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 September 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 [_]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934) Yes [_] No [X]

As of November 8, 2005, 13,326,810 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]


<PAGE>





PART I. FINANCIAL INFORMATION



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

<TABLE>
<CAPTION>
<S>                                                                                                               <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                                                       $   2,530,881
  Accounts receivable, net of allowance for doubtful accounts of $266,319                                             7,279,802
  Other current assets                                                                                                1,224,157
                                                                                                                  -------------
Total current assets                                                                                                 11,034,840
                                                                                                                  -------------

Property and equipment, net                                                                                           2,430,584
Capitalized software development costs, net                                                                           1,843,200
Intangible assets, net                                                                                               13,917,448
Goodwill                                                                                                             14,582,287
Other assets                                                                                                          1,112,110
                                                                                                                  -------------
                                                                                                                     33,885,629
                                                                                                                  -------------

TOTAL ASSETS                                                                                                      $  44,920,469
                                                                                                                  =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
  Current portion of note payable, capital leases and other long-term obligations                                 $  10,187,870
  Accounts payable                                                                                                    6,592,082
  Accrued expenses                                                                                                    3,323,099
  Current portion of deferred revenue                                                                                 1,218,201
                                                                                                                  -------------
Total current liabilities                                                                                            21,321,252
                                                                                                                  -------------

Note payable, capital leases and other long-term obligations, net of current portion                                  1,552,901
Deferred revenue, net of current portion                                                                                103,691
                                                                                                                  -------------
                                                                                                                      1,656,592
                                                                                                                  -------------
TOTAL LIABILITIES                                                                                                    22,977,844
                                                                                                                  -------------

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                                                23,963,942
                                                                                                                  -------------

Shareholders' deficit:
   Preferred stock, nonvoting, $.001 par value, 2,500,000 shares                                                             --
   authorized, none issued or outstanding
   Common stock, $.001 par value, 200,000,000 shares authorized, 13,316,328 shares issued,                                   --
   13,172,964 shares outstanding, 143,364 shares in treasury                                                             13,173
   Additional paid-in capital                                                                                       124,439,794
   Accumulated other comprehensive loss                                                                                (140,407)
   Accumulated deficit                                                                                             (126,333,877)
                                                                                                                  -------------
TOTAL SHAREHOLDERS' DEFICIT                                                                                          (2,021,317)
                                                                                                                  -------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                                                       $  44,920,469
                                                                                                                  =============
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.


                                       1
<PAGE>


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

                                                                 THREE MONTHS ENDED SEPTEMBER 30,    NINE MONTHS ENDED SEPTEMBER 30,
                                                                     2005              2004             2005              2004
                                                                     ----              ----             ----              ----
<S>                                                              <C>               <C>               <C>               <C>
Revenues:
  Products                                                       $  8,908,321      $  2,552,378      $ 25,991,840      $  2,734,943
  Services                                                          3,516,605         1,795,982        10,039,480         5,868,869
                                                                 ------------      ------------      ------------      ------------
TOTAL REVENUES                                                     12,424,926         4,348,360        36,031,320         8,603,812
                                                                 ------------      ------------      ------------      ------------

Cost of revenue:
  Products                                                          6,800,863           979,931        17,932,458           979,931
  Services                                                          2,203,757         1,500,101         6,641,570         4,049,799
                                                                 ------------      ------------      ------------      ------------
Total cost of revenue                                               9,004,620         2,480,032        24,574,028         5,029,730
                                                                 ------------      ------------      ------------      ------------
GROSS MARGIN                                                        3,420,306         1,868,328        11,457,292         3,574,082
                                                                 ------------      ------------      ------------      ------------

Selling, general and administrative                                 4,881,256         2,502,482        14,269,760         6,473,669
Acquisition costs                                                          --         1,425,189                --         1,425,189
Amortization                                                          819,305           522,092         2,410,614           997,045
Depreciation                                                          134,615            46,825           326,009           128,904
                                                                 ------------      ------------      ------------      ------------
                                                                    5,835,176         4,496,588        17,006,383         9,024,807
                                                                 ------------      ------------      ------------      ------------
LOSS FROM OPERATIONS                                               (2,414,870)       (2,628,260)       (5,549,091)       (5,450,725)
                                                                 ------------      ------------      ------------      ------------

Other income (expense):
  Interest income                                                       1,181             5,620            27,128            11,439
  Interest expense                                                   (608,565)         (545,220)       (1,779,876)       (1,936,440)
  Other income                                                         36,788           234,554           414,955              (696)
  Foreign currency transaction (loss) gain                            (45,693)           (1,074)           28,032               859
                                                                 ------------      ------------      ------------      ------------
                                                                     (616,289)         (306,120)       (1,309,761)       (1,924,838)
                                                                 ------------      ------------      ------------      ------------

LOSS BEFORE INCOME TAX EXPENSE                                     (3,031,159)       (2,934,380)       (6,858,852)       (7,375,563)
Income tax expense                                                   (179,250)               --        (1,056,250)               --
                                                                 ------------      ------------      ------------      ------------
NET LOSS                                                           (3,210,409)       (2,934,380)       (7,915,102)       (7,375,563)
                                                                 ------------      ------------      ------------      ------------

Deemed dividends on redeemable preferred stock                             --           (50,959)               --          (348,493)
Accretion of redeemable preferred stock to redemption amount         (654,392)         (320,769)       (1,963,176)         (336,434)
                                                                 ------------      ------------      ------------      ------------

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                       $ (3,864,801)     $ (3,306,108)     $ (9,878,278)     $ (8,060,490)
                                                                 ============      ============      ============      ============

COMPREHENSIVE LOSS
Net Loss                                                         $ (3,210,409)     $ (2,934,380)     $ (7,915,102)     $ (7,375,563)
Foreign currency translation adjustments                               (5,641)               --          (159,591)               --
                                                                 ------------      ------------      ------------      ------------
                                                                 $ (3,216,050)     $ (2,934,380)     $ (8,074,693)     $ (7,375,563)
                                                                 ============      ============      ============      ============

Weighted average number of common shares                           13,021,752         9,358,315        12,278,733         7,583,964
  outstanding - basic and diluted                                ============      ============      ============      ============

Basic and diluted net loss per share
  applicable to common shareholders                              $      (0.30)     $      (0.35)     $      (0.80)     $      (1.06)
                                                                 ============      ============      ============      ============
</TABLE>




See accompanying notes to unaudited condensed consolidated financial statements.


                                       2
<PAGE>


                            INCENTRA SOLUTIONS, INC.
                                AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                     NINE MONTHS ENDED SEPTEMBER 30,
                                                                                                         2005               2004
                                                                                                         ----               ----
<S>                                                                                                  <C>               <C>
Cash flows from operating activities:
     Net loss                                                                                        $ (7,915,102)     $ (7,375,563)
     Adjustments to reconcile net loss to net cash used in operating activities:
        Depreciation                                                                                    1,166,158         1,354,808
        Amortization of intangible assets and software development costs                                2,822,818         1,271,232
        Amortization of non-cash loan discount                                                             12,735                --
        Stock-based compensation expense                                                                  414,184           977,214
        Non-cash interest expense                                                                       1,365,654           136,779
        Non-cash interest expense on Series C mandatorily redeemable preferred stock liability                 --         1,703,332
        Non-cash income tax expense                                                                     1,056,250                --
        Share of losses of Front Porch Digital, Inc. and related impairment of goodwill                        --           198,280
        Loss on disposal of assets and other                                                               48,658               500
        Bad debt expense                                                                                   66,460           198,435
        Gain on revaluation of derivative warrant liability                                              (390,280)               --
        Changes in operating assets and liabilities, net of business acquisitions:
           Accounts and other receivables                                                               3,987,357        (1,744,109)
           Other current assets                                                                          (488,877)         (200,012)
           Other assets                                                                                    37,867          (190,760)
           Accounts payable                                                                            (2,435,407)          875,161
           Accrued liabilities                                                                           (368,267)          428,831
           Deferred revenue                                                                               (55,640)         (380,152)
           Other liabilities                                                                             (421,335)          (10,399)
                                                                                                     ------------      ------------
                 Net cash used in operating activities                                                 (1,096,767)       (2,756,423)
                                                                                                     ------------      ------------
Cash flows from investing activities:
     Purchases of property and equipment                                                                 (886,343)       (1,694,869)
     Capitalized software development costs                                                            (1,080,384)         (750,796)
     Proceeds from sale of property and equipment                                                           1,876           135,650
     Cash acquired in Incentra of CA acquisition (Note 2)                                               1,597,498                --
     Cash acquired in PWI acquisition (Note 2)                                                             74,297                --
     Cash acquired in Front Porch Digital, Inc. acquisition                                                    --           946,732
     Cash payment to former owners of PWI per purchase agreement                                         (100,000)
     Restricted cash acquired from Front Porch Digital, Inc.                                                   --         3,058,953
     Net change in restricted cash                                                                           (604)       (3,059,430)
     Proceeds received from maturies/sale of short-term investments                                            --         3,793,099
                                                                                                     ------------      ------------
                 Net cash provided/(used in) by investing activities                                     (393,660)        2,429,339
                                                                                                     ------------      ------------
Cash flows from financing activities:
     Proceeds from bank line of credit, net of financing costs                                          5,029,529                --
     Proceeds from lease line of credit                                                                   875,300           815,654
     Payments on capital leases, notes payable and other long term liabilities                         (4,874,905)         (738,426)
     Other changes in financing activities                                                                    137           (30,016)
                                                                                                     ------------      ------------
                 Net cash provided by financing activities                                              1,030,061            47,212
                                                                                                     ------------      ------------

Effect of exchange rate changes on cash and cash equivalents                                              (77,211)           (6,739)
                                                                                                     ------------      ------------

                 Net decrease  in cash and cash equivalents                                              (537,577)         (286,611)
Cash and cash equivalents at beginning of period                                                        3,068,458         2,201,192
                                                                                                     ------------      ------------
Cash and cash equivalents at end of period                                                           $  2,530,881      $  1,914,581
                                                                                                     ============      ============

Supplemental disclosures of cash flow information:
     Cash paid during the period for interest                                                        $    514,463      $     96,329

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                --
     Net assets acquired from Front Porch Digital, Inc. exluding cash                                          --        13,517,778
     Capital lease obligations incurred in connection with acquisition of property and equipment               --           815,654
     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                                      73,439            31,705

</TABLE>



See accompanying notes to unaudited condensed consolidated financial statements.


                                       3
<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., 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
nine month periods  ended  September  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


                                       4
<PAGE>

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   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 nine months
ended September 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 September 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


                                       5
<PAGE>

nine months  ended  September  30, 2005 and 2004.  All amounts  except per share
amounts in (000's):

<TABLE>
<CAPTION>
                                                                                    THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                                      SEPTEMBER 30,              SEPTEMBER 30,
                                                                                  2005           2004          2005           2004
                                                                               ---------      ---------      ---------      -------
<S>                                                                            <C>            <C>            <C>            <C>
Net loss before deemed dividends and accretion on
  preferred stock, as reported                                                 $  (3,210)     $  (2,934)     $  (7,915)     $(7,376)
Add stock-based employee compensation expense included in reported
     net loss                                                                        150             63            414          152
Deduct total stock-based employee compensation expense
     determined under fair value-based method for all awards                        (646)          (198)        (1,844)        (284)
                                                                               ---------      ---------      ---------      -------
Pro forma net loss before deemed dividends and accretion on
  preferred stock                                                              $  (3,706)     $  (3,069)     $  (9,345)     $(7,508)
                                                                               =========      =========      =========      =======
Net loss per weighted average common share outstanding - basic and
     diluted - pro forma                                                       $   (0.33)     $   (0.37)     $   (0.92)     $ (1.08)
                                                                               =========      =========      =========      =======

Net loss per weighted average common share outstanding - basic and
     diluted - as reported                                                     $   (0.30)     $   (0.35)     $   (0.80)     $ (1.06)
                                                                               =========      =========      =========      =======
</TABLE>


In  determining  the fair value of stock  options  granted by us during the nine
months ended  September 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
the first nine months of 2005 was $2.10 per option.

In  determining  the fair  value of stock  options  granted  by MSI for the nine
months ended September 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 3.89%,  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  thereunder  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 nine months ended  September
30, 2005, we reported a cumulative  translation  loss of $159,591 as a component
of accumulated other comprehensive loss. We are also subject to foreign exchange
transaction  exposure when our subsidiary transacts business in a


                                       6
<PAGE>

currency  other than its own functional  currency.  The effects of exchange rate
fluctuations in remeasuring  foreign currency  transactions for the three months
ended   September  30,  2005  and  2004  was  a  loss  of  $45,693  and  $1,074,
respectively.  The effect of exchange rate  fluctuations in remeasuring  foreign
currency  transactions for the nine months ended September 30, 2005 and 2004 was
a gain of $28,032 and of $858 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 in the statements
of operations.  We recorded a realized gain of  approximately $0 and $74,600 for
the three and nine months ended September 30, 2005, respectively, and a realized
gain of approximately  $65,000 for the three and nine months ended September 30,
2004,  which  represented the change in the fair value of these foreign currency
forward  contracts  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 nine months ended September 30, 2005, we recorded
a gain of $0 and $390,280, respectively, on these contracts. The appropriateness
of the  classification  of these  contracts is  reassessed at each balance sheet
date.


                                       7
<PAGE>

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 assets.

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.

At September 30, 2005,  we believe there is no impairment of long-lived  assets.
For the three and nine months ended September 30, 2004, MSI recorded  impairment
losses of $0 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.


                                       8
<PAGE>

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 nine months  ended  September  30,  2005,  capitalized
software  development  costs,  which related  primarily to  enhancements  to our
Gridworks and DIVArchive  software  solutions,  totaled $351,382 and $1,080,384,
respectively.  For the three months ended September 30, 2005 and 2004,  $164,020
and  $96,859,  respectively,  of  software  development  costs  were  charged to
expense.  For the nine months ended  September  30, 2005 and 2004,  $412,202 and
$274,187,  respectively,  of software development costs were charged to expense.
As of September 30, 2005, the unamortized portion of software  development costs
was $1,843,200.

INCOME TAX

Income tax expense  recognized for the three and nine months ended September 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 FASB issued SFAS No. 123(R),  SHARE-BASED  PAYMENT,  which
addresses the accounting for  share-based  compensation  transactions.  SFAS No.
123(R)


                                       9
<PAGE>

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  beginning  of the next  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 principles. 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  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
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


                                       10
<PAGE>

"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  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
September 30, 2005, the principal  balance on the STAR Note was convertible into
a maximum of 593,535 shares of our common stock. Our obligations  under the STAR
Note are not secured by any of our assets.

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.  We have been  accruing  interest  at the 12%
default rate since August 11, 2005.

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.


                                       11
<PAGE>

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

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.  Pending the outcome of the arbitration  proceeding  discussed in Note 7
(E), there may be a material  adjustment to the purchase price and the resultant
purchase price allocation.

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 7 (D).


(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.  During the
three months ended  September 30, 2005, the former PWI  shareholders  achieved a
partial earn out of $100,000  which was paid to them in cash. As a result of the
earn out payment, the purchase price (goodwill) was increased by $100,000 during
the three  months  ended  September  30,  2005.  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


                                       12
<PAGE>

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 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                                                              6,461,000
Other intangible assets (3-5 year lives)                                310,000
Current liabilities                                                  (7,157,000)
Other liabilities                                                    (2,415,000)
                                                                    -----------
Total purchase price                                                $ 4,485,000
                                                                    ===========

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 7 (D) 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


                                       13
<PAGE>

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.

(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 nine months ended September 30, 2005 and 2004:

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED                          NINE MONTHS ENDED

                                              SEPTEMBER 30, 2005    SEPTEMBER 30, 2004     SEPTEMBER 30, 2005     SEPTEMBER 30, 2004
                                              ------------------    ------------------    ------------------      ------------------
<S>                                               <C>                  <C>                    <C>                     <C>
Revenue                                           $ 12,424,926         $ 13,295,678           $ 46,475,081            $ 41,432,576
Cost of revenue                                      9,004,620            8,239,554             33,479,945              27,877,995
                                                  ------------         ------------           ------------            ------------
Gross margin                                         3,420,306            5,056,124             12,995,136              13,554,581

Operating expenses                                   5,697,203            7,805,506             18,363,106              20,510,168
                                                  ------------         ------------           ------------            ------------
Loss from operations                                (2,276,897)          (2,749,382)            (5,367,970)             (6,955,587)
                                                  ------------         ------------           ------------            ------------

Other income (expense), net                           (616,289)            (985,852)            (1,387,590)             (2,930,336)
Income tax expense                                    (179,250)                  --             (1,057,857)                     --
                                                  ------------         ------------           ------------            ------------
Net loss                                            (3,072,436)          (3,735,234)            (7,813,417)             (9,885,923)

Dividends on redeemable preferred stock                     --                   --                     --                (297,534)
Accretion of redeemable preferred stock
     to redemption amount                             (654,392)            (654,392)            (1,963,176)               (670,058)
                                                  ------------         ------------           ------------            ------------

Net loss applicable to common shareholders        $ (3,726,828)        $ (4,389,626)          $ (9,776,593)           $(10,853,515)
                                                  ============         ============           ============            ============

Net loss per share applicable to common
    shareholders -- basic and diluted             $      (0.29)        $      (0.35)          $      (0.77)           $      (0.86)
                                                  ============         ============           ============            ============

</TABLE>


                                       14
<PAGE>


(3)  PROPERTY AND EQUIPMENT

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


Computer equipment                                                  $ 4,635,215
Software                                                              1,779,008
Office furniture and equipment                                           63,246
Leasehold improvements                                                  617,749
                                                                    -----------
                                                                      7,095,218
Less accumulated depreciation                                        (4,664,634)
                                                                    -----------
                                                                    $ 2,430,584
                                                                    ===========


For the three  months  ended  September  30, 2005 and 2004,  total  depreciation
expense was $373,201 and $560,171, respectively, of which $238,585 and $513,436,
respectively,  was  included  in cost of  revenue.  For the  nine  months  ended
September  30, 2005 and 2004,  total  depreciation  expense was  $1,166,158  and
$1,628,995,  respectively, of which $840,148 and $1,500,091,  respectively,  was
included in cost of revenue.

Included in the balance  above is property and  equipment  under a capital lease
with a cost of $1,550,477  and  accumulated  depreciation  and  amortization  of
$545,640.

(4)  CONCENTRATION OF CREDIT RISK

We sell our products and services throughout North America, Europe and the 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  September  30,  2005,
aggregate  revenues  from  customers  located in Europe or Asia amounted to $2.4
million, or 20% of total revenue, while revenues from customers located in North
America  totaled $10.0 million,  or 80% of total  revenue.  For the three months
ended September 30, 2004, our revenues from customers  located in Europe or Asia
amounted to $2.4 million, or 54% of total revenue, while revenues from customers
located in North America totaled $2.0 million, or 46% of total revenue.  For the
nine months ended September 30, 2005,  aggregate revenues from customers located
in Europe or Asia  amounted  to $9.9  million,  or 27% of total  revenue,  while
revenues from customers  located in North America totaled $26.1 million,  or 73%
of total  revenue.  For the nine months ended  September 30, 2004,  our revenues
from  customers  located in Europe or Asia amounted to $6.6  million,  or 76% of
total revenue,  while revenues from customers  located in North America  totaled
$2.1 million,  or 24% of total revenue.  On a pro forma basis,  giving effect to
the acquisitions described in Note 2 as if they had occurred at the beginning of
the periods  presented for the nine months ended  September 30, 2005,  aggregate
revenues from customers  located in Europe or Asia amounted to $9.9 million,  or
approximately  21% of total revenue,  while  revenues from customers  located in
North America totaled $36.6 million, or approximately 79% of total revenue.


                                       15
<PAGE>

For the three months ended  September 30, 2005, one customer  represented 13% of
total  revenues.  For the nine months  ended  September  30,  2005 one  customer
represented 21% of total revenues.  No one customer represented more than 10% of
accounts receivable as of September 30, 2005.

For the three  months  ended  September  30,  2004,  revenue  from one  customer
represented  11% of total  revenues and for the nine months ended  September 30,
2004,  revenues from two customers  represented  15% and 10% of total  revenues,
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 nine months ended  September  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  13.4  million  and  5.3  million  at
September 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 26,075  Series A
Preferred  shares at a  purchase  price of $10.35  per share and 6,954  Series A
Preferred  shares at a  purchase  price of $6.02 per  share,  per the  Amendment
described below.

The Series A Preferred shares are convertible at any time upon written notice to
us into  shares  of common  stock on a  two-for-one  basis.  So long as at least
500,000  originally  issued  shares of Series A Preferred are  outstanding,  the
holders of Series A Preferred  shares have the right to appoint three  directors
to our Board of Directors. As a result, our Board of Directors has been expanded
to seven members to accommodate  these three  directors.  On or after August 16,
2008, the holders of at least 80% of the Series A Preferred  shares may elect to


                                       16
<PAGE>

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  $118,106 and $391,111 of  additional  non-cash  interest  expense
relating to the amortization of the discount for the three and nine months ended
September 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 nine months ended September 30, 2005, we recorded a gain of
$0 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


                                       17
<PAGE>

thresholds.  However, the rate cannot be less than 5% per annum. The Laurus Note
also  provides  for  monthly  amortization  of  principal,  which  commenced  on
September  1,  2004,  at  the  rate  of  $45,455  per  month  and  increased  to
approximately  $159,000  per month  beginning  in March  2005,  with the balance
payable on the  maturity  date.  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 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 and waived certain events of default under certain of such loan
documents.  Pursuant to the Amendment and Waiver,  the parties  agreed to reduce
the "Fixed  Conversion  Price" set forth in the Laurus  Note from $5.00 to $3.00
per share and to amend the Master  Security  Agreement to provide for a "Lockbox
Deposit  Account" to be maintained by us and our  subsidiaries  under the Master
Security  Agreement.  Lockbox  remittances do not automatically  reduce the debt
outstanding  unless an event of default has occurred.  Laurus  further agreed to
(i) release to us  approximately  $3 million,  which  represented all funds then
remaining in a restricted account (less outstanding  accrued interest and fees);
(ii) postpone  until the maturity date of the Laurus Note the monthly  principal
payable by us under the Laurus Note from  November 1, 2004  through  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.


                                       18
<PAGE>

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

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

On February 18, 2005, in satisfaction of $375,000 of liquidated damages 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 nine months ended
September 30, 2005, we expensed  $375,000 for the  liquidated  damages,  none of
which was incurred in the quarter ended  September 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 nine months ended September 30, 2005, we entered into four amendments
with  Laurus to the  Laurus  Note  pursuant  to which the  conversion  price for
$800,000 of principal converted on or after April 28, 2005. The conversion price
for each  amendment was $1.48,  $1.40,  $1.52 and $1.30.  During the nine months
ended September 30, 2005,  Laurus  converted this $800,000 under the Laurus Note
into 562,765 shares of our common stock.  The conversion was deemed  beneficial,
and, as a result,  additional  interest  expense of  approximately  $186,000 was
recorded during the nine months ended September 30, 2005.


                                       19
<PAGE>

(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
September  30, 2005,  we have drawn  $1,470,507 on the Lease Line and $29,493 of
the Lease Line had expired unused.  The original  borrowing under the Lease Line
was repaid in full on October 1, 2005.

On March 2, 2005,  we entered into an  amendment  to the Lease Line.  Under this
amendment,  we could draw an additional $500,000 (the "New Credit Facility") for
equipment  purchases  through  June  30,  2005 of which  we used  $497,667.  The
amendment  also grants us a call option to purchase  equipment  from the lessor.
With  respect to $2,333 of the New Credit  Facility  amount that was unfunded on
June 30, 2005, we paid the lessor 5% of such unfunded  amount upon demand by the
lessor.  The term of the  agreement  is for 15 months with an  interest  rate of
14.96% per annum,  which amount has since been paid. The New Credit  Facility is
to be repaid in monthly  principal and interest  installments  through September
2006. The unpaid balance at September 30, 2005 was $373,093.

On September 11, 2005, we entered into Amendment No. 2 to the Lease Line.  Under
this  amendment,  we may draw an  additional  $1,000,000  (the  "Amended  Credit
Facility") for equipment purchases through December 31, 2005. The amendment also
grants us a call option to purchase  equipment from the lessor.  With respect to
the Amended  Credit  Facility,  $622,367 was unfunded at September 30, 2005. The
terms of the agreement  are for lease terms of 12-15 months with interest  rates
ranging from 14.964% to 15%.  During the three months ended  September 30, 2005,
we drew $377,633 on the Amended Credit Facility.  The Amended Credit Facility is
to be repaid in monthly  principal and interest  installments  through September
2006. The unpaid balance at September 30, 2005 was $377,633.

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

(C)  REVOLVING LINE OF CREDIT

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


                                       20
<PAGE>

(D)  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 " 2005  Facility").  The term of the 2005 Facility is three years.
In  connection  with the 2005  Facility,  we  executed  in favor of  Laurus a $9
million Secured Revolving Note (the "Revolver Note").  Borrowings under the 2005
Facility  accrue  interest  at a rate per annum  equal to the  "prime  rate" (as
published in The Wall Street  Journal) plus 1%, which is subject to reduction if
the market  price of our common stock  exceeds  certain  designated  thresholds.
Pursuant to the 2005 Facility, the minimum initial amount available to us, until
December 31, 2005, is $6.0 million.  Thereafter, the maximum principal amount of
all  borrowings  under  the 2005  Facility  cannot  exceed  90% of the  combined
eligible  accounts  receivable  of PWI and Incentra of CA. At September 30, 2005
the  outstanding principal balance on the 2005 Facility was $5.5 million, net of
debt discount of $0.5 million.

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


                                       21
<PAGE>

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

The credit facility  requires a lockbox  arrangement which requires all receipts
to be swept daily to reduce  borrowings  outstanding  under the credit facility.
This  arrangement,  combined  with  a  Subjective  Acceleration  Clause  ("SAC")
contained within the credit facility,  cause the revolving credit facility to be
classified as a current liability, in accordance with the FASB's Emerging Issues
Task Force Issue 95-22, "Balance Sheet Classification of Borrowings  Outstanding
under  Revolving  Credit  Agreements  that  Include  Both a SAC  and a  Lock-Box
Arrangement."  However,  the Company does not expect to repay, or be required to
repay,  within one year, the balance of the revolving credit facility classified
as a current  liability.  The SAC, which is a typical  requirement in commercial
credit agreements, allows the lender to call the loan if it determines there has
been  a  material  adverse  effect  on  the  Company's   operations,   business,
properties,  assets, liabilities,  condition or prospects. The classification of
the  revolving  credit  facility as a current  liability is a result only of the
combination of the two aforementioned  factors,  the lockbox arrangement and the
SAC.  However,  the revolving credit facility does not expire or have a maturity
date within one year.  Additionally,  the Lender has not notified the Company of
any indication of an acceleration as of the date of this filing.

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

In  connection  with the  financing,  we issued  Laurus a warrant that  entitles
Laurus to purchase,  at any time through June 30, 2012, up to 400,000  shares of
our  common  stock  at a price  of $2.63  per  share,  as  adjusted  (the  "2005
Warrant").  The value of the warrant  was  determined,  using the  Black-Scholes
model,  to be $0.6 million and is recorded as a debt  discount at September  30,
2005. The discount is being amortized to earnings as additional interest expense
over the term of the 2005 Facility.  Accordingly, we have recorded approximately
$45,000 of additional  non-cash interest expense relating to the amortization of
the discount for the three months ended September 30, 2005.

The first $3 million of borrowings under the 2005 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 2005 Facility may be prepaid from time to time without penalty.


                                       22
<PAGE>

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 2005 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, or (ii) all
registrable  securities may be sold immediately  without  registration under the
Act and without volume restrictions  pursuant to Rule 144(k). 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 2005 Facility,  we paid Laurus  approximately  $359,000,
comprised  of a facility  fee of $324,000  (representing  an annual fee equal to
1.2% of the 2005 Facility  payable in advance at closing) and  reimbursement  of
$35,000 of  Laurus'  expenses,  of which  $344,000  were  recorded  as  deferred
financing  costs during the three months ended  September 30, 2005. The deferred
financing costs will be amortized to interest  expense over the life of the 2005
Facility.

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.

(E) STAR NOTE DEFAULT

We are engaged in the early  stages of an  arbitration  proceeding  to resolve a
dispute with one of our creditors  that, if resolved  unfavorably,  would have a
material adverse affect on our liquidity and financial condition.  In connection
with our  acquisition of STAR (now known as Incentra of CA) in February 2005, we
issued to Alfred Curmi,  the principal  stockholder  of STAR, a promissory  note
(the "STAR Note") in the principal amount of $2.5 million that is payable in ten
installments and matures on August 1, 2007. On August 1, 2005, we elected not to
make a  payment  to Mr.  Curmi  due  under  the STAR  Note  after we  identified
significant  required  post-closing  adjustments  to the purchase  price for the
assets of STAR and,  consequently,  the  principal  amount of the STAR Note.  On
August 16, 2005, we received a


                                       23
<PAGE>

demand for  arbitration  from legal  counsel to Mr.  Curmi.  The parties have an
arbitration  hearing  scheduled  in April  2006,  but are  currently  seeking to
schedule a mediation  prior to such hearing in an effort to resolve the dispute.
As of the balance sheet date, we have reclassified approximately $1.3 million of
the debt to current  liabilities based on the default.  In the event the dispute
is not resolved in a mediation and the parties proceed to arbitration,  the full
outstanding  balance of the STAR Note  could be  accelerated  if the  arbitrator
rules in favor of Mr. Curmi in such  proceeding.  As of the balance  sheet date,
the entire  principal  balance of $2.4 million on the STAR Note is classified as
current.  Management does not believe the debt will be paid in one year from the
balance sheet date, however,  the reclassification on the balance sheet was made
as the debt is now callable.

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

The event of  default  on the STAR Note  created  an event of default of certain
provisions of the 2005  Facility and the Term Note with Laurus.  On November 10,
2005, we obtained a limited waiver from Laurus of the default for a period of 30
days.

(8)  SUBSEQUENT EVENTS

     (A)  LAURUS NOTE CONVERSION

On October 3, 2005, we entered into an amendment  with Laurus to the Laurus Note
pursuant to which the conversion  price for an additional  $200,000 of principal
converted on or after April 28, 2005 was reduced to $1.30.  On October 12, 2005,
Laurus  converted  this  $200,000 into 153,846  shares of our common stock.  The
conversion was deemed beneficial,  and as a result,  additional interest expense
of approximately $22,000 will be recorded during the three months ended December
31, 2005.

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


                                       24
<PAGE>

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 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.


                                       25
<PAGE>

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.

BUSINESS OUTLOOK

The following summarized  discussion of financial results for the three and nine
months ended September 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.


                                       26
<PAGE>

For the three and nine months  ended  September  30,  2005,  pro forma  revenues
totaled  $12.4  million and $46.5  million,  respectively,  as compared to $13.3
million and $41.4 million for the comparable prior periods. The rate of decrease
for the three month period ended September 30, 2005 was approximately  6.8% when
compared to the same period for 2004. The decline in revenue from the prior year
quarter is a result of slower deliveries of broadcast  solutions and termination
of  a  large   professional   services  contract  in  July  2005.  The  rate  of
year-over-year  growth in revenues for the nine months ended  September 30, 2005
was  approximately  12.3%. The 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 nine
months  ended   September  30,  2005,  we  invested  $1.1  million  in  software
development and $0.9 million for data storage infrastructure.

During  the three  months  ended  September  30,  2005,  our pro forma loss from
operations  decreased by approximately $0.5 million, to $2.3 million as compared
to a pro forma loss of $2.8 million for the comparable  prior year period.  This
reduction in our pro forma loss was due to decreased general and  administrative
costs of $0.7 million and the  elimination of $1.4 million of acquisition  costs
from the reverse  merger with MSI  recorded  in 2004,  offset by a $1.7  million
decrease in our gross  margin as a result of the  decrease in revenue  discussed
above. The improvement in our general and administrative expenses was due to the
elimination 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 nine  months  ended  September  30,  2005,  we  realized an
adjusted EBITDA(1) loss of approximately $0.8 million and $0.1 million,

--------
(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
                    September 30, 2005
                  All amounts in (000's)
                                           THREE MONTHS ENDED  NINE MONTHS ENDED
                                                 2005                2005
                                                 ----                ----
Pro forma net loss before deemed
  dividends and accretion on
  preferred stock                              $(3,072)             $(7,813)
Depreciation and amortization                    1,356                4,051
Taxes                                              179                1,058
Interest (cash portion)                            239                  565
Interest (non-cash portion)                        368                1,265
                                               -------              -------
EBITDA                                            (930)                (874)
                                               -------              -------
Former owner costs                                  --                  314
Non-cash stock based compensation                  150                  414
Referral fees                                       --                   72
                                               -------              -------
EBITDA, as adjusted                            $  (780)             $   (74)
                                               =======              =======


                                       27
<PAGE>

respectively, 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 was a non-cash gain of approximately
$0 and $390,000  during the three and nine months ended  September 30, 2005, due
to the revaluation of the derivative warrant liability.

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
our  professional  services  business  will also be enhanced as we leverage  our
engineering resources across our entire customer base. In the three months ended
September 30, 2005, we increased our engineering and sales resources,  which are
focused on the enterprise  market and will resell a variety of storage  products
directly to businesses.  We expect to continue to increase these  resources over
the next 12 months.

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.


                                       28
<PAGE>


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

REVENUE.  Total revenue for the three months ended  September 30, 2005 increased
$8.1  million,  or 186%,  to $12.4  million  compared  to total  revenue of $4.3
million for the three  months  ended  September  30,  2004.  This  increase  was
attributable  to the  additional  revenues of $8.4  million  resulting  from the
acquisitions  of Front Porch,  Incentra of CA and PWI.  Revenue from the sale of
our products increased to $8.9 million compared to revenue of approximately $2.6
million for the comparable  prior year period.  Revenue from the delivery of our
services increased $1.7 million to $3.5 million compared to $1.8 million for the
comparable prior period.

        For the quarter ended  September 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 $2.4 million, or 20% of total revenue, while revenues from customers
located in North America totaled $10.0 million, or 80% of total revenue. For the
quarter ended September 30, 2004,  revenues from customers located in Europe and
Asia  amounted to $1.4 million,  or 33% of total  revenue,  while  revenues from
customers  located  in  North  America  totaled  $2.9  million,  or 67% of total
revenue.

GROSS MARGIN.  Total gross margin for the three months ended  September 30, 2005
increased $1.5 million to $3.4 million,  or 27% of total revenue, as compared to
gross margin of $1.9 million, or 43% of total revenue,  for the comparable prior
year period.  The decline in gross  margin as a percentage  of revenue is due to
increased  sales of third party  products at lower gross  margins  which  offset
higher margins on our Software and Service  Solutions,  and  specifically due to
the lower  deliveries  of  broadcast  solutions  as  compared  to the prior year
quarter.  Product  gross margin for the three months  ended  September  30, 2005
totaled $2.1 million,  or 24% of product  revenue.  Service gross margin for the
three months ended  September 30, 2005 totaled $1.3  million,  or 37% of service
revenue.

        SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  ("SG&A")  expenses for the three months ended September 30, 2005
increased  by  approximately  $2.4 million to $4.9 million from $2.5 million for
the  comparable  prior year  period.  SG&A  expenses  included  $3.4  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, $0.2 million for  travel-related  costs, and $0.2 million in
facilities  costs.  SG&A expenses of $2.5 million for the comparable  prior year
period included $1.5 million in salaries and related  benefits for employees not
directly  related to the  production of revenue,  $0.3 million in general office
expenses,  $0.2 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  September 30, 2005 was
due to the  inclusion  of $2.5  million of SG&A  expenses  for the  acquisitions
described above, offset by a reduction in MSI's SG&A expenses.


                                       29
<PAGE>

        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  $1.4  million and $1.1 million for the
three  months ended  September  30, 2005 and 2004,  respectively,  of which $0.4
million and $0.5 million was included in cost of revenue for the periods  ending
September  30, 2005 and 2004.  The increase was primarily due to the increase in
amortization  associated with the intangible assets purchased in the acquisition
of Front Porch.

        OPERATING  LOSS.  During the three months ended  September  30, 2005, we
incurred  a loss from  operations  of $2.4  million as  compared  to a loss from
operations of $2.6 million for the three months ended  September 30, 2004.  This
decrease  in  operating  loss was  primarily  the result of an increase in gross
margin of  approximately  $1.5 million for the three months ended  September 30,
2005 offset by an increase in selling,  general and  administrative  expenses of
approximately  $2.4 million and depreciation  and  amortization  expense of $0.3
million due to the  acquisitions of Front Porch,  Incentra of CA and PWI as well
as  acquisition  costs of $1.3  million  incurred in 2004 related to the reverse
merger with Front Porch that was not incurred in 2005.

        INTEREST EXPENSE. Interest expense was $0.6 million for the three months
ended  September  30, 2005  compared to $0.5  million for the three months ended
September  30, 2004.  The  increase in interest  expense was  attributable  to a
decrease  of $0.4  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  $0.4  million  related  to  warrants  and  non-cash  interest  for
amortization of debt discounts and deferred  financing costs and $0.2 million of
cash interest on senior secured  convertible  notes,  line of credit and capital
leases in 2005.

        OTHER INCOME AND EXPENSE. Other income was approximately $37,000 for the
three months ended September 30, 2005 compared to approximately $235,000 for the
three months ended  September 30, 2004.  Other income for the three months ended
September 30, 2005 and 2004 included  investment income from leased equipment to
customers and gains from sales of fixed assets.

        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 September 30, 2005 resulted in
a loss of approximately $46,000.

          INCOME TAX  EXPENSE.  We  incurred  income tax  expense  for the three
months  ended  September  30, 2005 of $0.2  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.


                                       30
<PAGE>

        NET LOSS  APPLICABLE  TO COMMON  SHAREHOLDERS.  During the three  months
ended  September  30,  2005,  we  incurred  a  net  loss  applicable  to  common
shareholders  of $3.9  million as  compared to a net loss  applicable  to common
shareholders  of $3.3 million for the three months ended September 30, 2004. The
increase in net loss for the three months ended September 30, 2005 was primarily
due to an increase in accretion on the  outstanding  Series A preferred stock of
$0.3 million and income tax expense of $0.2 million.

RESULTS OF  OPERATIONS - NINE MONTHS ENDED  SEPTEMBER  30, 2005  COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2004

REVENUE.  Total revenue for the nine months ended  September 30, 2005  increased
$27.4  million,  or 319%,  to $36.0  million  compared to total  revenue of $8.6
million for the nine months ended September 30, 2004.  Front Porch,  Incentra of
CA and PWI  contributed  $28.0  million of the  increase,  offset  slightly by a
decline in MSI product  revenue of $0.6  million.  Revenue  from the sale of our
products  increased to $26.0 million compared to revenue of $2.7 million for the
comparable prior year period.  Revenue from service sales increased $4.1 million
from $5.9 million to $10.0 million for the comparable prior year period.

        For the nine months ended  September 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 $9.9 million, or 27% of total revenue, while revenues from customers
located in North America totaled $26.1 million, or 73% of total revenue. For the
nine months ended September 30, 2004,  revenues from customers located in Europe
and Asia amounted to $2.3 million, or 27% of total revenue,  while revenues from
customers  located  in  North  America  totaled  $6.3  million,  or 73% of total
revenue.

GROSS  MARGIN.  Total gross margin for the nine months ended  September 30, 2005
increased $7.9 million to $11.5 million, or 32% of total revenue, as compared to
gross margin of $3.6 million, or 42% of total revenue,  for the comparable prior
year period.  The decline in gross  margin as a percentage  of revenue is due to
increased  sales of third party  products at lower gross  margins  which  offset
higher margins on our software and service  solutions.  Product gross margin for
the nine months ended September 30, 2005 totaled $8.1 million, or 31% of product
revenue.  Service  gross  margin for the nine months  ended  September  30, 2005
totaled $3.4 million, or 34% of service revenue.

        SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  ("SG&A")  expenses for the nine months ended  September 30, 2005
increased by  approximately  $7.7 million to $14.3 million from $6.5 million for
the  comparable  prior year  period.  SG&A  expenses  for the nine months  ended
September 30, 2005  included  $9.6 million in salaries and related  benefits for
employees not directly  related to the  production  of revenue,  $1.8 million in
general office  expenses,  $1.2 million in  professional  fees, $0.8 million for
travel-related  costs,  $0.8  million in  facilities  costs and $0.1  million in
research and development costs. SG&A expenses of $6.5 million for the


                                       31
<PAGE>

comparable  prior year period  included  $3.9  million in  salaries  and related
benefits for employees not directly  related to the production of revenue,  $1.1
million in general office expenses,  $0.5 million in travel related costs,  $0.5
million in professional  fees, $0.4 million of facilities costs and $0.2 million
of bad debt expense.  The increase in SG&A expenses during the nine months ended
September 30, 2005 was due to the inclusion of $8.4 million of SG&A expenses for
Front  Porch,  Incentra of CA and PWI for the full  period.  This  increase  was
offset by $0.7 million of reduced SG&A expenses at MSI, primarily as a result of
decreased staffing levels and 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  $4.0  million and $2.6 million for the
nine  months  ended  September  30, 2005 and 2004,  respectively,  of which $1.3
million and $1.5 million was  included in cost of revenue for the periods  ended
September  30, 2005 and 2004.  The increase was primarily due to the increase in
amortization  associated with the intangible assets purchased in the acquisition
of Front Porch.

        OPERATING LOSS.  During each of the nine months ended September 30, 2005
and September 30, 2004, we incurred a loss from  operations of $5.5 million.  An
increase in gross margin of approximately $7.9 million for the nine months ended
September  30,  2005  was  offset  by  an  increase  in  selling,   general  and
administrative  expenses of approximately $7.7 million during the period related
to the  acquisitions and increased  amortization  expense of $1.4 million due to
the  acquisitions as well as acquisition  costs of $1.3 million incurred in 2004
related to the reverse merger with FPDI, that was not incurred in 2004.

        INTEREST EXPENSE.  Interest expense was $1.8 million for the nine months
ended  September  30, 2005  compared to $1.9  million for the nine months  ended
September  30, 2004.  The  decrease in interest  expense was  attributable  to a
decrease  of $1.7  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 $0.3 million related to warrants,  non-cash interest of $0.9 million
for amortization of debt discounts and deferred  financing  costs,  $0.2 million
related to the conversion of debt to equity and $0.5 million of cash interest on
senior secured convertible notes, line of credit and capital leases.

        OTHER  INCOME AND  EXPENSE.  Other  income was $0.4 million for the nine
months  ended  September  30, 2005  compared to $0.3 million for the nine months
ended  September  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


                                       32
<PAGE>

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 nine months
ended  September  30,  2005  resulted  in a loss of  approximately  $46,600.  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 nine
months ended September 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 nine months
ended  September  30, 2005 of $1.1 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 nine months ended
September 30, 2005, we incurred a net loss applicable to common  shareholders of
$9.9 million as compared to a net loss applicable to common shareholders of $8.1
million for the nine months ended  September 30, 2004.  The increase in net loss
for the nine months ended September 30, 2005 was primarily due to an increase in
accretion on the outstanding Series A preferred stock of $1.6 million.

LIQUIDITY AND CAPITAL RESOURCES

At  September  30,  2005,  we had $2.5  million  of cash  and cash  equivalents.
Issuance of convertible debt and equity  securities have been a principal source
of liquidity for us.

On May 13, 2004, we  consummated  a private  placement  with Laurus  pursuant to
which  we  issued  a  secured  convertible  term  note  due May 13,  2007 in the
principal amount of $5.0 million,  and a common stock purchase warrant entitling
Laurus to purchase 4,435,500 shares of our common stock (See Note 7 of the Notes
to Consolidated Financial Statements). In the past, we have agreed to reduce the
fixed conversion price of such note in order to induce Laurus to allow us to pay
the scheduled  monthly payment in shares of our common stock. In the short term,
we intend to  continue  to request  that  Laurus  accept  payment in the form of
shares of our common stock so that we may preserve cash for use in our business.
There can be no assurances that Laurus will comply with our request.

On June 30, 2005, we entered into a Security  Agreement with Laurus  pursuant to
which  Laurus  agreed to  provide us with a $9  million  revolving,  convertible
credit  facility (the "2005  Facility").  The term of the 2005 Facility is three
years. In connection  with the 2005 Facility,  we issued to Laurus (i) a minimum
borrowing  promissory  note in the  principal  amount  of $3.0  million  that is
convertible  into  shares of our common  stock at a fixed  conversion  price per
share of $2.05,  subject to  adjustment  for dilutive  issuances,  stock splits,
stock  dividends  and the like,  and (ii) a  revolving  convertible  note in the
principal amount of $6.0 million,  of which the first $3.0 million of borrowings
is convertible  into shares of our common stock at a fixed


                                       33
<PAGE>

conversion price per share of $2.56, subject to adjustment,  and the second $3.0
million of borrowings is convertible  into shares of our common stock at a fixed
conversion price per share of $2.99, subject to adjustment.  On July 5, 2005, we
borrowed $6 million under the 2005 Facility, of which approximately $4.4 million
was used to extinguish,  in full, our indebtedness to Wells Fargo Bank, N.A. and
the balance of the initial draw,  less expenses of the 2005  Facility,  has been
used for general corporate and working capital  purposes.  The terms of the 2005
Facility  significantly  limit our  ability  to  obtain  future  financing.  For
example,  so long as any principal  amount  borrowed  under the 2005 Facility is
outstanding, we may not obtain any secured or unsecured debt financing in excess
of $100,000  without the prior approval of Laurus.  We are also  restricted from
issuing any shares of preferred  stock without the prior approval of Laurus.  To
the extent that Laurus declines to approve a proposed  secured or unsecured debt
financing  or issuance  of  preferred  stock,  we would be unable to obtain such
financing without defaulting under the 2005 Facility.  To the extent that such a
financing  is required  for us to continue to conduct or expand our  operations,
these restrictions could materially  adversely impact our ability to achieve our
operational  objectives.  The securities  held by Laurus  contain  anti-dilution
protections  against the issuance of equity securities at a price per share that
is less than the conversion price or exercise price of our convertible  notes or
stock purchase warrants held by Laurus.

In connection with the original  funding under the 2005 Facility,  Laurus waived
until December 31, 2005 the borrowing base  limitation  under the 2005 Facility,
and  permitted us to borrow $6.0 million  under the 2005 Facility at a time that
we did not have sufficient eligible accounts receivable to support such funding.
If we are unable to generate  sufficient accounts receivable as of such date, we
will be required to make  interest  payments to Laurus in the amount of 1.5% per
month on any such borrowing base deficiency.

As of August 11, 2005,  the default on the STAR Note created an event of default
under the 2005 Facility. On November 12, 2005, we obtained a limited waiver from
Laurus waiving the event of default for a 30 day period.

As of September 30, 2005, we had current assets of $11.0  million.  These assets
were primarily  derived from our operations in 2005 and from our acquisitions of
Incentra of CA and PWI.  Long-term  assets of $33.9  million  consisted of $14.0
million of intangible assets acquired during the transactions with MSI, Incentra
of CA and PWI, $14.6 million of goodwill  acquired during the Incentra of CA and
PWI  transactions,  $2.4  million of property  and  equipment,  $1.8  million of
software  development  costs and $1.1 million of other assets,  which consist of
$0.8 million of deferred  financing  costs,  $0.1 million of restricted cash and
$0.2 million of deposits, prepaid expenses and other receivables.

Current  liabilities  of $21.3 million at September  30, 2005  consisted of $6.6
million of accounts payable;  $1.2 million of deferred revenue,  which consisted
of billings in excess of revenue  recognized,  deposits  and  progress  payments
received on engagements currently in progress; $3.3 million of accrued expenses;
and $10.1 of current portion of notes payable, other long term obligations,  and
capital leases.


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<PAGE>

Our working  capital  deficit was $10.3 million as of September 30, 2005,  which
includes the outstanding  principle  balance on the Laurus 2005 Facility of $5.5
million, net of debt discount of $0.5 million,  which is classified as a current
liability as a result of the credit  facility  containing a lockbox  arrangement
which requires all receipts to be swept daily to reduce  borrowings  outstanding
under the credit facility and a subjective  acceleration clause, as described in
Note 7 (D) to the unaudited condensed  consolidated  financial  statements.  The
Laurus 2005 Facility has a stated  maturity date of June 30, 2008. Also included
in  the  deficit  is  $1.3  million  of  the  deficit  was  attributable  to the
reclassification  of the promissory note issued to a former owner of Incentra of
CA to current  liabilities due to a default on such note, as described in Note 7
(E) in the notes to unaudited condensed  consolidated financial statements as of
September 30, 2005.

We used net cash of $1.1 million in operating  activities during the nine months
ended  September 30, 2005,  respectively,  primarily as a result of the net loss
incurred  during such  periods.  We used net cash of $0.4  million in  investing
activities  during the nine  months  ended  September  30,  2005,  of which $1.5
million  represented  cash acquired from the  acquisitions,  which was offset by
$2.0  million  used  primarily  to purchase  or develop  computer  software  and
equipment.  Financing  activities  provided net cash of $1.0 million  during the
nine months ended  September 30, 2005  primarily  from the new Laurus  financing
discussed in Note 7 (D) which provided $5.0 million,  offset by repayment of the
outstanding  Wells Fargo line of credit of $3.7  million.  Repayment  of capital
leases,  long-term  obligations  and notes  payable of $1.2 million was somewhat
offset by proceeds of $0.9 million from a lease line of credit. We used net cash
of $2.8 million from operating activities during nine months ended September 30,
2004 primarily as a result of the net loss incurred during the period.

As described in Note 7 (E) to the condensed  consolidated  financial statements,
we are  currently  in default of the STAR Note and in the event that the outcome
of our current  arbitration  proceeding is unfavorable,  it is possible that the
full outstanding  balance of the STAR Note could be accelerated.  We do not have
the cash  available  to pay such amount and,  in such  event,  we could  require
additional financing to meet our obligations. There can be no assurances that we
will be able to obtain additional funding when needed, or that such funding,  if
available,  will be obtainable on terms  acceptable to us. In the event that our
operations do not generate  sufficient cash flow, or we cannot obtain additional
funds if and when needed,  we may be forced to curtail or cease our  activities,
which  would  likely  result in the loss to  investors  of all or a  substantial
portion of their investment.

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

Our  management  believes  that our cash and  cash  equivalents  and  borrowings
available  from the 2005  Facility,  will  provide  us with  sufficient  capital
resources to fund our operations, debt service requirements, and working capital
needs for the next 12 months. There can be no assurances that we will be able to
obtain additional funding


                                       35
<PAGE>

when needed,  or that such funding,  if  available,  will be obtainable on terms
acceptable to us. In the event that our  operations  do not generate  sufficient
cash flow, or we cannot obtain  additional  funds if and when needed,  we may be
forced to curtail or cease our activities, which would likely result in the loss
to investors of all or a substantial portion of their investment.

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

We expect capital  expenditures to be approximately $1.0 million and capitalized
software  development costs to be approximately $1.6 million during the 12-month
period ended  September 30, 2006. It is expected that our principal uses of cash
will be for  working  capital,  to finance  capital  expenditures  and for other
general corporate  purposes,  including  financing the expansion of the business
and implementation of our sales and marketing  strategy.  The amount of spending
in each respective area is dependent upon the total capital available to us.



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<PAGE>


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123(R),  SHARE-BASED  PAYMENT,  which
addresses the accounting for  share-based  compensation  transactions.  SFAS No.
123(R)   eliminates  the  ability  to  account  for   share-based   compensation
transactions using APB 25, and generally requires instead that such transactions
be accounted and  recognized in the statement of operations  based on their fair
value. SFAS No. 123(R) will be effective for public companies that file as small
business  issuers as of the beginning of the next 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
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 third 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 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: November 14, 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)




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<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.







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