UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   Form 10-QSB
                                   (Mark One)

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                       For the period ended June 30, 2005

           [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
               For the transition period from _______ to _______.

                        Commission File  Number  333-16031
                            INCENTRA SOLUTIONS, INC.
                            ------------------------
        (Exact name of small business issuer as specified in its charter)

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

                                1140 PEARL STREET
                             BOULDER, COLORADO 80302
                             -----------------------
                    (Address of principal executive offices)

                                 (303) 449-8279
                                 --------------
                           (Issuer's telephone number)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Securities  Exchange  Act of 1934  during the  preceding  12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. Yes [X] No []

As of August 10, 2005, 13,018,661 shares of the issuer's common stock, $.001 par
value per share,  and 2,466,971 shares of the issuer's Series A preferred stock,
$.001 par value per share, were outstanding.

Transitional Small Business Disclosure Format (check one): Yes [ ]  No [X]

                                       1
<PAGE>

PART I. FINANCIAL INFORMATION

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 2005
                                   (UNAUDITED)


<TABLE>
<S>                                                                                                                   <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                                                           $   2,058,585
  Accounts receivable, net of allowance for doubtful accounts of $260,000                                                12,309,757
  Other current assets                                                                                                    1,036,076
                                                                                                                      -------------
Total current assets                                                                                                     15,404,418
                                                                                                                      -------------

Property and equipment, net                                                                                               2,366,712
Capitalized software development costs, net                                                                               1,655,837
Intangible assets, net                                                                                                   14,916,003
Goodwill                                                                                                                 14,482,287
Other assets                                                                                                                894,149
                                                                                                                      -------------
                                                                                                                         34,314,988
                                                                                                                      -------------

TOTAL ASSETS                                                                                                          $  49,719,406
                                                                                                                      =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current portion of note payable, capital leases and other long-term obligations                                     $   4,495,929
  Accounts payable                                                                                                        9,612,801
  Accrued expenses                                                                                                        3,720,186
  Current portion of deferred revenue                                                                                     1,378,109
                                                                                                                      -------------
Total current liabilities                                                                                                19,207,025
                                                                                                                      -------------

Note payable, capital leases and other long-term obligations, net of current portion                                      6,317,932
Deferred revenue, net of current portion                                                                                    109,105
                                                                                                                      -------------
                                                                                                                          6,427,037
                                                                                                                      -------------
TOTAL LIABILITIES                                                                                                        25,634,062
                                                                                                                      -------------

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                                                     23,309,550
                                                                                                                      -------------

Shareholders' equity:
  Preferred stock, nonvoting, $.001 par value, 2,500,000 shares                                                                  --
  authorized, none issued or outstanding
  Common stock, $.001 par value, 200,000,000 shares authorized, 13,030,446 shares issued,                                        --
  12,887,082 shares outstanding, 143,364 shares in treasury                                                                  12,887
  Additional paid-in capital                                                                                            124,021,141
  Accumulated other comprehensive loss                                                                                     (134,766)
  Accumulated deficit                                                                                                  (123,123,468)
                                                                                                                      -------------
TOTAL SHAREHOLDERS' EQUITY                                                                                                  775,794
                                                                                                                      -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                                            $  49,719,406
                                                                                                                      =============
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.

                                       2
<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED JUNE 30,    SIX MONTHS ENDED JUNE 30,

                                                                             2005           2004           2005            2004
                                                                             ----           ----           ----            ----
<S>                                                                      <C>            <C>            <C>             <C>
Revenues:
  Products                                                               $ 13,788,519   $     30,500   $ 17,020,031    $    402,000
  Services                                                                  3,810,713      1,867,531      6,586,364       3,859,827
                                                                         ------------   ------------   ------------    ------------
TOTAL REVENUES                                                             17,599,232      1,898,031     23,606,395       4,261,827
                                                                         ------------   ------------   ------------    ------------

Cost of revenue:
  Products                                                                 10,010,843             --     11,287,217              --
  Services                                                                  2,494,582      1,337,362      4,282,191       2,549,699
                                                                         ------------   ------------   ------------    ------------
Total cost of revenue                                                      12,505,425      1,337,362     15,569,408       2,549,699
                                                                         ------------   ------------   ------------    ------------
GROSS MARGIN                                                                5,093,807        560,669      8,036,987       1,712,128
                                                                         ------------   ------------   ------------    ------------

Selling, general and administrative                                         5,361,134      2,046,528      9,388,507       4,101,731
Amortization                                                                  806,028        237,476      1,591,309         474,952
Depreciation                                                                  120,249         37,162        191,393          82,079
Impairment of goodwill                                                             --        136,852             --         198,280
                                                                         ------------   ------------   ------------    ------------
                                                                            6,287,411      2,458,018     11,171,209       4,857,042
                                                                         ------------   ------------   ------------    ------------
LOSS FROM OPERATIONS                                                       (1,193,604)    (1,897,349)    (3,134,222)     (3,144,914)
                                                                         ------------   ------------   ------------    ------------

Other income (expense):
  Interest income                                                               3,516            659         25,947           5,818
  Interest expense                                                           (610,000)      (697,705)    (1,171,310)     (1,391,219)
  Other income                                                                 11,425         34,173        378,167          87,188
  Foreign currency transaction (loss) gain                                     (8,464)         2,244         73,725           1,932
                                                                         ------------   ------------   ------------    ------------
                                                                             (603,523)      (660,629)      (693,471)     (1,296,281)
                                                                         ------------   ------------   ------------    ------------

LOSS BEFORE INCOME TAX EXPENSE                                             (1,797,127)    (2,557,978)    (3,827,693)     (4,441,195)
Income tax expense                                                           (559,000)            --       (877,000)             --
                                                                         ------------   ------------   ------------    ------------
NET LOSS                                                                   (2,356,127)    (2,557,978)    (4,704,693)     (4,441,195)
                                                                         ------------   ------------   ------------    ------------

Deemed dividends on redeemable preferred stock                                     --       (149,589)            --        (297,534)
Accretion of redeemable preferred stock to redemption amount                 (654,392)        (7,833)    (1,308,784)        (15,666)
                                                                         ------------   ------------   ------------    ------------

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                               $ (3,010,519)  $ (2,715,400)  $ (6,013,477)   $ (4,754,395)
                                                                         ============   ============   ============    ============

COMPREHENSIVE NET LOSS
Net Loss                                                                 $ (2,356,127)  $ (2,557,978)  $ (4,704,693)   $ (4,441,195)
Foreign currency translation adjustments                                      (76,717)            --       (153,950)             --
                                                                         ------------   ------------   ------------    ------------
                                                                         $ (2,432,844)  $ (2,557,978)  $ (4,858,643)   $ (4,441,195)
                                                                         ============   ============   ============    ============

Weighted average number of common shares                                   12,703,068      1,953,308     11,901,066       1,950,114
  outstanding - basic and diluted                                         ===========     ==========    ===========    ============

Basic and diluted net loss per share applicable to common shareholders   $      (0.24)  $      (1.39)  $      (0.51)   $      (2.44)
                                                                         ============   ============   ============    ============
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                         SIX MONTHS ENDED JUNE 30,

                                                                                                            2005            2004
                                                                                                            ----            ----
<S>                                                                                                     <C>             <C>
Cash flows from operating activities:
     Net loss                                                                                           $(4,704,693)    $(4,441,195)
     Adjustments to reconcile net loss to net cash used in operating activities:
        Depreciation                                                                                        792,959         890,213
        Amortization of intangible assets and software development costs                                  1,839,492         653,563
        Amortization of non-cash loan discount                                                               12,735           7,643
        Stock-based compensation expense                                                                    263,753          88,618
        Non-cash interest expense                                                                           959,402              --
        Non-cash interest expense on Series C mandatorily redeemable preferred stock liability                   --       1,335,650
        Non-cash income tax expense                                                                         877,000              --
        Share of losses of Front Porch Digital, Inc. and related impairment of goodwill                          --         198,280
        Loss on disposal of assets and other                                                                (25,205)          9,541
        Bad debt expense                                                                                     20,787         126,924
        Gain on revaluation of derivative warrant liability                                                (390,280)             --
        Changes in operating assets and liabilities, net of business acquisitions:
           Accounts and other receivables                                                                  (971,197)       (277,073)
           Other current assets                                                                            (241,418)         (5,374)
           Other assets                                                                                      29,524          (8,218)
           Accounts payable                                                                                 711,812         330,023
           Accrued liabilities                                                                              (49,099)           (956)
           Deferred revenue                                                                                  83,955        (463,093)
           Other liabilities                                                                               (328,128)         (6,932)
                                                                                                        -----------     -----------
                 Net cash used in operating activities                                                   (1,118,601)     (1,562,386)
                                                                                                        -----------     -----------
Cash flows from investing activities:
     Purchases of property and equipment                                                                   (516,745)       (750,750)
     Capitalized software development costs                                                                (729,002)       (353,729)
     Proceeds from sale of property and equipment                                                               750         134,758
     Cash acquired in Incentra of CA acquisition (Note 2)                                                 1,597,498              --
     Cash acquired in PWI acquisition (Note 2)                                                               74,297              --
     Net change in restricted cash                                                                             (366)           (317)
     Maturies of short-term investments                                                                          --       3,793,099
                                                                                                        -----------     -----------
                 Net cash provided by investing activities                                                  426,432       2,823,061
                                                                                                        -----------     -----------
Cash flows from financing activities:
     Proceeds from bank line of credit                                                                      862,000              --
     Proceeds from lease line of credit                                                                     497,667
     Payments on capital leases, notes payable and other long term liabilities                           (1,594,954)       (410,055)
     Proceeds from exercise of stock options and purchase of restricted stock                                    --           1,418
                                                                                                        -----------     -----------
                 Net cash used in financing activities                                                     (235,287)       (408,637)
                                                                                                        -----------     -----------
Effect of exchange rate changes on cash and cash equivalents                                                (82,417)             --
                                                                                                        -----------     -----------

                 Net (decrease) increase in cash and cash equivalents                                    (1,009,873)        852,038

Cash and cash equivalents at beginning of period                                                          3,068,458       2,201,192
                                                                                                        -----------     -----------
Cash and cash equivalents at end of period                                                              $ 2,058,585     $ 3,053,230
                                                                                                        ===========     ===========

Supplemental disclosures of cash flow information:
     Cash paid during the period for interest                                                           $   199,174     $    34,285

Supplemental disclosures of non-cash investing and financing activities:
     Net assets acquired in Incentra of CA acquisition, excluding cash (Note 2)                           6,097,510              --
     Net assets acquired in PWI acquisition, excluding cash (Note 2)                                      4,310,840              --
     Conversion of notes payable and accrued interest in exchange for common stock                          400,000
     Reclassification of derivative warrant liability to equity                                           1,910,254
     Purchases of property and equipment included in accounts payable                                       118,608         205,492


See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>

                                       4
<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)


(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF PRESENTATION

Incentra  Solutions,  Inc.  (which  is  referred  to  herein  together  with its
subsidiaries  as ("we",  "us" or "our"),  formerly  Front  Porch  Digital,  Inc.
("FPDI"  or "Front  Porch"),  was  organized  and  incorporated  in the state of
Nevada. On October 25, 2004, we changed our name from Front Porch Digital,  Inc.
to Incentra Solutions, Inc.

We  recently  completed  three  acquisitions:  On August 18,  2004,  we acquired
ManagedStorage International, Inc., a Delaware corporation incorporated in March
2000 ("MSI");  on February 18, 2005, we acquired  Incentra of CA, formally known
as STAR  Solutions of  Delaware,  Inc., a  privately-held  Delaware  corporation
("Incentra of CA "); and on March 30, 2005, we acquired PWI Technologies,  Inc.,
a  privately-held  Washington  corporation  ("PWI").  The  MSI  acquisition  was
accounted  for as a reverse  merger,  and  therefore,  MSI was  deemed to be the
acquirer  for  accounting  purposes.  Accordingly,  the  condensed  consolidated
financial  statements  presented herein include the results of operations of MSI
for all periods presented, and include the results of operations of the acquired
companies from the dates of the acquisitions forward.

We are a provider of complete  solutions  for an  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,  Incentra
Solutions of CA and PWI  Technologies.  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.   Incentra  of  CA  and  PWI  are  systems  integrators  that  provide
Information  Technology ("IT") products,  professional  services and outsourcing
solutions  to  enterprise  customers  located  primarily  in the western  United
States. Our customers are located in North America, Europe, Asia and the Pacific
Rim.

On April 12, 2005,  our Board of Directors  (the "Board") and the holders of the
required  number of shares of our capital  stock  approved an  amendment  to our
Articles of Incorporation to effect a one-for-ten  reverse stock split effective
June 9, 2005. All references to shares,  options,  and warrants in the three and
six months  ended June 30,  2005 and in prior  periods,  have been  adjusted  to
reflect  the  post-reverse  split  amounts.  Our common  stock now trades on the
Over-the-Counter Bulletin Board under the trading symbol "ICNS".

The accompanying unaudited condensed consolidated financial statements have been
prepared by us in accordance with accounting  principles  generally  accepted in
the United States of America for interim  financial  information and pursuant to
the rules and  regulations of the Securities  and Exchange  Commission  ("SEC").
Certain  information  and  note  disclosures   normally  included  in  financial
statements prepared in accordance with accounting  principles generally accepted
in the United States of America have been condensed or omitted  pursuant to such
regulations. The unaudited condensed

                                       5
<PAGE>

consolidated  financial  statements reflect all adjustments and disclosures that
are, in the opinion of management,  necessary for a fair presentation.  All such
adjustments  are  of  a  normal  recurring   nature.   These  interim  condensed
consolidated  financial  statements should be read in conjunction with a reading
of the  consolidated  financial  statements  and notes  thereto  included in our
Annual  Report on Form 10-KSB filed with the SEC on April 6, 2005,  for the year
ended December 31, 2004.

Certain  amounts in the 2004  financial  statements  have been  reclassified  to
conform  to the  2005  presentation.  We do not  believe  the  effects  of  such
reclassifications  are material.  Operating  results for the three or six months
ended June 30, 2005 are not necessarily  indicative of the operating  results to
be expected for the year ending December 31, 2005.

MANAGEMENT'S PLANS

Our 2005  operating  plan and the  execution  thereof is  focused on  increasing
revenue,  controlling  costs,  and  conserving  cash;  however,  there can be no
assurance  that  we  will  be  able  to  meet  the   operational  and  financial
requirements  of our operating  plan. Our 2005 plan also includes growth through
our recent business  acquisitions (Note 2). We 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, we believe that our cash
and cash  equivalents  and  working  capital  will  provide  sufficient  capital
resources to fund our operations,  debt service requirements and working capital
needs at least through June 30, 2006.

STOCK-BASED COMPENSATION

We apply the intrinsic value-based method of accounting prescribed by Accounting
Principles  Board  Opinion  No. 25 (APB  25),  ACCOUNTING  FOR  STOCK  ISSUED TO
EMPLOYEES, and related interpretations, including Financial Accounting Standards
Board  ("FASB")   Interpretation  No.  44  (FIN  44),   ACCOUNTING  FOR  CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION,  AN INTERPRETATION OF APB OPINION NO.
25, to account for our fixed-plan stock options. Under this method, compensation
expense is  generally  recorded on the date of grant only if the current  market
price of the underlying stock exceeds the exercise price. Statement of Financial
Accounting  Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED  COMPENSATION
and SFAS No. 148,  ACCOUNTING  FOR  STOCK-BASED  COMPENSATION  - TRANSITION  AND
DISCLOSURE,  AN AMENDMENT OF FASB STATEMENT NO. 123, established  accounting and
disclosure  requirements  using a fair  value-based  method  of  accounting  for
stock-based  employee  compensation  plans. As permitted by existing  accounting
standards, we have elected to continue to apply the intrinsic value-based method
of accounting described above, and have adopted only the disclosure requirements
of Statement 123, as amended.  The following table illustrates the effect on net
loss if the fair  value-based  method had been  applied to all  outstanding  and
unvested  awards in the three and six months  ended June 30, 2005 and 2004.  All
amounts except per share amounts in (000's):

                                       6
<PAGE>

<TABLE>
<CAPTION>
                                                                                         THREE MONTHS ENDED      SIX MONTHS ENDED
                                                                                               JUNE 30,               JUNE 30,

                                                                                          2005        2004        2005       2004
                                                                                         -------     -------     -------    -------
<S>                                                                                      <C>         <C>         <C>        <C>
Net loss before deemed dividends and accretion on preferred stock, as reported           $(2,356)    $(2,558)    $(4,705)   $(4,441)
Add stock-based employee compensation expense included in reported
  net loss                                                                                   108          44         264         89
Deduct total stock-based employee compensation expense determined under
  fair value-based method for all awards                                                    (688)        (47)     (1,198)       (94)
                                                                                         -------     -------     -------    -------
Pro forma net loss before deemed dividends and accretion on preferred stock              $(2,936)    $(2,561)    $(5,639)   $(4,446)
                                                                                         =======     =======     =======    =======
Net loss per weighted average common share outstanding - basic and
  diluted - pro forma                                                                    $ (0.28)    $ (1.39)    $ (0.58)   $ (2.44)
                                                                                         =======     =======     =======    =======

Net loss per weighted average common share outstanding - basic and
  diluted - as reported                                                                  $ (0.24)    $ (1.39)    $ (0.51)   $ (2.44)
                                                                                         ========    =======     =======    =======
</TABLE>

In  determining  the fair value of stock options  granted by us during the three
and six months ended June 30, 2005, and thus determining pro forma  compensation
expense under the fair value  method,  we utilized the  Black-Scholes  valuation
model with the following  weighted  average  assumptions:  dividend yield of 0%,
risk free interest  rate of 3.64%,  expected  volatility  of 111%,  and expected
lives of three years.  The weighted average fair value of options granted during
2005 is $2.10 per option.

In determining  the fair value of stock options granted by MSI for the three and
six months ended June 30, 2004, we 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 4.76%,  expected  volatility of 0.001%, and expected lives of ten years.
The weighted average fair value of options granted during 2004 was $3.20.

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

On August 16, 2004, our Board of Directors  approved,  and on April 1, 2005, our
stockholders  approved by majority  written  consent,  an  amendment to our 2000
Equity  Incentive  Plan (the "Plan") to increase the maximum number of shares of
our common  stock  available  for issuance  there under from  600,000  shares to
2,265,000 shares.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

The accounts of our international subsidiary, Front Porch Digital International,
SAS ("FPD  International"),  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 period.  For the six months  ended June 30,
2005,  we reported a cumulative  translation  loss of $153,950 as a component of
accumulated  other  comprehensive  loss. We are also subject to foreign exchange
transaction  exposure when our subsidiary transacts business in a currency other
than its own functional  currency.  The effects of exchange rate fluctuations in
remeasuring  foreign  currency  transactions for the three months ended June 30,
2005 and 2004  was a loss of  $8,500  and a gain of  $2,200,  respectively.  The
effect  of  exchange  rate   fluctuations   in  remeasuring   foreign   currency
transactions  for the six  months  ended  June  30,  2005 and 2004 was a loss of
$1,000 and a gain of $2,000, respectively.

During 2004, we began managing our foreign  currency cash flow exposure  through
the use of $/Euro forward contracts, which are considered derivative instruments
and which are recorded as either an asset or liability,  measured at fair value.
We recognize changes in fair value of the contracts currently

                                       7
<PAGE>

in the statements of operations. We recorded a realized gain of approximately $0
and  $74,600  for the three and six months  ended June 30,  2005,  respectively,
which  represented the change in the fair value of one foreign  currency forward
contract related to the difference between changes in the spot and forward rates
excluded from the assessment of hedge  effectiveness.  This contract was settled
on April 1, 2005. Currently, there are no forward contracts outstanding.

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

We account for obligations and instruments  potentially  settled in our stock in
accordance  with Emerging  Issues Task Force ("EITF") No. 00-19,  ACCOUNTING FOR
DERIVATIVE  FINANCIAL  INSTRUMENTS  INDEXED  TO,  AND  POTENTIALLY  SETTLED IN A
COMPANY'S OWN STOCK ("EITF  00-19").  This issue  addresses the initial  balance
sheet  classification  and  measurement  of  contracts  that are indexed to, and
potentially settled in, our 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.

At  December  31,  2004,  our   authorized  and  unissued   common  shares  were
insufficient to settle these contracts.  As a result, we classified the value of
these  contracts as a liability.  As a result of the  one-for-ten  reverse stock
split on June 9, 2005,  there are now sufficient  authorized and unissued common
shares to settle these contracts. Accordingly, the fair value of the warrants at
the effective  date of the stock split was  reclassified  to additional  paid-in
capital.  During the three and six months ended June 30, 2005 we recorded a gain
of $48,785 and $390,280,  respectively,  on these contracts. The appropriateness
of the  classification  of these  contracts 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.  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.

As of June  30,  2005,  we  believe  there  were  no  indicators  of a  possible
impairment,  and  accordingly,   no  impairment  tests  were  performed  and  no
impairment  losses were  recorded.  For the three and six months  ended June 30,

                                       8
<PAGE>

2004, MSI recorded impairment losses of $136,852 and $198,280, respectively.

REVENUE RECOGNITION

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

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

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

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

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

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

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

SOFTWARE DEVELOPMENT COSTS

We account for costs related to software developed for internal use and marketed
for external use in  accordance  with SFAS No. 86,  ACCOUNTING  FOR THE COSTS OF
COMPUTER  SOFTWARE TO BE SOLD,  LEASED, OR OTHERWISE  MARKETED.  MSI's Gridworks
software product is used internally for providing  services to our customers and
is also marketed separately as a stand-alone product. FPDI's DIVArchive software
product is marketed solely as a stand-alone product. As required by SFAS No. 86,
we capitalize  costs in developing  software  products upon  determination  that
technological  feasibility has been established for the product, if that product
is to be  sold,  leased  or  otherwise  marketed.  Costs  incurred  prior to the
establishment  of   technological   feasibility  are  charged  to  research  and
development  expense.  When the product or  enhancement is available for general
release to customers, capitalization is ceased, and previously capitalized costs
are amortized  based on current and future revenue for the product,  but with an
annual amortization amount at least equal to the straight-line,  typically three
years.  For the three and six months  ended June 30, 2005  capitalized  software
development  costs, which related primarily to enhancements to our Gridworks and
DIVArchive software solutions, totaled $329,691 and $729,002,  respectively. For
the  three  months  ended  June  30,  2005  and  2004,   $130,449  and  $91,505,
respectively, of software

                                       9
<PAGE>

development  costs were  charged to expense.  For the six months  ended June 30,
2005 and 2004,  $248,182 and  $178,611,  respectively,  of software  development
costs were charged to expense.  As of June 30, 2005, the unamortized  portion of
software development costs was $1,655,837.

INCOME TAX

Income tax expense  recognized for the three and six months ended June 30, 2005,
represented  income tax expense on FPD  International,  our wholly-owned  French
subsidiary.  We are  currently in the process of creating an agreement  with FPD
International for the allocation of costs related to its sale of our proprietary
software  solutions.  Any such  agreement is subject to acceptance by the French
taxing  authorities.  We expect that we will be able to implement this agreement
in the fourth quarter of 2005, and therefore  allocate the appropriate  costs to
FPD International,  which we anticipate would serve to significantly  reduce our
income tax exposure  for the  remainder  of the year.  However,  there can be no
assurance that the French taxing authorities will accept this agreement with FPD
International  and that we will be able to reduce this income tax  expense.  Our
income  tax  expense  is a  non-cash  item  due to the  utilization  of our  net
operating loss carryforwards in France.

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 are currently
evaluating  the  provisions  of this  standard.  However,  we  expect  that  the
implementation  of this  standard  will have a material  impact on our financial
position and results of operations.

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


(2) ACQUISITIONS

(A) ACQUISITION OF INCENTRA OF CA, FORMALLY KNOWN AS STAR SOLUTIONS OF
DELAWARE, INC.

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

                                       10
<PAGE>

financial statements beginning on February 18, 2005.

Pursuant to the STAR Merger  Agreement,  the purchase  price  consisted of (i) a
cash payment of $1,422,000,  (ii) the issuance of 1,261,756  unregistered shares
of our common stock valued at $3,136,364 (based upon the market price three days
before and after the  acquisition  date) and (iii) the  issuance of an unsecured
convertible  promissory note for $2,500,000 (the "STAR Note").  In addition,  we
paid $78,000 to the sole remaining stockholder of Incentra OF CA in exchange for
all shares of capital stock of Incentra OF CA held by such stockholder.  We paid
approximately   $400,000  in  investment   banking  fees   associated  with  the
transaction.

Interest  on the STAR Note  accrues  at an annual  rate of 0.5%,  which has been
discounted to reflect a fair value rate of interest.  The remaining principal of
$2,374,139  is payable in eight  consecutive  quarterly  payments  of  $251,722,
commencing on August 1, 2005, and a single payment of $377,583 on August 1, 2007
(each of the foregoing dates, a "STAR Payment Due Date"). We elected not to make
the August 1, 2005 payment  within the grace period allowed under the STAR Note,
which  created an event of default  on the STAR Note as of August 11,  2005.  We
have not received notice of default or  acceleration  from the STAR note holder.
We  elected  not to make  the  scheduled  payment  as we are in the  process  of
negotiating  post-closing  adjustments  to  the  purchase,  which  could  have a
significant  impact on the amount and terms of the STAR Note.  As of the balance
sheet  date,  we have  reclassified  approximately  $1.3  million of the debt to
current  liabilities based on the default, as it was not cured within the 10-day
grace period. Management does not believe the debt will be paid in one year from
the balance sheet date, however,  the  reclassification on the balance sheet was
made as the debt is now callable.

All or a portion of the  outstanding  principal  and interest due under the STAR
Note may be  converted by the holder into shares of our common stock at any time
from the end of each calendar quarter  immediately  preceding a STAR Payment Due
Date until and including  one day prior to such STAR Payment Due Date.  The STAR
Note is initially  convertible at a conversion price equal to the greater of (i)
$4.00 or (ii) seventy  percent (70%) of the average  closing price of our common
stock,  as reported on the  Over-The-Counter  Bulletin  Board,  for the ten (10)
consecutive  trading days ending on and  including  the last day of the calendar
quarter  immediately  preceding the applicable STAR Payment Due Date. As of June
30, 2005, the STAR Note was convertible  into a maximum of 593,535 shares of our
common stock. Our obligations  under the STAR Note are not secured by any of our
assets.

The STAR Note provides that all unpaid  principal and accrued interest shall, at
the option of the holder and without notice,  become immediately due and payable
upon the  occurrence of an event of default (as defined in the STAR Note).  Such
events of default  include the  occurrence of any of the following  events:  (i)
failure to pay within ten (10) days after the  applicable  due date any  amounts
payable under the STAR Note, (ii) an assignment for the benefit of creditors, or
(iii) failure to perform any material  covenant under the STAR Merger Agreement,
the registration rights agreement or the consulting agreement described below or
any other material  agreement  between us and the seller.  Principal amounts not
paid when due (subject to applicable  cure periods) bear interest at the rate of
twelve percent (12%) per annum.

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

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

                                       11
<PAGE>

Cash and cash equivalents                                           $ 1,598,000
Other current assets                                                    825,000
Property and equipment                                                   20,000
Other assets                                                              7,000
Goodwill                                                              8,122,000
Other intangible assets (3-5 year lives)                                540,000
Current liabilities                                                  (1,517,000)
Other liabilities                                                    (1,900,000)
                                                                    -----------
Total purchase price                                                $ 7,695,000
                                                                    ===========

The purchase  price  allocation is not  considered  final as of the date of this
report.  However,  we believe the final  purchase price  allocation  will not be
materially  different  than  that  presented  herein.  In  connection  with  the
acquisition,  on February 18, 2005,  Incentra of CA obtained a revolving line of
credit from a bank that  provides for  borrowings  until March 1, 2007, of up to
$5,000,000 (Note 7(c)). This line of credit and all the related accrued interest
was paid in full on July 5, 2005,  in connection  with the New Laurus  Financing
Agreement as discussed in Note 8.


(B) ACQUISITION OF PWI TECHNOLOGIES, INC.

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

The purchase  price of PWI consisted of $2,300,000 in cash and 841,934 shares of
our common  stock valued at  $1,683,868  (based upon the market price three days
before and after the acquisition date). In addition, the former PWI shareholders
have the  opportunity  to earn an additional  $200,000 in cash and $1,000,000 in
our common stock based upon achieving certain earn out requirements.  Should PWI
exceed the earn-out  requirements,  its former  shareholders can earn additional
common stock having a value equal to PWI's EBITDA contribution over the earn out
requirement.  We paid  approximately  $300,000  in  investment  banking  fees in
connection with the transaction.

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

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

                                       12
<PAGE>

with PWI for a  period  of at least  one  year  from the date of the  agreement,
except in cases of his death or disability.

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

Cash and cash equivalents                                           $    74,000
Other current assets                                                  7,010,000
Property and equipment                                                  174,000
Other assets                                                             28,000
Goodwill                                                              6,361,000
Other intangible assets (3-5 year lives)                                310,000
Current liabilities                                                  (7,157,000)
Other liabilities                                                    (2,415,000)
                                                                    -----------
Total purchase price                                                $ 4,385,000
                                                                    ===========

The purchase  price  allocation is not  considered  final as of the date of this
report.  However,  we believe the final  purchase price  allocation  will not be
materially different than that presented herein.

Financing  for the cash  component  of the  acquisition  was  provided by a bank
through an existing line of credit  ("LOC") that was  established as part of the
acquisition  of Incentra of CA. In connection  with the  financing,  the LOC was
amended to make PWI a co-borrower  under the  agreements  and to modify  certain
financial  covenants to accommodate  the addition of PWI to the LOC. The LOC and
all related  accrued  interest was paid in full on July 5, 2005,  in  connection
with  the New  Laurus  Financing  Agreement,  as  discussed  in Note 8 to  these
condensed consolidated financial statements.


(C) ACQUISITION OF MANAGEDSTORAGE INTERNATIONAL, INC.

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

                                       13
<PAGE>

(D) PROFORMA RESULTS

The following  unaudited pro forma financial  information  presents our combined
results of operations as if the acquisitions described in (A), (B) and (C) above
had occurred as of the  beginning  of each of the periods  reported  below.  The
unaudited  pro forma  financial  information  is not intended to represent or be
indicative  of the  consolidated  results  of  operations  that  would have been
reported by us had the  acquisitions  been  completed as of the beginning of the
periods  presented,  and  should  not be taken as  representative  of our future
consolidated  results of  operations or financial  condition.  Pro forma results
were as follows for the three and six months ended June 30, 2005 and 2004:

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED                       SIX MONTHS ENDED

                                                           JUNE 30, 2005       JUNE 30, 2004       JUNE 30, 2005       JUNE 30, 2004
                                                           -------------       -------------       -------------       -------------
<S>                                                        <C>                 <C>                 <C>                 <C>
Revenue                                                    $ 17,599,232        $ 13,860,231        $ 34,050,155        $ 28,136,898
Cost of revenue                                              12,505,425           9,510,887          24,475,325          19,638,441
                                                           ------------        ------------        ------------        ------------
Gross margin                                                  5,093,807           4,349,344           9,574,830           8,498,457

Operating expenses                                            6,287,411           6,883,428          12,667,511          12,704,662
                                                           ------------        ------------        ------------        ------------
Loss from operations                                         (1,193,604)         (2,534,084)         (3,092,681)         (4,206,205)
                                                           ------------        ------------        ------------        ------------

Other income (expense), net                                    (603,523)         (1,098,722)           (771,301)         (1,944,484)
Income tax expense                                             (559,000)                 --            (877,000)                 --
                                                           ------------        ------------        ------------        ------------
Net loss                                                     (2,356,127)         (3,632,806)         (4,740,982)         (6,150,689)

Dividends on redeemable preferred stock                              --            (149,589)                 --            (297,534)
Accretion of redeemable preferred stock
  to redemption amount                                         (654,392)             (7,835)         (1,308,784)            (15,666)
                                                           ------------        ------------        ------------        ------------

Net loss applicable to common shareholders                 $ (3,010,519)       $ (3,790,228)       $ (6,049,766)       $ (6,463,889)
                                                           ============        ============        ============        ============
</TABLE>

(3) PROPERTY AND EQUIPMENT

As of June 30, 2005, property and equipment consisted of:

Computer equipment                                                   $4,439,951
Software                                                              1,543,533
Office furniture and equipment                                           63,246
Leasehold improvements                                                  615,793
                                                                     ----------
                                                                      6,662,523
Less accumulated depreciation                                        (4,295,811)
                                                                     ----------
                                                                     $2,366,712
                                                                     ==========

For the three months ended June 30, 2005 and 2004,  total  depreciation  expense
was  $398,258  and  $486,503,  respectively,  of which  $278,008  and  $449,341,
respectively, was included in cost of revenue. For the six months ended June 30,
2005  and  2004,   total   depreciation   expense  was  $792,959  and  $890,213,
respectively, of which $601,563 and $808,134, respectively, was included in cost
of revenue.

Included in the balance  above is property and  equipment  under a capital lease
with a cost of $1,883,090  and  accumulated  depreciation  and  amortization  of
$798,257.

                                       14
<PAGE>

(4) CONCENTRATION OF CREDIT RISK

We sell our products and services  throughout North America,  Europe,  and Asia/
Pacific Rim. We perform periodic credit evaluations of our customers'  financial
condition  and  generally  do not require  collateral.  Credit  losses have been
within our  expectations.  For the three months  ended June 30, 2005,  aggregate
revenues from customers  located in Europe or Asia amounted to $4.4 million,  or
25% of total revenue,  while  revenues from  customers  located in North America
totaled $13.2 million, or 75% of total revenue.  For the three months ended June
30, 2004, our revenues from customers located in Europe or Asia amounted to $0.5
million, or 25% of total revenue, while revenues from customers located in North
America totaled $1.4 million, or 75% of total revenue.  For the six months ended
June 30,  2005,  aggregate  revenues  from  customers  located in Europe or Asia
amounted to $7.4 million, or 31% of total revenue, while revenues from customers
located in North America totaled $16.2 million, or 69% of total revenue. For the
six months ended June 30, 2004, our revenues from customers located in Europe or
Asia  amounted to $0.9 million,  or 20% of total  revenue,  while  revenues from
customers  located  in  North  America  totaled  $3.4  million,  or 80% of total
revenue.  On a pro forma basis, giving effect to the acquisitions as if they had
occurred at the beginning of the periods presented for the six months ended June
30, 2005 aggregate revenues from customers located in Europe or Asia amounted to
$7.4  million,  or  approximately  22% of total  revenue,  while  revenues  from
customers  located in North America totaled $26.6 million,  or approximately 78%
of total revenue.

For the three months ended June 30, 2005, one customer  represented 12% of total
revenues. For the six months ended June 30, 2005 no one customer represented 10%
or more of total revenues or accounts receivable as of June 30, 2005.

For the three and six months ended June 30, 2004, revenues from three customers,
each exceeding 10% of total revenues, represented 23%, 18% and 15%, and 18%, 17%
and 17%, respectively.

(5) PER SHARE DATA

Basic  loss per  share is  calculated  using  the net loss  allocable  to common
shareholders  divided by the weighted average common shares  outstanding  during
the period. In accordance with accounting  requirements for reverse mergers, the
historical  loss  per  share  of MSI  prior  to the  MSI  Acquisition  has  been
retroactively  restated to reflect our capital  structure.  Due to our 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 three and six months ended June 30, 2005 and 2004
because the effect  would be  antidilutive.  Shares  issuable  from common stock
equivalents 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  10.3  million and 0.3 million at June 30,
2005 and 2004, respectively.

(6) SERIES A CONVERTIBLE PREFERRED STOCK

In connection  with the MSI  Acquisition,  we designated 2.5 million  authorized
shares of preferred stock as Series A Preferred  shares and issued  2,466,971 of
such shares.  Warrants are outstanding for the purchase of the remaining  33,029
Series A Preferred shares at a purchase price of $10.35 per share.

The Series A Preferred shares are convertible at any time upon written notice to
us into  shares  of common  stock on a  two-for-one  basis.  So long as at least
500,000  originally  issued  shares of Series A Preferred are  outstanding,  the
holders of Series A Preferred  shares have the right to appoint three  directors
to our Board of Directors. As a result, our Board of Directors has

                                       15
<PAGE>

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

(7) DEBT

(A) SENIOR SECURED CONVERTIBLE NOTE

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

In  connection  with the issuance of the Laurus Note, we recorded the fair value
of the Laurus  Warrant as a debt  discount in the amount of  approximately  $1.8
million  based upon the  Black-Scholes  option-pricing  model,  resulting  in an
imputed  interest rate of 37%.  This discount is being  amortized to earnings as
additional  interest expense over the term of the Laurus Note.  Accordingly,  we
have recorded  $133,460 and $273,005 of  additional  non-cash  interest  expense
relating to the  amortization of the discount for the three and six months ended
June 30, 2005, respectively.

In accordance with EITF 00-19, we initially  accounted for the fair value of the
Laurus Warrant as equity. As discussed below, in the fourth quarter of 2004, due
to an October 2004 change in the Laurus Note  conversion  terms,  our authorized
and unissued  shares  available to settle the Laurus Warrant (after  considering
all other  commitments that may require the issuance of stock during the maximum
period the Laurus  Warrant  could  remain  outstanding)  were  determined  to be
insufficient.  As a result,  we  reassessed  and  reclassified  the value of the
Laurus  Warrant to a  liability  at the  reassessment  date.  As a result of the
one-for-ten  reverse  stock  split  effected  on June  9,  2005,  there  are now
sufficient  authorized and unissued  common shares to settle the Laurus Warrant.
During  the three and six  months  ended June 30,  2005,  we  recorded a gain of
$48,785 and $390,280,  respectively,  on these contracts. The appropriateness of
the  classification  of the Laurus  Warrant is  reassessed at each balance sheet
date.

The Laurus Note  provides  for monthly  payments of interest at a rate per annum
equal to the prime rate plus 1%,  which is subject  to  reduction  if the market
price of our common stock exceeds certain designated  thresholds.  However,  the
rate cannot be less than 5% per annum. The Laurus Note also provides for monthly
amortization  of  principal,  which  commenced on September 1, 2004,  of $45,455
(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
our common  stock in lieu of debt  service  payments at the market  price of our
common stock at the date of conversion. The Laurus Note

                                       16
<PAGE>

is  collateralized  by a  security  interest  in all of our  assets.  The Laurus
Warrant entitles the holder to purchase, at any time through May 13, 2011, up to
443,500  shares of our common  stock at a price of $4.80 per  share,  subject to
antidilution adjustments.

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

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

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

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

                                       17
<PAGE>

intangibles, equipment and inventory of Incentra of CA.

On February 18, 2005, in satisfaction of $375,000 of liquidated damages incurred
due to our failure to maintain the effectiveness of the registration  statement,
we issued to Laurus an immediately  exercisable  seven-year  warrant to purchase
362,500  shares of common  stock at an  exercise  price of $2.60 per share  (the
"Additional  Warrant") and further  agreed to register  under the Securities Act
the  resale  of the  shares  of  common  stock  issuable  upon  exercise  of the
Additional  Warrant.  The  Additional  Warrant  was valued at  $375,000  and was
recorded as a  liability  on the  issuance  date.  We amended  our  registration
statement on April 14, 2005 to include the shares  issuable upon exercise of the
additional warrant and such registration statement was declared effective by the
Securities  and Exchange  Commission on April 25, 2005. For the six months ended
June 30, 2005, we expensed $375,000 for the liquidated damages, of which $75,000
was incurred in the quarter ended June 30, 2005. In connection  with the reverse
stock  split  discussed  above,  the fair value of this  additional  warrant was
reclassified to additional paid-in capital on June 9, 2005.

During the three months ended June 30, 2005, we entered into two amendments with
Laurus to the Laurus Note pursuant to which the conversion price for $400,000 of
principal  converted  on or after  April 28,  2005 was  reduced to eighty  seven
percent (87%) of the five (5) lowest  closing  prices of the common stock during
the  twenty-two  (22)  trading  days  immediately  prior  to the  date  of  such
conversion; provided, however, that such conversion price shall not be less than
$1.40.  During the three  months  ended June 30,  2005,  Laurus  converted  this
$400,000  under the Laurus Note into  277,339  shares of our common  stock.  The
conversion was deemed beneficial,  and, as a result, additional interest expense
of  approximately  $110,000 was recorded  during the three months ended June 30,
2005.

(B) CAPITAL LEASES

On November 20, 2003, we entered into a capital  lease line of credit  agreement
(the "Lease Line") for  $1,500,000  with a third-party  lender.  The term of the
agreement is for term leases ranging from 12 to 18 months.  The interest rate on
the Lease Line  ranges from  10.514% per annum to 10.731% per annum.  As of June
30, 2005,  we have drawn  $1,470,507  on the Lease Line and $29,493 of the Lease
Line had 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 June 30, 2005 was $71,073.

On March 2, 2005,  we entered into an  amendment  to the Lease Line.  Under this
amendment,  we may draw an additional  $500,000 (the "New Credit  Facility") for
equipment  purchases  through June 30, 2005. The amendment also grants us a call
option to purchase equipment from the lessor.  With respect to $2,333 of the New
Credit  Facility  amount that was unfunded on June 30, 2005, we were required to
pay the lessor 5% of such unfunded amount upon demand by the lessor. The term of
the agreement is for 15 months with an interest rate of 14.96% per annum,  which
amount has since been paid. During the three and six months ended June 30, 2005,
we drew  $333,490  and  $497,667  on the New  Credit  Facility.  The New  Credit
Facility is to be repaid in monthly principal and interest  installments through
September 2006. The unpaid balance at June 30, 2005 was $443,649.

(C) REVOLVING LINE OF CREDIT

On February 18, 2005, Incentra of CA obtained a revolving line of credit from

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<PAGE>

a bank, that 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,
Incentra of CA entered into a credit agreement (the "Credit Agreement") with the
bank and executed in favor of the bank 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." On March 30, 2005, the Credit
Agreement was amended to make PWI a co-borrower thereunder.

Pursuant to the Credit Agreement, the maximum principal amount of all borrowings
under  the line of  credit  cannot  exceed  80% of  Incentra  of CA's and  PWI's
eligible accounts receivable. At certain times during the quarter ended June 30,
2005,  we were over  advanced on our line of credit due to  fluctuations  in the
eligible accounts  receivable.  The bank did not require the over advances to be
repaid. At June 30, 2005, we were not in an over advanced  position.  The Credit
Agreement further provides that all borrowed amounts shall, at the option of the
bank 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 plus 1.5%.  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
assets  of  Incentra  of CA and PWI.  If an event of  default  occurs  under the
Security  Agreements  or the LOC  Note,  the  bank 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
Note  contains  certain  financial  covenants  for which  compliance is measured
quarterly. During the three and six months ended June 30, 2005, we drew $862,000
and $4,381,452 on the line of credit.  We were not in compliance with one of our
covenants  for the  quarter  ended June 30,  2005 and  obtained  from the bank a
waiver for this covenant through September 30, 2005.

The LOC Note  was  repaid  in full on July 5,  2005 in  connection  with the New
Laurus Financing, discussed below.

(8) SUBSEQUENT EVENTS

(A) NEW LAURUS FINANCING

On June 30, 2005, we entered into a Security  Agreement with Laurus  pursuant to
which  Laurus  provided  us  with a $9  million  revolving,  convertible  credit
facility  (the  "Facility").  The  term  of the  Facility  is  three  years.  In
connection  with the  Facility,  we  executed  in favor of  Laurus a $9  million
Secured  Revolving Note (the  "Revolver  Note").  Borrowings  under the Facility
accrue  interest at a rate per annum equal to the "prime rate" (as  published in
The Wall Street  Journal)  plus 1%,  which is subject to reduction if the market
price of our common stock exceeds certain designated thresholds. Pursuant to the
Facility,  the minimum initial amount  available to us, until December 31, 2005,
is $6.0 million.  Thereafter,  the maximum  principal  amount of all  borrowings
under  the  Facility  cannot  exceed  90%  of  the  combined  eligible  accounts
receivable of PWI and Incentra of CA.

Pursuant to the revolver note issued under the  Facility,  Laurus has the option
to convert borrowings under the Facility into shares of our common

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<PAGE>

stock.  The first $3 million of borrowings  are  convertible  into shares of our
common  stock  registered  under the  Securities  Act of 1933,  as amended  (the
"Act"),  at a  fixed  conversion  price  of  $2.05  (as  adjusted  for  dilutive
issuances,  stock splits,  stock  dividends and the like,  "as  adjusted").  The
second $3 million of borrowings are convertible into unregistered  shares of our
common stock at a fixed  conversion  price of $2.56,  as  adjusted.  The last $3
million of borrowings are  convertible  into  unregistered  shares of our common
stock at a fixed conversion price of $2.99, as adjusted.

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

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

In  connection  with the  financing,  we issued  Laurus a warrant that  entitles
Laurus to purchase,  at any time through June 30, 2012, up to 400,000  shares of
our common stock at a price of $2.63 per share, as adjusted (the "Warrant").

The first $3 million of borrowings under the Facility is further  evidenced by a
Secured  Convertible  Minimum  Borrowing Note (the "$3 Million Minimum Borrowing
Note"), which provides Laurus with certain additional rights,  including without
limitation,  the right to receive a pre-payment penalty and certain registration
rights (as further described  herein).  In the event we redeem,  or prepay,  the
outstanding balance under the $3 Million Minimum Borrowing Note, we are required
to pay  Laurus a sum equal to one  hundred  twenty  five  percent  (125%) of the
principal amount  outstanding under such note,  together with accrued but unpaid
interest  thereon.  All other  borrowings under the Facility may be prepaid from
time to time without penalty.

Pursuant to a registration  rights  agreement with Laurus,  we are obligated to:
(a) file a  registration  statement  under the Act to register the resale of the
shares of our common stock  issuable upon  conversion of the $3 Million  Minimum
Borrowing Note and exercise of the Warrant (the "Registration Statement") within
55 days of the  date of the  funding  with  respect  to the $3  Million  Minimum
Borrowing  Note;  (b) use our best  efforts to have the  Registration  Statement
declared effective under the Act as promptly as possible, but in any event prior
to the 115th day following the funding of the $3 Million Minimum Borrowing Note;
and (c) 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 $3  Million  Minimum  Borrowing  Note have been paid in full.
Laurus is entitled to certain  remedies  specified  in the  registration  rights
agreement if we do not timely comply with its registration obligations.

In  connection  with  the  Facility,  we  paid  Laurus  approximately  $359,000,
comprised  of a facility  fee of $324,000  (representing  an annual fee equal to
1.2% of the Facility payable in advance at closing) and reimbursement of $35,000
of Laurus' expenses.

                                       20
<PAGE>

Concurrently  with the closing of the Facility,  we amended our existing Secured
Convertible  Term Note with  Laurus,  dated March 13,  2004,  to provide that an
event of default by us under the  Facility  shall  also  constitute  an event of
default under such Term Note.

On August 1, 2005,  we entered into an amendment  with Laurus to the Laurus Note
pursuant to which the conversion price for $200,000 of principal converted on or
after  April 28,  2005 was reduced to an amount  equal to eighty  seven  percent
(87%) of the average of the five (5) lowest  closing  prices of the common stock
during the twenty-two  (22) trading days  immediately  prior to the date of such
conversion,  but not less than $1.52. On August 1, 2005,  Laurus  converted this
$200,000 into 131,579  shares of our common  stock.  The  conversion  was deemed
beneficial,  and as a  result,  additional  interest  expense  of  approximately
$40,000 will be recorded during the three months ended September 30, 2005.

As of August 11, 2005,  the default on the STAR Note  discussed in footnote 2(A)
above and item (B) below,  created an event of default of certain  provisions of
the Facility and the Term Note  discussed in footnote  7(A). On August 12, 2005,
we obtained a waiver from Laurus  waiving the default.

(B) STAR Note Default

We  elected  not to make the  August 1, 2005  payment  within  the grace  period
allowed under the STAR Note,  which creates an event of default as of August 11,
2005. We have not received any notice of default or  acceleration  from the STAR
note  holder.  We  elected  not to make the  scheduled  payment as we are in the
process of negotiating  post-closing  adjustments  to the purchase,  which could
have a significant impact on the amount and terms of the note. As of the balance
sheet  date,  we have  reclassified  approximately  $1.3  million of the debt to
current  liabilities based on the default.  Management does not believe the debt
will  be  paid  in  one  year  from  the  balance  sheet  date,   however,   the
reclassification on the balance sheet was made as the debt is now callable.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

When used in this discussion, the word "believes", "anticipates",  "expects" and
similar expressions are intended to identify  forward-looking  statements.  Such
statements  are  subject to certain  risks and  uncertainties  that could  cause
actual results to differ materially from those projected.

Our business and results of operations are affected by a wide variety of factors
that could materially and adversely affect us and our actual results, including,
but not limited to: (1) the  availability  of  additional  funds to enable us to
successfully  pursue our business  plan;  (2) the  uncertainties  related to the
effectiveness  of our  technologies  and the development of the our products and
services;  (3)  our  ability  to  maintain,  attract  and  integrate  management
personnel; (4) our ability to complete the development and continued enhancement
of our products in a timely manner;  (5) our ability to  effectively  market and
sell our products and services to current and new customers;  (6) our ability to
negotiate and maintain suitable strategic partnerships, vendor relationships and
corporate  relationships;  (7) the  intensity  of  competition;  and (8) general
economic  conditions.  As a result of these and other factors, we may experience
material  fluctuations  in future  operating  results on a  quarterly  or annual
basis,  which could  materially  and adversely  affect our  business,  financial
condition, operating results and stock price.

Any  forward-looking  statements  herein  speak only as of the date  hereof.  We
undertake  no  obligation  to publicly  release the results of any  revisions to
these  forward-looking  statements  that  may  be  made  to  reflect  events  or
circumstances   after  the  date  hereof  or  to  reflect  the   occurrence   of
unanticipated events.

OVERVIEW

We are a supplier of complete  solutions  for an  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"),
Incentra Solutions ("Incentra of CA") and PWI Technologies ("PWI").  Front Porch
provides unique software and professional services solutions for digital archive
management to broadcasters and media

                                       21
<PAGE>

companies.  MSI provides  outsourced storage solutions,  including  engineering,
hardware  and  software  procurement  and remote  storage  operations  services.
Incentra of CA and PWI are leading systems  integrators that provide Information
Technology ("IT") products,  professional  services and outsourcing solutions to
enterprise customers located primarily in the western United States.

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.  The  software  converts  audio,  video,
images,  text and data into digital formats for ease of use and archiving.  With
more than 100  installations  worldwide,  our  DIVArchive  software has become a
leading  digital  archive  management   application  among  European  and  Asian
broadcast and media  companies,  and is gaining an increasing share of the North
American market. Front Porch's DIVArchive and BitScream applications provide the
essential  integration  layer within the digital content  creation and broadcast
environments.   Front  Porch  built  its  archive   management  and  transcoding
software-based solutions on intelligent,  distributed architecture,  which makes
than   flexible,   scalable,   easily   upgradable,    failure   resilient   and
well-integratable with leading automation and asset management applications.

Through MSI, we deliver  comprehensive  storage services including  professional
services,  hardware/software  procurement  and resale,  financing  solutions and
remote  monitoring/management  services.  We focus on providing data  protection
solutions  and services  that ensure that our  customers'  data is backed-up and
recoverable and 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 Tokyo. MSI delivers this worldwide service 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.
These customers  benefit from reduced  operating costs and reductions in capital
expenditures.

Through  Incentra of CA and PWI, we deliver  complete  IT  solutions,  including
professional  services,  third-party  hardware/software  procurement and resale,
financing  solutions  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 its North American
expansion plans.

The  following  discussion  and analysis of financial  condition  and results of
operations  is based upon our pro forma and  historical  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.

                                       22
<PAGE>

BUSINESS OUTLOOK

The following  summarized  discussion of financial results for the three and six
months  ended June 30,  2005 and 2004 is of our  results  on a pro forma  basis,
giving  effect to the  acquisitions  referred  to in Note 2 above as if they had
occurred at the  beginning  of all periods  presented.  We believe the pro forma
results of operations provide additional and more relevant information about the
operating  performance  of our  business  and  give a better  indication  of our
results of operations, and the size and scalability of our business on a forward
looking  basis.  However,  the  pro  forma  statements  are  not  intended  as a
substitute  for  financial  statements  prepared in  accordance  with  generally
accepted accounting principles.

For the three and six months ended June 30,  2005,  pro forma  revenues  totaled
$17.6 million and $34.0 million,  respectively, as compared to $13.9 million and
$28.1  million for the  comparable  prior  periods.  The rate of  year-over-year
growth in revenues for the three and six months ended 2005 was approximately 27%
and 21%,  respectively.  The  significant  growth  in  revenue  was a result  of
increased  sales  and  deliveries  of  our  proprietary   DIVArchive   solution,
third-party hardware and software and our professional services. In addition, we
have a recurring  revenue base created by our proprietary  Gridworks  Operations
System Support  solution that provides  added  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,  as well as new  enterprise  and  service  provider  customer
opportunities.

We  continue to invest in  hardware  and the  development  of our  software  and
digital archiving in the data storage and infrastructure  areas.  During the six
months ended June 30, 2005, we invested $0.7 million in software development and
$0.4 million for data storage infrastructure development.

During the three months ended June 30, 2005, our pro forma loss from  operations
decreased by  approximately  $1.3 million,  to $1.2 million as compared to a pro
forma loss of $2.5 million for the comparable prior year period.  This reduction
in our pro forma loss was due to $0.7  million of increased  gross  margins as a
result of our increased revenues,  decreased general and administrative costs of
$0.4 million and the  elimination of a $0.1 million  impairment loss recorded in
2004. The improvement in our general and administrative  expenses was due to the
absence of  owner-related  costs in our 2005  acquisitions  and the  decrease in
MSI's expenses as a result of reduced staffing levels.

During the three and six months  ended June 30,  2005,  we  realized an adjusted
EBITDA(1) profit of approximately  $0.3 million and $0.7 million,  respectively,

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

                             * EBITDA Reconciliation
                                  June 30, 2005
                             All amounts in (000's)

                                                        Three Months  Six Months
                                                            Ended       Ended
                                                             2005        2005
                                                             ----        ----
Pro forma net loss before deemed dividends and
accretion on preferred stock                               $(2,356)     $(4,741)
Depreciation and amortization                                1,347        2,694
Taxes                                                          559          879
Interest (cash portion)                                        171          326
Interest (non-cash portion)                                    436          897
                                                           -------      -------
EBITDA                                                         157           55
                                                           -------      -------
Former owner costs                                              --          314
Non-cash stock based compensation                              108          264
Referral fees                                                   29           72
                                                           -------      -------
EBITDA, as adjusted                                        $   294      $   705
                                                           =======      =======


                                       23
<PAGE>

on a pro forma  basis.  EBITDA  adjustments  remove  the  impacts  of the former
owner's costs as well as non-cash  stock  compensation  expense and referral fee
amortization.  Also  included in EBITDA for the three and six months  ended June
30, 2005 was a gain of approximately $49,000 and $390,000,  respectively, due to
the  revaluation of the derivative  warrant  liability.  During the three months
ended June 30, 2005, we received an insurance  settlement of $0.1 million from a
customer  theft  of  equipment.  This  was  accounted  for as a  purchase  price
adjustment.  However,  if this cash settlement  were recorded in the period,  it
would result in $0.4 million in adjusted EBITDA for the period.

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 customers both directly and through existing
channel  partners.  We also  plan to  increase  our  expenditures  for sales and
marketing initiatives to meet what appears to be an increasing volume of digital
archive  implementations in the North American market and throughout the rest of
the world.

We also  believe we can increase  our sales of managed  services by  introducing
these services to the customers of our recently acquired businesses.  We believe
professional  services  will also be  enhanced as we  leverage  our  engineering
resources  across our entire  customer  base. In the three months ended June 30,
2005, we increased engineering and sales resources and will continue to increase
these  resources,  which are focused on the enterprise  market and will resell a
variety of storage products directly to businesses.

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
inter-operability and feature sets.

RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2004


                                       24
<PAGE>

       REVENUE. Total revenue for the three months ended June 30, 2005 increased
$15.7  million,  or 827%,  to $17.6  million  compared to total  revenue of $1.9
million for the three months  ended June 30, 2004.  Revenue from the sale of our
products increased to $13.8 million compared to revenue of approximately $30,000
for the  comparable  prior year period.  This increase was  attributable  to the
additional  revenues of $13.7  resulting from the  acquisitions  of Front Porch,
Incentra of CA and PWI.  Revenue from  delivery of our services  increased  $1.9
million,  or 100%, to $3.8 million  compared to $1.9 million for the  comparable
prior  year  period.   Service  revenue   increased  $1.9  million  due  to  the
acquisitions as described above.

        For the  quarter  ended  June 30,  2005,  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 $4.4 million, or 25% of total revenue, while revenues from customers
located in North America totaled $13.2 million, or 75% of total revenue. For the
quarter ended June 30, 2004,  revenues from customers located in Europe and Asia
amounted to $1.0 million, or 55% of total revenue, while revenues from customers
located in North America totaled $0.9 million, or 45% of total revenue.

        GROSS  MARGIN.  Total gross  margin for the three  months ended June 30,
2005  increased  $4.5  million  to $5.1  million,  or 29% of total  revenue,  as
compared  to gross  margin of $0.6  million,  or 30% of total  revenue,  for the
comparable  prior year period.  Product  gross margin for the three months ended
June 30, 2005 totaled $3.8  million,  or 27% of product  revenue.  Service gross
margin for the three months ended June 30, 2005 totaled $1.3 million,  or 35% of
service revenue. Gross margins were consistent with management  expectations for
the quarter.

        SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  ("SG&A")  expenses  for the three  months  ended  June 30,  2005
increased  by  approximately  $3.3 million to $5.4 million from $2.1 million for
the  comparable  prior year  period.  SG&A  expenses  included  $3.6  million in
salaries  and  related  benefits  for  employees  not  directly  related  to the
production of revenue, $0.7 million in general office expenses,  $0.4 million in
professional  fees, $0.3 million for  travel-related  costs, and $0.3 million in
facilities  costs.  SG&A expenses of $2.1 million for the comparable  prior year
period included $1.3 million in salaries and related  benefits for employees not
directly  related to the  production of revenue,  $0.3 million in general office
expenses,  $0.1 million in travel  related costs,  $0.2 million in  professional
fees, $0.1 million of facilities costs and $0.1 million of bad debt expense. The
increase in SG&A expenses during the three months ended June 30, 2005 was due to
the  inclusion of $3.9 million of SG&A expenses for the  acquisitions  described
above, offset by a reduction in MSI's SG&A expenses.

        DEPRECIATION  AND   AMORTIZATION.   Amortization   expense  consists  of
amortization  of  intellectual  property,  capitalized  research and development
costs and other intangible assets. Depreciation expense consists of depreciation
of  furniture,   equipment,   software  and   improvements.   Depreciation   and
amortization  expense was  approximately  $1.3  million and $0.8 million for the
three months ended June 30, 2005 and 2004,  respectively,  of which $0.3 million
and $0.4 million was included in cost of revenue for the periods ending June 30,
2005 and 2004.  The increase was primarily  due to the increase in  amortization
associated with the intangible assets created in the acquisition of Front Porch.

        OPERATING LOSS. During the three months ended June 30, 2005, we incurred
a loss from  operations of $1.2 million as compared to a loss from operations of
$1.9 million for the three months ended June 30, 2004. This

                                       25
<PAGE>

decrease  in  operating  loss was  primarily  the result of an increase in gross
margin of  approximately  $4.5  million for the three months ended June 30, 2005
offset by an  increase  in  selling,  general  and  administrative  expenses  of
approximately  $3.3 million and depreciation  expense of $0.6 million due to the
acquisitions of Front Porch, Incentra of CA and PWI.

        INTEREST EXPENSE. Interest expense was $0.6 million for the three months
ended June 30, 2005 compared to $0.7 million for the three months ended June 30,
2004. The decrease in interest  expense was  attributable  to a decrease of $0.7
million of non-cash  interest expense on MSI's previously  outstanding  Series C
preferred  stock,  offset in part,  by an increase in non-cash  interest of $0.1
million related to warrants,  non-cash interest of $0.4 million for amortization
of debt discounts and deferred financing costs and $0.2 million of cash interest
on senior secured convertible notes and capital leases.

        OTHER INCOME AND EXPENSE. Other income was approximately $11,000 for the
three months ended June 30, 2005 compared to approximately $34,000 for the three
months  ended June 30,  2004.  Other  income for the three months ended June 30,
2005 and 2004 included  investment income from leased equipment to customers and
gains from sales of fixed assets and the  revaluation of our derivative  warrant
liability.

        FOREIGN CURRENCY TRANSACTION GAIN (LOSS). 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.  We are  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  transact  business  in a  currency  other  than  our own  functional
currency.  The effects of exchange  rate  fluctuations  in  remeasuring  foreign
currency  transactions  for the three months  ended June 30, 2005  resulted in a
loss of approximately $8,000

        INCOME TAX EXPENSE.  We incurred income tax expense for the three months
ended June 30, 2005 of $0.6 million.  This expense  represented  non-cash income
tax expense related to our French subsidiary, Front Porch Digital International,
SAS.  These  income  taxes  have no cash  impact due to the  utilization  of the
subsidiary's deferred tax assets during the period.

        NET LOSS  APPLICABLE  TO COMMON  SHAREHOLDERS.  During the three  months
ended June 30, 2005, we incurred a net loss applicable to common shareholders of
$3.0 million as compared to a net loss applicable to common shareholders of $2.7
million for the three months  ended June 30, 2004.  The increase in net loss for
the three  months  ended  June 30,  2005 was  primarily  due to an  increase  in
accretion on the outstanding Series A preferred stock of $0.7 million.

RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2004

        REVENUE.  Total revenue for the six months ended June 30, 2005 increased
$19.3  million,  or 449%,  to $23.6  million  compared to total  revenue of $4.3
million for the six months  ended June 30,  2004.  Revenue  from the sale of our
products  increased to $17.0 million compared to revenue of $0.4 million for the
comparable prior year period. Revenue from product sales increased $16.6 million
from $0.4 million to $17.0 million for the comparable  prior year period.  Front
Porch, Incentra of CA and PWI contributed $16.9 million of the increase,  offset
slightly  by a decline in MSI  product  revenue of $0.3  million.  Revenue  from
delivery  of our  services  increased  $2.7  million,  or 71%,  to $6.6  million
compared to $3.9 million for the comparable  prior year period.  Service revenue
increased $2.7 million due to the  acquisitions of Front Porch,  Incentra of CA,
and PWI.

                                       26
<PAGE>

        For the six months  ended June 30, 2005,  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 $7.4 million, or 31% of total revenue, while revenues from customers
located in North America totaled $16.2 million, or 69% of total revenue. For the
six months ended June 30, 2004,  revenues from  customers  located in Europe and
Asia  amounted to $0.9 million,  or 20% of total  revenue,  while  revenues from
customers  located  in  North  America  totaled  $3.4  million,  or 80% of total
revenue.

        GROSS MARGIN.  Total gross margin for the six months ended June 30, 2005
increased $6.3 million to $8.0 million,  or 34% of total revenue, as compared to
gross margin of $1.7 million, or 40% of total revenue,  for the comparable prior
year period. Product gross margin for the six months ended June 30, 2005 totaled
$5.7 million, or 34% of product revenue. Service gross margin for the six months
ended  June 30,  2005  totaled  $2.3  million,  or 35% of service  revenue.  The
decrease in gross  margin was the result of lower  gross  margins on third party
products,  offset by increased gross margins realized by Front Porch on sales of
its DIVArchive.

        SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  ("SG&A")  expenses  for the  six  months  ended  June  30,  2005
increased  by  approximately  $5.3 million to $9.4 million from $4.1 million for
the  comparable  prior year period.  SG&A expenses for the six months ended June
30, 2005  included  $6.2 million in salaries and related  benefits for employees
not  directly  related to the  production  of revenue,  $1.1  million in general
office   expenses,   $0.9  million  in  professional   fees,  $0.6  million  for
travel-related  costs,  $0.5  million in  facilities  costs and $0.1  million in
research and development costs. SG&A expenses of $4.1 million for the comparable
prior year period  included  $2.5 million in salaries  and related  benefits for
employees not directly  related to the  production  of revenue,  $0.7 million in
general office expenses,  $0.3 million in travel related costs,  $0.3 million in
professional fees, $0.2 million of facilities costs and $0.1 million of bad debt
expense. The increase in SG&A expenses during the six months ended June 30, 2005
was due to the  inclusion  of $6.3  million of SG&A  expenses  for Front  Porch,
Incentra of CA and PWI for the full  quarter.  This  increase was offset by $1.0
million of reduced  SG&A  expenses at MSI,  primarily  as a result of  decreased
staffing levels, and in general office expenses.

        DEPRECIATION  AND   AMORTIZATION.   Amortization   expense  consists  of
amortization  of  intellectual  property,  capitalized  research and development
costs and other intangible assets. Depreciation expense consists of depreciation
of  furniture,   equipment,   software  and   improvements.   Depreciation   and
amortization expense was approximately $2.6 million and $1.5 million for the six
months  ended June 30, 2005 and 2004,  respectively,  of which $0.6  million and
$0.8 million was included in cost of revenue for the periods ended June 30, 2005
and 2004.  The  increase  was  primarily  due to the  increase  in  amortization
associated with the intangible assets created in the acquisition of Front Porch.

        OPERATING  LOSS.  During each of the six months  ended June 30, 2005 and
June 30, 2004, we incurred a loss from  operations of $3.1 million.  An increase
in gross margin of approximately  $6.3 million for the six months ended June 30,
2005 offset by an increase in selling,  general and  administrative  expenses of
approximately $6.3 million during the period related to the acquisitions.

        INTEREST  EXPENSE.  Interest expense was $1.2 million for the six months
ended June 30, 2005 compared to $1.4 million for the six months ended

                                       27
<PAGE>

June 30, 2004. The decrease in interest  expense was  attributable to a decrease
of $1.3 million of non-cash  interest  expense on MSI's  previously  outstanding
Series C preferred stock, offset in part, by an increase in non-cash interest of
$0.3  million  related  to  warrants,  non-cash  interest  of $0.5  million  for
amortization  of debt  discounts  and  deferred  financing  costs,  $0.1 million
related to the conversion of debt to equity and $0.3 million of cash interest on
senior secured convertible notes and capital leases.

        OTHER  INCOME AND  EXPENSE.  Other  income was $0.4  million for the six
months  ended June 30, 2005  compared to $0.1  million for the six months  ended
June 30, 2004.  Other income of $0.4 million for 2005  included  $0.3 million of
income  resulting from the revaluation of our derivative  warrant  liability and
$0.1 million of investment  income from leased  equipment to customers and gains
from sales of fixed assets.

        FOREIGN  CURRENCY  TRANSACTION  GAIN.  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.  We are  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  transact  business  in a  currency  other  than  our own  functional
currency.  The effects of exchange  rate  fluctuations  in  remeasuring  foreign
currency  transactions for the six months ended June 30, 2005 resulted in a loss
of approximately $1,000. In addition, we entered into a forward contract,  which
expired on April 1, 2005, for which we recorded a realized gain of approximately
$74,600 for the six months ended June 30, 2005, 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 six months
ended June 30, 2005 of $0.9 million. This income tax expense represents non-cash
income tax  expense  related  to our  French  subsidiary,  Front  Porch  Digital
International,  SAS.  These  income  taxes  have  no  cash  impact  due  to  the
utilization  of the  subsidiary's  deferred  tax assets (net  operating  losses)
during that period.

        NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.  During the six months ended
June 30, 2005, we incurred a net loss applicable to common  shareholders of $6.0
million as  compared to a net loss  applicable  to common  shareholders  of $4.8
million for the six months ended June 30, 2004. The increase in net loss for the
six months ended June 30, 2005 was  primarily due to an increase in accretion on
the outstanding Series A preferred stock of $1.3 million.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2005, we had $2.1 million of cash and cash equivalents.  At June 30,
2005, we had a working  capital deficit of $3.8 million of which $1.3 million of
the deficit is attributable to the  reclassification of the STAR Note to current
liabilities  due to the default on the STAR Note  described in footnote  8(B) in
the notes to unaudited condensed consolidated financial statements.  We used net
cash of $1.1  million in operating  activities  during the six months ended June
30, 2005,  primarily as a result of the net loss incurred during the period.  We
provided net cash of $0.4 million in investing  activities during the six months
ended June 30, 2005,  of which $1.7 million  represented  cash acquired from the
acquisitions,  which was offset by $1.2  million  used  primarily to purchase or
develop computer software and equipment.  Financing  activities used net cash of
$0.2  million  during the six  months  ended June 30,  2005  primarily  from the
repayment of capital  leases,  long-term  obligations  and notes payable of $1.6
million,  which was  offset by  proceeds  of $1.4  million  from a lease line of
credit and our revolving line of credit.

We expect our anticipated  cash flow from  operations  combined with our current
cash and cash equivalents will meet our working capital and capital  expenditure
requirements for at least the next twelve months.  We believe we

                                       28
<PAGE>

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 or subsequent  acquisitions  and that sufficient  capital will be
available  upon  acceptable   terms.  We  expect  capital   expenditures  to  be
approximately  $2.6  million  during the  12-month  period  ended June 30, 2006.
Capital  expenditures  are  comprised of  approximately  $1.0 million of capital
equipment  purchase and $1.6 million of  capitalized  development  costs for our
internally  developed  software  platforms.  The  amount  of  spending  in  each
respective area is dependent upon the total capital available to us.

Our actual  financial  results  may differ  materially  from the stated  plan of
operations.  Factors which may cause a change from our plans 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.

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 are currently
evaluating  the  provisions  of this  standard.  However,  we  expect  that  the
implementation  of this  standard  will have a material  impact on our financial
position and results of operations.

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

ITEM 3. 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

                                       29
<PAGE>

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 it files or submits 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 first quarter of 2005
that have materially  affected,  or are reasonably likely to materially  affect,
our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:

On June 30, 2005, in connection with the credit facility from Laurus Master Fund
Ltd.  ("Laurus")  described  herein,  we issued to Laurus a secured  convertible
promissory  note in the amount of $9.0 million,  of which the first $3.0 million
of borrowings are convertible  into shares of our common stock  registered under
the Securities Act of 1933, as amended, at a fixed conversion price of $2.05 (as
adjusted for dilutive issuances,  stock splits, stock dividends and the like "as
adjusted"),  the second $3.0 million of borrowings is convertible into shares of
unregistered  common stock at a fixed  conversion  price of $2.56; and a secured
convertible note in the amount of $3.0 million, which is convertible into shares
of unregistered  common stock at a fixed  conversion price of $2.99. The funding
of the  secured  convertible  promissory  note  occurred on July 5, 2005 when we
advanced $6.0 million on this facility.

The convertible  notes issued by us in the transaction was issued in reliance on
the exemption from  registration  provided by Section 4(2) of the Securities Act
of 1933,  as amended,  on the basis that such  issuance did not involve a public
offering,  no underwriter  fees or commissions were paid in connection with such
issuance and Laurus  represented  to us that it was  `accredited  investors'  as
defined in Regulation D under the Securities Act of 1933, as amended.

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

On  April,   1,  2005,   stockholders   beneficially   owning  an  aggregate  of
approximately 9.0 million shares of our common stock, representing approximately
52% of the voting power of our company, delivered their written consent to amend
the Company's  2000 Equity  Incentive  Plan (the "Plan") to increase the maximum
number of shares of our common  stock  available  for issuance  thereunder  from
6,000,000 shares to 22,625,000  shares.  As a result of the one-for-ten  reverse
stock split described above, the authorized shares in the Plan have been reduced
to 2,262,500 shares.

On  April  12,   2005,   stockholders   beneficially   owning  an  aggregate  of
approximately   10.7   million   shares  of  our  common   stock,   representing
approximately  61% of the voting power of our company,  delivered  their written
consent to adopt a resolution to amend our Articles of Incorporation to effect a
stock combination, or reverse stock split, pursuant to which every ten shares of
the our outstanding  common stock would be exchanged for one new share of common
stock.



ITEM 6. EXHIBITS.

The  exhibits  required  by this item are listed on the Exhibit  Index  attached
hereto.

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<PAGE>

                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned,  thereunto
duly authorized.

Dated: August 15, 2005                     INCENTRA SOLUTIONS, INC.

                                             By:  /s/ Thomas P. Sweeney III
                                                  -------------------------
                                                    Thomas P. Sweeney III
                                                   Chief Executive Officer
                                                (principal executive officer)

                                             By:      /s/ Paul McKnight
                                                  -------------------------
                                                        Paul McKnight
                                                   Chief Financial Officer
                                                  (principal financial and
                                                      accounting officer)

                                       31
<PAGE>

                                  EXHIBIT INDEX

31.1    Certification of Chief Executive Officer pursuant to 18 U.S.C.  1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2    Certification of Chief Financial Officer pursuant to 18 U.S.C.  1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C.  1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C.  1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

                                       32