  For the year ended  December 31, 2004,
aggregate  revenues from  customers  located in Europe or Asia amounted to $ 9.0
million, or 51% of total revenue, while revenues from customers located in North
America  totaled $8.7 million,  or 49% of total  revenue,  in each case on a pro
forma basis assuming the acquisition of MSI occurred on January 1, 2004. For the
year ended December 31, 2004,  actual aggregate  revenues from customers located
in Europe or Asia  amounted  to $4.7  million,  or 35% of total  revenue,  while
revenues from customers located in North America totaled $8.6 million, or 65% of
total revenues. As a result of our recent acquisitions of STAR and PWI we do not
expect this concentration of revenues to continue in 2005.

PRODUCTS AND SERVICES

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

PRODUCTS

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

DIGITAL VIDEO ARCHIVE MANAGEMENT SOFTWARE AND SOLUTIONS

     Under our Front Porch brand, we offer a comprehensive  integrated  suite of
digital  video  archive  management   solutions.   Our  proprietary   DIVArchive
(Distributed  Intelligent  Versatile Archive) software products enable customers
to  manage  large-scale  digital  video  archives  in the  broadcast,  media and
entertainment  industry.  With  over  90  installations  worldwide,  we  believe
DIVArchive  maintains  a  dominant  position  in Europe  and Asia and is gaining
market share in North  America.  We believe  participants  in the  entertainment


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industry  are  increasingly  seeking  to convert  non-digitized  data to digital
formats that may easily be accessed, browsed, indexed, managed and distributed.

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

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

     DIVARCHIVE  5.8:  The  most  recent  version  of  DIVArchive  features  the
     following enhanced functionality:

     o    Integration with the full range of TeleStream FlipFactory  transcoding
          solutions

     o    Enhanced integration with leading non-linear editing platforms

     o    Greater control through the Storage Plan Manager Configuration Engine

     o    Expanded  support  for  Tape  Import/Export  and  Meta  Source

     o    New   capabilities   for  MXF  devices   including   partial   restore
          functionality

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

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

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

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


                                       7
<PAGE>

GRIDWORKS OPERATIONS SUPPORT SYSTEM (OSS)


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


RESALE OF THIRD-PARTY HARDWARE AND SOFTWARE

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

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


PRODUCTS                              SUPPLIERS

Primary Storage                       Sun Microsystems

                                      Hitachi Data Systems Corporation

                                      Network Appliance, Inc.

                                      Storage Technology Corporation

                                      Xiotech


Servers and Systems                   Sun Microsystems

                                      HP Compaq

                                      Dell Computer


Tape Automation                       Quantum Corporation

                                      Spectra Logic Corporation

                                      Storage Technology Corporation

                                      Xiotech


                                       8
<PAGE>

Software Solutions                    VERITAS Software Corporation

                                      Commvault Software

                                      Symantec Software


Networking                            Brocade Communications Systems, Inc.

                                      Cisco Systems

                                      McData Corporation

PROFESSIONAL SERVICES

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

     o    STORAGE & INFRASTRUCTURE  ASSESSMENTS - providing critical feedback on
          the  health,  performance  and  utilization  of  storage  and  systems
          infrastructure, as well as a report card of business  performance  and
          compliance relative to established objectives and peer organizations.

     o    STORAGE SYSTEM DESIGN  SERVICES - defining the  appropriate  technical
          architecture  and  unbiased  product  selection  to meet key  business
          criteria and assure optimal results.

     o    IMPLEMENTATION   AND  INTEGRATION   SERVICES  -  assuring   technology
          purchases  are  installed  and  optimized to achieve the best possible
          performance and utilization of resources minimizing ongoing operations
          costs while assuring the best possible availability.

     o    COST OF OWNERSHIP  ASSESSMENTS  - helping  organizations  identify key
          cost areas, most effectively  align resources and leverage  technology
          to reduce ongoing expenses and streamline operations

     o    PROJECT  MANAGEMENT  SERVICES - supplying  professional  assistance to
          oversee  deployment  of assets,  implementations  of new  applications
          while  assisting in the  alignment of scarce  technical  resources for
          timely solutions.

     o    LEVEL 1, 2 & 3  ENGINEERING  SUPPORT  -  assisting  in  rapid  problem
          diagnosis,  vendor response and problem resolution across a very broad
          range of systems and storage applications.


24X7 FIRST CALL OPERATIONS AND MAINTENANCE SUPPORT

     We  operate a 24x7 NOC in  Broomfield,  Colorado  where all first  call and
maintenance   in-coming  calls  are  received,   diagnosed  and  routed  to  the
appropriate  engineering  personnel or vendor.  Support services are provided on
all proprietary and third party products and services. In many cases the support
personnel  in our NOC have the  ability,  if enabled by  customer,  to  remotely
access the customer's  infrastructure using our GridWorks 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.


                                       9
<PAGE>

OUTSOURCING SERVICES

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

Managed storage and monitoring services

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

     o    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.

     o    Our  GridManage   solution   provides  remote  management  of  storage
          applications  and  hardware  infrastructure.  The service is performed
          using the customer's existing storage  infrastructure and includes the
          actual   day-to-day   operation   of  the   customer's   data  storage
          applications, including specifically the back up and recoverability of
          data. This service solution  includes all of the services  provided by
          our GridWatch solution.

     o    Our  GridComplete  offering is a complete storage solution by which we
          provide   the   storage   infrastructure,   integration/implementation
          services  and  complete   management  of  storage   applications   and
          infrastructure.  This solution encompasses all of the services offered
          by our GridWatch and GridManage products.

Outsourcing and service desk operations

          Our  outsourcing  solutions  assist our customers in the management of
their IT environment, by augmenting their staff and operations with personnel as
well as  methodologies,  and  technologies  that  are  based  on  industry  best
practices.  We assist in the design,  implementation  and  management  of new IT
environments,  or leverage an existing  environment  to unlock value and enhance
business performance. Our flexible outsourcing solutions are provided as full or
partial  service  desk  outsourcing  as well as overflow  support  for  existing
service  operations.  We provide full service desk  solutions  housed within our
facilities or design and  implement  custom  solutions at the customer  site. In
each case we coordinate all transitioning needs of the customer.

FINANCING SOLUTIONS

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


                                       10
<PAGE>


internal  or  external  financing  is  largely  dependent  on  the  size  of the
transaction, as well as the creditworthiness and size of the customer.

SALES AND DISTRIBUTION

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

          At March 22,  2005,  our  direct  sales  force  consisted  of 27 sales
people.  Sales and marketing personnel are located at our offices in Broomfield,
Colorado;  Phoenix,  Arizona; San Ramon, Los Angeles and San Diego,  California;
Chicago,  Illinois;  Mount  Laurel,  New Jersey  and  Dallas,  Texas.  Sales and
marketing  personnel  are also  located at our  international  sales and support
offices in the United  Kingdom,  France and Hong Kong. We conduct  comprehensive
marketing programs that include  telemarketing,  public relations,  direct mail,
advertising, seminars, trade shows and ongoing customer communications programs.

     We obtain  sales  leads  through  advertising,  seminars,  trade  shows and
relationships with industry  consultants.  A typical sales cycle begins with the
generation of a sales lead or the receipt of a request for proposal ("RFP") from
a prospective  customer or his representative.  After qualification of the sales
lead and analysis of the prospective customer's requirements,  a formal proposal
in response to the RFP is prepared.  The proposal  generally  describes  how our
products and services are expected to meet the RFP  requirements  and associated
costs. Product  demonstrations are often conducted at the prospective customer's
facilities.  Site  visits to existing  installations  of our  products  are also
encouraged by our sales staff.  While the sales cycle varies  substantially from
customer to customer, it typically ranges from 3 to 8 months.

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

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

          We  have  co-marketing   relationships   with  national  and  regional
distribution  partners  to drive  regional  and local  market  penetration,  and
market-specific   regional   marketing   partners  to  drive   vertical   market
penetration.  Manufacturers  and distributors make available to us certain funds
for marketing  expenses through various programs.  These programs include direct
mail, lead generation,  advertising,  event marketing, brand awareness and sales
support. Manufacturing rebates are also applied to fund a significant portion of

                                       11
<PAGE>


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

          Through Front Porch, we seek to offer an extensive, integrated product
line that provides  digital archive  management  solutions to  broadcasters  and
media companies worldwide.  Through MSI, we seek to offer comprehensive  storage
services  using our  proprietary  Gridworks  Operations  Support  System,  which
enables   automated  remote   monitoring  and  management  of  complete  storage
infrastructures and back-up applications.  To effect this strategy, we intend to
continue  to  introduce  upgraded  functionality  and  enhancements  to existing
products.

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

          Developing  new  technology,  products  and  services  is complex  and
involves  uncertainties.  There can be no assurance that our development efforts
will be successful. For the years ended December 31, 2004 and December 31, 2003,
we incurred total costs, of which a portion is capitalized and the remainder  is
expensed, related to research and development activities totaling $1,337,180 and
$414,590,  respectively.  On a pro forma basis, assuming  the acquisition of MSI
had  occurred  on January 1, 2004,  for the years  ended  December  31, 2004 and
December 31, 2003, we incurred  total costs,  of which a portion is  capitalized
and the remainder is  expensed,  related to research and development  activities
totaling $1,909,373 and $997,590, respectively.

PATENTS, TRADEMARKS AND LICENSES

          We regard our  technology as  proprietary  and will attempt to protect
our technology through patents,  copyrights,  trade secret laws, restrictions on
disclosure  and other  methods.  We  currently  do not hold any issued  patents.
However, we are pursuing patents on key enabling  architectures,  algorithms and
processes  that  encompass   fundamental   technologies   associated   with  the
compression,  storage and transcoding of digital data formats.  We believe that,
because  of the rapid  pace of  technological  change in the  computer  software
industry,  trade  secret  and  copyright  protection  are  less  significant  in


                                       12
<PAGE>


affecting our business, results of operation or financial condition than factors
such as the knowledge, ability and experience of our employees, frequent product
enhancements and timeliness and quality of support services.

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

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

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


COMPETITION

          The markets for our products  and  services are becoming  increasingly
competitive.  We believe our ability to compete  depends on a number of factors,
both within and outside of our control. These factors include, among others, the
functionality,  price and  performance 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 financial resources than we do.

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

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


                                       13
<PAGE>

          We believe the primary  competitors for our data protection  solutions
and complete  solutions to enterprises  include Arsenal Digital,  Electonic Data
Systems  ("EDS")  and IBM Global  Services  ("IBM").  However,  EDS and IBM only
deliver   solutions  from  a  total  IT  outsourcing  and  management   solution
perspective  and do not  focus on the  storage  layer as a core  competency.  In
addition,  these  competitors  often  do not  meet  mid-tier  enterprise  budget
constraints.

EMPLOYEES

          As of March 22, 2005, we employed 134 persons on a full-time basis, of
which 16 were executive  management,  16 were in finance and administration,  27
were in sales and  marketing,  15 were in research and  development,  18 were in
operations support and 42 were in engineering and delivery.

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

DEVELOPMENT OF BUSINESS

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

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

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

          On August 18, 2004, we acquired all of the  outstanding  capital stock
of MSI (the  "Acquisition").  The  Acquisition  was  accounted  for as a reverse
merger,  as  more  fully  described  in  Note  1 to the  Consolidated  Financial
Statements, and  MSI was deemed to be the acquirer for accounting  purposes.  We
changed our name on October 25, 2004 to Incentra Solutions, Inc.

          Due to the Acquisition with MSI, the consolidated financial statements
presented  herein include the financial  statements of MSI for all periods prior
to August 18, 2004 and the financial  statements of the  consolidated  companies
from the date of the  Acquisition  forward.  In addition,  we are disclosing pro
forma  financial   information,   which  reflects  the  consolidated   financial
statements  of both  MSI and  Front  Porch  prior to the  Acquisition  as if the
Acquisition occurred at the beginning of the periods presented.

          On February 18, 2005, we acquired all of the outstanding capital stock
of Star Solutions of Delaware,  Inc., a  privately-held  company.  In connection
with this  acquisition,  we acquired all assets and liabilities of the business,


                                       14
<PAGE>


primarily cash and accounts  receivable/payable,  and  substantially  all of the
personnel of this business.

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

ITEM 2. DESCRIPTION OF PROPERTY

          Our executive offices and certain administrative functions are located
in Boulder,  Colorado,  where we lease approximately 5,000 square feet of office
space under a month-to-month  arrangement.  We lease  approximately 4,000 square
feet of office space in Mount Laurel, New Jersey through September 2006. The New
Jersey  site  houses  our  research  and  software  development  resources,  our
development/testing/staging   laboratory  facilities,  and  certain  information
management  systems for our  domestic  operations  of our Front  Porch  business
operations.  We  lease  approximately  10,700  square  feet of  office  space in
Broomfield,  Colorado  through  September  2007. The Broomfield  site houses our
software  development  resources,  engineering,  managed  storage and monitoring
operations center,  information management systems and administrative functions.
Our  international  operations  are  located in 160 square  meters of office and
production space in Toulouse,  France under a lease that expires in May 2009. We
have sales offices and  operating  locations in San Ramon,  California,  Geneva,
Switzerland and London, England.

          At December 31, 2004, aggregate lease payments under the Mount Laurel,
New Jersey,  Broomfield,  Colorado,  Toulouse,  France and San Ramon, California
leases through the end of the lease terms were as follows:

                    Mount Laurel, New Jersey        $ 96,599
                    Broomfield, Colorado             428,715
                    Toulouse, France                 214,589
                    San Ramon, California              7,533
                                                    --------
                    Total                           $747,436
                                                    ========

          We believe  our  current  facilities  are  adequate  for our  existing
operations and that all of our  properties are adequately  covered by insurance.
We  anticipate  having to  increase  the size of our  facilities  in 2005 if the
growth we experienced in fiscal 2004 continues or accelerates in 2005.

ITEM 3.  LEGAL PROCEEDINGS

         None

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

          We held our annual  meeting of  shareholders  on November 17, 2004 for
the purpose of electing four members to our board of directors.

          The  shareholders  elected  each of the four  nominees to our board of
directors for a one-year term. The following table indicates the number of votes
cast for,  against and  abstained  from the election of the four nominees to our
board of directors:


                                       15
<PAGE>

            DIRECTOR                       FOR            AGAINST      ABSTAINED

Thomas P. Sweeney III                 124,805,554                        58,500

Paul McKnight                         124,805,554                        58,500

James Wolfinger                       124,805,554                        58,500

Patrick Whittingham                   124,805,554                        58,500


                                     PART II

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

          Our common stock is currently  quoted on the OTC Bulletin  Board under
the symbol  "ICEN".  The following  table sets forth the high and low bid prices
for our common stock for each fiscal  quarter  within our last two fiscal years,
as  reported  by the  National  Quotation  Bureau.  The prices  set forth  below
represent interdealer quotations,  without retail markup, markdown or commission
and may not be reflective of actual transactions.

                                                   HIGH BID           LOW BID
                                                   --------           -------
Year ended December 31, 2003
First Quarter..............................          $0.38             $0.15
Second Quarter.............................           0.26              0.08
Third Quarter..............................           0.40              0.13
Fourth Quarter.............................           0.22              0.11

Year ended December 31, 2004
First Quarter..............................          $1.25             $0.12
Second Quarter.............................           0.86              0.32
Third Quarter..............................           0.39              0.16
Fourth Quarter.............................           0.35              0.20


Holders

          At March 22, 2005, there were  approximately 360 record holders of our
common  stock.  This  number  excludes  any  estimate  by us of  the  number  of
beneficial owners of shares held in street name, the accuracy of which cannot be
guaranteed.

Dividends

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

Securities Authorized for Issuance Under Equity Compensation Plans

          As of December 31, 2004, the following equity  compensation plans were
in effect:


                                       16
<PAGE>

<TABLE>
<CAPTION>
                           Number of securities to    Weighted average
                           be issued upon exercise    exercise price of       Number of securities
                           of outstanding options,    outstanding options,    remaining available
Plan category              warrants and rights        warrants and rights     for future issuance
==================================================================================================
<C>                                 <C>                <C>                     <C>
Equity compensation
plans approved by
security holders                      -0-               N/A                     -0-
=================================================================================================
Equity compensation
plans not approved by
security holders

2000 Equity Incentive Plan (a)      18,290,603         $0.32                   4,334,397

MSI 2000 Stock Option Plan (b)       2,196,006         $0.05                   -0-
=================================================================================================
Total                               20,486,609         $0.29                   4,334,397
=================================================================================================
</TABLE>

     (a)  Total number of securities  remaining  available  for future  issuance
          includes   22,625,000  shares  for  issuance  under  our  2000  Equity
          Incentive Plan, less options outstanding. An increase in the number of
          shares reserved from 6,000,000 to 22,625,000 was approved by the Board
          of  Directors and  shareholders  and the effectiveness of the increase
          is subject to our filing of a Schedule 14C Information Statement.

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


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


ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

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

REVENUE RECOGNITION

          Given the growth in orders  during 2004 and the  continuation  of such
growth  into  2005,  as well  as the  complexities  and  estimates  involved  in
measuring  and  determining   revenue  in  accordance  with  generally  accepted
accounting  principles,  our  accounting  for  revenue  is crucial to the proper
periodic reporting of revenue and deferred revenue.

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



                                       17
<PAGE>

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

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

          We sell  hardware  to  customers  as part of an  integrated  solution.
Hardware sales are recognized when the hardware is received by the customer.

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

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

SOFTWARE DEVELOPMENT COSTS

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

STOCK-BASED COMPENSATION

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

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

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


                                       18
<PAGE>

          In December 2004, the FASB issued SFAS No. 123(R) Share-Based Payment,
which addresses the accounting for share-based  payment  transactions.  SFAS No.
123(R)   eliminates  the  ability  to  account  for   share-based   compensation
transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees,
and  generally   requires  instead  that  such  transactions  be  accounted  and
recognized in the statement of income based on their fair value. SFAS No. 123(R)
will be effective for public companies that file as small business issuers as of
the first  interim or annual  reporting  period that begins  after  December 15,
2005. We are evaluating the provisions of this standard,  but depending upon the
number  and  terms of  options  that  may be  granted  in  future  periods,  the
implementation  of this standard  could have a material  impact on our financial
position and results of operations.

ACCOUNTING FOR OBLIGATIONS AND INSTRUMENTS  POTENTIALLY SETTLED IN THE COMPANY'S
COMMON STOCK

We account for  obligations  and  instruments  potentially  to be settled in our
stock in  accordance  with  EITF  00-19,  ACCOUNTING  FOR  DERIVATIVE  FINANCIAL
INSTRUMENTS  INDEXED TO, AND POTENTIALLY  SETTLED IN A COMPANY'S OWN STOCK. This
issue  addresses the initial  balance sheet  classification  and  measurement of
contracts that are indexed to, and potentially settled in, our own stock.

Under EITF  00-19  contracts  are  initially  classified  as equity or as either
assets or liabilities,  depending on the situation.  All contracts are initially
measured at fair value and subsequently  accounted for based on the then current
classification.  Contracts  initially  classified  as  equity  do not  recognize
subsequent  changes  in  fair  value  as long as the  contracts  continue  to be
classified as equity.  For contracts  classified  as assets or  liabilities,  we
report  changes in fair value in  earnings  and  disclose  these  changes in the
financial  statements  as long as the contracts  remain  classified as assets or
liabilities.  If contracts  classified as assets or  liabilities  are ultimately
settled in shares,  any previously  reported gains or losses on those  contracts
continue  to be  included  in  earnings.  The  classification  of a contract  is
reassessed at each balance sheet date.


IMPAIRMENT OF LONG-LIVED ASSETS

          Long-lived, tangible and intangible assets that do not have indefinite
lives,  such as  fixed  assets  and  intellectual  property,  are  reviewed  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying  amount  of such  assets  may not be  recoverable.  As a result  of the
acquisition  of MSI,  which is a reverse  merger  for  accounting  purposes  and
treated as though it were an  acquisition of FPDI, we have  approximately  $17.7
million in intangible  assets.  Determination of  recoverability  is based on an
estimate of  undiscounted  future cash flows resulting from the use of the asset
and its  eventual  disposition.  Measurement  of an  impairment  loss  for  such
long-lived assets is based on the fair value of the asset.

          Goodwill and other  intangible  assets with  indefinite  lives are not
amortized and are subject to write downs  charged to results of operations  only
when their carrying  amounts are determined to be more than their estimated fair
values based upon impairment tests that are required to be made annually or more
frequently  under certain  circumstances.  Fair values are  determined  based on
models that incorporate estimates of future probability and cash flows.

CONCENTRATION OF RISK - CUSTOMERS AND GEOGRAPHIC

          During 2004, a  significant  portion of our revenues were derived from
the European and Asian geographic markets. For the year ended December 31, 2004,
aggregate  revenues from  customers  located in Europe or Asia amounted to $ 9.0
million,  or 51 % of total pro forma  revenue,  while  revenues  from  customers
located in North America  totaled $ 8.7 million,  or 49% of total revenue,  on a
pro forma basis. For the year ended December 31, 2004, actual aggregate revenues
from  customers  located in Europe or Asia amounted to $4.7  million,  or 35% of
total revenue,  while revenues from customers  located in North America  totaled
$8.6 million, or 65% of total revenues.

          As a  result  of  our  recent  acquisitions,  we do  not  expect  this
concentration of revenues to continue in 2005. In 2003, our actual revenues from
customers  located in Europe or Asia amounted to $ 1.1 million,  or 11% of total
revenue,  while  revenues from customers  located in North America  totaled $8.7
million, or 89% of total revenue.

          During 2004, revenues from two customers,  each exceeding 10% of total
revenue,  aggregated 13% and 11%,  respectively.  Accounts receivable from these
customers  represented  approximately 20% of total trade receivables at December
31, 2004.

          During 2003,  revenues  from three  customers  each  exceeding  10% of
revenue represented 36%, 19%, and 11%, respectively, of total revenues.

                                       19
<PAGE>

GENERAL

BUSINESS OUTLOOK

          The following summarized discussion of financial results for the years
ended  December  31, 2004 and December 31, 2003 is of our results on a pro-forma
basis, giving effect to the Acquisition of ManagedStorage International, Inc. as
if the  Acquisition  had  occurred on January 1, 2003.  We believe the pro forma
results of operations provide additional and more relevant information about the
operating  performance  of the  business  and gives a better  indication  of the
results of operations, size and scalability of the business on a forward looking
basis. For the year ended December 31, 2004, pro forma revenues increased 39% to
$17.7  million from $12.7  million for the  comparable  prior year  period.  The
significant  growth in revenue was a result of increased sales and deliveries of
our  proprietary  DIVArchive  solution  and related  professional  services.  In
addition, the stability of the recurring revenue base created by our proprietary
Gridworks OSS solution  provides a monthly  recurring  revenue stream which adds
stability  and  predictability  in  revenue,  as  well as a  significant  growth
opportunity  through  the  expansion  of services  to  existing  customers,  the
continued  increase in the amount of data under  protection,  and new enterprise
and service provider customer opportunities.

          During the year ended  December 31, 2004,  we sold and  delivered  our
first fully  integrated  digital archive and storage  infrastructure  to a major
cable provider in the United States. This complete solution approach will be our
focus in 2005.  During  the  first  quarter  of 2005,  we sold  two   additional
complete archive solutions each with approximately $1.0 million in revenue.

          We continue to invest in the  development  of our software and digital
archiving in the data storage and  infrastructure  areas.  During the year ended
December  31,  2004,  we  invested   approximately   $1.0  million  in  software
development and approximately $1.2 million for data storage  infrastructure.  As
we  continue  to  grow,  we will  need to  sustain  and  possibly  increase  the
investment of capital into our software technologies,  Gridworks and DIVArchive,
to ensure they maintain their competitive advantage and to further enhance their
interoperability and feature sets.

          During  the first  quarter  of 2005,  we  successfully  completed  the
acquisition of two leading  systems  integrators  with combined 2004 revenues of
approximately  $38.3 million.  These  integrators sell IT hardware and software,
professional  services and outsourcing solutions to enterprise customers located
primarily in the western and northwestern United States.  These acquisitions are
a cornerstone in implementing our overall strategy to sell complete solutions to
our  customers as well as to increase the sale of managed  storage  services and
monitoring solutions to enterprise customers. We believe these acquisitions will
provide new  opportunities  to sell these  solutions in  conjunction  with their
existing business of reselling hardware and software solutions.




                                       20
<PAGE>

          For the  year  ended  December  31,  2004,  our pro  forma  loss  from
operations  improved  by  approximately  26%,  decreasing  to $9.3  million,  as
compared to a loss of $12.7 million for the  comparable  prior year period.  The
significant  decrease in losses was a direct result of the increased revenues as
described  above offset by a slight  growth in cost of revenues and SG&A of only
3%. For the year ended  December 31,  2004,  on a pro forma basis we realized an
EBITDA  loss of $3.7  million  compared  to a  pro  forma  EBITDA  loss of $10.3
million for the comparable prior year period. Excluding the impact of the merger
related  costs of $1.4  million  the  adjusted  EBITDA loss on a pro forma basis
would be $2.3 million in 2004.(1)

          We intend to further  leverage  our unique  intellectual  property  by
continuing  to leverage our position as a leading  provider of archive  software
solutions. In addition, we intend to expand our product and service offerings to
position ourselves as a provider of a wide range of services and products to the
broadcast and media markets.  We believe we can increase  revenues from existing
and new customers by offering  complete  archive  solutions,  including  storage
hardware and software,  servers and  peripheral  devices,  as well as first call
support services.  To facilitate this strategy, we intend to increase our volume
of products  available  for resale to the  customers  both  directly and through
existing channel partners.  New products have been announced and are expected to
be launched in the spring of 2005. We also plan to increase our expenditures for
sales and marketing  initiatives to meet an increasing volume of digital archive
implementations worldwide.

          We believe we can increase  the sales of managed  services by becoming
more directly involved in the sale of storage products and professional services
direct to enterprise customers.  We plan to increase our sales resources focused
on the enterprise  market and will resell a variety of storage products directly
to  businesses.  The  acquisitions  of Star and PWI in the first quarter of 2005
serve as essential building blocks for the implementation of that strategy.

----------

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

                                                     FOR THE YEARS ENDING
                                                         DECEMBER 31,

                                                   2004                2003
                                               ------------        ------------

Pro forma net loss before deemed dividends
  and accretion on preferred stock             $    (13,031)       $    (17,893)

Interest (cash portion)                                 273                 135

Interest (non-cash portion)                           3,177               1,561

Taxes                                                   400                  --

Depreciation and amortization                         5,477               5,932
                                               ------------        ------------

EBITDA                                               (3,704)            (10,265)

Acquisition charges                                   1,425                  --
                                               ------------        ------------

EBITDA, as adjusted                            $     (2,279)       $    (10,265)
                                               ============        ============

                                       21
<PAGE>


          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.

RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED
DECEMBER 31, 2003

          REVENUE.  Total revenue for the year ended December 31, 2004 increased
$3.5 million, or 35%, to $13.3 million compared to total revenue of $9.8 million
for the year ended  December  31,  2003.  Revenue  from the sale of our products
increased to $5.2  million  compared to revenue of $0 for the  comparable  prior
year period.  This  increase was  attributable  to:(1) the  additional  revenues
resulting from the merger with Front Porch in August 2004, (2) increased  orders
for our  software  and related  products,  consisting  primarily of sales of our
DIVArchive  solutions  and the  licensing of the  Gridworks OSS solution and (3)
sales of  hardware  as part of  complete  archive  solutions  and as part of SAN
infrastructures.  Revenue from delivery of our services  decreased $1.7 million,
or 17%, to $8.1 million  compared to $9.8 million for the comparable  prior year
period. The decrease in service revenue was the result of a reduction in revenue
of $2.8 million from a large customer that filed for bankruptcy in December 2003
and did not  renew the  service  upon  contract  expiration  in 2004,  which was
offset, in part, by additional  revenues of $1.1 million related to our existing
and new customer base in 2004.

          For the year ended  December 31, 2004,  a  significant  portion of our
revenues  were derived from the European and Asian  geographic  markets.  During
that  period,  aggregate  revenues  from  customers  located  in  Europe or Asia
amounted to $4.7 million, or 35% of total revenue, while revenues from customers
located in North America totaled $8.6 million, or 65% of total revenue.  For the
year ended December 31, 2003, our revenues from customers  located in Europe and
Asia  amounted to $1.1 million,  or 11% of total  revenue,  while  revenues from
customers  located  in  North  America  totaled  $8.7  million,  or 89% of total
revenue.

          GROSS MARGIN.  Total gross margin for the year ended December 31, 2004
increased $3.1 million to $6.0 million,  or 45% of total revenue, as compared to
gross margin of $2.9 million, or 29% of total revenue,  for the comparable prior
year period.  Product gross margin for the year ended  December 31, 2004 totaled
$3.7 million, or 71% of product revenue. Service gross margin for the year ended
December 31, 2004 totaled $2.3 million, or 28% of service revenue. The increased
gross margin was primarily the result of the  acquisition of Front Porch and the
sale of higher margin software (DIVArchive). The gross margin as a percentage of
total revenue  reported for the year ended December 31, 2004 met our anticipated
gross margin and was significantly  higher than the gross margin of 29% reported
for  the  prior  year-end  due to  the  growth  in  revenues  of our  DIVArchive
solutions.

          SELLING,  GENERAL AND ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  ("SG&A") expenses for the year ended December 31, 2004 increased
slightly by  approximately  $0.9 million to $10.3  million from $9.4 million for
the  comparable  prior year  period.  Actual  SG&A  expenses  for the year ended
December 31, 2004  included  $5.9  million in salaries and related  benefits for
employees not directly  related to the  production  of revenue,  $1.6 million in
general office  expenses,  $1.0 million in  professional  fees, $0.8 million for
travel-related costs, $0.6 million in facilities costs, $0.3 million in bad debt


                                       22
<PAGE>


expense and $0.1 million in research and  development  costs.  SG&A  expenses of
$9.4 million for the prior year ending  December 31, 2003  included $5.4 million
in salaries and related  benefits  for  employees  not  directly  related to the
production of revenue, $1.5 million in general office expenses,  $0.9 million in
professional  fees,  $0.8  million  in travel  related  costs,  $0.5  million of
facilities  costs and $0.3  million of bad debt  expense.  The  increase in SG&A
expenses  during the year ended  December  31,  2004 was a direct  result of the
inclusion  of SG&A  expenses  for Front  Porch from the date of the  acquisition
forward,  which was offset, in part, by a reduction in payroll and related costs
as a result of reductions in staffing levels.

          MERGER  COSTS.  Merger cost of $1.3 million in 2004  consists of costs
incurred in the acquisition of Front Porch. The costs consist of $0.8 million in
accelerated  compensation  expense related to the  accelerated  vesting of stock
options,  $0.4 million in professional  fees for legal,  banking and accounting,
$0.1 million of severance  related  costs due to reduction in staffing as result
of the acquisition. There were no merger related costs in 2003.

          DEPRECIATION  AND  AMORTIZATION.   Amortization  expense  consists  of
amortization of intellectual property, and other intangible assets. Depreciation
expense  consists  of  depreciation  of  furniture,   equipment,   software  and
improvements and capitalized  research and development  costs.  Depreciation and
amortization  expense was  approximately  $4.0  million and $3.3 million for the
years ended December 31, 2004 and 2003, respectively.  The increase is driven by
the increase in amortization  associated  with the intangible  assets created in
the acquisition of Front Porch.

          OPERATING LOSS. During the year ended December 31, 2004, we incurred a
loss from  operations  of $7.7 million as compared to a loss from  operations of
$8.5 million for the year ended  December 31,  2003.  Included in the  operating
loss for the year ended  December 31, 2004 was $1.3 million of costs  related to
the merger with MSI.  Excluding  the costs of the  acquisition,  the decrease in
loss from  operations  for the year ended December 31, 2004 was primarily due to
the increased revenues and gross margin described above.

          INTEREST EXPENSE. Interest expense was $2.4 million for the year ended
December 31, 2004 compared to $2.2 million for the year ended December 31, 2003.
The increase in interest expense was  attributable to increased  amortization of
debt  discounts.  Interest  expense  during 2004 included cash interest costs of
$0.2 million on notes payable and capital leases and non-cash  interest  charges
of $2.2  million  consisting  of $1.7  million of interest  on MSI's  previously
outstanding  Series C preferred  stock,  $0.2 million related to amortization of
debt discounts,  $0.2 million  related to warrants,  and $0.1 million related to
amortization  of  financing  costs.  Interest  expense  of $2.2  million in 2003
included cash interest of $0.1 million on capital  leases and non-cash  interest
charges  of  $2.1  million  consisting  of  $1.3  million  on  MSI's  previously
outstanding  Series C preferred stock and $0.8 million of interest in connection
with an issuance of MSI's previously outstanding common stock.

          OTHER  INCOME  AND  EXPENSE.  Other  income of $0.4  million  for 2004
included  $0.3 million of income for the sale of New Jersey state net  operating
losses from prior years and $0.1  million for  investment  income and gains from
the sale of fixed assets. Other expense of $0.3 million for 2003 included a loss
on the investment in Front Porch of $0.6 million (prior to the merger),  reduced
by $0.1  million of income  from the sale of fixed  assets  and $0.2  million of
income from leased equipment to customers.

          FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS.  As discussed above, we
conduct  business in various  countries  outside the United  States in which the
functional currency of the country is not the U. S. dollar. As a result, we have
foreign currency exchange  translation  exposure as the results of these foreign
operations  are  translated  into U.S.  dollars  in our  consolidated  financial


                                       23
<PAGE>


statements.  For the year ended  December 31, 2004,  we reported an  accumulated
translation  gain of approximately  $19,000 as a component of accumulated  other
comprehensive  income.  We are also  subject  to  foreign  exchange  transaction
exposure  because we provide  for  intercompany  funding  between  the U.S.  and
international  operations,  when  we  and/or  our  French  subsidiary  transacts
business in a currency  other than our own functional  currency.  The effects of
exchange rate fluctuations in remeasuring foreign currency  transactions for the
year ended  December 31, 2004 was a $25,000 loss.  In addition,  we entered into
two new  forward  contracts,  one of which  expired on  December 7, 2004 and the
other of which  expires on April 1, 2005.  We  recorded a realized  loss of $0.1
million and an  unrealized  loss of $0.1 million on the contracts as of December
31,  2004,  which  represented  the  change in the fair  value  for the  foreign
currency forward contract related to the difference  between changes in the spot
and forward rates excluded from the assessment of hedge effectiveness.

          INCOME TAX EXPENSE.  We incurred income tax expense for the year ended
December 31, 2004 of $0.4 million.  This income tax expense represents  non-cash
deferred  income  tax  expense  related to our French  subsidiary,  Front  Porch
Digital International, S.A.S. These income taxes were incurred during the period
from the Acquisition  through December 31, 2004 and represent the utilization of
the subsidiary's  deferred tax assets (net operating losses) during that period,
which was recorded as a deferred tax asset in purchase accounting.

          NET LOSS  APPLICABLE  TO COMMON  STOCKHOLDERS.  During  the year ended
December 31, 2004, we incurred a net loss  applicable to common  stockholders of
$11.8  million as compared to a net loss  applicable to common  stockholders  of
$12.7 million for the year ended December 31, 2003. Included in the net loss for
the year  ended  December  31,  2004 was $1.3  million  of costs  related to the
acquisition.  Excluding the acquisition  costs, the decrease in net loss for the
year ended  December 31, 2004 was primarily  due to the  increased  revenues and
gross margin described above and the net decrease of the dividends and accretion
on preferred stock of $0.4 million.


LIQUIDITY AND CAPITAL RESOURCES

          At  December  31,  2004,   we  had  $3.1  million  of  cash  and  cash
equivalents.  Issuance of  convertible  debt and equity  securities  have been a
principal source of liquidity for us.

          On May 13, 2004, we consummated a private placement  pursuant to which
we issued a secured  convertible  term  note due May 13,  2007 in the  principal
amount of $5.0 million, and a common stock purchase warrant entitling the holder
to purchase  4,435,500  shares of our common  stock (See Note 10 of the Notes to
Consolidated Financial Statements).

          We are still in the early stages of executing  our business  strategy,
we have recently  completed  two  significant  acquisitions  and expect to begin
numerous new engagements during the next 12 months. Although we are experiencing
success in the deployment of our marketing strategy for the sale and delivery of
our  DIVArchive and other software  solutions,  continuation  of this success is
contingent upon several factors,  including available cash resources, the prices
of our products and services  relative to those of our competitors,  and general
economic and business conditions, among others.

          We expect anticipated cash flow from operations combined with our cash
and cash  equivalents  at April 1, 2005 will be  sufficient  to operate  through
March 31, 2006. In addition,  in connection  with the  acquisitions in the first
quarter of 2005,  the  Company  issued a $5  million  Senior  Secured  Revolving
Commercial  Loan  with  Wells  Fargo  Bank,  N.A.  to  finance  the  cost of the


                                       24
<PAGE>


acquisitions  and to provide working capital and additional  capacity for future
acquisitions.  Considering  these  acquisitions and the related funding combined
with our current cash position,  we believe we have sufficient capital available
for the  execution  of our  business  strategy  and  our  continued  growth  and
expansion.  However,  there can be no assurance  that we will not need to access
the capital  markets for  additional  financing  to fund our organic  growth and
subsequent  acquisitions  and that  sufficient  capital will be  available  upon
acceptable  terms.  We incurred an  operating  loss of $7.7 million for the year
ended December 31, 2004 and $8.5 million for the  comparable  prior year period.

          During 2004,  we continued to have success in deploying  our marketing
strategy  for the sale and delivery of our  DIVArchive  software  solutions.  We
continue to build a backlog into the first quarter of 2005. In addition, we have
experienced  sales of complete  archive  solutions to major  broadcasters in the
first  quarter of 2005 and plan on  continuing  this sales  approach in 2005. In
addition, we have completed two acquisitions in the first quarter of 2005, which
allow us to  expand  and  penetrate  the  complete  solutions  offerings  in the
enterprise  market place.  Both  acquisitions are expected to be accretive on an
operating cash flow basis and we anticipate  further  improvements  to operating
cash flows as synergies  are  realized.  These  synergies  result from  improved
margins on  maintenance  contracts due to the handling of first call support and
improved service revenue growth from the introduction of managed services to the
new and existing enterprise customers of these two acquisitions.

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

          We expect capital expenditures to be approximately $1.5 million during
the 12-month  period ended  December 31, 2005. 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 the
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.

          As of December 31, 2004, we had current assets of $7.5 million.  These
assets  were  primarily  derived  from  our  operations  in 2004  and  from  the
acquisition  of MSI,  which is accounted  for as a reverse  merger as though MSI
acquired  us.  Long-term  assets of $21.2  million  consist of $16.5  million of
intangible assets acquired during the transaction with Front Porch, $2.5 million
of property and equipment,  $1.2 million of software  development costs and $1.0
million of other  assets  which  consist  primarily  of $0.8 million of deferred
financing  costs,  $0.1 million of restricted cash and $0.1 million of deposits,
prepaid expenses and other receivables.

                                       25
<PAGE>


          Current  liabilities of $7.4 million at December 31, 2004 consisted of
$1.4  million of  accounts  payable;  $1.2  million of deferred  revenue,  which
consisted  of billings in excess of revenue  recognized,  deposits  and progress
payments received on engagements currently in progress;  $3.1 million of accrued
expenses;  and  $1.7 of  current  portion  of notes  payable,  other  long  term
obligations, and capital leases.

          Our working capital was $0.1 million as of December 31, 2004.

          We used net cash of $3.5  million in operating  activities  during the
year ended  December  31, 2004,  primarily as a result of the net loss  incurred
during the period.  We used net cash of $4.2 million from  operating  activities
during the year ended  December  31, 2003  primarily as a result of the net loss
incurred during the period.

          We provided net cash of $4.7 million in  investing  activities  during
the year ended  December 31, 2004,  of which $4.0  million  represents  cash and
restricted cash acquired from Front Porch in the acquisition  transaction,  $3.8
million of proceeds from the maturity of short term investments and $0.1 million
of proceeds from the sale of fixed assets.  These amounts were offset by capital
expenditures  of $1.9  million,  the  investment  in  development  for our video
software and  Gridworks  solutions of $1.2 million and  capitalized  acquisition
costs of $0.2  million.  During the year ended  December 31, 2003,  we used $8.5
million of cash in  investing  activities  of which $3.8 million was to purchase
short  term  investments,  net of  maturities  of short term  investments,  $2.3
million was to purchase  intangible assets and $2.1 million was used to purchase
property and  equipment  and $0.3 million was invested in  capitalized  software
development.

          Financing  activities  used net cash of $0.3  million  during the year
ended  December 31, 2004 primarily  from the repayment of capital  leases,  long
term  obligations and notes payable of $1.2 million,  which was partially offset
by proceeds of $0.8  million from a lease line of credit.  Financing  activities
provided  net cash of $14.8  million  during the year ended  December  31,  2003
primarily  from proceeds  from the issuance of preferred  stock of $12.9 million
and common stock of $3.2 million, offset by offering costs for the preferred and
common stock of $0.8 million and principal  repayments on capital leases of $0.4
million.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

          In December 2004, the Financial  Accounting  Standards  Board ("FASB")
issued SFAS No. 123(R),  SHARE-BASED PAYMENT, which addresses the accounting for
share-based compensation transactions. SFAS No. 123(R) eliminates the ability to
account for share-based  compensation  transactions  using APB 25, and generally
requires  instead that such  transactions  be accounted  and  recognized  in the
statement  of  operations  based on their fair  value.  SFAS No.  123(R) will be
effective for public  companies  that file as small  business  issuers as of the
first interim or annual reporting period that begins after December 15, 2005. We


                                       26
<PAGE>


are evaluating  the  provisions of this standard.  Depending upon the number and
terms of options that may be granted in future periods,  the  implementation  of
this standard could have a material impact on our financial position and results
of operations.

          In May 2003,  the FASB  issued SFAS No.  150,  ACCOUNTING  FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, which
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer  classify a financial  instrument that is within
its scope, which may have previously been reported as equity, as a liability (or
an  asset  is some  circumstances).  Mandatorily  redeemable  instruments  (i.e.
instruments  issued  in the form of shares  that  unconditionally  obligate  the
issuer to redeem the shares for cash or by transferring  other assets) are to be
reported as  liabilities  by their  issuers.  This statement does not affect the
classification  or measurement of convertible  bonds,  puttable  stock, or other
outstanding shares that are conditionally redeemable. The provisions of SFAS No.
150 are  generally  effective  for  those  provisions  relating  to  mandatorily
redeemable non-controlling interests, which have been deferred. MSI's previously
outstanding New Series C preferred  stock was mandatorily  redeemable on January
9, 2008,  (the redemption  amount was estimated to be $33,156,000,  representing
$1,000 per share plus five years of dividends  at $100 per share per year),  and
therefore  was  considered  a liability  under the  provisions  of SFAS No. 150.
Accordingly,  on July 1, 2003,  the  carrying  amount of the New Series C, which
approximated its fair value, was  reclassified  from the "mezzanine"  section of
the balance sheet to the liability  section.  There was no gain or loss recorded
upon the adoption of SFAS No. 150. From July 1, 2003 through  December 31, 2003,
we recorded  non-cash  interest expense of $1,262,508,  and from January 1, 2004
through August 18, 2004, when the stock was exchanged for our Series A Preferred
Stock we  recorded  non-cash  interest  expense  of  $1,703,332,  reflecting  an
effective interest rate on this security of 13.44%.

          In December 2003, the FASB issued  Interpretation No. 46R ("FIN 46R"),
a revision to SFAS  Interpretation  No. 46,  CONSOLIDATION OF VARIABLE  INTEREST
ENTITIES. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain
entities from its  requirements.  FIN 46R requires a variable interest entity to
be  consolidated  by a company if that  company is subject to a majority  of the
risk of loss from the  variable  interest  entity's  activities  or  entitled to
receive a  majority  of the  entity's  residual  returns  or both.  FIN 46R also
requires  disclosures  about  variable  interest  entities that a company is not
required to consolidate but in which it has a significant variable interest. FIN
46R became effective for variable  interest  entities created after December 15,
2003 for public companies,  and became effective for all other variable interest
entities by the end of the first annual  reporting  period ending after December
15, 2004 for companies that are small business  issuers.  FIN46R did not have an
impact on our financial position or results of operation.


ITEM 7.   FINANCIAL STATEMENTS

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

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

          During the  fiscal  year  ended  December  31,  2004,  we changed  our
independent  registered public accounting firm to GHP Horwath, P.C., as reported
in our  Current  Reports on Forms 8-K filed  with the  Securities  and  Exchange
Commission on November 9, 2004,  December 23, 2004,  January 6, 2005 and January
7, 2005.


                                       27
<PAGE>

ITEM 8A.  CONTROLS AND PROCEDURES.

          DISCLOSURE   CONTROLS  AND  PROCEDURES.   Our  management,   with  the
participation of our chief executive  officer and chief financial  officer,  has
evaluated the  effectiveness of our disclosure  controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e)  under the Securities  Exchange
Act of 1934,  as  amended  (the  "Exchange  Act"))  as of the end of the  period
covered by this report.  Based on such evaluation,  our chief executive  officer
and chief  financial  officer have concluded that, as of the end of such period,
our disclosure  controls and procedures are effective in recording,  processing,
summarizing  and  reporting,  on a  timely  basis,  information  required  to be
disclosed by us in the reports that we file or submit under the Exchange Act.

          INTERNAL  CONTROL OVER  FINANCIAL  REPORTING.  There have not been any
changes  in our  internal  control  over  financial  reporting  (as such term is
defined in Rules  13a-15(f)  and  15d-15(f)  under the Exchange  Act) during the
fourth quarter of 2004 that have materially  affected,  or are reasonably likely
to materially affect, our internal control over financial reporting.

ITEM 8B.  OTHER INFORMATION

          On December 6, 2004, we entered into a two-year  employment  agreement
(the "Knaisch  Agreement")  with Michael C. Knaisch,  the President of our Front
Porch Digital division.  The Knaisch  Agreement  provides for the payment to Mr.
Knaisch  of an annual  base  salary of  $200,000,  subject  to  increase  at the
discretion of the compensation committee of our board of directors and quarterly
performance-based  bonuses of up to $37,500,  as determined by our board, during
the fiscal year ending  December 31, 2005. The Knaisch  Agreement  provides that
Mr.  Knaisch may  terminate  the Knaisch  Agreement  upon thirty (30) days prior
written notice to us and we may terminate the Knaisch Agreement, with or without
cause, upon written notice to Mr. Knaisch.  If Mr. Knaisch is terminated without
cause he will be  entitled  to receive  his full  salary and group  health  plan
benefits for twelve  months  following  such  termination.  The full text of the
Knaisch  Agreement  is  included as Exhibit  10.29 to this annual  report and is
incorporated by reference herein.


                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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 30, 2005:

               NAME                AGE               POSITION(S)
               ----                ---               ----------
      Thomas P. Sweeney III         44       Chairman of the Board and
                                                Chief Executive Officer

      Michael Knaisch               48       President of Front Porch
                                                Digital Division

      Paul McKnight                 48       Chief Financial Officer and
                                                Director

      Matthew Richman               34       Senior Vice President -
                                                Corporate Development

      Walter Hinton                 42       Chief Technology Officer


                                       28
<PAGE>

      Patrick Whittingham           56       Director

      James Wolfinger               48       Director

      Christopher S. Gaffney        42       Director

      Carmen J. Scarpa              40       Director

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

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

          THOMAS P.  SWEENEY  III.  Mr.  Sweeney  has been our  Chief  Executive
Officer since August 18, 2004,  the date of our  acquisition  of  ManagedStorage
International, Inc. ("MSI"), and Chairman of our Board of Directors since August
2002.  Mr.  Sweeney  previously  served on our Board of Directors for the period
November 30, 2000 through February 12, 2002. From February 2001 until August 19,
2004, Mr. Sweeney was Chief Executive  Officer and Chairman of the Board of MSI.
Since such date, Mr. Sweeney has also served as President and a director of MSI.
Mr.  Sweeney is the founder of Equity Pier LLC, a business  advisory and venture
capital firm, and has served as its Managing Partner since May 2000. From August
1997 through  February  2000, Mr. Sweeney was Senior Vice President of Marketing
at Level 3 Communications, Inc., where he was responsible for the development of
global products and services.

          MICHAEL  KNAISCH.  Mr. Knaisch has been our President since August 18,
2004.  From June 2003 to August 18, 2004,  Mr.  Knaisch was our Chief  Executive
Officer.  From January 2003 to June 2003,  Mr.  Knaisch was our Chief  Operating
Officer.  From October 2002 to January 2003,  Mr.  Knaisch  provided  consulting
services to us. From August 1998 through  September 2002, Mr. Knaisch was Senior
Vice President of Global Strategic Alliances at Level 3 Communications, Inc.

          PAUL MCKNIGHT. Since October 12, 2004, Mr. McKnight has been our Chief
Financial Officer.  Mr. McKnight has also served on our Board of Directors since
August 2002.  From August 2002 to January 2003, Mr.  McKnight also served as our
interim Chief  Financial  Officer.  Since August 2001, Mr. McKnight has been the
Chief  Financial  Officer of MSI.  From May 2000 to August  2001,  Mr.  McKnight
served as Chief  Financial  Officer of Equity Pier LLC, a business  advisory and
venture  capital firm.  From January 1997 through May 2000, Mr. McKnight was the
Chief Operating Officer and Chief Financial Officer of MCI WorldCom Wireless.

          MATTHEW  RICHMAN.  Mr.  Richman has been our Senior  Vice  President -
Corporate  Development  since October 12, 2004. From January 2003 to October 12,
2004,  Mr.  Richman  was our  Chief  Financial  Officer  and from  June  2003 to
September 30, 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.  From
October 2000 through January 2001, Mr. Richman was Vice President of Finance for
TelePlace,  Inc., a datacenter/co-location  company. From September 1994 through
September  2000,  Mr.  Richman was  employed by Deloitte & Touche LLP,  where he
served in various auditing and consulting roles, most recently as a Manager.

          WALTER HINTON.  Mr. Hinton has been our Chief Technology officer since
October 12, 2004. Mr. Hinton was the Chief Technology Officer for MSI from March
2000 through  October 12, 2004.  From 1999 to March 2000 Mr. Hinton was the Vice
President and General Manager of Storage Networking for StorageTek.

          PATRICK  WHITTINGHAM.  Mr.  Whittingham  has  served  on the  Board of
Directors  since  April  2004.  Since April  2004,  Mr.  Whittingham  has been a
consultant  in  the  area  of  broadcast  and  production  technology,   systems


                                       29
<PAGE>


integration and digital cinema. Prior to February 2004, Mr. Whittingham had been
for more than 28 years an employee of various  affiliates  of Sony  Corporation,
including  President of the Sony  Broadcast and Production  Systems  Division of
Sony Electronics  (USA), Inc. from June 2003 to January 2004;  President of Sony
Business  Solution and System Company (USA) from June 2002 to June 2003;  Senior
Vice  President of System  Solutions  Division  (USA) from February 2001 to June
2002;  and  Executive  Vice  President  of Sony of Canada Ltd.  from May 1997 to
February 2001.

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

          CHRISTOPHER  S.  GAFFNEY.  Mr.  Gaffney  has  served  on our  Board of
Directors  since August 2004.  Mr.  Gaffney is a founder of Great Hill Partners,
LLC, a private  equity  firm  specializing  in the  communications,  information
technology,  media  and  business  service  industries,  and has  served  as its
Managing Partner since January 1999.

          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.


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,  2004,  all Section
16(a)  filing  requirements  applicable  to  our  officers,  directors  and  10%
Shareholders  were  complied  with,  except (i) Thomas P. Sweeney III, our Chief
Executive  Officer and Chairman of the Board,  was late in filing a Statement of
Changes of Beneficial  Ownership of Securities on Form 4 for the  acquisition of
2,023,810  shares of our common stock on April 1, 2004 upon the  conversion of a
convertible  promissory  note by  Equity  Pier LLC (of whom Mr.  Sweeney  is the
founder and managing member),  (ii) Matthew Richman, our Senior Vice President -
Corporate  Development,  was late in filing a Statement of Changes of Beneficial
Ownership of Securities on Form 4 for (1) options to purchase  425,000 shares of
our  common  stock  granted to him on March 16,  2004,  (2) the  acquisition  of
357,143  shares of our common  stock on April 1, 2004 upon the  conversion  of a
convertible  promissory  note and (3) the  acquisition  of 233,000 shares of our
common stock on June 11, 2004 in satisfaction of Mr. Richman's  outstanding 2003
employee bonus;  (iii) Patrick  Whittingham,  one of our directors,  was late in
filing an Initial Statement of Beneficial  Ownership of Securities on Form 3 for
options  granted him on April 16, 2004 to purchase  250,000 shares of our common
stock; (iv) Walter Hinton,  our Chief Technical  Officer,  was late in filing an
Initial Statement of Beneficial Ownership of Securities on Form 3 for options to
purchase  1,036,422 shares of our common stock granted him on February 13, 2004;
(v) Michael Knaisch,  the President of our Front Porch Digital division was late
in filing a Statement of Changes of Beneficial Ownership of Securities on Form 4


                                       30
<PAGE>


for options to purchase  600,000  shares of our common  stock  granted to him on
March 16; (vi) JP Morgan Direct Venture Capital  Institutional  Investors LLC, a
10% Shareholder, was late in filing an Initial Statement of Beneficial Ownership
of Securities on Form 3 for (1) 9,295,166 shares of our common stock it acquired
on August 18, 2004 and (2) 497,532 shares of our Series A preferred stock (which
are presently convertible into 9,950,633 shares of our common stock) it acquired
on August 18, 2004; (vii) Tudor Ventures II LP, a 10%  Shareholder,  was late in
filing an Initial Statement of Beneficial  Ownership of Securities on Form 3 for
(1) 6,081,629  shares of our common stock it acquired on August 18, 2004 and (2)
903,994 shares of our Series A preferred stock (which are presently  convertible
into 18,079,880  shares of our common stock) it acquired on August 18, 2004; and
(viii) Great Hill Equity Partners LP, a 10%  Shareholder,  was late in filing an
Initial  Statement  of  Beneficial  Ownership  of  Securities  on Form 3 for (1)
19,796,518  shares of our common  stock it  acquired  on August 18, 2004 and (2)
815,715 shares of our Series A preferred stock (which are presently  convertible
into  16,314,297  shares of our common  stock) it acquired  on August 18,  2004;
(viii)  Paul  McKnight,  our  Chief  Financial  Officer  was  late in  filing  a
Statement of Change in Beneficial  Ownership of Securities on Form 4 relating to
his  acquisition  of options for the  purchase  of 500,000  shares of our common
stock granted to him on November 17, 2004.

CODE OF ETHICS

          We have not yet adopted a formal  code of ethics  that  applies to our
principal executive officer,  principal financial officer,  principal accounting
officer or  controller,  or persons  performing  similar  functions.  Management
expects to  implement  a formal  code of ethics and  related  control  for these
persons during 2005.

                                       31
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

          The following Summary  Compensation  Table sets forth  compensation we
paid for  services  rendered  to each  person who served as our Chief  Executive
Officer  during the years  ended  December  31,  2004 and 2003,  and to our most
highly compensated executive officers at December 31, 2004, other than our Chief
Executive Officer (collectively, the "Named Executed Officers").

<TABLE>
<CAPTION>
                                                Annual Compensation                      Long Term Compensation Awards
                                                                             --------------------------------------------------
                                                                                     Awards                   Payouts
                                        ------------------------------------ ------------------------ -------------------------

                                                                  Other     Restricted   Securities
                                                                 Annual       Stock      Underlying     LTIP       All Other
                                Fiscal    Salary     Bonus    Compensation   Award(s)     Options/     Payouts   Compensation
                                 Year       ($)       ($)          ($)          ($)       SARs (#)       ($)          ($)
                                 ----    --------   --------  ------------  ----------   ----------    -------   ------------
<S>                              <C>     <C>        <C>           <C>        <C>         <C>             <C>        <C>
Thomas P. Sweeney III(1)         2004    $220,192   $220,000      $-0-          $-0-     11,062,000      $-0-       $12,010
Chief Executive Officer          2003    $125,000   $150,000      $-0-          $-0-      1,510,093      $-0-        $3,200
                                 2002    $162,500   $200,000      $-0-       $22,927         20,078      $-0-          $-0-

Michael Knaisch(2)               2004    $200,000   $142,667      $-0-          $-0-        600,000      $-0-          $-0-
Chief Executive Officer          2003    $217,000   $129,000      $-0-          $-0-        750,000      $-0-          $-0-
  until August 18, 2004          2002     $50,000       $-0-      $-0-          $-0-            -0-      $-0-          $-0-
  President of Front Porch
  Digital Division since
  August 18, 2004

Matthew Richman(3)               2004    $160,000   $119,133      $-0-          $-0-        425,000      $-0-       $15,000
Chief Financial Officer &        2003    $168,000   $105,000      $-0-          $-0-        500,000      $-0-          $-0-
  Chief Operating Officer        2002     $30,500       $-0-      $-0-          $-0-            -0-      $-0-          $-0-
  until October 12, 2004
  Sr. Vice President -
  Corporate Development
  since October 12, 2004

Donald Maggi(7)                  2004     $13,300       $-0-      $-0-          $-0-            -0-       $-0-         $-0-
Senior Vice President            2003    $207,500       $-0-      $-0-          $-0-        840,000       $-0-         $-0-
  of Business Development        2002    $180,000       $-0-      $-0-          $-0-            -0-       $-0-         $-0-
  until January 2004
  Chief Executive Officer
  until June 1, 2003

Jay Yogeshwar(4)                 2004     $12,381     $7,500      $-0-          $-0-            -0-       $-0-         $-0-
President and Chief              2003    $129,000    $10,500      $-0-          $-0-            -0-       $-0-         $-0-
  Technology Officer             2002    $150,000       $-0-      $-0-          $-0-            -0-       $-0-         $-0-
  until January 2004

Paul McKnight(5)                 2004    $195,000    $25,000      $-0-          $-0-        500,000       $-0-         $-0-
Chief Financial Officer          2003    $195,000     $9,000      $-0-          $-0-        275,881       $-0-         $-0-
  since October 12, 2004         2002    $196,231     $1,500      $-0-        $1,534          1,344       $-0-         $-0-

Walter Hinton(6)                 2004    $210,000    $50,000      $-0-          $-0-        700,000       $-0-       $3,920
Chief Technical Officer          2003    $210,000    $45,000      $-0-          $-0-        336,423       $-0-       $3,720
  since October 12, 2004         2002    $210,000     $1,500      $-0-        $3,845          3,367       $-0-         $-0-
</TABLE>

-----------------

(1)  Mr. Sweeney was appointed as our Chief Executive  Officer  effective August
     18,  2004 and has also served as our  Chairman  of the Board  since  August
     2002.  Prior to August 18, 2004,  Mr.  Sweeney  served as the President and
     Chief  Executive  Officer of MSI,  which we  acquired  on August 18,  2004.
     Compensation paid to Mr. Sweeney in 2004 includes salary of $93,077 paid by
     our company after the  Acquisition and salary of $127,115 paid by MSI prior
     to the  Acquisition.  Included in the 2004 bonus  earned by Mr.  Sweeney is
     $220,000 of accrued but unpaid compensation.  Compensation in 2003 and 2002
     represents compensation paid to Mr. Sweeney by MSI.

(2)  Mr.  Knaisch  served as our Chief  Executive  Officer  from June 2, 2003 to
     August  18,  2004  (the  date of the  Acquisition),  on  which  date he was
     appointed  President of our Front Porch Digital  division.  Included in the
     2004 bonus  earned by Mr.  Knaisch are  $117,667 of paid  compensation  and
     $25,000 of accrued but unpaid  compensation.  From June 1, 2003 to December
     31,  2003,  Mr.  Knaisch was an employee of ours and  received  $117,000 in
     salary for serving as our Chief Executive Officer.  From January 1, 2003 to


                                       32
<PAGE>


     June 2, 2003, Mr. Knaisch provided  consulting  services to us and received
     $100,000  in  consulting  fees and  $12,000  in bonus as  compensation  for
     services provided as our Chief Operating Officer.  Included in the $129,000
     bonus  earned by Mr.  Knaisch in 2003 was  $107,000  of accrued  but unpaid
     compensation.  From October 2002 to December  2002,  Mr.  Knaisch  provided
     consulting  services  to us and was paid  $50,000  in  consulting  fees and
     reimbursed $6,700 in business expenses.

(3)  Mr.  Richman  served as our Chief  Financial  Officer  and  Treasurer  from
     January 2003 and our Chief  Operating  Officer from June 2003 until October
     12, 2004, on which date he was appointed  Senior Vice President - Corporate
     Development.  Included in the 2004 bonus earned by Mr.  Richman are $99,133
     of paid compensation and $20,000 of accrued but unpaid  compensation.  From
     June 1, 2003 to December 31, 2003,  Mr. Richman was an employee of ours and
     received  $93,000 in salary for serving in the capacities  described above.
     From  January 1, 2003 to May 31,  2003,  Mr.  Richman  provided  consulting
     services to us and received $75,000 in consulting fees and $12,000 in bonus
     as  compensation  for  services  provided as our Chief  Financial  Officer.
     Included in the $105,000 bonus earned by Mr. Richman in 2003 was $85,000 of
     accrued but unpaid  compensation.  From October 2002 to December  2002, Mr.
     Richman  provided  consulting  services  to us  and  was  paid  $30,500  in
     consulting fees and reimbursed $10,300 in business expenses.

(4)  Dr. Yogeshwar resigned as an officer and employee of our company in January
     2004.  Dr.  Yogeshwar was appointed to our Board of Directors in March 2004
     and resigned from such position on August 16, 2004.

(5)  Mr. McKnight was appointed to our board of directors in August 2002 and was
     appointed our Chief Financial  Officer on October 12, 2004. Prior to August
     18, 2004 (the date of the  Acquisition),  Mr.  McKnight served as the Chief
     Financial  Officer  of  MSI.  Compensation  paid  to Mr.  McKnight  in 2004
     includes salary and bonus of $66,000 and $25,000, respectively, paid by our
     Company after the  Acquisition  and salary of $129,000 paid by MSI prior to
     the Acquisition.  Compensation in 2003 represents  compensation paid to Mr.
     McKnight by MSI.  Compensation in 2002 represents  compensation paid to Mr.
     McKnight  by MSI of  $183,731  and  compensation  of  $12,500  paid  to Mr.
     McKnight by us for his role as interim Chief Financial Officer.

(6)  Mr.  Hinton has served as our Chief  Technical  Officer  since  October 12,
     2004. Prior to such date, Mr. Hinton served as the Chief Technical  Officer
     of MSI, which was acquired by us in August 2004.  Compensation  paid to Mr.
     Hinton  in  2004  includes   salary  and  bonus  of  $71,077  and  $45,000,
     respectively,  paid by us after the  Acquisition  and  salary  and bonus of
     $138,923 and $50,000,  respectively,  paid by MSI prior to the Acquisition.
     The $50,000 bonus paid in 2004 is included in 2003  compensation  as it was
     accrued  but unpaid at December  31,  2003.  Compensation  in 2003 and 2002
     represents compensation paid to Mr. Hinton by MSI.

(7)  Mr.  Maggi was  appointed  acting  Chief  Executive  Officer of our company
     effective December 1, 2001, in which capacity he served until June 1, 2003,
     at which time he resigned  from that office and took the position of Senior
     Vice  President of Business  Development.  Mr. Maggi resigned as an officer
     and director of our company in January 2004. Mr. Maggi served as an officer
     of our company in his capacity as controlling shareholder of Intertainment,
     Inc., which provided consulting services to our company.  Mr. Maggi was not
     compensated  directly by our company. For the year ended December 31, 2004,
     our company paid  Intertainment,  Inc.  $13,300 for Mr. Maggi's services as
     Sr. Vice  President of Business  Development.  Included in such payment was
     $11,500 in consulting fees and $1,800 as reimbursement for a portion of the
     rent on a New York  office he  occupied.  For the year ended  December  31,
     2003,  our  company  paid  Intertainment,  Inc.  $358,647  for Mr.  Maggi's
     services as acting Chief Executive Officer and other  capacities.  Included
     in such  payment was  $207,500  in  consulting  fees,  $119,647 in business
     expense  reimbursements,  and $31,500 as reimbursement for a portion of the
     rent on a New York  office he  occupied.  For the year ended  December  31,
     2002,  our  company  paid  Intertainment,  Inc.  $314,830  for Mr.  Maggi's
     services as acting Chief  Executive  Officer.  Included in such payment was
     $180,000  in  consulting  fees,  $100,483  in expense  reimbursements,  and
     $34,347 as reimbursement  for a portion of the rent on a New York office he
     occupied.

EMPLOYEE BONUS PLAN

          In March 2001, our Board of Directors  adopted the Front Porch Digital
Inc.  Employee  Bonus Plan (the "Bonus  Plan") to promote the  interests  of our
company and our  shareholders  by  permitting  us to award bonuses in cash or in
shares of our common stock to key  employees  in order to reward such  employees
for their successful  efforts in attaining  objectives  beneficial to the growth
and profitability of our company and to retain their services.  We have reserved
2,000,000 shares, subject to adjustment,  of common stock for issuance under the
Bonus Plan. As of December 31, 2004, no shares have been issued under this plan.
The  Bonus  Plan will  terminate  on March 31,  2006,  except  that the Board of
Directors may  terminate the Bonus Plan (except with respect to any  outstanding
bonus awards) at an earlier date.


                                       33
<PAGE>

          The Bonus Plan is administered by either the Board of Directors or the
Compensation  Committee of the Board. Members of the Compensation  Committee are
eligible  to receive  bonuses  only if such  bonuses are granted by the Board of
Directors.

          The Board of Directors or the Compensation Committee has the authority
to  determine  which key  employees  shall be awarded  bonuses;  the  amounts of
bonuses and the number of shares of common stock, if any, to be awarded; and all
other terms and  combinations  of performance  measurement  criteria,  which may
differ as to various key employees or attainment of certain  performance levels.
The Board of Directors or the Compensation Committee decides whether performance
criteria  have been met,  whether  and when to award  bonuses,  time  payment of
bonuses,  and  whether  to  pay  bonuses  in  cash  or in  common  stock  or any
combination  thereof.  The  determinations  of the  Board  of  Directors  or the
Compensation  Committee,  as  the  case  may  be,  on  these  matters  shall  be
conclusive.  The number of shares of common stock to be awarded as a bonus is to
be equal in value to a fixed cash  amount,  with the value of such common  stock
computed  at the higher of (a) the fair market  value of the common  stock to be
awarded  on date of  award,  or (b) the par  value  of the  common  stock  to be
awarded.

          Any eligible  employee whose  employment has terminated for any reason
other than  death  prior to the end of the bonus  measurement  period may remain
eligible for a full or prorated bonus, or may forfeit his bonus in its entirety,
in accordance  with such terms as may be set for such bonus from time to time by
the Board of Directors or the  Compensation  Committee.  Bonuses payable will be
paid to the  estate of  designee  of any  eligible  employee  who has died after
termination of employment  but before  payment of the bonus award.  In the event
that any eligible  employee's  employment is terminated either (i) for cause, or
(ii) without the consent of our company,  his  eligibility for a bonus under the
Bonus Plan shall terminate in whole  immediately upon termination of employment.
If an  eligible  employee  dies  while  he is  employed  by us  or  any  of  our
subsidiaries,  his estate or  designee  shall be  eligible to receive a prorated
bonus.  Bonus rights are not transferable  otherwise than by will or the laws of
descent and distribution.

          No bonus  award of common  stock may be made under the Plan unless and
until the  shares  subject  to such  award  have  been  listed,  registered  and
qualified upon any applicable  securities exchange or under any applicable state
or federal law, including without limitation, the Securities and Exchange Act of
1933,  as amended,  and the consent or approval of any  governmental  regulatory
body, necessary or desirable as a condition of, or in connection with, the award
or issuance of shares hereunder has been obtained

EQUITY INCENTIVE PLAN

          In May 2000, we adopted our 2000 Equity  Incentive Plan (the "Incentra
Option  Plan") for the  purpose of  attracting,  retaining  and  maximizing  the
performance  of  executive  officers  and  key  employees  and  consultants.  We
currently have reserved  6,000,000 shares of common stock for issuance under the
Incentra  Option  Plan.  An  increase  in the  number  of shares  reserved  from
6,000,000 to 22,625,000 was approved by the Board of Directors and  shareholders
and the effectiveness of the increase is subject to our filing of a Schedule 14C
Information  Statement.  The Incentra  Option Plan has a term of ten years.  The
Incentra Option Plan provides for the grant of "incentive  stock options" within
the meaning of Section 422 of the  Internal  Revenue  Code of 1986,  as amended,
non-statutory  stock options,  stock  appreciation  rights and restricted  stock
awards. The Incentra Option Plan is administered by a Compensation  Committee of
the Board of Directors (the  "Compensation  Committee").  The exercise price for
non-statutory  stock options may be equal to or more or less than 100 percent of
the fair  market  value of  shares of  common  stock on the date of  grant.  The
exercise  price for incentive  stock options may not be less than 100 percent of
the fair  market  value of  shares  of  common  stock on the date of grant  (110
percent of fair market value in the case of incentive  stock options  granted to


                                       34
<PAGE>


employees  who hold more than ten percent of the voting  power of our issued and
outstanding shares of common stock).

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

          The   Incentra   Option  Plan  also   provides  for  grants  of  stock
appreciation  rights  ("SARs"),  which entitle a  participant  to receive a cash
payment,  equal to the  difference  between the fair market  value of a share of
common  stock on the exercise  date and the exercise  price of SAR. The 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 grantee's  termination of
employment  by us for any reason  other than death,  disability  or  retirement.
Although the Board of  Directors  has the  authority to grant SARs,  it does not
have any present plans to do so.

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


MANAGEDSTORAGE INTERNATIONAL, INC. - 2000 STOCK OPTION AND GRANT PLAN

          Prior  to  our  acquisition  of  ManagedStorage  International,   Inc.
("MSI"),   which  is  accounted  for  as  a  reverse  merger,  MSI  adopted  and
administered  its 2000  Stock  Option  and Grant  Plan (the "MSI  Plan") for its
employees,  directors,  consultants  and other key persons.  As a result of such
acquisition,  no  additional  grants  will be made under the MSI Plan,  however,
outstanding  stock  options  previously  issued  pursuant to the MSI Plan may be
exercised  for  unregistered  shares of common  stock.  As  provided  in the MSI
acquisition  agreements,  upon the exercise of any  outstanding  options  issued
under the MSI Plan,  we will issue 0.3089 shares of our  unregistered  shares of
common  stock for each share of MSI common  stock that would have been  issuable
upon the exercise of such options.  Currently,  there are outstanding  under the
MSI Plan options to purchase 2,196,006 shares of our common stock.

          The following table sets forth  information  with respect to the stock
options granted to the Named  Executive  Officers during the year ended December
31, 2004.


                                       35
<PAGE>

                OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 2004
                               (INDIVIDUAL GRANTS)

                           NUMBER OF     % OF TOTAL
                          SECURITIES    OPTIONS/SARS
                          UNDERLYING     GRANTED TO     EXERCISE OR
                         OPTIONS/SARS   EMPLOYEES IN    BASE PRICE    EXPIRATION
       NAME               GRANTED (#)    FISCAL YEAR      ($/SH)         DATE

Thomas P. Sweeney III       825,000          5.6%         $0.22     3/16/2014
                         10,237,000         69.5%         $0.28     8/18/2014


Michael Knaisch             600,000          4.1%         $0.22     3/16/2014


Matthew Richman             425,000          2.9%         $0.22     3/16/2014

Jay Yogeshwar                     0          0.0%          N/A          N/A

Donald Maggi                      0          0.0%          N/A          N/A


Paul McKnight               500,000          3.4%         $0.32     11/17/2014


Walter Hinton               700,000          4.7%         $0.32     11/17/2014

          The  following  table  sets  forth  information  with  respect to each
exercise of stock options during the year ended December 31, 2004 by each of the
Named  Executive  Officers and the value at December 31, 2004 of all unexercised
stock options held by such persons.

         AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 2004
                       AND DECEMBER 31, 2004 OPTION VALUES

<TABLE>
<CAPTION>
                                                          NUMBER OF SECURITIES
                                                         UNDERLYING UNEXERCISED               VALUE OF UNEXERCISED
                                            VALUE              OPTIONS AT                   IN-THE-MONEY OPTIONS AT
                      SHARES ACQUIRED     REALIZED          DECEMBER 31, 2004                  DECEMBER 31, 2004
       NAME           ON EXERCISE (#)        ($)       EXERCISABLE/UNEXERCISABLE         EXERCISABLE/UNEXERCISABLE (A)
<S>                     <C>                <C>            <C>                      <C>         <C>
Thomas P. Sweeney III         0            $  --          765,086/11,827,085       (1)         $197,638/$357,758

Michael Knaisch               0            $  --             1,350,000/0                          $49,500/$-0-

Matthew Richman               0            $  --              925,000/0                          $244,900/$-0-

Jay Yogeshwar                 0            $  --               15,950/0                             $-0-/$-0-

Donald Maggi            100,000            $61,178            460,000/0                            $4,600/$-0-

Paul McKnight                 0            $  --           238,949/538,276         (2)           $12,077/$9,882

Walter Hinton                 0            $  --           168,211/868,211         (3)           $43,382/$43,382
</TABLE>


                                       36
<PAGE>

(1)  Includes   options  to  purchase  765,086  issued  under  the  MSI  Plan  -
unregistered common stock

(2) Includes options to purchase 38,949 issued under the MSI Plan - unregistered
common stock

(3)  Includes   options  to  purchase  168,212  issued  under  the  MSI  plan  -
unregistered common stock

---------------
(A)  Potential  unrealized  value  is  calculated  as the fair  market  value at
December  31, 2004  ($0.29 per share on the  OTC-BB),  less the option  exercise
price, times the number of shares.


COMPENSATION OF DIRECTORS

          Generally,  non-employee  directors  receive no annual  fees for their
services,  but will be reimbursed for their  reasonable  out-of-pocket  expenses
incurred in  attending  meetings  of the Board.  However,  in April 2004,  James
Wolfinger and Patrick  Whittingham,  non-employee  directors,  were each granted
options to purchase up to 250,000 shares of our common stock at a price of $0.22
per share. The options vest pursuant to a three-year vesting schedule.

EMPLOYMENT CONTRACTS

          On August 18, 2004,  we entered into a two-year  employment  agreement
with Thomas P. Sweeney  III,  our  Chairman of the Board of Directors  and Chief
Executive  Officer.  Mr. Sweeney's  employment  agreement contains the following
provisions: annual base salary of $275,000 and $300,000 for the first and second
years, respectively;  annual bonus of up to 100% of the base salary; the payment
of insurance  premiums under Mr. Sweeney's  existing life insurance policy;  the
issuance of options to purchase up to  10,237,000  shares of our common stock at
$0.28 per share,  which  options are subject to a three-year  vesting  schedule;
severance  provisions  for the payment of one-year of base  salary;  a pro-rated
bonus  and  certain  benefits  in  the  event  of a  change  of  control  or the
termination of Mr. Sweeney's  employment for any reason other than for cause (as
defined).

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

          On June 1, 2003,  we entered  into a  one-year  employment  agreement,
which was  automatically  renewed for an  additional  one-year term with Matthew
Richman,  our Senior Vice  President - Corporate  Development  (and former Chief
Financial Officer and Chief Operating  Officer).  The employment  agreement with


                                       37
<PAGE>


Mr. Richman contains the following  provisions:  annual base salary of $160,000;
annual  bonus  of up to fifty  percent  (50%) of the  base  salary,  subject  to
increase at the  discretion of the Board of  Directors;  a term of one year with
automatic  renewal;  additional life insurance for Mr. Richman paid by us with a
benefit equal to three times the annual base salary;  and  severance  provisions
for the  payment of  one-year  of annual  salary and  benefits in the event of a
change in control or the termination of the employee's employment for any reason
other than for cause.

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

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


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

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

          The  following  table  sets  forth  information  as of March 22,  2005
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:


                                       38
<PAGE>

<TABLE>
<CAPTION>
                                                                              Number of Shares        Percent of
                                                                                Beneficially         Outstanding
                   Name                         Title of Class                    Owned(1)           Shares(2)(3)
                   ----                         --------------                --------------         ------------
<S>                                        <C>                                   <C>                    <C>
5% BENEFICIAL OWNERS
Great Hill Equity Partners LP              Common Stock                          37,326,115             27.7%(4)
One Liberty Square                         Series A Preferred Stock                 843,170             34.2%
Boston, MA  02109

Tudor Investment Corporation               Common Stock                          26,845,466             19.4%(5)
1275 King Street                           Series A Preferred Stock               1,004,405             40.7%
Greenwich, CT 06831

J.P. Morgan Direct Venture Capital         Common Stock                          23,307,959             18.0%(6)
  Institutional Investors, LLC             Series A Preferred Stock                 602,775             24.4%
522 Fifth Avenue
New York, NY  10036

Providence Equity Partners III, LP         Common Stock                           6,190,309              5.2%(7)
50 Kennedy Plaza
Providence, RI  02903

Alfred N. Curmi                            Common Stock                          11,355,799              9.6%(8)
910 Seasage Drive
Delray Beach, Florida 33483


DIRECTORS AND NAMED EXECUTIVE OFFICERS

Christopher S. Gaffney                     Common Stock                          37,326,115             27.7%(4)
One Liberty Square                         Series A Preferred Stock                 843,170             34.2%
Boston, MA  02109

Thomas P. Sweeney III                      Common Stock                           7,064,200              5.8%(9)
1140 Pearl Street                          Series A Preferred Stock                  16,588                *
Boulder, CO  80302

Michael Knaisch                            Common Stock                           1,998,143              1.7%
1140 Pearl Street
Boulder, CO  80302

Matthew Richman                            Common Stock                           1,525,143              1.3%(11)
1140 Pearl Street
Boulder, CO  80302

James Wolfinger                            Common Stock                             678,571                * (12)
1140 Pearl Street
Boulder, CO  80302

Walter Hinton                              Common Stock                             287,260                * (13)
1140 Pearl Street
Boulder, CO  80302

Paul McKnight                              Common Stock                             240,285                * (14)
1140 Pearl Street
Boulder, CO  80302
</TABLE>


                                       39
<PAGE>

<TABLE>
<CAPTION>
                                                                              Number of Shares        Percent of
                                                                                Beneficially         Outstanding
                   Name                         Title of Class                    Owned(1)           Shares(2)(3)
                   ----                         --------------                --------------         ------------
<S>                                        <C>                                   <C>                    <C>
Patrick Whittingham                        Common Stock                              83,333                * (15)
12 Heron Drive
Old Tappan, NJ  07675

Carmen J. Scarpa                           --                                            --               --
50 Rowes Wharf, 6th Floor
Boston, MA  02110


ALL DIRECTORS AND EXECUTIVE                COMMON STOCK                          49,203,050             34.7%
OFFICERS AS A GROUP (9 PERSONS)            SERIES A PREFERRED STOCK                 859,758             34.9%
</TABLE>


-------------------

*    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 22, 2005.

(2)  All  percentages  for  common  stock are  calculated  based upon a total of
     117,677,534  shares  outstanding as of March 22, 2005, 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 22, 2005.

(3)  All percentages  for Series A preferred  stock are calculated  based upon a
     total of 2,466,971 shares outstanding as of March 22, 2005.

(4)  Represents  36,110,815 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  16,314,297  shares of common  stock)  and
     1,215,300  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 549,091 shares of common stock). The foregoing numbers represent
     shares for which GHEP and GHI each has shared dispositive and voting power.
     Such shares may be deemed to be  beneficially  owned by Great Hill Partners
     GP, LLC  ("GP"),  the general  partner of GHEP,  Great Hill  Partners,  LLC
     ("GHP"), a manager of GP and Messrs.  Christopher S. Gaffney, John G. Hayes
     and Stephen F. Gormley,  the managers of GHI, GHP and GP. Share information
     is furnished in reliance on the Schedule 13D dated August 18, 2004 filed by
     the persons named herein with the Securities and Exchange  Commission.  The
     persons  named  herein have each  specifically  disclaimed  that they are a
     member of a group for purposes of Section 13(d) or 13(g) of the  Securities
     Exchange Act of 1934, as amended (the "Exchange Act").

(5)  Represents  24,161,509  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 18,079,880  shares of common stock),  2,665,826 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 1,994,820  shares of common stock),  and 18,131 shares of common
     stock held by The Altar Rock Fund LP ("Altar") (assuming  conversion of 670


                                       40
<PAGE>


     shares of Series A preferred stock into 13,400 shares of common stock). The
     foregoing numbers  represent shares for which Tudor,  Raptor and Altar each
     has shared  dispositive  and voting power.  Such shares may be deemed to be
     beneficially  owned  by  Tudor  Investment  Corporation  ("TIC"),  the sole
     general  partner of Altar and an  investment  advisor for Tudor and Raptor,
     and Paul  Tudor  Jones,  II,  the  controlling  shareholder  of TIC.  Tudor
     Ventures  Group LP ("TV  GP"),  the  general  partner  of Tudor,  and Tudor
     Ventures Group LLC, the general  partner of TV GP, may also be deemed to be
     beneficial  owners  of the  shares  held by  Tudor.  Share  information  is
     furnished  in reliance on the  Schedule  13D dated August 18, 2004 filed by
     the persons named herein with the Securities and Exchange  Commission.  The
     persons  named  herein have each  specifically  disclaimed  that they are a
     member of a group for  purposes of Section  13(d) or 13(g) of the  Exchange
     Act.

(6)  Represents  19,245,798  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
     9,950,633  shares of common stock),  3,115,135 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
     1,622,729 shares of common stock), and 947,026 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  482,136  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  6,125,411  shares of common stock owned of record by Providence
     Equity  Partners III L.P.  ("PEP3") and 64,898 shares of common stock owned
     of record by Providence Equity Operating Partners III L.P.  ("PEOP3").  The
     foregoing  numbers  represent shares for which PEP3 and PEOP3 each has sole
     dispositive and voting power.  Such shares may be deemed to be beneficially
     owned by Providence Equity GP III L.P. ("PEGP3"),  the sole general partner
     of each of PEP3 and PEOP3,  Providence Equity Partners III LLC (the "LLC"),
     the sole general partner of PEGP3,  and Jonathan M. Nelson,  a 50% owner of
     LLC.  Share  information is furnished in reliance on the Schedule 13G dated
     August 18, 2004 filed by the persons named herein with the  Securities  and
     Exchange Commission. Each of PEGP3 and the LLC have specifically disclaimed
     beneficial  ownership  in the common stock  beneficially  owned by PEP3 and
     PEOP3, except to the extent of its pecuniary interest therein.

(8)  Share  information is furnished in reliance on the Schedule 13G dated March
     2, 2005 filed by the person named herein with the  Securities  and Exchange
     Commission.

(9)  Represents  1,224,420 shares of common stock owned of record by Equity Pier
     LLC, of which Mr.  Sweeney is the founder and  managing  member,  3,324,696
     shares issuable upon the exercise of presently exercisable warrants held by
     Equity Pier LLC,  1,418,370  shares of common  stock owned of record by Mr.


                                       41
<PAGE>


     Sweeney,  and  765,046  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
     331,767 shares of common stock.

(10) Represents  648,143  shares of common stock owned of record by Mr.  Knaisch
     and  1,350,000  shares  of  common  stock  issuable  upon the  exercise  of
     presently exercisable options held by Mr. Knaisch.

(11) Represents  600,143  shares of common stock owned of record by Mr.  Richman
     and 925,000  shares of common stock issuable upon the exercise of presently
     exercisable options held by Mr. Richman.

(12) Represents  595,238  shares  owned of record by Mr.  Wolfinger  and  83,333
     shares of common stock issuable upon the exercise of presently  exercisable
     options held by Mr. Wolfinger.


(13) Represents 119,048 shares of common stock owned of record by Mr. Hinton and
     168,212 shares issuable upon the exercise of presently  exercisable options
     held by Mr. Hinton.

(14) Represents  1,344 shares of common  stock owned of record by Mr.  McKnight,
     1,000  shares of common  stock owned by Mr.  McKnight's  spouse and 237,941
     shares issuable upon the exercise of presently  exercisable options held by
     Mr.  McKnight.  Mr.  McKnight is a member of Equity Pier LLC and  disclaims
     beneficial  ownership of the shares of common stock  beneficially  owned by
     such entity.

(15) Represents  shares of common stock  issuable upon the exercise of presently
     exercisable options held by Mr. Whittingham.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During  2003,  MSI  purchased  one of our 8%  convertible  notes  having  a
principal  amount of $250,000 in our private  placement  of  convertible  notes.
During 2004, that note was converted into shares of common stock and outstanding
interest of $19,167 was cancelled upon the consummation of the  Acquisition.  At
the time of the sale of the note,  Thomas P.  Sweeney  III,  our Chairman of the
Board and Chief Executive Officer, was the President and a director of MSI.

     During  2003 and 2004,  MSI  provided  services  to us in human  resources,
finance and  technology  support in  exchange  for service  fees.  Service  fees
outstanding  at the time of the  Acquisition  of $180,516  were  cancelled  upon
consummation of the Acquisition.

          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 5.8% of our outstanding common stock.  During 2004 and 2003,
we  incurred  liabilities  to Equity  Pier  totaling  approximately  $6,866  and
$16,000,  respectively,  primarily  related the reimbursement of airplane usage,
travel and business  expenses  incurred by Mr. Sweeney and those incurred by our
executives. We also leased office space from Equity Pier in 2004 and 2003. Total
costs incurred under the leasing arrangement and associated expenses (utilities,
supplies  and  insurances)  amounted  to  approximately  $130,252  and  $18,000,
respectively.  We paid  consulting fees and other  reimbursable  expenses to the
members of Equity  Pier  during  2004 and 2003 in the amount of $32,183  and $0,
respectively.  At December 31, 2004 and 2003, we owed Equity Pier  approximately
$470 and $0,  respectively.  On a pro  forma  basis,  as though we had owned MSI
since January 1, 2004 through December 31, 2004,  liabilities incurred to Equity
Pier were $100,571 for  reimbursement  of airplane  usage,  $250,347 for leasing


                                       42
<PAGE>


arrangements and associated  expenses  (utilities,  supplies and insurances) and
$32,183 for consulting  fees and other  reimbursable  expenses to the members of
Equity Pier.

     During 2004, Patrick Whittingham, a director on our Board of Directors, had
a consulting  agreement with us. During 2004, we paid Mr. Whittingham $18,711 in
consulting fees and expenses.

     In August 2004, we acquired all of the outstanding capital stock of MSI. At
the time of the  acquisition,  Thomas P.  Sweeney III, our Chairman of the Board
and Chief Executive  Officer,  was the President and Chief Executive  Officer of
MSI and Paul McKnight, our Chief Financial Officer and a director, was the Chief
Financial Officer of MSI. In addition, immediately prior to the acquisition, MSI
was the beneficial owner of approximately  19% of the outstanding  shares of our
common stock.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

          (A)(1) FINANCIAL STATEMENTS:

                                                                            Page
Report of Independent Registered Public Accounting Firm -
GHP Horwath, P.C .........................................................  F-1

Report of Independent Registered Public Accounting Firm - KPMG LLP .......  F-2

Consolidated Balance Sheet as of December 31, 2004 .......................  F-3

Consolidated Statements of Operations for the years ended
December 31, 2004 and 2003 ...............................................  F-4

Consolidated Statements of Mandatorily Redeemable Preferred Stock for the
years ended December 31, 2004 and 2003 ...................................  F-5

Consolidated Statements of Shareholders' Deficit and Comprehensive Loss
for the years ended December 31, 2004 and 2003 ...........................  F-7

Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003 ...............................................  F-9

Notes to Consolidated Financial Statements ...............................  F-11


          (A)(2) EXHIBITS:

          (a) Exhibits

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

EXHIBIT
NUMBER                                DESCRIPTION
------                                -----------

2.1       Stock Purchase Agreement, dated as of March 29, 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 March 30, 2005).


3.1       Articles of Incorporation  dated as of April 10, 1995 (incorporated by
          reference   to  the  exhibit  of  the  same  number   filed  with  our
          Registration Statement on Form SB-2, filed on November 13, 1996).

3.2       Certificate of Amendment to the Articles of Incorporation  dated as of
          August 22, 1996  (incorporated by reference to the exhibit of the same
          number filed with our  Registration  Statement on Form SB-2,  filed on
          November 13, 1996).


                                       43
<PAGE>

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 of
          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).

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      Employee  Bonus  Plan  dated as of March  20,  2001  (incorporated  by
          reference to Exhibit 10.10 filed with our Annual Report on Form 10-KSB
          for the period ended December 31, 2000, filed on April 2, 2001).

10.3      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).

10.4      Employment  Agreement dated as of June 1, 2003 between our company and
          Matthew Richman  (incorporated by reference to Exhibit 10.2 filed with
          our  Quarterly  Report on Form  10-QSB for the  period  ended June 30,
          2003, filed on September 2, 2003).

10.5      Securities  Purchase  Agreement,  dated  as of May  13,  2004,  by and
          between our company and Laurus  Master  Fund,  Ltd.  (incorporated  by
          reference  to Exhibit  10.1 filed  with our  Quarterly  Report on Form
          10-QSB for the period ended March 31, 2004, filed on May 17, 2004).

10.6      Secured  Convertible  Term Note, dated as of May 13, 2004, made by our
          company  in  favor  of  Laurus  Master  Fund,  Ltd.  (incorporated  by
          reference  to Exhibit  10.2 filed  with our  Quarterly  Report on Form
          10-QSB for the period ended March 31, 2004, filed on May 17, 2004).

10.7      Master  Security  Agreement,  dated May 13,  2004,  by and between our
          company and Laurus  Master Fund,  Ltd.  (incorporated  by reference to


                                       44
<PAGE>


          Exhibit  10.3 filed with our  Quarterly  Report on Form 10-QSB for the
          period ended March 31, 2004, filed on May 17, 2004).

10.8      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).

10.9      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).

10.10     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).

10.11     Registration Rights Agreement dated as of August 18, 2004 by and among
          our company and the other signatory  parties thereto  (incorporated by
          reference  to Exhibit  10.2 filed with our Current  Report on Form 8-K
          filed on August 20, 2004).

10.12     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).

10.13     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).

10.14     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).

10.15     Director Indemnification  Agreement dated as of August 18, 2004 by and
          between our company and Paul  McKnight  (incorporated  by reference to
          Exhibit 10.6 filed with our Current Report on Form 8-K filed on August
          20, 2004).

10.16     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).

10.17     Director Indemnification  Agreement dated as of August 18, 2004 by and
          between our company and Patrick Whittingham (incorporated by reference
          to Exhibit  10.8 filed  with our  Current  Report on Form 8-K filed on
          August 20, 2004).

10.18     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).

10.19     Director Indemnification  Agreement dated as of August 18, 2004 by and
          between  our company  and  Christopher  S.  Gaffney  (incorporated  by
          reference to Exhibit  10.10 filed with our Current  Report on Form 8-K
          filed on August 20, 2004).

10.20     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).


                                       45
<PAGE>




10.21     Stock Pledge  Agreement dated as of August 18, 2004 by and between our
          company and Laurus  Master Fund,  Ltd.  (incorporated  by reference to
          Exhibit  10.1 filed with our  Quarterly  Report on Form 10-QSB for the
          period ended September 30, 2004, filed on December 10, 2004).

10.22     Subsidiary   Guaranty  dated  as  of  August  18,  2004,  executed  by
          ManagedStorage  International,  Inc.  (incorporated  by  reference  to
          Exhibit  10.2 filed with our  Quarterly  Report on Form 10-QSB for the
          period ended September 30, 2004, filed on December 10, 2004)

10.23     Joinder in the Master Security  Agreement dated as of August 18, 2004,
          executed  by  our  company  and  ManagedStorage  International,   Inc.
          (incorporated  by reference  to Exhibit 10.3 filed with our  Quarterly
          Report on Form 10-QSB for the period ended  September 30, 2004,  filed
          on December 10, 2004).

10.24     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).

10.25     Employment  Agreement dated as of December 21, 2004 by and between our
          company and Walter Hinton  (incorporated by reference to Exhibit 10.11
          filed with our Current Report on Form 8-K filed on December 22, 2004).

10.26     Amendment  and Waiver,  dated as of October 25, 2004,  our company and
          Laurus Master Fund,  Ltd.  (incorporated  by reference to Exhibit 10.6
          filed with our Current Report on Form 8-K filed on October 29, 2004).

10.27     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).

10.28     Employment  Agreement dated as of December 6, 2004 between our company
          and Michael Knaisch.

10.29     Office Lease,  dated as of March 15, 2002, by and between  W9/MTN Real
          Estate Limited Partnership and ManagedStorage International, Inc.

10.30     First  Amendment to Office  Lease,  dated as of June 30, 2002,  by and
          between  W9/MTN Real Estate  Limited  Partnership  and  ManagedStorage
          International, Inc.

10.31     2000  Stock  Option and Grant  Plan of  ManagedStorage  International,
          Inc., as amended.

10.32     $2,500,000 Convertible Promissory Note, dated as of February 18, 2005,
          by our company in favor of Alfred Curmi  (incorporated by reference to
          Exhibit  10.1  filed  with our  Current  Report  on Form 8-K  filed on
          February 23, 2005).

10.33     Registration  Rights Agreement,  dated as of February 18, 2005, by and
          between our company and Alfred  Curmi  (incorporated  by  reference to
          Exhibit  10.2  filed  with our  Current  Report  on Form 8-K  filed on
          February 23, 2005).

10.34     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).

10.35     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).

10.36     Credit  Agreement,  dated as of February 18, 2005, by and between STAR
          Solutions of Delaware,  Inc. and Wells Fargo Bank, N.A.  (incorporated
          by reference to Exhibit 10.5 filed with our Current Report on Form 8-K
          filed on February 23, 2005).

10.37     Revolving Line of Credit Note,  dated as of February 18, 2005, by STAR
          Solutions of Delaware,  Inc. and Wells Fargo Bank, N.A.  (incorporated
          by reference to Exhibit 10.6 filed with our Current Report on Form 8-K
          filed on February 23, 2005).

10.38     Continuing Guaranty,  dated as of February 18, 2005, by our company in
          favor of Wells Fargo Bank, N.A.  (incorporated by reference to Exhibit
          10.7 filed with our Current  Report on Form 8-K filed on February  23,
          2005).

10.39     Continuing Security Agreement,  dated as of February 18, 2005, by STAR
          Solutions  of  Delaware,  Inc.  in  favor of Wells  Fargo  Bank,  N.A.
          (incorporated  by  reference  to Exhibit  10.8 filed with our  Current
          Report on Form 8-K filed on February 23, 2005).

10.40     Security  Agreement,  dated as of February 18, 2005, by STAR Solutions
          of Delaware,  Inc. in favor of Wells Fargo Bank, N.A. (incorporated by
          reference  to Exhibit  10.9 filed with our Current  Report on Form 8-K
          filed on February 23, 2005).

                                       46
<PAGE>

10.41     Amendment  and Waiver,  dated as of February 17, 2005,  by and between
          our company and Laurus Master Fund, Ltd. (incorporated by reference to
          Exhibit  10.10  filed  with our  Current  Report  on Form 8-K filed on
          February 23, 2005).

10.42     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).

10.43     Waiver and Subordination Agreement,  dated as of February 17, 2005, by
          and among our company,  Laurus  Master Fund Ltd. and Wells Fargo Bank,
          N.A.  (incorporated  by  reference  to  Exhibit  10.12  filed with our
          Current Report on Form 8-K filed on February 23, 2005).

10.44     Standstill Agreement,  dated as of February 18, 2005, by and among our
          company,   Laurus  Master  Fund  Ltd.  and  Wells  Fargo  Bank,   N.A.
          (incorporated  by  reference  to Exhibit  10.13 filed with our Current
          Report on Form 8-K/A filed on February 25, 2005).

10.45     Registration  Rights  Agreement,  dated as of March 29,  2005,  by and
          among  our  company,   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 4, 2005).

10.46     Employment  Agreement,  dated as of March 29, 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).

10.47     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).

10.48     First  Amendment to Credit  Agreement,  dated as of March 29, 2005, by
          and between STAR  Solutions  of  Delaware,  Inc. and Wells Fargo Bank,
          N.A. (incorporated by reference to Exhibit 10.4 filed with our Current
          Report on Form 8-K filed on April 4, 2005).

10.49     Continuing  Security  Agreement,  dated as of March 29,  2005,  by PWI
          Technologies, Inc. in favor of Wells Fargo Bank, N.A. (incorporated by
          reference  to Exhibit  10.5 filed with our Current  Report on Form 8-K
          filed on April 4, 2005).

10.50     Security  Agreement,  dated as of March 29, 2005, by PWI Technologies,
          Inc. in favor of Wells Fargo Bank, N.A.  (incorporated by reference to
          Exhibit 10.6 filed with our Current  Report on Form 8-K filed on April
          4, 2005).

10.51     Waiver and Subordination Agreement, dated as of March 23, 2005, by and
          between  Incentra  Solutions,   Inc.  and  Laurus  Master  Fund,  Ltd.
          (incorporated  by  reference  to Exhibit  10.7 filed with our  Current
          Report on Form 8-K filed on April 4, 2005).

10.52     Standstill  Agreement,  dated  as of  March  23,  2005,  by and  among
          Incentra  Solutions,  Inc.,  Laurus Master Fund,  Ltd. and Wells Fargo
          Bank, N.A.  (incorporated  by reference to Exhibit 10.8 filed with our
          Current Report on Form 8-K filed on April 4, 2005).

23.1      Consent of GHP Horwath, P.C., independent registered public accounting
          firm.

23.2      Consent of KPMG LLP, 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.

          (b)  Reports on Form 8-K

          We filed the following  current  reports on Form 8-K during our fourth
fiscal quarter of 2004.


                                       47
<PAGE>

          We  filed a  Current  Report  on  Form  8-K  dated  October  15,  2004
announcing  the  resignation  of Matthew  Richman  and the  appointment  of Paul
McKnight as our Chief Financial Officer.

          We  filed a  Current  Report  on  Form  8-K  dated  October  29,  2004
announcing (i) the amendment of certain of the Laurus loan documents and certain
waivers by Laurus  under such  documents;  (ii) an  amendment to our Articles of
Incorporation (A) changing our name from "Front Porch Digital Inc." to "Incentra
Solutions,  Inc." and (B)  increasing  the  number of  authorized  shares of our
common stock that we may issue from  150,000,000  shares to 200,000,000  shares;
and (iii) the issuance of a press  release  announcing  (A) the amendment to the
Laurus loan documents, (B) our name change, (C) a change in the CUSIP number for
our common  stock and (D) a change in the ticker  symbol  under which our common
stock is traded under on NASDAQ's "Over-the-Counter" Bulletin Board.

          We  filed a  Current  Report  on  Form  8-K  dated  November  9,  2004
announcing the dismissal of J.H. Cohn LLP as our independent accountants and the
engagement  of GHP  Horwath,  P.C.  as our  new  independent  registered  public
accounting firm.

          We  filed a  Current  Report  on Form  8-K  dated  November  17,  2004
announcing our preliminary financial results for the third quarter of 2004.

          We  filed a  Current  Report  on Form  8-K  dated  November  23,  2004
announcing (i) our financial  results for the third quarter of 2004 and (ii) the
results of our 2004 annual stockholder meeting.

          We  filed a  Current  Report  on Form  8-K  dated  November  24,  2004
releasing the transcript of an investor  conference  call on which our financial
results for the third quarter of 2004 was discussed.

          We  filed a  Current  Report  on Form  8-K  dated  December  22,  2004
announcing that we had entered into employment agreements with Paul McKnight and
Walter  Hinton,  our  Chief  Financial  Officer  and  Chief  Technical  Officer,
respectively.

          We  filed a  Current  Report  on Form  8-K  dated  December  23,  2004
announcing the resignation of KPMG LLP (the former independent registered public
accounting  firm  of  ManagedStorage  International,  Inc.)  as our  independent
accountants  effective  upon the issuance of their report on MSI's  December 31,
2003 financial statements (which occurred on January 6, 2005) and reiterated the
engagement  of  GHP  Horwath,  P.C.  as  our  new  independent  accountants  (as
previously announced in a Current Report on Form 8-K filed on November 9, 2004).


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

          The firm of GHP Horwath, P.C. has served as our independent registered
public  accounting firm since November 9, 2004. The firm of J.H. Cohn LLP served
as our  independent  registered  public  accounting  firm from  October 24, 2003
through  November  8,  2004.  The  firm  of  Ernst  & Young  LLP  served  as our
independent public accountants through October 23, 2003.

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


                                       48
<PAGE>

          For the year ended  December 31, 2003,  the  aggregate  fees billed by
J.H. Cohn LLP and Ernst & Young LLP were $112,000 and $18,000, respectively.

          For MSI, our acquirer for  accounting  purposes,  the firm of KPMG LLP
served as our independent  registered  public accounting firm through January 6,
2005. For the fiscal year ended  December 31, 2003,  fees billed by KPMG LLP for
the 2003 MSI audit totaled $51,198.

AUDIT-RELATED FEES

          The  aggregate  fees  billed  in each of  fiscal  2004  and  2003  for
assurance  and related  services  by the  accounting  firms that are  reasonably
related  to the audit or review of our  financial  statements  and that were not
covered in the Audit Fees disclosure  above, was $72,706, ($23,811 by J.H. Cohn,
$20,365 by Ernst & Young LLP and $28,530 by KPMG LLP) and $8,200 ($3,800 by J.H.
Cohn and $4,400 by Ernst & Young LLP), respectively.

TAX FEES

          The  aggregate  fees  billed  in each of  fiscal  2004  and  2003  for
professional  services  rendered by J.H. Cohn for tax compliance,  tax advice or
tax planning was $72,655 and $0,  respectively.  For MSI,  aggregate fees billed
for professional services rendered by Amann, DeLau and & Associates, LLC for tax
compliance, tax advice or tax planning was $43,325 and $58,521, respectively.

ALL OTHER FEES

          There  were no fees  billed  in fiscal  2004 or 2003 for  professional
services rendered by the accounting firms except as disclosed above.

BOARD OF DIRECTORS PRE-APPROVAL

          Our Board of  Directors  reviews  and  approves  audit  and  non-audit
services  performed by our authorized  independent public accountants as well as
the fees  charged by the  authorized  independent  public  accountants  for such
services.  All of the  services  provided  and fees  charged  by the  authorized
independent  public  accountants  in 2004 and 2003 were approved by our Board of
Directors.


                                       49
<PAGE>

                                   SIGNATURES

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

Dated: April 6, 2005                            Incentra Solutions, Inc.
                                                By: /s/ Thomas P. Sweeney III
                                                ------------------------------
                                                Thomas P. Sweeney III
                                                Chief Executive Officer


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

Signature/Date                            Title

/s/ Thomas P. Sweeney III                 Chief Executive Officer and Director
----------------------------------         (principal executive officer)
Thomas P. Sweeney III
April 6, 2005


/s/ Paul McKnight                         Chief Financial Officer and Director
----------------------------------         (principal financial
Paul McKnight                                and accounting officer)
April 6, 2005


/s/ James Wolfinger                       Director
----------------------------------
James Wolfinger
April 6, 2005


/s/ Patrick Whittingham                   Director
----------------------------------
Patrick Whittingham
April 6, 2005



/s/ Carmen J. Scarpa                      Director
----------------------------------
Carmen J. Scarpa
April 6, 2005



/s/ Christopher S. Gaffney                Director
----------------------------------
Christopher S. Gaffney
April 6, 2005


                                       50
<PAGE>

                            INCENTRA SOLUTIONS, INC.
                                AND SUBSIDIARIES

                   Index to Consolidated Financial Statements

                     Years Ended December 31, 2004 and 2003



                                TABLE OF CONTENTS




                                                                            PAGE

Report of Independent Registered Public Accounting Firm -
GHP Horwath, P.C. ........................................................  F-1

Report of Independent Registered Public Accounting Firm - KPMG LLP .......  F-2

Consolidated Balance Sheet as of December 31, 2004 .......................  F-3

Consolidated Statements of Operations for the years ended
December 31, 2004 and 2003 ...............................................  F-4

Consolidated Statements of Mandatorily Redeemable Preferred Stock
for the years ended December 31, 2004 and 2003 ...........................  F-5

Consolidated Statements of Shareholders' Deficit and Comprehensive Loss
for the years ended December 31, 2004 and 2003 ...........................  F-7

Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003 ...............................................  F-9

Notes to Consolidated Financial Statements ...............................  F-11


                                       51
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Incentra Solutions, Inc.

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Incentra
Solutions,  Inc. and  subsidiaries  (the "Company") as of December 31, 2004, and
the  related  consolidated  statements  of  operations,  mandatorily  redeemable
preferred stock,  shareholders'  deficit and comprehensive  loss, and cash flows
for the  year  then  ended.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  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,  2004,  and the  results  of their
operations  and their cash flows for the year then  ended,  in  conformity  with
accounting principles generally accepted in the United States of America.

As discussed in Note 4 to the consolidated  financial  statements, on August 18,
2004, the Company acquired Managed Storage International,  Inc. in a transaction
recorded as a reverse merger.


/s/ GHP Horwath, P.C.
Denver, Colorado
March 4, 2005,
except for Notes 2 and 17 item (D),
as to which the date
is April 5, 2005


                                      F-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Stockholders
Incentra Solutions, Inc.:

We  have  audited  the  accompanying   consolidated  statements  of  operations,
mandatorily redeemable preferred stock,  shareholders' deficit and comprehensive
loss, and cash flows of ManagedStorage International,  Inc. and subsidiaries for
the year ended December 31, 2003. These  consolidated  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.

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


In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the results of operations and the cash flows
of ManagedStorage  International,  Inc. for the year ended December 31, 2003, in
conformity with U.S. generally accepted accounting principles.

On August 18,  2004,  ManagedStorage  International,  Inc. was acquired by Front
Porch  Digital,  Inc., now known as Incentra  Solutions,  Inc., in a transaction
accounted for as a reverse merger whereby ManagedStorage International, Inc. was
the acquirer for accounting purposes.


                                  /s/ KPMG LLP


Denver, Colorado
October 29, 2004
except for Note 2,
as to which the date
is April 5, 2005


                                      F-2
<PAGE>


                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2004


ASSETS
Current assets:
  Cash and cash equivalents                                       $   3,068,458
  Accounts receivable, net of allowance for doubtful
  accounts of $274,879                                                3,740,554
  Other current assets                                                  645,637
                                                                  -------------
Total current assets                                                  7,454,649
                                                                  -------------

Property and equipment, net                                           2,452,817
Capitalized software development costs, net                           1,188,885
Intangible assets, net                                               16,537,060
Other assets                                                          1,043,634
                                                                  -------------
                                                                     21,222,396
                                                                  -------------
TOTAL ASSETS                                                      $  28,677,045
                                                                  =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
  Current portion of note payable, capital leases and other
  long-term obligations                                           $   1,738,516
  Accounts payable                                                    1,374,953
  Accrued expenses                                                    3,058,806
  Current portion of deferred revenue                                 1,185,736
                                                                  -------------
Total current liabilities                                             7,358,011

Note payable, capital leases and other long-term obligations,
net of current portion                                                2,266,970
Derivative warrant liability                                          1,925,534
Deferred revenue, net of current portion                                149,204
                                                                  -------------
TOTAL LIABILITIES                                                    11,699,719
                                                                  -------------

Commitments and contingencies

Series A convertible redeemable preferred stock, $.001
par value, $31,500,000 liquidation preference, 2,500,000 shares
authorized, 2,466,971 shares issued and outstanding                  22,000,767
                                                                  -------------

Shareholders' deficit:
  Preferred stock, nonvoting, $.001 par value, 2,500,000 shares              --
  authorized, none issued or outstanding
  Common stock, $.001 par value, 200,000,000 shares authorized,
  106,493,617 shares issued,
  105,059,979 shares outstanding, 1,433,639 shares in treasury          105,060
  Additional paid-in capital                                        113,271,091
  Accumulated other comprehensive income                                 19,184
  Accumulated deficit                                              (118,418,776)
                                                                  -------------
TOTAL SHAREHOLDERS' DEFICIT                                          (5,023,441)
                                                                  -------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                       $  28,677,045
                                                                  =============


          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>


                       INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
                         CONSOLIDATED STATEMENTS OF OPERATIONS

                                                     YEARS ENDED DECEMBER 31,
                                                       2004            2003
                                                   ------------    ------------

Revenues:
  Products                                         $  5,155,101    $         --
  Services                                            8,129,569       9,810,741
                                                   ------------    ------------
TOTAL REVENUE                                        13,284,670       9,810,741
                                                   ------------    ------------

Cost of revenue:
  Products                                            1,479,580              --
  Services                                            5,820,755       6,951,781
                                                   ------------    ------------
Total cost of revenue                                 7,300,335       6,951,781
                                                   ------------    ------------
GROSS MARGIN                                          5,984,335       2,858,960
                                                   ------------    ------------

Selling, general and administrative                  10,262,730       9,361,089
Acquisition costs                                     1,275,189              --
Amortization                                          1,776,473         928,851
Depreciation                                            183,057         363,099
Impairment of goodwill                                  198,280         692,098
                                                   ------------    ------------
                                                     13,695,729      11,345,137
                                                   ------------    ------------
LOSS FROM OPERATIONS                                 (7,711,394)     (8,486,177)
                                                   ------------    ------------

Other income (expense):
  Interest income                                        22,096          39,167
  Interest expense                                   (2,428,643)     (2,225,443)
  Other income (expense)                                382,989        (327,468)
  Foreign currency transaction (loss) gain             (303,342)          8,550
                                                   ------------    ------------
                                                     (2,326,900)     (2,505,194)
                                                   ------------    ------------

LOSS BEFORE INCOME TAX                              (10,038,294)    (10,991,371)
Income tax expense                                     (400,000)             --
                                                   ------------    ------------
NET LOSS                                            (10,438,294)    (10,991,371)
                                                   ------------    ------------

Deemed dividends on redeemable preferred stock         (348,493)     (1,647,669)
Accretion of redeemable preferred stock to
redemption amount                                      (990,826)        (96,236)
                                                   ------------    ------------

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS         $(11,777,613)   $(12,735,276)
                                                   ============    ============

Weighted average number of common shares
  outstanding - basic and diluted                    51,027,329      18,945,516
                                                   ============    ============

Basic and diluted net loss per share applicable
to common shareholders                             $      (0.23)   $      (0.67)
                                                   ============    ============


          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

<TABLE>
<CAPTION>
                                           INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
                               Consolidated Statements of Mandatorily Redeemable Preferred Stock
                                            Years ended December 31, 2004 and 2003


                                                                    "NEW" SERIES PREFERRED
                                         -------------------------------------------------------------------------
                                            MSI SERIES A         MSI SERIES B           MSI SERIES C
                                             REDEEMABLE           CONVERTIBLE             REDEEMABLE
                                           PREFERRED STOCK       PREFERRED STOCK       PREFERRED STOCK
                                         -------------------   --------------------  -------------------------
                                         SHARES     AMOUNT     SHARES      AMOUNT     SHARES         AMOUNT         TOTAL
                                         ------   ----------   -------   ----------  ----------    ----------    ------------
<S>                                      <C>      <C>          <C>       <C>            <C>       <C>             <C>
Balance at December 31, 2002             50,000   $5,000,000   650,000   $7,955,122                               $ 12,955,122
Issuance of mandatorily redeemable
  Series C preferred stock for cash of
  $12,858,817 and the conversion of
  $4,760,000 of principal amount and
  payable $85,811 of related interest
  of notes payable                           --           --        --           --      22,104   $ 17,704,628      17,704,628
Series C offering costs                      --           --        --           --          --       (626,113)       (626,113)
Issuance of mandatorily redeemable
  Series C preferred stock in
  asset acquisition                          --           --        --           --         333         33,283          33,283
Repurchase of mandatorily redeemable
  Series C preferred stock                   --           --        --           --        (333)       (33,283)        (33,283)
Estimated fair value of warrants to
  purchase Class A common stock and
  Series C redeemable preferred stock
  issued in exchange for services
  rendered in the Series C offering          --           --        --           --          --       (126,637)       (126,637)
Accretion of mandatorily redeemable
  preferred stock to redemption amount       --           --        --       31,889          --         64,347          96,236
Accrual of dividends on redeemable
  preferred stock                            --           --        --      600,000          --      1,047,669       1,647,669
Reclassification of mandatorily
  redeemable Series C preferred stock
  to liabilities upon adoption of
  SFAS No. 150 effective July 1, 2003        --           --        --           --     (22,104)   (18,063,894)    (18,063,894)
                                         ------   ----------   -------   ----------  ----------   ------------    ------------
Balance at December 31, 2003             50,000   $5,000,000   650,000   $8,587,011          --   $         --    $ 13,587,011
                                         ======   ==========   =======   ==========  ==========   ============    ============
</TABLE>
(Continued)


                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                                           INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
                         Consolidated Statements of Mandatorily Redeemable Preferred Stock (continued)
                                            Years ended December 31, 2004 and 2003


                              -----------------------------------------------------------------------------------
                                MSI SERIES A REDEEMABLE     MSI SERIES B CONVERTIBLE    FPDI SERIES A CONVERTIBLE
                                    PREFERRED STOCK             PREFERRED STOCK              PREFERRED STOCK
                              --------------------------    ------------------------    -------------------------
                                SHARES         AMOUNT         SHARES       AMOUNT         SHARES       AMOUNT           TOTAL
                              ----------    ------------    ---------    -----------    ----------   ------------   -------------
<S>                            <C>          <C>             <C>          <C>             <C>         <C>
Balance at December
  31, 2003                        50,000    $  5,000,000      650,000    $ 8,587,011            --            --     $13,587,011
Exchange of MSI Series A
  redeemable preferred stock
  for common stock of
  FPDI  in merger                (50,000)     (5,000,000)          --             --            --            --      (5,000,000)
Deemed dividends on MSI
  redeemable preferred stock          --              --           --        348,493            --            --         348,493
Accretion of MSI mandatorily
  redeemable preferred stock
  to redemption amount                --              --           --         19,793            --            --          19,793
Exchange of MSI Series B
  convertible preferred stock
  for common stock of
  FPDI in merger                      --              --     (650,000)    (8,955,297)           --            --      (8,955,297)
Issuance of FPDI Series A
  convertible preferred stock
  due to merger                       --              --           --             --     2,466,971   $21,029,734      21,029,734
Accretion of FPDI convertible
  preferred stock to
  redemption amount                   --              --           --             --            --       971,033         971,033
                              ----------    ------------    ---------    -----------    ----------   -----------     -----------
Balance at December 31, 2004          --    $         --           --    $        --     2,466,971   $22,000,767     $22,000,767
                              ==========    ============    =========    ===========    ==========   ===========     ===========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

<TABLE>
<CAPTION>
                                           INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
                            Consolidated Statements of Shareholders' Deficit and Comprehensive Loss
                                            Years ended December 31, 2004 and 2003


                                                                 SERIES C
                                                      CLASS A  REDEEMABLE
                                   COMMON STOCK        COMMON   PREFERRED                ADDITIONAL
                              ----------------------    STOCK     STOCK      DEFERRED      PAID-IN      ACCUMULATED
                                SHARES       AMOUNT   WARRANTS  WARRANTS   COMPENSATION    CAPITAL        DEFICIT         TOTAL
                              -----------   --------  -------- ----------- ------------  -----------   -------------   ------------
<S>                            <C>          <C>        <C>      <C>          <C>         <C>           <C>             <C>
Balance at December 31, 2002       63,174   $     63        --        --            --   $81,082,544   $ (96,989,111)  $(15,906,504)
Accretion of mandatorily
  redeemable preferred stock           --         --        --        --            --       (96,235)             --        (96,235)
Dividends on redeemable
  preferred stock                      --         --        --        --            --    (1,647,669)             --     (1,647,669)
Issuance of Class A common
  stock for cash of $3,214,704
  and the conversion of
  $1,190,000 of principal
  amount and $21,453 of
  related interest of notes
  payable                      16,681,772     16,682        --        --            --     4,409,475              --      4,426,157
Issuance of Class A common
  stock to induce conversion
  of notes payable in the
  Series C redeemable
  preferred and Class A
  common stock financing        2,710,597      2,711        --        --            --       874,789              --        877,500
Class A common stock offering
  costs                                --         --        --        --            --      (156,528)             --       (156,528)
Issuance of restricted Class A
  common stock for cash            28,945         29        --        --            --           440              --            469
Exercise of stock options          15,392         15        --        --            --           725              --            740
Repurchase of nonvested
  restricted Class A
  common stock                     (1,606)        (2)       --        --            --             1              --             (1)
Estimated fair value of
  warrants issued to purchase
  Series C mandatorily
  redeemable preferred stock
  in exchange for the
  equipment lease facility             --         --        --  $ 22,927            --            --              --         22,927
Estimated fair value of
  warrants issued to purchase
  Class A common stock and
  Series C mandatorily
  redeemable preferred stock
  in exchange for services in
  the Series C financing               --         --   $65,571    92,725            --       (31,659)             --        126,637
Deferred compensation related
  to grants of options to
  employees to purchase
  common stock                         --         --        --        --     $(670,558)      670,558              --             --
Amortization of deferred
  compensation                         --         --        --        --       308,418            --              --        308,418
Net loss before amounts
  allocable to common
  shareholders                         --         --        --        --            --            --     (10,991,371)   (10,991,371)
                              -----------   --------   -------  --------     ---------   -----------   -------------   ------------
Balance at December 31, 2003   19,498,274   $ 19,498   $65,571  $115,652     $(362,140)  $85,106,441   $(107,980,482)  $(23,035,460)
                              ===========   ========   =======  ========     =========   ===========   =============   ============
</TABLE>

                                  (continued)

                                      F-7
<PAGE>

<TABLE>
<CAPTION>
                                             INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
                                         Consolidated Statements of Shareholders' Deficit
                                                and Comprehensive Loss (Continued)
                                              Years ended December 31, 2004 and 2003


                                                             SERIES C                        ACCUMULATED
                                                  CLASS A   REDEEMABLE                          OTHER
                                 COMMON STOCK      COMMON   PREFERRED  DEFERRED    ADDITIONAL  COMPRE-
                            ---------------------   STOCK     STOCK    COMPEN-      PAID-IN    HENSIVE    ACCUMULATED
                               SHARES     AMOUNT  WARRANTS  WARRANTS    SATION      CAPITAL     INCOME      DEFICIT         TOTAL
                            -----------  --------  -------  --------  ---------  ------------  -------  -------------  ------------
<S>                          <C>         <C>       <C>      <C>       <C>        <C>           <C>      <C>            <C>
Balance at
  December 31, 2003          19,498,274  $ 19,498  $65,571  $115,652  $(362,140) $ 85,106,441       --  $(107,980,482) $(23,035,460)
Accretion of MSI
  mandatorily redeemable
  preferred stock to
  redemption amount                  --        --       --        --         --       (19,793)      --             --       (19,793)
Accretion of FPDI
  mandatorily redeemable
  preferred stock to
  redemption amount                  --        --       --        --         --      (971,033)      --             --      (971,033)
Deemed dividends on MSI
  redeemable preferred
  stock                              --        --       --        --         --      (348,493)      --             --      (348,493)
Exercise of MSI stock
  options                        34,805        35       --        --         --         1,804       --             --         1,839
Repurchase of MSI
  common stock                  (72,839)      (73)      --        --         --        (4,703)      --             --        (4,776)
Cancellations of MSI
  stock options                      --        --       --        --     11,519       (11,519)      --             --            --
Transactions related to
  reverse acquisition of
  FPDI by MSI:
    MSI Series A preferred
      stock exchanged for
      common stock of FPDI   10,000,000    10,000       --        --         --     4,990,000       --             --     5,000,000
    MSI Series B preferred
      stock exchanged for
      common stock of FPDI   18,062,850    18,063       --        --         --     8,937,234       --             --     8,955,297
    Stock-based compensation
      incurred in connection
      with the merger                --        --       --        --         --       798,598       --             --       798,598
    Acquisition of FPDI by
      MSI, based on fair
      value of common
      stock, warrants and
      options                57,238,685    57,238       --        --         --    16,417,192       --             --    16,474,430
    Series C warrants of
      MSI exchanged for
      Series A stock
      warrants of FPDI               --        --       --  (115,652)        --       115,652       --             --            --
    Class A common stock
      warrants of MSI
      exchanged for common
      stock warrants of FPDI         --        --  (65,571)       --         --        65,571       --             --            --
    Reclassification of
      deferred compensation
      to additional paid-in
      capital due to merger          --        --       --        --    238,388      (238,388)      --             --            --
    Cancellation of MSI
      common stock exchanged
      for common stock
      of FPDI                        --        --       --        --         --         6,277       --             --         6,277
Amortization of deferred
  compensation and stock
  option expense                     --        --       --        --    112,233       280,446       --             --       392,679
FPDI common stock issued
  in lieu of interest
  payment                       293,651       294       --        --         --        12,206       --             --        12,500
Reclassification of
  derivative warrant
  to liability                       --        --       --        --         --    (1,836,534)      --             --    (1,836,534)
Exercise of FPDI stock
  options                         4,553         5       --        --         --           133       --             --           138
Acquisition costs                    --        --       --        --         --       (30,000)      --             --       (30,000)
Components of
  comprehensive loss:
  Net loss                           --        --       --        --         --            --       --    (10,438,294)  (10,438,294)
  Change in foreign currency
    translation adjustments                                                                   $19,184                        19,184
                                                                                                                       ------------
Total comprehensive loss                                                                                                (10,419,110)
                            -----------  --------  -------  --------  ---------  ------------  -------  -------------  ------------
Balance at
  December 31, 2004         105,059,979  $105,060       --        --         --  $113,271,091  $19,184  $(118,418,776) $ (5,023,441)
                            ===========  ========  =======  ========  =========  ============  =======  =============  ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-8
<PAGE>


                            INCENTRA SOLUTIONS, INC.
                                AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                 YEARS ENDED DECEMBER 31,
                                                                                                    2004          2003
                                                                                                -----------    ----------
<S>                                                                                             <C>            <C>
Cash flows from operating activities:
  Net loss                                                                                      $(10,438,294)  $(10,991,371)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation                                                                                   2,197,213      2,337,524
    Amortization of intangible assets                                                              1,776,473        928,851
    Amortization of non-cash loan discount                                                                --          1,274
    Stock-based compensation                                                                       1,191,277        308,418
    Interest expense paid with common stock                                                           12,500        877,500
    Non-cash interest expense                                                                        447,797         14,191
    Non-cash interest expense on Series C mandatorily redeemable preferred stock liability         1,703,332      1,262,508
    Share of losses of Front Porch Digital, Inc. and related impairment of goodwill                  198,280      1,328,283
    (Gain) loss on disposal of assets                                                                 22,291        (15,868)
    Non-cash interest income on note receivable                                                           --        (13,666)
    Bad debt expense                                                                                 233,864        266,387
    Gain from early extinguishments of debt                                                               --        (20,826)
    Changes in operating assets and liabilities, net of business acquisition:
      Accounts and other receivables                                                                (942,174)      (967,544)
      Other current assets                                                                            91,811        (93,226)
      Prepaid expenses                                                                                    --         16,211
      Other assets                                                                                    45,295         15,687
      Accounts payable                                                                               (73,065)      (286,417)
      Accrued liabilities                                                                            739,287         34,523
      Deferred revenue                                                                              (738,456)       831,790
      Other liabilities                                                                              (11,784)        (9,518)
                                                                                                ------------   ------------
          Net cash used in operating activities                                                   (3,544,353)    (4,175,289)
                                                                                                ------------   ------------
Cash flows from investing activities:
  Purchases of property and equipment                                                             (1,152,120)    (2,103,746)
  Captialized software development costs                                                          (1,044,325)      (320,414)
  Acquisition costs                                                                                 (198,597)            --
  Proceeds from sale of property and equipment                                                       126,084        267,902
  Purchase of intangible assets                                                                           --     (2,349,714)
  Net change in restricted cash                                                                         (638)          (648)
  Cash and restricted cash acquired in FPDI acquisition (Note 3)                                   4,005,685             --
  Issuance of note receivable from Front Porch Digital                                                    --       (250,000)
  Purchases of short-term investments                                                                     --     (5,300,000)
  Maturities of short-term investments                                                             3,793,099      1,506,901
                                                                                                ------------   ------------
          Net cash provided by (used in) investing activities                                      5,529,188     (8,549,719)
                                                                                                ------------   ------------
Cash flows from financing activities:
  Cash proceeds from issuance of redeemable preferred stock                                               --     12,858,817
  Proceeds from issuance of common stock                                                                  --      3,214,704
  Redeemable preferred stock and Class A common stock offering costs                                      --       (782,641)
  Payments on capital leases, notes payable and other long term liabilities                       (1,151,319)      (446,372)
  Proceeds from exercise of stock options and purchase of restricted stock                             1,977          1,208
  Repurchase of common stock                                                                         (31,427)            --
                                                                                                ------------   ------------
          Net cash (used in) provided by financing activities                                     (1,180,769)    14,845,716
                                                                                                ------------   ------------

Effect of exchange rate changes on cash and cash equivalents                                          63,200             --
                                                                                                ------------   ------------

          Net increase in cash and cash equivalents                                                  867,266      2,120,708
Cash and cash equivalents at beginning of year                                                     2,201,192         80,484
                                                                                                ------------   ------------
Cash and cash equivalents at end of year                                                        $  3,068,458   $  2,201,192
                                                                                                ============   ============
</TABLE>

(continued)

                                      F-9
<PAGE>


                            INCENTRA SOLUTIONS, INC.
                                AND SUBSIDIARIES
                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                                                 YEARS ENDED DECEMBER 31,
                                                                                                    2004          2003
                                                                                                -----------    ----------
<S>                                                                                             <C>            <C>
Supplemental disclosures of cash flow information:
  Cash paid during the year for interest                                                        $   202,516    $   72,789
Supplemental disclosures of non-cash investing and financing activities:
  Net assets acquired in FPDI acquisition, excluding cash (Note 3)                              $13,517,778            --
  Reclassification of derivative contract to liability                                            1,836,534            --
  Deferred compensation for options granted at less than fair value                                      --    $  670,558
  Redeemable preferred stock issued for discount on capital lease obligation                             --        22,927
  Redeemable preferred stock warrants and common stock warrants issued for financing costs               --       158,296
  Notes payable and accrued interest converted to preferred and common stock                             --     6,057,264
  Capital lease obligations incurred in connection with the purchase of property and equipment      815,654       654,852
  Purchases of property and equipment included in accounts payable                                  130,471       215,715
</TABLE>

                                      F-10

          See accompanying notes to consolidated financial statements.

<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


(1)  ORGANIZATION

     Incentra  Solutions,  Inc.  (which is referred to herein  together with its
     subsidiaries  as  the  "Company"),   formerly  Front  Porch  Digital,  Inc.
     ("FPDI"), was organized and incorporated in the state of Nevada. On October
     25,  2004,  the name of the Company was changed  from Front Porch  Digital,
     Inc. to Incentra  Solutions,  Inc., and the common stock of the Company now
     trades on the  Over-the-Counter  Bulletin  Board under the  trading  symbol
     "ICEN".   On  August  18,  2004,   the  Company   acquired   ManagedStorage
     International,  Inc.,  a Delaware  corporation  incorporated  in March 2000
     ("MSI") (the "Acquisition", Note 4). The Acquisition has been accounted for
     as a reverse  merger,  and therefore,  MSI is deemed to be the acquirer for
     accounting  purposes.  Accordingly,  the consolidated  financial statements
     presented  herein  include the financial  statements of MSI for all periods
     prior to August 18, 2004 and the financial  statements of the  consolidated
     companies from the date of the Acquisition forward.

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

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

     The Company's customers are located in North America,  Europe, Asia and the
     Pacific Rim.

     BASIS OF PRESENTATION

     At  December  31,  2004,  the  consolidated  financial  statements  include
     Incentra  Solutions,  Inc. and its wholly-owned  subsidiaries,  Front Porch
     Digital  International,  SAS, which is based in France, MSI, which is based
     in Colorado, and MSI's wholly-owned  subsidiaries,  ManagedStorage UK, Inc.
     and  Seabrook  Technologies,  Inc.  ManagedStorage  UK, Inc.  and  Seabrook
     Technologies,  Inc. did not have any operating  activities  during the year
     ended  December  31,  2004.  All  significant   intercompany  accounts  and
     transactions have been eliminated in consolidation.

                                      F-11
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     RISKS, UNCERTAINTIES AND MANAGEMENT'S PLANS

     The  Company  is  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, its
     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,  the Company must,
     among  other  things,  gain  access  to  capital  in  amounts  and on terms
     acceptable to it,  maintain and increase its customer  base,  implement and
     successfully  execute  its  business  strategy,  continue  to  enhance  its
     technology,  provide superior customer service,  and attract,  retain,  and
     motivate  qualified  personnel.  There can be no assurance that the Company
     will be successful in addressing such risks.

     Since inception, the Company has incurred substantial  operating losses and
     has a shareholders' deficit at December 31, 2004. Management of the Company
     intends to fund these  deficiencies by utilizing its existing cash and cash
     equivalents,  and  anticipated  increasing  cash  flows  from its  business
     operations.  Realization  of  the  Company's  investment  in  property  and
     equipment and other long-lived assets is dependent upon achieving  positive
     operating  cash flows.  If the Company does not achieve and  maintain  such
     positive  operating cash flows,  its long-lived  assets could be considered
     impaired, resulting in a significant impairment charge to operations.

     The Company's 2005  operating plan and the execution  thereof is focused on
     increasing revenue,  controlling costs, and conserving cash, however, there
     can be no assurance  that the Company will be able to meet the  operational
     and financial  requirements  of its operating plan. The Company's 2005 plan
     also includes growth through  business  acquisitions  (Notes 4 and 17). The
     Company cannot predict with  certainty the expected  revenue,  gross profit
     margin,  net loss, and/or usage of cash and cash equivalents as a result of
     these  acquisitions.  However,  the Company's  management believes that the
     Company's  cash and cash  equivalents  and  working  capital  will  provide
     sufficient   capital  resources  to  fund  its  operations,   debt  service
     requirements, and working capital needs at least through December 31, 2005.

(2)  SHARE AND PER SHARE DATA

     In accordance  with  generally  accepted  accounting  principles,  and as a
     result of the  Acquisition  being  accounted for as a reverse  merger,  all
     share and per share data prior to the Acquisition  have been  retroactively
     adjusted  to  reflect  the  0.3089 to 1  exchange  of shares  occurring  in
     connection with the merger of the Company and MSI, in a manner similar to a
     reverse stock split,  with  differences in par value being recorded through
     an offset to additional paid-in capital.

(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     USE OF ESTIMATES

     The  preparation  of financial  statements  in conformity  with  accounting
     principles  generally accepted in the United States requires  management 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.  The Company has recorded  transactions  that include the
     issuance  of options  and  warrants  to  purchase  shares of the  Company's
     preferred and common stock.  The  accounting  for such  securities is based
     upon fair values of the Company's  equity  securities  and other  valuation
     criteria that were determined by management and the board of directors. The
     Company  believes  these  estimates  of fair  value are  reasonable.  Other
     significant  estimates  made by  management  include  those related to fair
     values of acquired intangible assets, and the establishment of an allowance
     for estimates of uncollectible accounts receivable.

     RECLASSIFICATIONS

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

                                      F-12
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     CASH AND CASH EQUIVALENTS

     The Company  considers  all highly  liquid  investments  purchased  with an
     original maturity of three months or less to be cash equivalents.

     RESTRICTED CASH

     The  Company  has  restricted   cash  of  $80,048  at  December  31,  2004,
     (classified as a non-current asset) which secures a letter of credit issued
     in connection with an operating lease (Note 9).

     PROPERTY AND EQUIPMENT

     Property and equipment, if acquired at the formation date of MSI or through
     acquisition,  have  been  recorded  at  the  estimated  fair  value  at the
     acquisition  date.  Otherwise,  all other  property and  equipment has 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 (SFAS
     144),  the  Company  reviews  the  carrying  value  of  long-lived  assets,
     including  property and equipment and  amortizable  intangible  assets,  to
     determine  whether there are any  indications of impairment.  Impairment of
     long-lived  assets is assessed by a comparison of the carrying amount of an
     asset to expected  future cash flows to be generated  by the asset.  If the
     assets are considered to be impaired, the impairment recognized is measured
     by the  amount  by which the  carrying  amount of the  assets  exceeds  the
     estimated fair value of the assets.

     GOODWILL

     Prior to the  Acquisition,  MSI accounted for an investment in common stock
     and  warrants  of FPDI using the equity  method of  accounting.  The excess
     estimated  fair value of FPDI's  common stock and warrants over MSI's share
     of FPDI's  net  assets  at the date of the  investment  purchase  (July 31,
     2002),  was  recognized as goodwill,  and in accordance  with SFAS No. 142,
     GOODWILL AND OTHER INTANGIBLE ASSETS, was not amortized.  MSI reviewed such
     goodwill for impairment and recognized an impairment  loss when there was a
     loss in value in the  equity  method  investment,  which was  other  than a
     temporary  decline.  For the years ended  December  31, 2004 and 2003,  MSI
     recorded  impairment losses of $198,280 and $692,098,  respectively.  As of
     December 31, 2004 the Company had no recorded goodwill.

     INCOME TAXES

     Income  taxes are  accounted  for under  the  asset and  liability  method.
     Deferred  tax  assets and  liabilities  are  recognized  for the future tax
     consequences  attributable to differences  between the financial  statement
     carrying  amounts of existing assets and  liabilities and their  respective
     tax bases and  operating  loss and tax credit  carryforwards.  Deferred tax
     assets and  liabilities  are measured  using enacted tax rates  expected to
     apply to taxable income in the years in which those  temporary  differences
     are expected to be recovered or settled.  The effect on deferred tax assets
     and  liabilities  of a change in tax rates is  recognized  in income in the
     period that includes the enactment date.

     REVENUE RECOGNITION

     Revenue  is  recognized  when  all  of  the  following  criteria  are  met:
     persuasive  evidence  of an  agreement  exists,  delivery  has  occurred or

                                      F-13
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004



     services have been rendered, the sales price is fixed or determinable,  and
     collectibility is reasonably assured.

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

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

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

     The Company also provides software related professional services.  Services
     are  generally  provided  on a time and  materials  basis  and  revenue  is
     recognized as the services are provided.

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

     COST OF REVENUE

     Cost of revenue  consists  primarily  of direct  labor,  cost of  hardware,
     depreciation  ($2,014,156  in 2004 and  $1,974,425 in 2003),  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 $80,844 and $270,964 for the years ended
     December 31, 2004 and 2003, respectively.

     SOFTWARE DEVELOPMENT COSTS

     The Company  accounts for costs related to software  developed for internal
     use  and  marketed  for  external  use in  accordance  with  SFAS  No.  86,
     ACCOUNTING  FOR THE  COSTS OF  COMPUTER  SOFTWARE  TO BE SOLD,  LEASED,  OR
     OTHERWISE MARKETED. MSI's Gridworks software product is used internally for
     providing  services  to  the  Company's  customers  and  is  also  marketed
     separately as a stand-alone product.  FPDI's DIVArchive software product is
     marketed solely as a stand-alone  product.  As required by SFAS No. 86, the
     Company   capitalizes   costs  in   developing   software   products   upon
     determination that  technological  feasibility has been established for the
     product, if that product is to be sold, leased or otherwise marketed. Costs
     incurred  prior  to the  establishment  of  technological  feasibility  are
     charged  to  research  and  development   expense.   When  the  product  or
     enhancement is available for general  release to customers,  capitalization
     is ceased, and previously  capitalized costs are amortized based on current
     and future revenue for the product, but with an annual amortization  amount
     at least equal to the  straight-line  amortization over an estimated useful


                                      F-14
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     life of three  years.  For the  years  ended  December  31,  2004 and 2003,
     capitalized   software   development  costs,  which  related  primarily  to
     enhancements to the Company's  Gridworks and DIVArchive  software solutions
     totaled $1,044,325 and $320,414, respectively. These costs are amortized on
     a straight-line  basis over the estimated life,  typically three years. For
     the  years  ended  December  31,  2004 and  2003,  $384,974  and  $272,731,
     respectively,  was  charged  to  expense.  As of  December  31,  2004,  the
     unamortized portion of software development costs was $1,188,885.

     DEFERRED LOAN COSTS

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

     RESEARCH AND DEVELOPMENT COSTS

     Research and  development  costs are  expensed as  incurred.  For the years
     ended  December  31, 2004 and 2003,  research  and  development  costs were
     $134,793 and $0, respectively.

     FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

     The  accounts  of  the  international  subsidiary,   (Front  Porch  Digital
     International, SAS) are translated using the exchange rate in effect at the
     balance  sheet date,  and the results of operations  are  translated at the
     average  exchange  rates during the year. At December 31, 2004, the Company
     reported a  cumulative  translation  gain of  $19,184,  as a  component  of
     accumulated  other  comprehensive  income.  The Company is also  subject to
     foreign  exchange   transaction  exposure  when  its  subsidiary  transacts
     business in a currency other than its own functional currency.  The effects
     of exchange rate fluctuations in remeasuring foreign currency  transactions
     for the years ended December 31, 2004 and 2003 were a loss of $24,756 and a
     gain of $8,550, respectively.

     In June 2004,  the Company  began  managing its foreign  currency cash flow
     exposure through the use of $/Euro forward contracts,  which are considered
     derivative  instruments  and  which  are  recorded  as  either  an asset or
     liability,  measured  at fair value.  Changes in fair value are  recognized
     currently  by the  Company in the  statement  of  operations.  The  Company
     recorded a realized loss of $144,086 and an unrealized  loss of $134,500 on
     these  contracts as of December 31, 2004,  which  represented the change in
     the fair value of the  foreign  currency  forward  contract  related to the
     difference  between changes in the spot and forward rates excluded from the
     assessment of hedge effectiveness.

     PER SHARE DATA

     The Company  reports its earnings  (loss) per share in accordance with SFAS
     No. 128, ACCOUNTING FOR EARNINGS PER SHARE (SFAS 128). Basic loss per share
     is calculated using the net loss allocable to common  shareholders  divided
     by the weighted  average common shares  outstanding  during the period.  In
     accordance with accounting requirements for reverse mergers, the historical
     loss per  share  of MSI  prior to the  Acquisition  has been  retroactively
     restated to reflect the Company's capital  structure.  Due to the Company's
     net loss,  shares  from the assumed  conversion  of  outstanding  warrants,
     options, convertible preferred stock and convertible debt have been omitted
     from the  computations  of  diluted  loss per  share  for the  years  ended
     December 31, 2004 and 2003 because the effect would be antidilutive. Shares
     issuable from securities that could  potentially  dilute earnings per share
     in the future that were not included in the  computation  of loss per share
     because their effect was anti-dilutive  totaled approximately 101.6 million
     at December 31, 2004.  Without  regard to any  reduction for the use of the
     treasury stock method, 2.7 million shares of common stock issuable upon the
     conversion of  outstanding  convertible  preferred  stock,  the exercise of
     options and  warrants,  and  restricted  stock have been  omitted  from the
     computations  of basic  and  diluted  loss  per  share  for the year  ended
     December 31, 2003 because the effect would be antidilutive.

     STOCK-BASED COMPENSATION

     The  Company  applies  the  intrinsic   value-based  method  of  accounting
     prescribed by Accounting  Principles Board (APB) Opinion No. 25, ACCOUNTING
     FOR STOCK  ISSUED TO  EMPLOYEES,  and  related  interpretations,  including
     Financial  Accounting  Standards Board ("FASB")  Interpretation No. 44 (FIN
     44), ACCOUNTING FOR CERTAIN TRANSACTIONS  INVOLVING STOCK COMPENSATION,  AN
     INTERPRETATION  OF APB OPINION NO. 25, to account for its fixed-plan  stock
     options.


                                      F-15
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     Under this method,  compensation  expense is generally recorded on the date
     of grant only if the current market price of the  underlying  stock exceeds
     the exercise price. SFAS No. 123,  ACCOUNTING FOR STOCK-BASED  COMPENSATION
     and SFAS No. 148, ACCOUNTING FOR STOCK-BASED  COMPENSATION - TRANSITION AND
     DISCLOSURE,  AN AMENDMENT OF FASB STATEMENT NO. 123, established accounting
     and disclosure  requirements  using a fair value-based method of accounting
     for  stock-based  employee  compensation  plans.  As  permitted by existing
     accounting  standards,  the  Company  has  elected to continue to apply the
     intrinsic value-based method of accounting described above, and has adopted
     only  the  disclosure  requirements  of  Statement  123,  as  amended.  The
     following table  illustrates the effect on net loss if the fair value-based
     method had been applied to all outstanding and unvested awards in the years
     ended  December 31, 2004 and 2003.  All amounts except per share amounts in
     (000's)

                                                               Years ended
                                                               December 31,
                                                            2004         2003
                                                          --------     --------
     Net loss before deemed dividends and accretion
        on preferred stock, as reported                   $(10,438)    $(10,991)
     Add stock-based employee compensation expense
       included in reported net loss, net of tax             1,191          308
     Deduct total stock-based employee compensation
       expense determined under fair value-based
       method for all awards, net of tax                    (1,853)        (322)
                                                          --------     --------
           Pro forma net loss before deemed dividends
              and accretion on preferred stock            $(11,100)    $(11,005)
                                                          ========     ========
     Net loss per weighted average common share
       outstanding - basic and diluted - pro forma        $  (0.24)    $  (0.67)
                                                          ========     ========

     Net loss per weighted average common share
       outstanding - basic and diluted - as reported      $  (0.23)    $  (0.67)
                                                          ========     ========


     In  determining  the fair value of stock options  granted by the Company in
     2004, and thus  determining pro forma  compensation  expense under the fair
     value method,  the Company utilized the Black-Scholes  valuation model with
     the following weighted average assumptions: dividend yield of 0%, risk free
     interest rates ranging from 1.2% to 2.09%, expected volatility of 143%, and
     expected  lives of three years.  The  weighted  average fair value of these
     options granted during 2004 is $0.28.

     In determining  the fair value of stock options granted by MSI in 2003, the
     Company utilized the  Black-Scholes  valuation model to determine pro forma
     compensation  expense  under  the fair  value  method  with  the  following
     weighted average assumptions: dividend yield of 0%, risk free interest rate
     of 3.91%,  expected  volatility of 0.001%, and expected lives of ten years.
     The weighted average fair value of options granted during 2003 was $0.30.

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

     FINANCIAL INSTRUMENTS

     The carrying amounts of financial  instruments  held by the Company,  which
     include  cash  equivalents,   restricted  cash,  accounts  receivable,  and
     accounts payable,  approximate fair value due to their short duration.  The
     carrying  values  of the note  payable  and other  non-current  obligations
     approximate fair values based upon market rates currently  available to the
     Company.

                                      F-16
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     CONCENTRATIONS OF CREDIT RISK

     The Company sells its products and services  throughout  the United States,
     Europe,  Asia and the Pacific Rim.  The Company  performs  periodic  credit
     evaluations  of its customers'  financial  condition and generally does not
     require  collateral.  Accounts receivable are reported at their outstanding
     unpaid principal  balances  reduced by an allowance for doubtful  accounts.
     The Company  estimates  doubtful  accounts  based on historical  bad debts,
     factors related to specific  customers' ability to pay and current economic
     trends.  The Company writes 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, 2004,
     aggregate  revenues from customers located in Europe,  Asia and the Pacific
     Rim amounted to $4.7 million or 35% of total  revenue,  while revenues from
     customers  located in North  America  totaled  $8.6 million or 65% of total
     revenue.  For the year ended  December 31, 2003,  aggregate  revenues  from
     customers  located in Europe,  Asia and the  Pacific  Rim  amounted to $1.1
     million or 11% of total revenue,  while revenues from customers  located in
     North America  totaled $8.7 million or 89 % of total revenue.  For the year
     ended December 31, 2004, revenue from two customers  individually accounted
     for approximately 13% and 11% of total revenues.  Accounts  receivable from
     these customers represented approximately 20% of total trade receivables at
     December 31, 2004.  For the year ended  December  31, 2003,  revenues  from
     three  customers each exceeding 10% of total revenues  aggregated  36%, 19%
     and 11%, respectively.

     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In December  2004, the FASB issued SFAS No.  123(R),  SHARE-BASED  PAYMENT,
     which addresses the accounting for share-based  compensation  transactions.
     SFAS  No.  123(R)   eliminates  the  ability  to  account  for  share-based
     compensation transactions using APB 25, and generally requires instead that
     such   transactions  be  accounted  and  recognized  in  the  statement  of
     operations based on their fair value. SFAS No. 123(R) will be effective for
     public  companies  that  file as small  business  issuers  as of the  first
     interim or annual reporting period that begins after December 15, 2005. The
     Company is evaluating the  provisions of this standard.  Depending upon the
     number and terms of options  that may be  granted  in future  periods,  the
     implementation  of  this  standard  could  have a  material  impact  on the
     Company's financial position and results of operations.

     In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
     INSTRUMENTS  WITH  CHARACTERISTICS  OF BOTH  LIABILITIES AND EQUITY,  which
     establishes  standards for how an issuer  classifies  and measures  certain
     financial  instruments with characteristics of both liabilities and equity.
     SFAS No. 150 requires that an issuer  classify a financial  instrument that
     is within its scope,  which may have previously been reported as equity, as
     a liability  (or an asset is some  circumstances).  Mandatorily  redeemable
     instruments   (i.e.   instruments   issued  in  the  form  of  shares  that
     unconditionally  obligate  the  issuer to redeem  the shares for cash or by
     transferring  other  assets)  are to be reported  as  liabilities  by their
     issuers.  This statement does not affect the  classification or measurement
     of convertible bonds,  puttable stock, or other outstanding shares that are
     conditionally  redeemable.  The  provisions  of SFAS No. 150 are  generally
     effective  for  those   provisions   relating  to  mandatorily   redeemable
     non-controlling  interests,  which  have been  deferred.  MSI's  previously
     outstanding  New Series C preferred  stock was  mandatorily  redeemable  on
     January 9, 2008,  (the  redemption  amount was estimated to be $33,156,000,
     representing  $1,000  per share plus five  years of  dividends  at $100 per
     share per  year),  and  therefore  was  considered  a  liability  under the
     provisions  of SFAS No. 150.  Accordingly,  on July 1, 2003,  the  carrying
     amount  of the New  Series  C,  which  approximated  its  fair  value,  was
     reclassified  from the  "mezzanine"  section  of the  balance  sheet to the



                                      F-17
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004

     liability section.  There was no gain or loss recorded upon the adoption of
     SFAS No. 150.  From July 1, 2003 through  December  31,  2003,  the Company
     recorded non-cash interest expense of $1,262,508,  and from January 1, 2004
     through  August  18,  2004,  when the  stock  was  exchanged  for  Series A
     preferred  stock,  the  Company  recorded   non-cash  interest  expense  of
     $1,703,332,  reflecting  an  effective  interest  rate on this  security of
     13.477%.

     In December  2003,  the FASB issued  Interpretation  No. 46R ("FIN 46R"), a
     revision to SFAS Interpretation No. 46,  CONSOLIDATION OF VARIABLE INTEREST
     ENTITIES.  FIN 46R clarifies  some of the  provisions of FIN 46 and exempts
     certain  entities  from  its  requirements.  FIN 46R  requires  a  variable
     interest  entity to be consolidated by a company if that company is subject
     to a  majority  of the risk of loss  from the  variable  interest  entity's
     activities  or  entitled  to receive a majority  of the  entity's  residual
     returns or both. FIN 46R also requires  disclosures about variable interest
     entities that a company is not required to consolidate  but in which it has
     a  significant  variable  interest.  FIN 46R became  effective for variable
     interest entities created after December 15, 2003 for public companies, and
     became effective for all other variable interest entities by the end of the
     first annual  reporting period ending after December 15, 2004 for companies
     that are  small  business  issuers.  FIN 46R did not have an  impact on the
     Company's financial position or results of operations.

(4)  ACQUISITIONS

       ACQUISITION OF MSI

     On August 18, 2004 (the  "Acquisition  Date"),  the Company (formerly Front
     Porch Digital,  Inc.) acquired all of the outstanding capital stock of MSI,
     a Delaware corporation. The Company acquired MSI to increase its ability to
     deliver a complete storage  infrastructure  and management  solution to its
     customers.  The transaction was structured as a reorganization  of MSI with
     and into Front Porch Merger Corp., a Delaware corporation and newly-formed,
     wholly-owned  subsidiary  of the  Company.  The  Acquisition  of MSI by the
     Company has been accounted for as a reverse merger because on a post-merger
     basis,  the former MSI  shareholders  hold a  majority  of the  outstanding
     common stock of the Company on a voting and diluted basis. As a result, MSI
     is deemed to be the  acquirer for  accounting  purposes.  Accordingly,  the
     consolidated  financial  statements  presented herein include the financial
     statements  of MSI for all periods  prior to the  Acquisition  Date and the
     financial  statements of the  consolidated  companies from the  Acquisition
     Date forward.  Historical  share and per share amounts for periods prior to
     the Acquisition  have been  retroactively  restated to reflect the exchange
     ratio  established  in the  transaction,  in a manner  similar to a reverse
     stock  split,  with  differences  in par values being  recorded  through an
     offset to additional paid-in capital. The consolidated  accumulated deficit
     of the  accounting  acquirer  (MSI)  has been  carried  forward  after  the
     Acquisition.  The  Acquisition  has  also  been  accounted  for  as a  step
     acquisition  since it occurred in multiple  steps over the period from July
     31, 2002,  when MSI sold its French  subsidiary  to the Company in exchange
     for shares of the Company's common stock. After the Acquisition, the former
     MSI  shareholders  owned  approximately  64% of  the  common  stock  of the
     Company, giving effect to the conversion of Series A preferred stock.

     The MSI stockholders  were issued  47,454,985  restricted  shares of common
     stock and 2,466,971 restricted shares of the  newly-designated,  voting and
     non-dividend  bearing  Series A Redeemable  Preferred  Stock (the "Series A
     Preferred")  of  the  Company  in  exchange  for  their  ownership  of  MSI
     securities.  The Series A Preferred  shares are convertible  into shares of
     common stock on a  twenty-for-one  basis (Note 11). In connection  with the
     Acquisition, the Company canceled 13,452,381 shares of outstanding Incentra
     common stock and warrants to purchase 3.5 million shares of Incentra common
     stock that were held by MSI prior to the Acquisition Date. MSI canceled

                                      F-18
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     $0.2 million in receivables  owed to it from the Company.  The Company also
     has outstanding  warrants to purchase  202,740 shares of restricted  common
     stock at a price per share of $.0003 and  outstanding  warrants to purchase
     33,029 shares of Series A Preferred at a price per share of $10.35.

     Although  there is no impact on the  purchase  price  allocation  or in the
     financial  information  presented,  the  determination  of the value of the
     consideration issued to the former MSI shareholders was as follows:

     a)   Common  shares issued - the valuation of the common was based upon the
          average  closing price of the Company's  common stock as posted on the
          OTC Bulletin Board for the three-day period prior to the closing date,
          the closing date and the three-day period after the closing date.

     b)   Series A Preferred - the  issuance  price of the  preferred  stock was
          fixed at $31.5 million.  The preferred  stock was recorded at its fair
          value at the Acquisition  Date,  which  approximated  the value of the
          redeemable  preferred stock of MSI exchanged in the  Acquisition.  The
          difference  between  the  issue  price  and the  fair  value  is being
          recorded as an accretion  on the Series A Preferred  stock and charged
          to net loss  applicable  to common  shareholders  over the term of the
          redemption period.

     The  47,454,985  common shares issued in the  Acquisition  was based on the
     following:  each outstanding  share of MSI's Series A Redeemable  Preferred
     Stock was  converted  into 200 shares of common stock of the Company,  each
     outstanding  share  of MSI's  Series  B  Convertible  Preferred  Stock  was
     exchanged  for  27.789  shares of  common  stock of the  Company,  and each
     outstanding  share of MSI common stock was converted  into 0.3089 shares of
     common  stock of the  Company.  Each  outstanding  share of MSI's  Series C
     Redeemable  Preferred  Stock was exchanged for 111.6042  shares of Series A
     Preferred.  In  addition,  each  outstanding  option to purchase MSI common
     stock was converted into an option to purchase unregistered common stock of
     the Company,  subject to certain  adjustments to the exercise price and the
     number of shares  issuable  upon  exercise  of such  options to reflect the
     exchange ratios in the Acquisition.

     The  holders  of the  Series A  Preferred  and  certain  other  former  MSI
     stockholders   executed  a  lock-up   agreement   pursuant  to  which  such
     stockholders  agreed  not to  transfer  their  unregistered  shares  of the
     Company's common stock for a period of 18 months (with limited exceptions).
     Concurrent with the  consummation of the  Acquisition,  the Company entered
     into a Registration Rights Agreement (the "Registration  Rights Agreement")
     with  the  holders  of the  Series A  Preferred.  Under  the  terms of such
     agreement, at any time after February 16, 2006, the holders of at least 51%
     of the Series A Preferred  have the right to cause the Company to register,
     under the  Securities  Act of 1933, the shares of common stock and Series A
     Preferred  (including  the common stock  underlying the Series A Preferred)
     issued to such holders in the Acquisition.  In addition,  such holders have
     'piggy-back' and Form S-3 registration rights.

     Since  the  Acquisition  has been  accounted  for as a  reverse  merger,  a
     determination  of the purchase price was made based upon the estimated fair
     value of Front Porch at the time of the acquisition. Accordingly, the total
     purchase  price for the Company was  determined to be  approximately  $17.5
     million, for which the allocation is below.

     Cash and cash equivalents                                $    946,732
     Other current assets                                        2,000,773
     Property and equipment                                        193,637
     Restricted cash                                             3,058,953
     Deferred tax asset                                            400,000
     Other assets                                                  920,357
     Intellectual property-DIVArchive software                   6,600,000
     Intellectual property-customer base                        10,039,785
     Current liabilities                                        (3,732,031)
     Other liabilities                                          (2,904,743)
                                                              ------------
                                                              $ 17,523,463
                                                              ============

                                      F-19
<PAGE>


                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004



     As of the  Acquisition  Date,  the  excess  fair  value over the net assets
     acquired totaled  approximately $16.6 million. This excess was allocated to
     the Company's intellectual property, including its DIVArchive and Bitscream
     proprietary  software and its  customer  base in the  broadcast,  media and
     entertainment  industries.  The amounts allocated to intellectual  property
     for the Company's software and customer base are being amortized over 5 and
     10-year periods,  respectively. The weighted average amortization period is
     approximately 8 years.

     The following unaudited pro forma results of operations for the years ended
     December 31, 2004 and 2003 are presented to reflect the  Acquisition  as if
     it had occurred as of the beginning of the periods  presented;  all amounts
     except per share amounts in (000's):

                                                       Years ended December 31,
                                                          2004         2003
                                                       ----------   ----------
     Revenues (2)                                      $   17,740   $   12,728
     Loss from continuing operations                      (12,631)     (12,674)
     Loss from discontinued operations (1)                     --       (3,711)
                                                       ----------   ----------
     Net loss applicable to common shareholders        $  (12,631)  $  (20,511)
                                                       ==========   ==========

     Loss per share - basic and diluted, pro forma     $    (0.25)  $    (1.08)
                                                       ==========   ==========

     (1)  During  2003,   Front  Porch  disposed  of  two  business  units:  the
          DIVArchive Medical business unit and the Media Services business unit.
          The operating  results of the two business units were accounted for as
          discontinued operations.

     (2)  On a pro forma basis,  giving effect to the  Acquisition  as if it had
          occurred on January 1, 2004,  for the year ended  December  31,  2004,
          aggregate pro forma revenues from customers located in Europe, Asia or
          the Pacific Rim amounted to $9.0 million or approximately 51% of total
          pro forma  revenue,  while  revenues from  customers  located in North
          America totaled $8.7 million or  approximately  49% of total pro forma
          revenues. On a pro forma basis, giving effect to the Acquisition as if
          it had occurred on January 1, 2004, one customer exceeded 10% of total
          pro forma revenues.


     ASSET ACQUISITION

     In January 2003,  MSI closed on an asset  purchase  agreement,  whereby MSI
     purchased certain assets from Sanrise, Inc. ("Sanrise"),  for $1,000,000 in
     cash and $2,000,000 in escrowed funds to be released over a 120-day period,
     provided  certain  conditions in the contract were met. The asset  purchase
     agreement  contained  an  earn-out  provision  payable  in cash and  stock,
     payable upon meeting certain conditions.

     In  September  2003,  MSI settled an  outstanding  lawsuit with Sanrise for
     $156,667  in cash and 333 shares of New  Series C. The  payment in cash and
     shares was made in full  satisfaction  of the  earn-out  provision.  In the
     settlement,  Sanrise  relinquished  any and all right to further payment in


                                      F-20
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004

     connection  with the asset  acquisition  of its DataVault  business and MSI
     released all remaining escrow payments.

     The 333 shares of Series C redeemable preferred stock were repurchased from
     Sanrise on December 19, 2003 for $33,283 and such shares were retired.

     The total purchase price for the Sanrise assets  (including direct costs of
     the  acquisition)  of $3,216,992  was allocated to the acquired  intangible
     asset of  acquired  customer  contracts  and  fixed  assets  based on their
     estimated fair market values.

(5)  RECAPITALIZATION AND STOCK PURCHASE AGREEMENTS

     In  January  2003 and May 2003,  MSI  entered  into a  securities  purchase
     agreement with certain  existing  investors and new investors.  Pursuant to
     this  agreement,  the Company  issued 22,104 shares of Series C mandatorily
     redeemable  preferred stock (New Series C) and 19,392,369 shares of Class A
     common stock.  In connection  with this  securities  sale, the Company also
     issued  warrants for the purchase of 270 shares of New Series C and 202,721
     shares of Class A common  stock.  The  warrants for the purchase of the New
     Series C and the Class A common  stock  were  exercisable  for  $1,000  and
     $.003,  respectively,  for a  period  of 5  years  from  the  date  of  the
     securities purchase  agreement.  The New Series C was converted into shares
     of Series A convertible  preferred  stock of the Company at the Acquisition
     date.  The Class A common  stock was  converted  into  common  stock of the
     Company at the Acquisition date.

     Proceeds  and cost of the  sale of the  Class A  common  stock  and the New
     Series C were  allocated  to each  class of stock  based on  relative  fair
     values on the date of the financing.  The New Series C was nonvoting, had a
     par value of $0.01 per  share,  accrued  a  dividend  of $100 per share per
     annum, had a $1,000 per share  liquidation  preference,  and was redeemable
     January 9, 2008. The purchase price of the New Series C was $800 per share.
     The Series C proceeds were $17,704,628 and consisted of cash of $12,858,817
     and the conversion of a note payable with a $4,760,000 principal amount and
     $85,811 of related interest.  Cash costs of the financing were $626,113 and
     non-cash  cost of  financing  were  warrants  with an  estimated  value  of
     $126,637.

     The purchase price of the Class A common stock was $0.32 per share. A total
     of  16,681,772  shares of the Class A common  stock  were  issued for total
     proceeds consisting of $3,214,704 cash and the conversion of a note payable
     with a $1,190,000  principal  amount and $21,453 of related  interest.  The
     remaining  2,710,597  shares  of Class A common  stock  were  issued  as an
     inducement to convert the notes payable.  Interest expense in the amount of
     $877,500  was  recorded  in  connection  with  the  conversion  based on an
     estimated fair value of the common stock of $0.32 per share.

(6)  PROPERTY AND EQUIPMENT

     Property and equipment consists of the following as of December 31, 2004:

     Computer equipment                                       $  5,844,721
     Software                                                    3,519,284
     Office furniture and equipment                              1,764,550
     Leasehold improvements                                         65,343
                                                              ------------
                                                                11,193,898
     Less accumulated depreciation                              (8,741,081)
                                                              ------------
                                                              $  2,452,817
                                                              ============

                                      F-21
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     Depreciation  expense  for the years ended  December  31, 2004 and 2003 was
     $2,197,213 and $2,337,524, respectively.

     Included in property and equipment is equipment  under capital lease with a
     cost of $1,334,427 and accumulated depreciation of $628,176 at December 31,
     2004.

(7)  INTANGIBLE ASSETS

     Intangible assets consist of the following as of December 31, 2004:

     Acquired customer base - FPDI (life of 10 years)         $ 10,039,785
     Intellectual property - DIVArchive (life of 5 years)        6,600,000
     Acquired customer base - MSI (life of 3 years)              2,599,714
     Patents (life of 7 years)                                       2,885
                                                              ------------
                                                                19,242,384
     Less accumulated amortization                              (2,705,324)
                                                              ------------
     Intangible assets, net                                   $ 16,537,060
                                                              ============

     Amortization  expense  for the years ended  December  31, 2004 and 2003 was
     $1,776,473 and $928,851,  respectively.  Estimated amortization expense for
     each of the five succeeding years is as follows:

     Year ending December 31:
       2005                                                   $  3,107,629
       2006                                                      2,345,445
       2007                                                      2,324,391
       2008                                                      2,324,391
       2009                                                      1,809,419
       Thereafter                                                4,625,785
                                                              ------------
                                                              $ 16,537,060
                                                              ============

(8)  ACCRUED EXPENSES

     Accrued expenses consist of the following as of December 31, 2004:

     Wages, benefits and payroll taxes                          $  1,202,677
     Professional service fees                                       393,545
     Derivative liability                                            134,500
     Accrued intereset and penalties                                 126,667
     Taxes, other than income taxes                                  662,244
     Other liabilities                                               539,173
                                                                ------------
                                                                $  3,058,806
                                                                ============

(9)  COMMITMENTS AND CONTINGENCIES

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

                                      F-22
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     The Company leases  facilities and equipment under  non-cancelable  capital
     and  operating  leases.  Rental  expense  relating to operating  leases was
     $536,192  and  $492,901  for the years  ended  December  31, 2004 and 2003,
     respectively.  Certain  of the  operating  lease  agreements  have  renewal
     provisions, which range from month-to-month to 24-month terms.

     A letter of credit was entered into as additional security for an operating
     lease due to the  limited  cash  resources  of the  Company at the time the
     lease was signed.  The agreement  requires a letter of credit in decreasing
     amounts  through the  expiration  of the lease on September  30, 2007.  The
     letter of credit  expires on April 1st of every  year and is  automatically
     extended without written amendment every year and would be used to pay rent
     on the Broomfield, Colorado facility if the Company were unable to make the
     monthly rent  payments.  At December 31, 2004,  the amount of the letter of
     credit is $80,048.  The letter of credit is secured by  restricted  cash in
     the same amount.

     Future minimum lease payments as of December 31, 2004 are as follows:

                                                   CAPITAL    OPERATING
                                                   LEASES       LEASES
                                                  ---------   ----------
     Year ending December 31:
       2005                                       $ 549,922   $ 290,574
       2006                                              --     247,465
       2007                                              --     160,145
       2008                                              --      36,190
       2009                                              --      13,062
                                                  ---------   ---------
                  Total minimum lease payments      549,922   $ 747,436
                                                              =========
     Less amounts representing interest             (33,909)
                                                  ---------
                  Present value of minimum lease
                    payments (all current)        $ 516,013
                                                  =========

(10) NOTE PAYABLE, CAPITAL LEASES, AND OTHER LONG-TERM OBLIGATIONS

     The following is a summary of the Company's  long-term  debt as of December
     31, 2004:

     Senior secured convertible note (A)                      $  3,119,112
     Capital leases (B)                                            516,013
     Other obligations (C)                                         370,361
                                                              ------------
                                                                 4,005,486
     Less current portion                                       (1,738,516)
                                                              ------------
     Long-term portion                                        $  2,266,970
                                                              ============

                                      F-23
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     (A)  SENIOR SECURED CONVERTIBLE NOTE

     On the Acquisition Date,  liabilities  assumed in the Acquisition  included
     the fair value of a convertible  note. This  convertible note originated on
     May 13, 2004, when the Company  consummated a private placement pursuant to
     which the Company issued a secured  convertible  term note due May 13, 2007
     in the principal amount of $5,000,000 (the "Note"),  and the Company issued
     a common stock purchase warrant, entitling the holder to purchase 4,435,000
     shares of common stock (the "Warrant") at $0.48 per share. The Note and the
     Warrant were sold to Laurus Master Fund,  Ltd.  ("Laurus"),  for a purchase
     price of  $5,000,000.  The  principal  and unpaid  interest on the Note are
     convertible  into shares of the Company's  common stock at a price of $0.30
     per share, subject to antidilution adjustments.

     In connection with the issuance of the Note to Laurus, the Company recorded
     the fair  value of the  warrant  issued as debt  discount  in the amount of
     approximately  $1.8  million  based upon the  Black-Scholes  option-pricing
     model, resulting in an imputed interest rate of 37%. This discount is being
     amortized to earnings as additional  interest  expense over the term of the
     Note. Accordingly, the Company has recorded $209,317 of additional non-cash
     interest  expense  relating to the  amortization of the discount during the
     year ended December 31, 2004.

     In accordance with Emerging  Issues Task Force Issue 00-19,  ACCOUNTING FOR
     DERIVATIVE FINANCIAL  INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A
     COMPANY'S OWN STOCK, the Company initially  accounted for the fair value of
     the Warrant as equity.  As discussed  below, in the fourth quarter of 2004,
     due to an October  2004  change in Note  conversion  terms,  the  Company's
     authorized  and  unissued  shares  available  to settle the Warrant  (after
     considering  all other  commitments  that may require the issuance of stock
     during the  maximum  period the  Warrant  could  remain  outstanding)  were
     determined to be insufficient  (Note 11, item B). As a result,  the Company
     reassessed and  reclassified the value of the Warrant to a liability at the
     reassessment  date.  The fair  value of the  Warrant is  evaluated  at each
     reporting  period  with  any  resulting  change  in the  fair  value  being
     reflected in the  Consolidated  Statement of Operations.  The fair value of
     the  Warrant  from  the  reassessment  and  reclassification  date  through
     December  31,  2004,  increased  by  approximately  $30,000,  which was not
     recorded due to the immaterial amount of the change.

     The Note  provides for monthly  payments of interest at the prime rate plus
     1%,  which is subject to  reduction  if the market  price of the  Company's
     common stock  exceeds  certain  designated  thresholds.  However,  the rate
     cannot be less than 5%. The Note also provides for monthly  amortization of
     principal,  which  commenced on September 1, 2004 of $45,455,  plus accrued
     interest,  per  month,  (increased  to  approximately  $159,000  per  month
     beginning  in March 2005) with the balance  payable on the  maturity  date.
     Laurus has the option to receive  shares of the  Company's  common stock in
     lieu of debt service  payments at the market price of the Company's  common
     stock at the date of conversion.  The Note is  collateralized by a security
     interest  in all of the assets of the  Company.  The Warrant  entitles  the
     holder to  purchase,  at any time  through May 13,  2011,  up to  4,435,000
     shares of the Company's common stock at a price of $0.48 per share, subject
     to antidilution adjustments.

     Pursuant to a  Securities  Purchase  Agreement  (the  "Securities  Purchase
     Agreement")  between  the  Company  and  Laurus,  for so long as 25% of the
     principal  amount of the Note is outstanding,  the Company may not directly
     or  indirectly  declare  or pay any  dividends  without  the prior  written
     consent of Laurus.  The  Securities  Purchase  Agreement  also requires the
     written   consent  of  Laurus   relating  to  any   liquidation,   material
     reorganization or certain additional indebtedness of the Company.

     Pursuant to a  Registration  Rights  Agreement  (the  "Registration  Rights
     Agreement")  between  the  Company and  Laurus,  the  Company:  (a) filed a
     registration  statement  under the Act to register the resale of the shares
     of the  Company's  common stock  issuable  upon  conversion of the Note and
     exercise of the Warrant (the "Registration Statement"),  which Registration
     Statement  became  effective  on July  29,  2004,  and (b) is  required  to
     maintain the effectiveness of the Registration Statement until the earliest
     date of when  (i) all  registrable  securities  have  been  sold,  (ii) all
     registrable  securities may be sold immediately without  registration under
     the Act and without  volume  restrictions  pursuant to Rule 144(k) or (iii)
     all amounts payable under the Note have been paid in full. Laurus, or other
     holders of the Note and the  Warrant,  are  entitled  to certain  specified
     remedies  if  the  Company  does  not  maintain  the  effectiveness  of the
     Registration Statement, subject to certain exceptions.

                                      F-24
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     On October 26, 2004, the Company entered into an Amendment and Waiver, (the
     "Amendment and Waiver"),  with Laurus.  The Amendment and Waiver amends the
     Securities  Purchase  Agreement  and  certain  other  documents  (the "Loan
     Documents")  and waived certain events of default under certain of the Loan
     documents.  Pursuant to the  Amendment  and Waiver,  the parties  agreed to
     reduce the "Fixed  Conversion  Price" set forth in the Term Note from $0.50
     to $0.30 per share and to amend the Master  Security  Agreement  to provide
     for a "Lockbox  Deposit  Account" to be  maintained  by the Company and its
     subsidiaries under the Master Security  Agreement.  Lockbox  remittances do
     not  automatically  reduce the debt outstanding  unless an event of default
     has  occurred.  Laurus  further  agreed  to  (i)  release  to  the  Company
     approximately $3 million,  which  represented all funds then remaining in a
     restricted  account  (less  outstanding  accrued  interest and fees);  (ii)
     postpone the monthly  principal  payments due by the Company under the Note
     on November 1, 2004 through February 1, 2005 until the maturity date of the
     Note;  (iii)  waive  certain  events of  default,  and all fees and default
     interest rates  applicable to such events of default;  (iv) extend the time
     for the  Company's  subsidiaries  to be  joined  as a party  to the  Master
     Security  Agreement;  (v) waive all fees and default  interest arising from
     the  Company's  failure  to pay the  liquidated  damages  set  forth in the
     Registration  Rights Agreement and further waive any liquidated damages due
     and payable to Laurus by the Company.

     In consideration of the waivers, the Company issued a seven-year warrant to
     Laurus to purchase  500,000  shares of the  Company's  common stock with an
     exercise price of $0.50 per share.  The Company further agreed to amend its
     Registration  Statement,  initially filed on the filing date (as defined in
     the Registration  Rights Agreement),  to include the additional warrant and
     additional  shares of the  Company's  common stock  issuable to Laurus upon
     conversion of the Term Note due to the  adjustment of the Fixed  Conversion
     Price.  The  Company  valued  the  Additional  Warrant  at  $89,000,  which
     represents the total liquidated damages waived by Laurus as a result of the
     Amendment and Waiver.  The Company  recorded this amount as a liability and
     additional  interest  expense  during the quarter ended  December 31, 2004.
     Subsequent  to year  end,  the  Company  and  Laurus  further  amended  the
     Agreement as discussed in Note 17 to the consolidated financial statements.

     (B)  CAPITAL LEASES

     On November 20,  2003,  the Company  entered  into a capital  lease line of
     credit  agreement  (the "Lease  Line") for  $1,500,000  with a  third-party
     lender.  The term of the agreement is for term leases ranging from 12 to 18
     months. The interest rate on the Lease Line ranges from 10.514% to 10.731%.
     As of December 31, 2004, the Company had drawn $1,470,507 on the Lease Line
     and  $29,493  of the Lease  Line  expired  unused.  The Lease Line is to be
     repaid in  monthly  principal  and  interest  installments,  with the final
     payment due in October  2005.  The unpaid  balance at December 31, 2004 was
     $516,013.  Subsequent  to year end, the Company  amended this Lease Line as
     described in Note 17 to the consolidated financial statements.

     (C)  OTHER OBLIGATIONS

     At December 31, 2004, the Company has a $323,318 payable to a single vendor
     (net of a $49,000  discount),  which was  restructured  in May 2003,  to be
     payable over a five-year period,  with interest of 5%. Payments are subject
     to certain  acceleration  clauses  based upon  working  capital  levels and
     capital raised.  The obligation is being repaid in monthly  installments of
     $8,333.  In addition,  the Company has deferred  rent of $47,043,  which is
     recognized over the life of the Broomfield, Colorado lease.

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

                                         Senior
                                        secured
                                      convertible
                            Capital    note, net      Other
                            Leases    of discount  obligations      Total
                          ----------  -----------  -----------   -----------
           2005           $  516,013  $ 1,122,342  $   100,161   $ 1,738,516
           2006                   --    1,346,809      102,926     1,449,735
           2007                   --      649,961       99,856       749,817
           2008                   --           --       67,418        67,418
                          ----------  -----------  -----------   -----------
                          $  516,013  $ 3,119,112  $   370,361   $ 4,005,486
                          ==========  ===========  ===========   ===========


                                      F-25
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


(11) MANDATORILY REDEEMABLE PREFERRED STOCK AND COMMON STOCK

     The Company's authorized capital stock at December 31, 2004 consists of the
     following:

     (A)  PREFERRED STOCK

          PREFERRED STOCK

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

          SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK

          The  Company  authorized  2,500,000  shares  of  Series A  Convertible
          Redeemable  Preferred  Stock (the "Series A Preferred")  in connection
          with  the  Acquisition.  At  December  31,  2004,  2,466,971  Series A
          Preferred shares are outstanding. Warrants are outstanding to purchase
          the remaining  33,029 Series A Preferred shares at a purchase price of
          $10.35 per share.

          The Series A Preferred  has voting  rights so long as at least 500,000
          originally  issued  shares  of the  Series A  Preferred  (as  adjusted
          appropriately  for  stock  splits,   stock  dividends,   combinations,
          recapitalizations  and similar  transactions) remain outstanding.  The
          holders of  outstanding  shares of Series A  Preferred  shall,  voting
          together as a separate  class, be entitled to elect three Directors of
          the Corporation. Each outstanding share of Series A Preferred shall be
          entitled  to a number of votes equal to the number of shares of common
          stock into which such share of Series A Preferred is then  convertible
          pursuant to the terms of the agreement.

          The  Company may (when,  and if  declared  by the Board of  Directors)
          declare  and  distribute  dividends  among  the  holders  of  Series A
          Preferred and the holders of common stock pro rata based on the number
          of  shares  of  common   stock   held  by  each,   determined   on  an
          as-if-converted  basis  (assuming full conversion of all such Series A
          Preferred)  as of the record date with respect to the  declaration  of
          such  dividends;  provided,  that the  holders  of  shares of Series A
          Preferred shall be entitled to participate on such a pro rata basis in
          any dividends declared with respect to the common stock.

          Upon any liquidation, dissolution or winding up of the Company and its
          subsidiaries,   whether   voluntary  or  involuntary  (a  "Liquidation
          Event"): each holder of outstanding shares of Series A Preferred shall
          be  entitled  to be paid in cash,  before any amount  shall be paid or
          distributed  to the holders of the common  stock or any other  capital
          stock  ranking on  liquidation  junior to the Series A Preferred  (the
          common  stock  and  such  other  capital   stock  being   referred  to
          collectively  as,  "Junior  Stock"),  an  amount  in cash per share of
          Series A Preferred  equal to (A) $12.60 (the  "Original  Issue Price")
          plus (B) an amount equal to all  accumulated  but unpaid  dividends on
          such  share  of  Series  A  Preferred  (such  amount  to  be  adjusted
          appropriately  for  stock  splits,   stock  dividends,   combinations,
          recapitalizations  and the like) (the "Series A Preference Amount") of
          $31.5  million.  If the  amounts  available  for  distribution  by the
          Company to holders of Series A Preferred upon a Liquidation  Event are
          not sufficient to pay the aggregate Series A Preference  Amount due to
          such holders,  such holders of Series A Preferred  shall share ratably
          in any  distribution  in  connection  with such  Liquidation  Event in
          proportion to the full respective  preferential  amounts to which they
          are entitled.

                                      F-26
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


          At any time on or after August 16, 2008,  the  holder(s)  may elect to
          have all (but not less than all) of the outstanding shares of Series A
          Preferred  redeemed.  In such event, the Corporation  shall redeem all
          (subject to the terms of the agreement) of the  outstanding  shares of
          Series A Preferred,  out of funds legally available therefore,  for an
          amount equal to the aggregate  Series A Redemption  Price specified in
          the agreement.  Any election by a Supermajority  Interest  pursuant to
          the agreement  shall be made by written  notice to the Company and the
          other  holders of Series A Preferred at least  fifteen (15) days prior
          to the elected redemption date (the "Series A Redemption Date").  Upon
          such  election,  all holders of Series A Preferred  shall be deemed to
          have  elected  to have  their  shares of Series A  Preferred  redeemed
          pursuant to the agreement and such election  shall bind all holders of
          Series A Preferred. Notwithstanding anything to the contrary contained
          herein,  each  holder of shares of Series A  Preferred  shall have the
          right to elect to give effect to the  conversion  rights  contained in
          the agreement instead of giving effect to the provisions  contained in
          the agreement with respect to the shares of Series A Preferred held by
          such holder.

          The price for each share of Series A  Preferred  redeemed  pursuant to
          the  agreement  shall be an amount (the "Series A  Redemption  Price")
          equal to the  greater  of (i) the  Series A  Preference  Amount  (such
          amount to be adjusted appropriately for stock splits, stock dividends,
          combinations,  recapitalizations  and the  like),  and  (ii)  the Fair
          Market  Value (as defined in the  agreement)  of the Common Stock into
          which the Series A Preferred is then convertible. The aggregate Series
          A Redemption  Price shall be payable in cash in immediately  available
          funds to the  respective  holders  of the  Series A  Preferred  on the
          Series A Redemption Date.

          Shares of Series A Preferred  Stock shall be converted  into shares of
          the Company's common stock in accordance with the following:

          Voluntary  conversion  occurs upon the written  election of the holder
          thereof  and without  payment of any  additional  consideration.  Each
          outstanding  share of Series A Preferred  held by such holder shall be
          converted into such number of fully paid and  nonassessable  shares of
          common stock as is  determined by dividing (i) the Series A Preference
          Amount,  by (ii) the  Conversion  Price at the time in effect for such
          Series A Preferred (such quotient, the "Conversion Rate"). The initial
          "Conversion Price" per share for shares of Series A Preferred shall be
          $0.63,  subject  to  adjustment  as set  forth in the  agreement.  Any
          election by a holder of Series A Preferred  pursuant to the  agreement
          shall be made by written notice to the Company, and such notice may be
          given at any time and from time to time  after  August  16,  2004 (the
          "Closing  Date") and through and  including  the day which is five (5)
          days  prior to the  Series A  Redemption  Date or the  closing  of any
          transaction contemplated by the agreement.

          Automatic   conversion   occurs  upon  the   written   election  of  a
          Supermajority  Interest  and  without  the  payment of any  additional
          consideration.  Upon automatic  conversion all (but not less than all)
          of the  outstanding  shares of Series A Preferred  shall be  converted
          into  fully  paid and  nonassessable  shares  of  common  stock at the
          Conversion Rate. Any election by a Supermajority  Interest pursuant to
          the agreement  shall be made by written  notice to the Company and the
          other  holders of Series A Preferred,  and such notice may be given at
          any time after the Closing Date through and  including  the date which
          is five (5) days prior to the closing of any transaction  contemplated
          by the  agreement.  Upon such  election,  all  holders of the Series A
          Preferred  shall be deemed to have elected to voluntarily  convert all
          outstanding  shares of Series A Preferred  into shares of common stock
          pursuant to the agreement and such election  shall bind all holders of
          Series A Preferred.

                                      F-27
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     (B)  COMMON STOCK

          In October  2004,  the Company  amended  its  charter to increase  the
          number of authorized common shares from 150,000,000 to 200,000,000. At
          December  31,  2004,  the  Company  had  106,493,617   shares  issued,
          105,059,979  shares outstanding and 1,433,639 shares held in treasury.
          In addition,  the Company had warrants,  options and other convertible
          securities  outstanding  which are exercisable  for  convertible  into
          common shares, which, if all were exercised or converted,  would cause
          the  Company's  outstanding  common  shares to exceed  its  authorized
          common shares by  approximately 7 million shares at December 31, 2004.
          Under the laws of the State of Nevada,  the Company is prohibited from
          issuing  shares in excess of its  number  of  authorized  shares.  The
          Company  may be required to take  certain  corporate  action to ensure
          that it has sufficient  authorized  shares of its common stock to meet
          its  commitments  under such warrants,  options and other  convertible
          securities  and to  seek  the  necessary  approvals  for  such  action
          pursuant to Section 14 of the Securities  Exchange Act of 1934 and the
          laws of the State of Nevada.  Not all of such  warrants,  options  and
          other convertible  securities are presently exercisable or convertible
          by the  holders  thereof and the  Company  has  sufficient  authorized
          shares to meet its obligations under those warrants, options and other
          convertible securities that are presently exercisable.

     The Company's authorized capital stock at December 31, 2003 consists of the
     following:

     (C)  MANDATORILY REDEEMABLE PREFERRED STOCK

          Prior to the  Acquisition,  the  Company had issued  three  classes of
          mandatorily   redeemable   preferred   stock:   Series  A  mandatorily
          redeemable  preferred  stock  (New  Series  A),  Series B  mandatorily
          redeemable, convertible preferred stock (New Series B), and New Series
          C. As of the  Acquisition  date,  New  Series A and New  Series B were
          converted into common stock and New Series C was converted into Series
          A Preferred.

          Series A Mandatorily Redeemable Preferred Stock

          The Company  authorized  and issued  50,000  shares of New Series A as
          part of the Recapitalization discussed in Note 5. New Series A did not
          have  voting  rights  and the  holders  were not  entitled  to receive
          dividends  on the  shares.  However,  on January 11,  2007,  the fifth
          anniversary  of the issuance of the stock,  a  cumulative  dividend of
          $10.00  (adjusted  for  subsequent  stock  dividends,   stock  splits,
          combinations,  recapitalizations  or the  like  with  respect  to such
          share) per share per year may have been paid, if approved by the board
          of  directors.  After January 11, 2007,  dividends  would have accrued
          daily in  arrears  and be  compounded  annually,  whether  or not such
          dividends  were  declared  by the  board of  directors  or paid.  This
          cumulative  dividend  was  subordinate  to  dividends  paid on the New
          Series B and New Series C.

          Series B Mandatorily Redeemable Convertible Preferred Stock

          The Company had  authorized  and issued 650,000 shares of New Series B
          as part of the Recapitalization discussed in Note 5. Each share of New
          Series B had voting  privileges equal to the number of shares of Class
          A common  stock  into  which  such  share of New  Series B would  have
          converted  pursuant to the conversion terms of the agreement.  The New
          Series B accrued a dividend of $0.923077 per share per year  (adjusted
          for subsequent stock cumulative dividends, stock splits, combinations,
          recapitalizations or the like with respect to such share).

          Series C Mandatorily Redeemable Preferred Stock

          The Company had  authorized  24,500 shares and issued 22,104 shares of
          New Series C as  discussed in Note 5. The holders of New Series C were
          not  entitled  to  vote  on any  matters  except  as  provided  in the
          covenants  or to the  extent  otherwise  required  under the  Delaware
          General  Corporation  Law.  The holders of  outstanding  shares of New
          Series C would be entitled to receive cumulative dividends at the rate
          of $100 per share of New Series C per year (as adjusted for subsequent
          stock dividends, stock splits, combinations,  recapitalizations or the
          like with respect to such share) from the date of original issuance of
          such share.

          At December 31, 2003 there were  cumulative  New Series B dividends of
          $1,181,918 and New Series C dividends of $1,047,669.

(12) EMPLOYEE STOCK OPTION AND BONUS PLANS

     The Company  currently has two employee  stock option plans - one plan that
     was  originally   established  under  MSI,  and  one  that  was  originally
     established under Front Porch Digital, Inc. ("Incentra Option Plan"). As of

                                      F-28
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     the date of the Acquisition,  the Company adopted the Incentra Option Plan.
     In connection with the Acquisition, no additional grants will be made under
     the MSI Plan, however, outstanding stock options issued pursuant to the MSI
     Plan may be exercised for unregistered common shares.

     EMPLOYEE EQUITY INCENTIVE PLAN

     The  Incentra  Option  Plan  provides  for the  granting  of options to key
     employees,  officers  and certain  individuals  to  purchase  shares of the
     Company's common stock. The Company currently has reserved 6,000,000 shares
     of common stock for issuance under the Incentra Option Plan. An increase in
     the number of shares  reserved from 6,000,000 to 22,625,000 was approved by
     the  Board of  Directors  and  shareholders  and the  effectiveness  of the
     increase  is  subject to the  Company  filing a  Schedule  14C  Information
     Statement.  The Incentra Option Plan has a term of ten years.  The Incentra
     Option Plan provides for the grant of "incentive  stock options" within the
     meaning of Section 422 of the Internal  Revenue  Code of 1986,  as amended,
     non-statutory stock options, stock appreciation rights and restricted stock
     awards.  The Incentra Option Plan is administered by the Company's Board of
     Directors.  The exercise price of non-statutory  stock options may be equal
     to or more or less  than 100  percent  (100%) of the fair  market  value of
     shares  of  common  stock on the date of  grant.  The  exercise  price  for
     incentive stock options may not be less than 100 percent (100%) of the fair
     market  value of  shares  of  common  stock on the date of the  grant  (110
     percent (110%) of fair market value in the case of incentive  stock options
     granted to  employees  who hold more than ten  percent  (10%) of the voting
     power of the issued and outstanding shares of common stock).

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

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

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

     Restricted  stock  awards,  which are grants of shares of common stock that
     are  subject to a  restricted  period  during  which such shares may not be
     sold, assigned,  transferred, made subject to a gift, or otherwise disposed

                                      F-29
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004

     of, or mortgaged,  pledged or otherwise encumbered,  may also be made under
     the Incentra  Option  Plan.  At this time,  our Board of Directors  has not
     granted, and does not have any plans to grant,  restricted shares of common
     stock.

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

                                                                     WEIGHTED
                                                    NUMBER           AVERAGE
                                                  OF OPTIONS      EXERCISE PRICE
                                                 ------------     --------------
     Balance, January 1, 2004                       2,623,712       $      0.62
     Granted                                       15,849,663              0.27
     Exercised                                       (100,000)             0.28
     Forfeited                                        (82,772)             0.33
                                                 ------------       ------------
     Balance, December 31, 2004                    18,290,603       $      0.32
                                                 ============       ============


                            OUTSTANDING OPTIONS            EXERCISABLE OPTIONS
                    -----------------------------------   ----------------------
                                   WEIGHTED
                                    AVERAGE    WEIGHTED                 WEIGHTED
                      SHARES      REMAINING     AVERAGE     SHARES       AVERAGE
       EXERCISE        UNDER     CONTRACTUAL   EXERCISE    CURRENTLY    EXERCISE
        PRICE         OPTION         LIFE        PRICE    EXERCISABLE    PRICE
     ------------   ----------   -----------   --------   -----------   --------
     $0.16 - 1.39   18,005,603         2.40    $   0.27     4,962,492   $   0.26
      2.00 - 2.90      110,000         4.40        2.41       110,000       2.41
             4.00      175,000         1.60        4.00       175,000       4.00
                    ----------                            -----------
                    18,290,603         2.40        0.32     5,247,492       0.43
                    ==========                            ===========


     MANAGEDSTORAGE INTERNATIONAL, INC. - 2000 STOCK OPTION AND GRANT PLAN

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

     The maximum  number of shares of  unregistered  common stock  available for
     issuance to eligible employees,  consultants,  and directors of the Company
     under the MSI Plan is 2,196,006  at December 31, 2004.  Options to purchase
     the  Company's  unregistered  common  stock are  exercisable  at a price as
     determined  by the board of  directors  at the time the option is  granted.
     Under the terms of the MSI Plan,  the exercise  prices for incentive  stock

                                      F-30
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004

     options granted shall not be less than 100% of the fair market value of the
     unregistered  common  stock or common  stock of the  Company at the date of
     grant,  or if a participant  owns more than 10% of the Company,  the option
     price  may  not  be  less  than  110%  of  the  fair  market  value  of the
     unregistered  common stock or common stock.  No incentive stock options may
     be exercised more than 10 years from the date of grant, or when an employee
     owns more than 10% of the Company,  the incentive  stock options may not be
     exercised more than five years from the date of grant.

     The MSI Plan is  administered  by the  board of  directors,  which  has the
     authority to select the  individuals  to whom awards will be granted and to
     determine  whether and to what extent stock options are to be granted,  the
     number of shares  of  unregistered  common  stock  and  common  stock to be
     covered by each award, the vesting schedule of stock options, and all other
     terms and conditions of each award. Options granted during 2004 vest over a
     four-year period, 25% per year,  commencing on the one-year  anniversary of
     the grant and/or the employee  hire date.  Unless  terminated  or otherwise
     canceled under the MSI Plan  provisions,  the contractual  life of all such
     options is no greater than ten years.

     During  2003,  a total of  2,179,843  stock  options  were  granted (net of
     cancellations)  with exercise  prices less than the estimated fair value of
     the  underlying  common  stock  resulting  in total  deferred  compensation
     expense to be  recognized  ratably  over the vesting  period of $635,111 of
     which  $199,686  and  $290,436  was   recognized   during  2004  and  2003,
     respectively.

     During 2002, a total of 21,422 shares of restricted stock were purchased by
     employees  for prices less than their  estimated  fair value,  resulting in
     $35,447 of  compensation  expense which will be recognized over the vesting
     period,  of which $8,860 and $17,982 was  recognized  through  December 31,
     2004 and 2003, respectively.

     Options  which  were  granted  during  2000 and 2001 vest over a  four-year
     period,  25% commencing on the one-year  anniversary  date of the grant and
     6.25% each three-month  period  thereafter.  All 2000 and 2001 options were
     cancelled in 2002.  The cancelled  options were replaced with 4,363 options
     and  3,636  shares  of  restricted  stock.  The  replacement   options  and
     restricted stock are subject to the variable accounting rules under FIN 44.
     The option exercise price on the  replacement  options was $1.62 per share,
     which exceeded the fair value of the Company's  common stock as of December
     31, 2003.

     The purchase price on the replacement  restricted  stock was $0.016 and the
     estimated  fair value of the  underlying  common stock on December 31, 2003
     was   $0.3237.    On   December    31,   2003,    2,660   shares   of   the
     replacement-restricted  stock were vested and $818 cumulative  compensation
     expense had been recognized.

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

                                                                  WEIGHTED
                                                    NUMBER        AVERAGE
                                                  OF OPTIONS   EXERCISE PRICE
                                                  ----------   --------------
     Balance, December 31, 2002                        2,012   $         1.62
     Granted                                       2,495,890             0.03
     Exercised                                       (15,392)            0.05
     Forfeited                                      (190,455)            0.05
                                                  ----------   --------------
     Balance, December 31, 2003                    2,292,055             0.05
                                                  ----------   --------------
     Granted                                         222,251             0.32
     Exercised                                       (39,469)            0.33
     Forfeited                                      (278,831)            0.28
                                                  ----------   --------------
    Balance, December 31, 2004                     2,196,006   $         0.05
                                                  ==========   ==============

                                      F-31
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


                            OUTSTANDING OPTIONS            EXERCISABLE OPTIONS
                    -----------------------------------   ----------------------
                                   WEIGHTED
                                    AVERAGE    WEIGHTED                 WEIGHTED
                      SHARES      REMAINING     AVERAGE     SHARES       AVERAGE
       EXERCISE        UNDER     CONTRACTUAL   EXERCISE    CURRENTLY    EXERCISE
        PRICE         OPTION         LIFE        PRICE    EXERCISABLE    PRICE
     ------------   ----------   -----------   --------   -----------   --------
     $       0.03    2,083,044          8.12   $   0.03     1,029,779   $   0.03
             0.32      112,285          9.14       0.32         9,457       0.32
             1.62          677          7.31       1.62           677       1.62
                    ----------                            -----------
                     2,196,006          8.17       0.05     1,039,913       0.03
                    ==========                            ===========

     In 2002, the Company issued  restricted stock grants,  which are restricted
     in terms of their disposal and vesting.  Vesting of restricted stock awards
     is determined by the board of directors for each specific  grant.  On April
     24, 2002,  the Company sold  1,663,668  restricted  shares under the Option
     Plan to  members  of  management.  The  shares  sold in  2002  vest  over a
     four-year period, 25% per year,  commencing on the one-year  anniversary of
     the grantee's date of hire.

EMPLOYEE BONUS PLAN

In connection with the Acquisition, the Company assumed the Front Porch Digital,
Inc.  Employee  Bonus  Plan (the  "Bonus  Plan").  In March  2001,  the Board of
Directors  adopted  the Bonus Plan to promote the  interests  of the Company and
shareholders  by permitting the Company to award bonuses in cash or in shares of
common  stock to key  employees  in order to  reward  such  employees  for their
successful  efforts  in  attaining  objectives  beneficial  to  the  growth  and
profitability  of the  Company  and to retain  their  services.  The Company has
reserved 2,000,000 shares,  subject to adjustment,  of common stock for issuance
under the Bonus Plan.  As of December 31, 2004, no shares have been issued under
this plan.  The Bonus Plan will  terminate  on March 31,  2006,  except that the
Board of  Directors  may  terminate  the Bonus Plan  (except with respect to any
outstanding bonus awards) at an earlier date.

The  Bonus  Plan is  administered  by  either  the  Board  of  Directors  or the
Compensation  Committee of the Board. Members of the Compensation  Committee are
eligible  to receive  bonuses  only if such  bonuses are granted by the Board of
Directors.

The Board of  Directors  or the  Compensation  Committee  has the  authority  to
determine which key employees shall be awarded  bonuses;  the amounts of bonuses
and the number of shares of common stock,  if any, to be awarded;  and all other
terms and combinations of performance measurement criteria,  which may differ as
to various key employees or attainment of certain  performance levels. The Board
of Directors or the Compensation  Committee decides whether performance criteria
have been met, whether and when to award bonuses,  time payment of bonuses,  and
whether to pay bonuses in cash or in common  stock or any  combination  thereof.
The determinations of the Board of Directors or the Compensation  Committee,  as
the case may be, on these matters shall be  conclusive.  The number of shares of
common  stock to be  awarded  as a bonus is to be equal in value to a fixed cash
amount,  with the value of such common  stock  computed at the higher of (a) the
fair market value of the common stock to be awarded on date of award, or (b) the
par value of the common stock to be awarded.

Any eligible  employee whose employment has terminated for any reason other than
death prior to the end of the bonus measurement period may remain eligible for a
full or prorated bonus, or may forfeit his bonus in its entirety,  in accordance
with such  terms as may be set for such  bonus from time to time by the Board of
Directors or the  Compensation  Committee.  Bonuses  payable will be paid to the
estate of designee of any eligible  employee who has died after  termination  of
employment but before payment of the bonus award. In the event that any eligible

                                      F-32
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004

employee's  employment is terminated  either (i) for cause,  or (ii) without the
consent of the Company,  his  eligibility for a bonus under the Bonus Plan shall
terminate in whole  immediately upon  termination of employment.  If an eligible
employee  dies while he is employed  by the Company or any of its  subsidiaries,
his estate or  designee  shall be eligible  to receive a prorated  bonus.  Bonus
rights are not  transferable  otherwise  than by will or the laws of descent and
distribution.

No bonus  award of common  stock may be made under the Plan unless and until the
shares subject to such award have been listed, registered and qualified upon any
applicable  securities  exchange or under any  applicable  state or federal law,
including  without  limitation,  the  Securities  and Exchange  Act of 1933,  as
amended,  and the  consent or  approval  of any  governmental  regulatory  body,
necessary or desirable as a condition  of, or in connection  with,  the award or
issuance of shares hereunder has been obtained.


(13) WARRANTS

     In  determining  the fair value of  warrants  granted in 2004,  the Company
     utilized the  Black-Scholes  valuation  model with the  following  weighted
     average  assumptions:  dividend  yield of 0%,  risk free  interest  rate of
     1.16%,  expected  volatility of 143%,  and expected  lives of five to seven
     years.

     At December 31, 2004,  the Company had the following  warrants  outstanding
     for the purchase of its common stock:

                                                          NUMBER OF     EXERCISE
             DESCRIPTION            EXPIRATION DATE    SHARES ISSUABLE    PRICE
             -----------            ---------------    ---------------  --------
     Issued to original Front
     Porch Shareholders                 May 2, 2005       2,900,000     $ 0.50

                                   February 1, 2005         160,000     $ 0.50
                                (which has expired)
                                     March 31, 2007         300,000     $ 0.65

     Issued in connection with
     notes payable                December 31, 2005         800,000     $ 1.00

     Issued in connection with
     a private placement           October 31, 2005         129,500     $ 2.40


     Issued to note holder        December 31, 2007         225,000     $ 0.10

     Issued to Equity Pier
     in exchange for consulting
     services (Note 15)           February 28, 2006       3,324,696     $ 2.00

     Issued to noteholder               May 1, 2008         100,000     $ 0.10

     Issued to noteholder               May 1, 2008         500,000     $ 0.10

     Issued in connection with
     debt issuance                     May 13, 2011       5,178,500     $ 0.48

     Issued in exchange for
     liquidated damages            October 25, 2011         500,000     $ 0.50

     Issued in exchange for
     services in financing
     transaction                   January 10, 2008         202,740     $ 0.0003
                                                        -----------

                                                         14,320,436
     Total warrants outstanding                         ===========

                                      F-33
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     At December 31, 2004,  the Company had the following  warrants  outstanding
     for the purchase of its 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      $10.35

     Issued in exchange for
     services in financing
     transaction                   January 10, 2008          26,075      $10.35
                                                        -----------

     Total warrants outstanding                              33,029
                                                        ===========


(14) EMPLOYEE CONTRIBUTION PLAN

     The  Company  sponsors  a 401(k)  Savings  Plan (the  Plan).  The Plan is a
     defined  contribution  plan  for  all  regular  domestic  employees  of the
     Company's ManagedStorage  International,  Inc. subsidiary who have attained
     at least 18 years of age.  Employees who meet these requirements may become
     a  participant  in the Plan on the first day of the  following  month after
     meeting the eligibility requirements.

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

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

(15) RELATED-PARTY TRANSACTIONS

     The  Company's  Chairman  of the  Board and Chief  Executive  Officer  (the
     "CEO"),  is the founder and  managing  partner of Equity Pier LLC  ("Equity
     Pier").  During 2004 and 2003, the Company  incurred  liabilities to Equity
     Pier totaling $100,571 and $153,320, respectively, primarily related to the
     reimbursement of airplane usage,  travel and business  expenses incurred by
     the CEO and other executives.  In addition, the Company leased office space
     from Equity Pier in 2004 and 2003.  Total costs  incurred under the leasing
     arrangement  and associated  expenses  (utilities,  supplies and insurance)
     amounted to $204,623 and $184,420, respectively.  During 2004 and 2003, the
     Company  paid   consulting   fees  and  other   reimbursable   expenses  to
     shareholders  of Equity Pier,  excluding  salaries paid to  shareholders of
     Equity Pier in their  capacity as employees of MSI, of $18,613 and $191,884
     respectively.

     The Company acquired equipment and equipment  maintenance services from two
     shareholders  in the amount of  $191,142  for the year ended  December  31,
     2003.

                                      F-34
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     During 2004, a director of the Company entered into a consulting  agreement
     with the Company to provide consulting  services in the broadcast industry.
     The agreement began on June 1, 2004 and expires May 31, 2005. The agreement
     requires monthly payments of $2,500 plus expenses. During 2004, the Company
     paid the director $18,711 in consulting fees and expenses.

(16) INCOME TAXES

     The domestic  and foreign  components  of loss before  income taxes for the
     years ended December 31, 2004 and 2003 are as follows:

                                                   2004                2003
                                              -------------       -------------
     Domestic                                 $ (11,343,294)      $ (10,991,371)
     Foreign                                      1,305,000                  --
                                              -------------       -------------
                                              $ (10,038,294)      $ (10,991,371)
                                              =============       =============

     The income tax provision of $400,000 for the year ended  December 31, 2004,
     consisted  solely of deferred,  foreign  income tax expense  related to the
     Company's French  subsidiary.  There was no income tax expense (benefit) in
     2003.

     The reconciliation between the federal statutory tax rate and the Company's
     effective tax rate on (loss) for 2004 and 2003 is as follows:

                                                                2004      2003
                                                               ------    ------
     Expected  tax  benefit of  federal  statutory  tax rate   (34.0%)   (35.0%)
     Increase (reduction) resulting from:
        State tax - net of federal tax benefit                  (4.4%)    (4.1%)
        Effect of permanent differences                         10.3%      5.1%
        Foreign taxes                                            4.0%       --
        Other                                                      0%      2.5%
        Change in valuation allowance                           28.1%     31.5%
                                                                -----     -----
           Actual income tax expense                             4.0%        0%
                                                                =====     =====

     At December  31,  2004,  the Company  had  available  for federal and state
     income tax purposes,  net operating  loss carry  forwards of  approximately
     $88,000,000  that  expire  between  2007 and 2024 and  foreign  loss  carry
     forwards of approximately $16,000,000 with no expiration.


                                      F-35
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004

     The Tax Reform Act of 1986 contains  provisions  that limit the utilization
     of net  operating  loss  carry  forwards  if there  has  been a  change  in
     ownership as described in Section 382 of the Internal  Revenue Code. Such a
     change  in  ownership  may  limit  the  Company's  utilization  of its  net
     operating loss carry forwards.  As a result of a private  placement in 2003
     and a reverse  acquisition  in 2004,  the Company  believes  that there are
     substantial  limitations on the utilization of its net operating loss carry
     forwards.

     Significant components of the Company's deferred tax assets and liabilities
     for federal and state income taxes  consist of the following as of December
     31, 2004:

     Deferred tax assets:
        Accrued liabilities and other                         $     516,583
        Property and equipment                                      630,916
        Loss carryforwards                                       35,037,283
                                                              -------------
              Deferred tax assets                                36,184,782
                                                              -------------

     Deferred tax liabilities:
        Intangible assets - Front Porch Digital Acquisition      (5,528,725)
        Unremitted earnings of French subsidiary                 (1,357,960)
                                                              -------------
              Deferred tax liabilities                           (6,886,685)
                                                              -------------

              Net deferred tax assets                            29,298,097
              Valuation allowance                               (29,298,097)
                                                              -------------
        Net deferred tax assets                               $      --
                                                              =============


     Management has recorded a valuation  allowance  against the entire deferred
     tax asset, as management does not consider the realization of this asset to
     be more likely than not. The decrease in the valuation allowance during the
     year ended December 31, 2004 was $942,204.

     Undistributed  earnings of foreign subsidiaries amounted to $3.4 million at
     December 31,  2004.  These  undistributed  earnings  are  considered  to be
     indefinitely reinvested, and, accordingly, no provision for U.S. federal or
     state income taxes has been provided.

     In addition, any tax benefits recognized in future periods for deferred tax
     assets of MSI allowed for at the date of the  Acquisition,  are to be first
     applied to reduce to zero, intangible assets related to the Acquisition.


(17) SUBSEQUENT EVENTS

     (A)  ACQUISITION OF STAR SOLUTIONS OF DELAWARE, INC.

     On February 18, 2005 (the "Closing Date"),  the Company acquired all of the
     outstanding   capital  stock  of  STAR  Solutions  of  Delaware,   Inc.,  a
     privately-held  Delaware corporation ("Star"). The acquisition was effected
     pursuant to an Agreement and Plan of Merger (the "Merger  Agreement").  The
     results  of  operations of  STAR,   will  be  included  in  the   Company's
     consolidated financial statements beginning on Feb. 18, 2005.


                                      F-36
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


     Pursuant to the Merger  Agreement,  the purchase  price  consisted of (i) a
     cash payment of  $1,422,000,  (ii) the issuance of 12,617,555  unregistered
     shares of the Company's common stock and (iii) the issuance of an unsecured
     convertible promissory note for $2.5 million (the "Note"). In addition, the
     Company paid $78,000 to the sole remaining  stockholder of Star in exchange
     for all shares of  capital  stock of Star held by such  stockholder.  Among
     other terms and conditions of the Merger Agreement,  as soon as practicable
     after the  Closing  Date the  Company  is  required  to take all  necessary
     actions  (including  amending the articles of incorporation) to ensure that
     the Company will have  sufficient  authorized but unissued shares of common
     stock to permit the  conversion of the Note in  accordance  with its terms.
     The Company  paid  approximately  $0.4 million in  investment  banking fees
     associated with the transaction.

     Interest  on the  Note  accrues  an  annual  rate of 0.5%  which  has  been
     discounted  to reflect a fair value rate of interest.  Principal is payable
     as follows:  (i) $125,861 on May 1, 2005, (ii) eight consecutive  quarterly
     payments  of  $251,722,  commencing  on August 1, 2005,  and (iii) a single
     payment of  $377,583  on August 1, 2007  (each of the  foregoing  dates,  a
     "Payment  Due Date").  All or a portion of the  outstanding  principal  and
     interest  due under the Note may be  converted by the holder into shares of
     common stock at any time from the end of each calendar quarter  immediately
     preceding  a Payment  Due Date  until and  including  one day prior to such
     Payment Due Date. The Note is initially  convertible at a conversion  price
     equal to the  greater  of (i) $0.40 or (ii)  seventy  percent  (70%) of the
     average  closing  price of the Company's  common stock,  as reported on the
     Over-The-Counter  Bulletin Board, for the ten (10) consecutive trading days
     ending on and  including the last day of the calendar  quarter  immediately
     preceding the applicable Payment Due Date. As of the Closing Date, the Note
     was  convertible  into a maximum of 6,250,000  shares of common stock.  The
     Company's  obligations  under  the  Note  are  not  secured  by  any of the
     Company's assets.

     The 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
     Note).  Such  events  of  default  include  the  occurrence  of  any of the
     following  events:  (i)  failure  to pay  within  ten (10)  days  after the
     applicable due date any amounts  payable under the Note, (ii) an assignment
     for the benefit of  creditors,  or (iii)  failure to perform  any  material
     covenant under the Merger Agreement,  the registration  rights agreement of
     the consulting  agreement  described below or any other material  agreement
     between  the seller and the  Company.  Principal  amounts not paid when due
     (subject to applicable cure periods) bear interest at twelve percent (12%).

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

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

     Cash and cash equivalents                                 $ 1,598,000
     Other current assets                                          687,000
     Property and equipment                                         20,000
     Other assets                                                    7,000
     Intangible assets                                           8,704,000
     Current liabilities                                        (1,421,000)
     Other liabilities                                          (1,900,000)

                                                               -----------
     Total purchase price                                      $ 7,695,000
                                                               ===========

                                      F-37
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


The purchase price is not considered final as of the date of this report, as the
Company and its  independent  valuation  advisors are still reviewing all of the
underlying  assumptions and calculations  used in the allocation.  However,  the
Company does not believe the final purchase price  allocation will be materially
different than that presented herein.

In addition, on February 18, 2005, Star obtained a revolving line of credit from
Wells Fargo Bank, N.A., which provides for borrowings until March 1, 2007, of up
to $5,000,000. See further discussion of this credit facility in item (E) below.

(B)  AMENDMENT TO SENIOR SECURED CONVERTIBLE NOTE

On February 17,  2005,  the Company  entered  into an Amendment  and Waiver (the
"Laurus  Amendment  and Waiver")  with Laurus.  The Laurus  Amendment and Waiver
waives certain events of default under the Registration  Rights  Agreement,  (as
amended on October 25, 2004) and the Term Note. Pursuant to the Laurus Amendment
and Waiver,  Laurus agreed to waive all fees and default  interest  arising from
the  Company's  failure  to  pay  the  liquidated   damages  set  forth  in  the
Registration  Rights Agreement and further waive any liquidated  damages due and
payable to Laurus in  connection  with the  Company's  failure to  maintain  the
effectiveness of the Registration Statement.

On February  18,  2005,  the  Company  entered  into a Waiver and  Subordination
Agreement  with Laurus (the "Laurus  Subordination").  The Laurus  Subordination
waives the Company's  obligation  under the Securities  Purchase  Agreement,  to
cause a new wholly-owned subsidiary STAR Solutions of Delaware, Inc. to become a
party to the Master Security  Agreement.  Pursuant to the Laurus  Subordination,
Laurus also agreed to  subordinate  to the lender its  security  interest in the
accounts receivable and other rights to payments, general intangibles, equipment
and inventory of the new entity.

In consideration of the waivers and subordination by Laurus described above, the
Company agreed to issue Laurus an immediately  exercisable seven-year warrant to
purchase  3,625,000  shares of common  stock at an  exercise  price of $0.26 per
share, at any time on or prior to February 17, 2012 (the  "Additional  Warrant")
and further agreed to amend the Registration  Statement to include the shares of
common stock issuable upon exercise of the Additional Warrant, such amendment to
be filed on or before April 10, 2005 and to be made  effective by the Securities
and Exchange  Commission no later than May 10, 2005.  At December 31, 2004,  the
Company had accrued $75,000 for the warrant value based on the terms of the Note
agreement  relating to liquidated  damages for not meeting the deadlines for the
Registration Rights Agreement.

(C)  AMENDMENT TO CAPITAL LEASE AGREEMENT

On March 2, 2005, the Company entered into an amendment of its Lease Line. Under
this  amendment,  the Company may draw an  additional  $500,000 (the "New Credit
Facility")  for equipment  purchases  through June 30, 2005.  The amendment also
grants the Company a call option to purchase  equipment from the lessor.  If any
part of the New Credit Facility amount is unfunded on June 30, 2005, the Company
is to pay the lessor 5% of such unfunded  amount upon demand by the lessor.  The
term of the  agreement is for term leases for 15 months with an interest rate of
14.96%.


                                      F-38
<PAGE>

                    Incentra Solutions, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2004


(D)  ACQUISITION OF PWI TECHNOLOGIES, INC.

On March 30, 2005, the Company acquired 100% of the outstanding capital stock of
privately-held PWI Technologies,  Inc. ("PWI") of Kirkland, WA. PWI is a systems
integrator and solutions provider of Information Technology consulting,  storage
solutions,  hardware,  software  and selected  managed  services to customers in
financial services,  communications,  government,  healthcare and manufacturing.
The results of operations of PWI will be included in the Company's  consolidated
financial statements beginning on April 1, 2005.

The purchase price of PWI consisted of $2.3 million in cash and 8,419,340 shares
of the Company's common stock. In addition, the former PWI shareholders have the
opportunity  to earn an  additional  $200,000 in cash and $1.0 million in common
stock of the Company based upon achieving certain earn out requirements.  Should
PWI  exceed  the  earn  out  requirements,  its  former  shareholders  can  earn
additional common stock equitable to PWI's EBITDA contribution over the earn out
requirement.  The Company paid  approximately $0.3 million in investment banking
fees associated with the transaction.  Due to the timing of the acquisition, the
Company  does  not  have  a  preliminary   purchase  price  allocation  for  the
transaction.

Financing  for the cash  component  of the  purchase was provided by Wells Fargo
Bank,  N.A.  through the existing Line of Credit ("LOC")  established as part of
the acquisition of STAR described  below. In connection with the financing,  the
LOC was amended to make PWI a  co-borrower  under the  agreements  and to modify
certain financial covenants to accommodate the addition of PWI to the LOC.

(E) WELLS FARGO REVOLVING LINE OF CREDIT

On February 18, 2004, STAR, obtained a revolving line of credit from Wells Fargo
Bank, N. A. ("Wells  Fargo"),  which provides for borrowings,  from time to time
until March 1, 2007, of up to $5,000,000. In connection with the line of credit,
on  February  18,  2005,  STAR  entered  into  a  credit  agreement(the  "Credit
Agreement")  with Wells  Fargo and  executed in favor of Wells Fargo a revolving
line of credit note (the "LOC Note"), a continuing security agreement (rights to
payment  and  inventory)  ("Security  Agreement  #1") and a  security  agreement
(equipment)  ("Security  Agreement #2, and collectively with Security  Agreement
#1,  the  "Security  Agreements").  The Credit  Agreement,  the LOC Note and the
Security Agreements are collectively referred to as the "Loan Documents."

Pursuant to the Credit Agreement, the maximum principal amount of all borrowings
under  the  line  of  credit  cannot  exceed  80% of  STAR's  eligible  accounts
receivable.  The Credit  Agreement  further  provides that all borrowed  amounts
shall, at the option of Wells Fargo and without notice,  become  immediately due
and payable upon the occurrence of an event of default (as defined in the Credit
Agreement).  Principal  amounts not paid when due bear  interest at 4% above the
per annum rate of interest of the LOC Note.

The LOC Note provides that interest on all outstanding  principal  amounts shall
accrue at a rate per annum  equal to the  "Prime  Rate"  (as  reported  by Wells
Fargo) plus 1.5% (subject to certain  adjustments  based on STAR's  tangible net
worth (as defined in the Credit Agreement).  Interest on the LOC Note is payable
monthly  on the  first  day of each  month  during  the  term  of the LOC  Note,
commencing April 1, 2005. Pursuant to the Security Agreements,  borrowings under
the line of credit are secured by a first priority lien on all of STAR's assets.
If an event of default occurs under the Security  Agreements or the Note,  Wells
Fargo has the right to accelerate  payments  under the LOC Note and, in addition
to any other remedies available to it, to foreclose upon the assets securing the
LOC Note. In addition,  the LOC contains certain  financial  covenants for which
compliance is measured quarterly.

                                      F-39