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 March 31, 2006

     [_]  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 Exchange Act. Yes [_] No [X]

As of May 3, 2006,  14,361,293  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.
                                     CONDENSED CONSOLIDATED BALANCE SHEET
                                                 (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                                         MARCH 31
                                                                                                                           2006
                                                                                                                      -------------
<S>                                                                                                                   <C>
ASSETS
Current assets:
Cash and cash equivalents                                                                                             $     457,183
Accounts receivable, net of allowance for doubtful accounts of $228,602                                                  10,211,945
Other current assets                                                                                                      1,300,385
                                                                                                                      -------------
Total current assets                                                                                                     11,969,513

Property and equipment, net                                                                                               2,417,939
Capitalized software development costs, net                                                                               2,312,001
Intangible assets, net                                                                                                   12,946,473
Goodwill                                                                                                                  5,857,770
Restricted cash                                                                                                              38,046
Other assets                                                                                                                519,110
                                                                                                                      -------------
TOTAL ASSETS                                                                                                          $  36,060,851
                                                                                                                      =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
  Current portion of notes payable, capital leases and other long term obligations                                    $  10,964,731
  Accounts payable                                                                                                        8,479,311
  Accrued expenses                                                                                                        4,509,564
  Current portion of deferred revenue                                                                                     2,346,147
                                                                                                                      -------------
Total current liabilities                                                                                                26,299,753

Notes payable, capital leases and other long term obligations, net of current portion                                       232,079
Deferred revenue, net of current portion                                                                                     98,270
                                                                                                                      -------------
TOTAL LIABILITIES                                                                                                        26,630,102
                                                                                                                      -------------

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                                        25,272,725
                                                                                                                      -------------

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, 13,326,810
  outstanding at March 31, 2006                                                                                              13,327
Additional paid-in capital                                                                                              120,520,704
Accumulated other comprehensive loss                                                                                        (95,213)
Accumulated deficit                                                                                                    (136,280,794)
                                                                                                                      -------------
TOTAL SHAREHOLDERS' DEFICIT                                                                                             (15,841,976)
                                                                                                                      -------------

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                                                           $  36,060,851
                                                                                                                      =============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                   THREE MONTHS ENDED MARCH 31,
                                                                                                  2006                     2005
                                                                                               ------------            ------------
<S>                                                                                            <C>                     <C>
Revenues:
  Products                                                                                     $  9,543,801            $  3,231,513
  Services                                                                                        3,365,370               2,775,652
                                                                                               ------------            ------------
TOTAL REVENUE                                                                                    12,909,171               6,007,165
                                                                                               ------------            ------------

Cost of revenue:
  Products                                                                                        5,443,048               1,276,375
  Services                                                                                        2,348,442               1,787,610
                                                                                               ------------            ------------
Total cost of revenue                                                                             7,791,490               3,063,985
                                                                                               ------------            ------------
GROSS MARGIN                                                                                      5,117,681               2,943,180
                                                                                               ------------            ------------

Selling, general and administrative                                                               5,987,905               4,027,373
Amortization                                                                                        644,547                 785,281
Depreciation                                                                                        107,376                  71,143
                                                                                               ------------            ------------
                                                                                                  6,739,828               4,883,797
                                                                                               ------------            ------------
LOSS FROM OPERATIONS                                                                             (1,622,147)             (1,940,617)
                                                                                               ------------            ------------

Other income (expense):
Interest income                                                                                         239                  22,431
Interest expense                                                                                   (628,933)               (561,310)
Loss on early extinguishment of debt                                                             (1,232,174)                     --
Other (expense) income                                                                              (60,397)                366,741
Foreign currency transaction gain                                                                     1,290                  82,189
                                                                                               ------------            ------------
                                                                                                 (1,919,975)                (89,949)
                                                                                               ------------            ------------

LOSS BEFORE INCOME TAX                                                                           (3,542,122)             (2,030,566)
Income tax expense                                                                                  (94,339)               (318,000)
                                                                                               ------------            ------------
NET LOSS                                                                                         (3,636,461)             (2,348,566)
                                                                                               ------------            ------------

Accretion of redeemable preferred stock to redemption amount                                       (654,392)               (654,391)
                                                                                               ------------            ------------

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                                                     $ (4,290,853)           $ (3,002,957)
                                                                                               ============            ============

COMPREHENSIVE NET LOSS
Net Loss                                                                                       $ (3,636,461)           $ (2,348,566)
Foreign currency translation adjustments                                                              8,022                 (77,233)
                                                                                               ------------            ------------
                                                                                               $ (3,628,439)           $ (2,425,799)
                                                                                               ============            ============

Weighted average number of common shares
  outstanding - basic and diluted                                                                13,326,810              11,090,153
                                                                                               ============            ============
Basic and diluted net loss per share applicable to common shareholders                                (0.32)           $      (0.27)
                                                                                               ============            ============
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.





<PAGE>

                            INCENTRA SOLUTIONS, INC.
                CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS'
                         DEFICIT AND COMPREHENSIVE LOSS
                        THREE MONTHS ENDED MARCH 31, 2006
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                       ACCUMULATED
                                      COMMON STOCK                                       OTHER
                                 ------------------------------      ADDITIONAL       COMPREHENSIVE    ACCUMULATED
                                     SHARES           AMOUNT      PAID-IN CAPITAL         LOSS           DEFICIT            TOTAL
                                 -------------    -------------   ---------------    --------------   -------------    ------------
<S>                                 <C>           <C>              <C>              <C>              <C>              <C>
BALANCES, JANUARY 1, 2006           13,326,810    $      13,327    $ 119,517,168    $    (103,235)   $(132,644,333)   $ (13,217,073)

Amortization of stock based
  compensation expense                                                   426,857                                            426,857
Accretion of FPDI mandatorily
  redeemable preferred
  stock to redemption amount                                            (654,392)                                          (654,392)
Warrants issued to Laurus
  related to 2006 Facility
  (Note 6C)                                                            1,231,071                                          1,231,071

Components of
  comprehensive loss:
Net loss                                                                                                (3,636,461)      (3,636,461)
Change in foreign currency
  translation adjustments                                                                   8,022                             8,022
                                                                                                                      -------------
Total comprehensive loss                                                                                                 (3,628,439)
                                 -------------    -------------    -------------    -------------    -------------    -------------
BALANCES, MARCH 31, 2006            13,326,810    $      13,327    $ 120,520,704    $     (95,213)   $(136,280,794)   $ (15,841,976)
                                 =============    =============    =============    =============    =============    =============
</TABLE>





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





                            INCENTRA SOLUTIONS, INC.
                                AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                       THREE MONTHS ENDED MARCH 31,

                                                                                                           2006            2005
                                                                                                       -----------      -----------
<S>                                                                                                    <C>              <C>
Cash flows from operating activities:
     Net loss                                                                                          $(3,636,461)     $(2,348,566)
     Adjustments to reconcile net loss to net cash used in operating activities:
        Depreciation                                                                                       388,951          394,700
        Amortization of intangible assets and software development costs                                   871,577          890,454
        Amortization of non-cash loan discount                                                                  --           10,188
        Stock-based compensation                                                                           426,857          155,515
        Non-cash interest expense                                                                          296,566          526,447
        Non-cash loss on early extinguishment of debt                                                      750,362               --
        Non-cash tax expense                                                                                94,339          318,000
        Bad debt expense                                                                                     5,860               --
        Gain on revaluation derivative warrant liability                                                        --         (341,495)
        Changes in operating assets and liabilities, net of business acquisitions (2005):
           Accounts and other receivables                                                                1,147,043         (965,496)
           Other current assets                                                                            (18,316)         (90,777)
           Other assets                                                                                     15,034          (17,462)
           Accounts payable                                                                                238,112          296,984
           Accrued liabilities                                                                            (399,619)         (80,677)
           Deferred revenue                                                                               (311,450)         424,404
           Other liabilities                                                                               (91,713)         (66,212)
                                                                                                       -----------      -----------
                 Net cash used in operating activities                                                    (222,858)        (893,993)
                                                                                                       -----------      -----------
Cash flows from investing activities:
     Purchases of property and equipment                                                                  (573,664)        (155,995)
     Capitalized software development costs                                                               (405,828)        (399,311)
     Proceeds from sale of property and equipment                                                               --              750
     Cash acquired in STAR acquisition (Note 4A)                                                                --        1,597,498
     Cash acquired in PWI acquisition (Note 4B)                                                                 --           74,297
     Net change in restricted cash                                                                          42,910             (175)
                                                                                                       -----------      -----------
                 Net cash (used in) provided by investing activities                                      (936,582)       1,117,064
                                                                                                       -----------      -----------
Cash flows from financing activities:
     Proceeds from  line of credit, net                                                                    478,639          164,177
     Proceeds from lease line of credit                                                                    414,514
     Payments on capital leases, notes payable and other long term liabilities                            (394,484)      (1,213,386)
                                                                                                       -----------      -----------
                 Net cash provided by (used in) financing activities                                       498,669       (1,049,209)
                                                                                                       -----------      -----------

Effect of exchange rate changes on cash and cash equivalents                                                 9,312          (36,412)
                                                                                                       -----------      -----------

                 Net decrease in cash and cash equivalents                                                (651,459)        (862,550)
Cash and cash equivalents at beginning of period                                                         1,108,642        3,068,458
                                                                                                       -----------      -----------
Cash and cash equivalents at end of period                                                             $   457,183      $ 2,205,908
                                                                                                       ===========      ===========

Supplemental disclosures of cash flow information:
     Cash paid during the period for interest                                                          $   332,368      $    99,676

Supplemental disclosures of non-cash investing and financing activities:
     Net liabilities acquired in Incentra of CA acquisition, excluding cash (Note 4A)                           --          620,178
     Net assets aquired in PWI acquisition, excluding cash (Note 4B)                                            --          269,306
     Purchases of property and equipment included in accounts payable                                      302,575           80,279
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

<PAGE>



                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED


(1) ORGANIZATION

         Incentra Solutions, Inc. (which is referred to herein together with its
subsidiaries  as "we",  "us" or  "our"),  formerly  Front  Porch  Digital,  Inc.
("FPDI"),  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.,  and our common stock now trades on the  Over-the-Counter  Bulletin  Board
under the trading symbol "ICNS". We have 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,  formerly  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  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 market our  complete  storage  solutions to  broadcasters  under the
trade name Front Porch Digital and to service  providers and enterprise  clients
under the trade name  ManagedStorage  International.  Through FPDI, 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.  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 that  meet  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, the United Kingdom, Bermuda and Japan.

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

         Through  Incentra  of CA and PWI,  we deliver  complete  IT  solutions,
including professional services,  third-party  hardware/software procurement and
resale,  financing  solutions,  maintenance  support  services  (first call) for
third-party  hardware and software  maintenance and managed  storage  solutions.
Solutions are sold primarily to enterprise  customers in the financial services,
government, hospitality, retail, security, healthcare and manufacturing sectors.
Incentra of CA and PWI primarily service customers in the western United States.

         Our customers are located in North and South America,  Europe, Asia and
the Pacific Rim.

BASIS OF PRESENTATION

         The  unaudited  condensed  consolidated  financial  statements  include
Incentra Solutions, Inc. and its wholly-owned subsidiaries,  Front Porch Digital
International,  SAS, which is based in France,  MSI, which is based in Colorado,
and MSI's  wholly-owned  subsidiaries,  ManagedStorage  UK,  Inc.  and

<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

Seabrook  Technologies,  Inc.,  Incentra  of CA,  which is  based in San  Diego,
California, and PWI, which is based in Kirkland, Washington.  ManagedStorage UK,
Inc.  and Seabrook  Technologies,  Inc.  did not have any  operating  activities
during the quarter ended March 31, 2006. All significant  intercompany  accounts
and transactions have been eliminated in consolidation.

         The accompanying  unaudited condensed consolidated financial statements
have been  prepared by us in accordance  with  accounting  principles  generally
accepted in the United States of America for interim  financial  information and
pursuant to the rules and regulations of the Securities and Exchange  Commission
("SEC").  Certain  information  and footnote  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. For further information,  refer to the consolidated  financial
statements  and  footnotes  included in our Annual Report on Form 10-KSB for the
year ended  December  31,  2005 filed with the SEC on April 4, 2006.

GOING CONCERN AND MANAGEMENT'S PLANS

         Our unaudited condensed  consolidated  financial statements as of March
31, 2006 and for the quarter  then ended have been  prepared on a going  concern
basis,   which  contemplates  the  realization  of  assets  and  settlements  of
liabilities  and  commitments  in the normal  course of  business.  Our  audited
consolidated financial statements for the year ended December 31, 2005 were also
prepared on a going concern  basis.  In our Annual Report on Form 10-KSB for the
year ended December 31, 2005, the Report of our  Independent  Registered  Public
Accounting  Firm includes an explanatory  paragraph  that describes  substantial
doubt about our ability to continue as a going concern as a result of nearly all
of our long  term  debt  being  callable  due to a dispute  with a  creditor  as
discussed  below  and in  Notes  4(A)  and  6(E) to  these  unaudited  condensed
consolidated financial statements.

         We are  currently  engaged in 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 Incentra of CA in February of 2005, we issued the former
owner of Incentra of CA a promissory note in the principal  amount of $2,500,000
(the "STAR Note").  On August 1, 2005 we elected to cease making payments on the
STAR Note, which created an event of default.  On August 16, 2005, we received a
demand for arbitration  from legal counsel of the former owner. In the event the
dispute is not resolved in our favor, the full  outstanding  balance of the STAR
Note could be  accelerated.  As a result,  the entire  balance of the STAR Note,
which totals $2.4 million,  is  classified  as a current  liability at March 31,
2006 as it is  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. See Note 6(E).

         The event of default on the STAR Note created an event of default under
our Senior Secured  Convertible  Note  outstanding  with Laurus Master Fund Ltd.
("Laurus"),  our senior secured lender. As a result,  the entire balance of this
Note,  which totaled $2.9 million at March 31, 2006 prior to discount,  has been
classified as a current liability at March 31, 2006 as it is callable.  See Note
6(A). 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.
<PAGE>


                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

         We believe we have a solid relationship with Laurus;  however, there is
uncertainty  regarding our ability to comply with required debt covenants in the
future,  which  places  the debt in a position  to be called  due.  This  raises
substantial doubt about our ability to continue as a going concern.  Our ability
to continue as a going  concern is dependent on future  financial  results,  the
results of the arbitration proceeding discussed above and, should we continue to
be in breach of the  covenants  on the  debt,  our  ability  to  restructure  or
otherwise amend the terms of that debt. Our financial  statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and  classifications of liabilities that
might result from the outcome of this uncertainty.

Management's plans in regard to these matters are as follows:

         If we continue  to be in default of our  covenants  in the  future,  we
would, as we have in the past, seek to obtain  amendments to the debt or waivers
of the covenants so that we are no longer in violation.

         While we believe we will execute our current business plan, which calls
for growth in our  business,  we will also  institute  various cost  controls to
reduce operating  expenses where necessary.  This includes the timely monitoring
of labor and selling, general and administrative costs.


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

IMPAIRMENT OF LONG-LIVED ASSETS

         In accordance with Statement of Financial  Accounting  Standards (SFAS)
No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets",  we
review the carrying value of long-lived assets, including property and equipment
and  amortizable   intangible   assets,  to  determine  whether  there  are  any
indications  of  impairment.  Impairment of  long-lived  assets is assessed by a
comparison of the carrying  amount of an asset to expected  future cash flows to
be  generated by the asset.  If the assets are  considered  to be impaired,  the
impairment  recognized is measured by the amount by which the carrying amount of
the assets exceeds the estimated fair value of the assets. At March 31, 2006, we
believe that there are no indicators that an impairment of any long-lived assets
has occurred.

GOODWILL

         Goodwill  represents  the excess of the purchase  price over the net of
the fair value of the identifiable  tangible and intangible  assets acquired and
the fair value of liabilities  assumed in acquisitions.  SFAS No. 142, "Goodwill
and Other  Intangible  Assets,"  (SFAS 142) requires the testing of goodwill and
indefinite-lived  intangible  assets for impairment at least  annually.  We test
goodwill for  impairment  in the fourth  quarter of each year or during  interim
periods if factors indicating impairment concerns arise.

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


<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

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 whom we have not yet performed the related services.

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

SOFTWARE DEVELOPMENT COSTS

         We account for costs related to software developed for internal use and
marketed for external use in accordance  with SFAS No. 86,  "Accounting  for the
Costs of Computer  Software to be Sold,  Leased, or Otherwise  Marketed".  MSI's
GridWorks  software  product is used  internally  for providing  services to our
customers and is also  marketed  separately  as a  stand-alone  product.  FPDI's
DIVArchive  software  product is marketed  solely as a stand-alone  product.  As
required by SFAS No. 86, we  capitalize  costs in developing  software  products
upon determination  that technological  feasibility has been established for the
product,  if that  product is to be sold,  leased or otherwise  marketed.  Costs
incurred prior to the establishment of technological  feasibility are charged to
research and development  expense.  When the product or enhancement is available
for general  release to  customers,  capitalization  is ceased,  and  previously
capitalized  costs are  amortized  based on current  and future  revenue for the
product,  but  with  an  annual  amortization  amount  at  least  equal  to  the
straight-line amortization over an estimated useful life of three years.

         For the three-month periods ended March 31, 2006 and 2005,  capitalized
software  development  costs,  which related  primarily to  enhancements  to our
GridWorks and  DIVArchive  software  solutions,  totaled  $405,828 and $399,311,
respectively.  These  costs are  amortized  on a  straight-line  basis  over the
estimated life of the  enhancements,  typically three years. For the three-month
periods ended March 31, 2006 and 2005, $227,030 and $117,734,  respectively,  of
amortization  costs  were  charged  to  expense.  As  of  March  31,  2006,  the
unamortized portion of software development costs was $2,312,001.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

         The balance sheet accounts of our international subsidiary (Front Porch
Digital International,  SAS) are translated using the exchange rate in effect at
the balance  sheet date,  and the results of  operations  are  translated at the
average  exchange  rates  during the period.  At March 31,  2006,  we reported a
cumulative  translation  loss of $95,213 as a  component  of  accumulated  other
comprehensive income (loss). We are also subject to foreign exchange transaction
exposure when our subsidiary transacts business in a currency other than its own
functional  currency.  The effects of exchange rate  fluctuations in remeasuring
foreign currency  transactions for the three-month  periods ended March 31, 2006
and 2005 were gains of $1,290 and $82,189, respectively.

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

         We account for obligations and instruments potentially to be settled in
our stock in  accordance  with  Emerging  Issues Task Force  ("EITF") No. 00-19,

<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

"Accounting  for Derivative  Financial  Instruments  Indexed To, and Potentially
Settled In a Company's Own Stock." ("EITF No.  00-19") This issue  addresses the
initial  balance sheet  classification  and  measurement  of contracts  that are
indexed to, and potentially settled in, our own stock.

         Under EITF No. 00-19 contracts are initially classified as equity or as
either  assets or  liabilities,  depending on the  situation.  All contracts are
initially  measured at fair value and  subsequently  accounted  for based on the
then current  classification.  Contracts  initially  classified as equity do not
recognize  subsequent changes in fair value as long as the contracts continue to
be classified as equity. For contracts  classified as assets or liabilities,  we
report  changes in fair value in  earnings  and  disclose  these  changes in the
financial  statements  as long as the contracts  remain  classified as assets or
liabilities.  If contracts  classified as assets or  liabilities  are ultimately
settled in shares,  any previously  reported gains or losses on those  contracts
continue  to be  included  in  earnings.  The  classification  of a contract  is
reassessed at each balance sheet date.

PER SHARE DATA

         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 our
financial  statements  for the  three-month  period  ended March 31, 2006 and in
prior periods, have been adjusted to reflect the post-reverse split amounts.

         We report our  earnings  (loss) per share in  accordance  with SFAS No.
128,  "Accounting  for Earnings Per Share".  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 and stock splits,  the historical
loss per share amounts have been  retroactively  restated to reflect our capital
structure.  Due to our net losses for the  periods  presented,  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  months  ended  March 31,  2006 and 2005  because the effect
would be antidilutive.

         An aggregate  of 13.2  million and 10.1 million  shares of common stock
issuable upon the conversion of outstanding  convertible  preferred  stock,  the
exercise of outstanding  options and warrants,  and  restricted  stock have been
omitted  from the  computations  of basic  and  diluted  loss per  share for the
three-month  periods  ended March 31, 2006 and 2005,  respectively,  because the
effect would be antidilutive.

STOCK-BASED COMPENSATION

         On December 16, 2004, the Financial  Accounting  Standards Board (FASB)
issued SFAS 123 (revised  2004),  "Share-Based  Payment" (SFAS 123R).  SFAS 123R
supersedes APB Opinion No. 25,  "Accounting for Stock Issued to Employees",  and
amends SFAS No. 95, "Statement of Cash Flows".  Generally,  the approach in SFAS
123R is  similar  to the  approach  described  in SFAS 123.  However,  SFAS 123R
requires all  share-based  payments to employees,  including  grants of employee
stock  options,  to be  recognized in the income  statement  based on their fair
values at the date of grant. Pro forma disclosure is no longer an alternative.

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

<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

modified prospective method of adoption, our results of operations and financial
position for prior periods have not been restated.

         We  use  the  Black-Scholes  option  pricing  model  to  calculate  the
grant-date fair value of an award.  The fair value of options granted during the
first  quarter of 2006 (there were no option  grants during the first quarter of
2005) was calculated using the following estimated weighted average assumptions:

Stock options granted                                                 50,000
Weighted-average exercise price                                      $  1.11
Weighted-average grant date fair value                               $  0.95
Assumptions:
Expected volatility                                                     113%
Expected term (in years)                                             6 years
Risk-free interest rate                                                4.62%

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

         The amount of stock-based  compensation  recognized  during a period is
based on the value of the portion of the awards that are ultimately  expected to
vest.  SFAS 123R requires  forfeitures  to be estimated at the time of grant and
revised,  if necessary,  in subsequent periods if actual forfeitures differ from
those  estimates.  The term  "forfeitures" is distinct from  "cancellations"  or
"expirations"  and  represents  only the  unvested  portion  of the  surrendered
option. We currently expect, based on an analysis of historical forfeitures that
approximately  90% of our options will actually vest, and therefore have applied
a forfeiture rate of 3.5% per year to all unvested options as of March 31, 2006.
This analysis will be  re-evaluated  quarterly and the  forfeiture  rate will be
adjusted  as  necessary.  Ultimately,  the actual  expense  recognized  over the
vesting period will only be for those shares that vest.

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

         The adoption of SFAS 123R on January 1, 2006 had the  following  impact
on the first  quarter of 2006  results:  net loss before  deemed  dividends  and
accretion on preferred stock increased by $0.4 million and net loss per weighted
average common share outstanding--basic and diluted increased by $.03 per share.
The following  table details the effect on net loss before deemed  dividends and
accretion on  preferred  stock and net loss per  weighted  average  common share
outstanding  had  stock-based  compensation  been  recorded  for the first three
months of 2005 based on the fair-value  method under SFAS 123,  "Accounting  for
Stock-Based  Compensation".  The reported  and pro forma net loss before  deemed
dividends  and  accretion on preferred  stock and net loss per weighted  average
common  share  for the  first  quarter  of 2006 are the same  since  stock-based
compensation  expense was  calculated  under the  provisions  of SFAS 123R.  All
amounts except per share amounts in 000's:

                                                              Three Months Ended
                                                                March 31, 2005
                                                                --------------

Net loss before deemed dividends and accretion
  on preferred stock , as reported                                $(2,349)
Add stock-based compensation expense included in
  reported net loss                                                   156
Deduct total stock-based employee compensation expense
  determined under the fair-value based method for all awards        (510)
                                                                  -------
Pro forma net loss before deemed dividends and
  accretion on preferred stock                                    $(2,703)
                                                                  =======
Net loss per weighted average common share outstanding--
  Basic and diluted--pro forma                                    $  (.30)
                                                                  =======
Net loss per weighted average common share outstanding-
  Basic and diluted-as reported                                   $  (.27)
                                                                  =======


Summaries  of option  activity  under the  plans as of March 31,  2006,  changes
during the quarter then ended,  and status of  non-vested  options are presented
below:

<TABLE>
<CAPTION>
                                                                      Weighted          Weighted
                                                    Number of         Average           Average
                                                     Options      Exercise Price    Contractual Life
                                                    ---------     --------------    ----------------
<S>                                                 <C>               <C>                <C>
Balance January 1, 2006                             2,217,016         $ 2.92             $ 8.50
Granted                                                50,000           1.11              10.00
Exercised                                                   -              -                  -
Forfeited                                             (28,267)          5.09              (8.70)
                                                    ---------         ------             ------

Balance March 31, 2006                              2,238,749           2.85               8.30
                                                    =========         ======             ======

Vested Balance at March 31, 2006                      878,693         $ 3.58             $ 7.70
                                                    =========         ======             ======





                                                                                        Weighted
                                                                                     Average Grant
                                                                                       Date Fair
                                                                                         Value
                                                                                    ----------------
Non-vested options at January 1, 2006               1,379,524         $ 2.42             $ 0.52
Granted                                                50,000           1.11               0.95
Vested                                                (48,203)          2.30              (1.35)
Forfeited                                             (21,265)          2.16              (0.94)
                                                    ---------                            ------

Non-vested options at March 31, 2006                1,360,056         $ 2.38             $ 0.50
</TABLE>



         As of March 31,  2006,  there was $2.2  million  of total  unrecognized
compensation  expense  related  to  the  non-vested,   share-based  compensation
arrangments granted under the plans. That cost is expected to be recognized over
a  weighted-average  period of 1.42 years. The total fair value of shares vested
during the quarter ended March 31, 2006 was approximately $43,000.



<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

USE OF ESTIMATES

         The  preparation of financial  statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  periods.  Actual results could differ from those  estimates.  We have
recorded  transactions  that  include the  issuance  of options and  warrants to
purchase  shares of our  preferred  and common stock.  The  accounting  for such
securities  is based  upon  fair  values  of our  equity  securities  and  other
valuation  criteria  that were  determined by our Board and us. We believe these
estimates of fair value are reasonable.  Other significant  estimates made by us
include  those  related to fair values of acquired  intangible  assets,  and the
establishment   of  an  allowance  for  estimates  of   uncollectible   accounts
receivable.

(3) CONCENTRATIONS OF CREDIT RISK

         We sell our products and services throughout the United States, Europe,
Asia  and the  Pacific  Rim.  We  perform  periodic  credit  evaluations  of our
customers' financial condition and generally do not require collateral. Accounts
receivable are reported at their outstanding  unpaid principal  balances reduced
by an allowance for doubtful  accounts.  We estimate  doubtful accounts based on
historical bad debts,  factors related to a specific  customer's  ability to pay
and  current  economic  trends.  We write off  accounts  receivable  against the
allowance when a balance is determined to be  uncollectible.  Credit losses have
been within management's expectations.

         For the quarter ended March 31, 2006, aggregate revenues from customers
located in Europe,  Asia and the Pacific Rim  amounted to $4.1 million or 32% of
total revenue,  while revenues from customers  located in North America  totaled
$8.8  million,  or 68% of total  revenue.  For the quarter ended March 31, 2005,
aggregate revenues from customers located in Europe, Asia and the Pacific Rim or
in North  America both  amounted to $3.0 million or 50% of total revenue in each
case. For the quarter ended March 31, 2006, no one customer  accounted  exceeded
10% of  total  revenues  nor did any  single  customer  account  for over 10% of
accounts  receivable at March 31, 2006. For the quarter ended March 31, 2005, no
one customer exceeded 10% of revenue.

<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

(4) ACQUISITIONS

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

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

         Pursuant to the STAR Merger Agreement,  the purchase price consisted of
(i) a cash payment of  $1,500,000,  (ii) the issuance of 1,261,756  unregistered
shares of our common  stock  valued at  $3,136,364  (based upon the market price
three days before and after the  acquisition  date) and (iii) the issuance of an
unsecured  convertible  promissory  note for  $2,500,000  (the "STAR Note").  We
entered into a consulting  agreement with the seller pursuant to which we agreed
to pay  consulting  fees in the amount of $500,000 which was included as part of
the purchase price. We paid  approximately  $400,000 in investment  banking fees
associated with the transaction.

         Interest on the STAR Note accrues at an annual rate of 0.5%,  which has
been  discounted  by  $300,000  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, which commenced on August 1, 2005, and a single payment of
$377,583 on August 1, 2007 (each of the  foregoing  dates,  a "STAR  Payment Due
Date").  We  elected  not to make the  August 1, 2005  payment  within the grace
period  allowed  under the STAR Note,  which  created an event of default on the
STAR Note as of August 11, 2005. As of March 31, 2006, we classified  the entire
principal amount of $2.4 million to current liabilities based on the default, as
the debt is now callable. Refer to Note 6(E).

         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 March  31,  2006 and  pending  the  results  of the  arbitration  proceedings
described in Note 6(E), 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.

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

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

Cash and cash equivalents                                           $ 1,597,498
Other current assets                                                    824,998
Property and equipment                                                   20,909
Other assets                                                              7,005
Goodwill                                                              6,177,686
Customer relationships (5 year life)                                    540,000
Current liabilities                                                  (1,473,088)
                                                                    -----------

Total purchase price                                                $ 7,695,008
                                                                    ===========
<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

         The purchase price  allocation was considered  final as of December 31,
2005.  As a result of the  goodwill  impairment  test we completed in the fourth
quarter of 2005 in  accordance  with SFAS 142, the amount  allocated to goodwill
was  considered  impaired and an impairment  loss of  $4,151,450  was charged to
income in the fourth quarter of 2005.

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 $2,350,000 in cash and 841,934
shares of our common  stock  valued at  $1,683,868  (based upon the market price
three days before and after the acquisition date). In addition,  during the year
ended December 31, 2005, the former PWI shareholders achieved a partial earn out
of $100,000 which was paid to them in cash. As a result of the earn-out payment,
the purchase price (goodwill) was increased by $100,000.  We paid  approximately
$250,000 in investment banking fees in connection with the transaction.

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

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

Cash and cash equivalents                                           $    74,297
Other current assets                                                  7,009,601
Property and equipment                                                  173,610
Other assets                                                             28,010
Goodwill                                                              3,831,534
Customer relationships (5 year life)                                    310,000
Current liabilities                                                  (6,877,351)
Other liabilities                                                       (64,564)
                                                                    -----------

Total purchase price                                                $ 4,485,137
                                                                    ===========

         The purchase price  allocation was considered  final as of December 31,
2005.

C) PROFORMA RESULTS

         The following  unaudited pro forma financial  information  presents our
combined  results  of  operations  for  the  first  quarter  of  2005  as if the
acquisitions  of Incentra of CA and PWI had occurred as of January 1, 2005.  The
unaudited  pro forma  financial  information  is not intended to represent or be
indicative  of the  consolidated  results  of  operations  that  would have been
reported by us had the  acquisitions  been  completed as of the beginning of the
period  presented,  and  should  not be taken as  representative  of our  future
consolidated results of operations or financial  condition.  Unaudited pro forma
results  were as follows for the  three-month  periods  ended March 31, 2006 and
2005:
<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED


                                                     Three-month periods ended
                                                            March 31,
                                                     2006             2005
                                                 ------------      ------------
                                                  (Unaudited)      (Unaudited)
Revenue                                          $ 12,909,171      $ 16,452,125
Cost of revenue                                     7,791,490        11,971,102
                                                 ------------      ------------

Gross margin                                        5,117,681         4,481,023
Operating expenses                                  6,739,828         6,377,743
                                                 ------------      ------------

Loss from operations                               (1,622,147)       (1,896,720)
Other expense, net                                 (1,919,975)         (184,604)
Income tax expense                                    (94,339)         (319,607)
                                                 ------------      ------------

Net loss                                           (3,636,461)       (2,400,931)
Accretion of redeemable preferred
 stock to redemption amount                          (654,392)         (654,391)
                                                 ------------      ------------

Net loss applicable to common
 shareholders                                    $ (4,290,853)     $ (3,055,322)
                                                 ============      ============

Net loss per share applicable to
 common shareholders-basic and diluted           $      (0.32)     $      (0.29)
                                                 ============      ============

(5) PROPERTY AND EQUIPMENT

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


Computer equipment                                                  $ 5,225,499
Software                                                              1,640,110
Leasehold improvements                                                   63,246
Assets under construction                                               172,209
Office furniture and equipment                                          758,345
                                                                    -----------
                                                                      7,859,409
Less accumulated depreciation                                        (5,441,470)
                                                                    -----------
                                                                    $ 2,417,939
                                                                    ===========

         Depreciation  expense for the three-month  periods ended March 31, 2006
and 2005 was $388,951 and $394,700, respectively.

         Included in property and equipment was equipment  under capital  leases
with a cost of $2,130,065 and accumulated  depreciation of $830,437 at March 31,
2006.


(6) NOTES PAYABLE, CAPITAL LEASES, AND OTHER LONG-TERM OBLIGATIONS

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

Senior Secured Convertible Note (A)                                $  2,371,954
Lines of Credit (B) and (C)                                           5,292,689
Acquisition Term Notes (D)                                                    0
STAR Note (E)                                                         2,106,281
Capital Leases (F)                                                      901,040
Other obligations                                                       524,846
                                                                   ------------
                                                                     11,196,810
Less current portion                                                (10,964,731)
                                                                   ------------

Long-term portion                                                  $    232,079
                                                                   ============

<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

(A) SENIOR SECURED CONVERTIBLE NOTE

         On May 13, 2004, we consummated a private  placement  pursuant to which
we issued a secured convertible term note due May 13, 2007 (the "Maturity Date")
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 are
convertible  into  shares of our  common  stock at a price of $3.00  per  share,
subject to adjustments for standard antidilution provisions.

         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  $108,986  and $139,545 of  additional  non-cash
interest   expense  relating  to  the  amortization  of  the  discount  for  the
three-month periods ended March 31, 2006 and 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.  However, as a result of
the one-for-ten  reverse stock split effected on June 9, 2005,  there were again
sufficient  authorized and unissued  common shares to settle the Laurus Warrant,
and it was again  reclassified and is included in equity through March 31, 2006.
The appropriateness of the classification of the Laurus Warrant is reassessed at
each balance sheet date.

         The Laurus Note provides for monthly payments of interest at a rate per
annum  equal to the prime rate plus 1%,  which is subject  to  reduction  if the
market price of our common stock exceeds certain designated thresholds. However,
the rate  cannot be less than 5% per annum.  The Laurus Note also  provides  for
monthly amortization of principal,  which commenced on September 1, 2004, 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. However,
due to an event of default on the STAR Note (see Note  6(E)),  all  amounts  due
under the Laurus Note have been reclassified to current liabilities at March 31,
2006.

         Laurus has the option to receive  shares of our common stock in lieu of
debt  service  payments at a fixed price of $3.00 per share.  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  standard
antidilution adjustments.

         On  February  6,  2006,  we  entered  into an  Amendment  and  Deferral
Agreement (the  "Amendment  and Deferral  Agreement")  with Laurus  amending the
Laurus  Note.  Pursuant to the  Amendment  and Deferral  Agreement,  the monthly
principal  amount of the Laurus  note  payable  to Laurus  for each of  January,
February, March, April, May and June 2006, equal to an aggregate of $952,495, is
deferred until the Maturity Date.
<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

(B) 2005 LINE OF CREDIT

         In June 2005, we entered into a Security Agreement with Laurus pursuant
to which Laurus provided us a $9 million revolving,  convertible credit facility
(the  "2005  Facility").  The term of the 2005  Facility  was  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 were  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  was  guaranteed  by PWI and Incentra of CA
pursuant to a Subsidiary Guaranty in favor of Laurus.

         In connection  with the  financing,  we issued to 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,  subject to adjustment
for standard  antidilution  provisions  (the "2005  Warrant").  The value of the
warrant was determined,  using the  Black-Scholes  model, to be $0.6 million and
was recorded as a debt discount.

         All borrowings  under the 2005 facility were repaid in full in February
2006 and the balance of the debt discount,  $448,533, and the deferred financing
costs, $301,140, were included in the loss on the early extinguishment of debt.

(C) 2006 LINE OF CREDIT

         On February 6, 2006,  we entered into the New Security  Agreement  with
Laurus  pursuant  to which  Laurus  agreed to provide us with a  non-convertible
revolving credit facility of up to $10 million (the "2006  Facility").  The term
of the 2006 Facility is three (3) years and  borrowings  under the 2006 Facility
accrue  interest on the unpaid  principal and interest at a rate per annum equal
to the prime rate plus 1%, subject to a floor of 7%. In connection with the 2006
Facility,  we  executed in favor of Laurus a secured  non-convertible  revolving
note in the  principal  amount  of $10  million  (the  "2006  Revolving  Note").
Interest on borrowings  under the 2006 Revolving Note is payable  monthly on the
first day of each month during the term of the 2006 Revolving  Note,  commencing
on March 1, 2006.  All  outstanding  principal  amounts  are due and  payable on
February 6, 2009.

         We entered  into the 2006  Facility  to pay off the 2005  Facility,  of
which  approximately  $6 million was  outstanding  as of  February  6, 2006.  In
connection  with the 2006  Facility,  we issued to Laurus an option to  purchase
1,071,428  shares of  common  stock at a price of $.001 per  share.  The  Option
expires on February 26, 2026. Pursuant to the 2006 Facility, Laurus may not sell
any shares of our common  stock it receives  through the  exercise of the Option
(the "Option Shares") prior to January 31, 2007. Additionally, Laurus agreed not
to sell an amount of Option Shares that would exceed  thirty-five  percent (35%)
of the aggregate  dollar  trading  volume of our Common Stock for the twenty-two
(22) trading day period immediately preceding such sale. Using the Black-Scholes
model,  we calculated  the value of the Option to be $1.2 million and recorded a
debt  discount of the same amount to be  amortized  over 36 months  beginning in
February 2006. In conjunction with the payoff of the 2005 Facility,  we incurred
a loss on the early extinguishment of that debt of $1.2 million.

         The 2006 Facility  increased the minimum  initial  amount of borrowings
available to us and to our subsidiaries  from $6 million under the 2005 Facility
to $6.48 million under the 2006 Facility until April 30, 2006.  Thereafter,  the
maximum principal amount of all borrowings under the 2006 Facility cannot exceed
90% of the  eligible  accounts  receivable  of our  company and each of our U.S.
subsidiaries,  minus any reserves  that Laurus may in good faith deem  necessary
and appropriate.

         On February 6, 2006,  we requested and Laurus agreed to lend an initial
draw under the 2006 Facility of $6.38 million,  of which (i) approximately  $5.9
million was used to satisfy in full our  indebtedness  to Laurus  under the 2005
Facility,  (ii) $375,000 was paid to Laurus as an early  termination fee for the
2005 Facility and (iii) $107,500 (recorded as expense) was applied

<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

towards costs of the 2006 Facility. Both of the two latter amounts were included
in the loss on the early extinguishment of debt.

         All loans and  obligations  owed by us to Laurus arising under the 2006
Facility or otherwise are secured by a security interest in substantially all of
the assets of our  company  and our  subsidiaries  pursuant  to the terms of the
Security Agreement.

         In addition,  we pledged to Laurus all of the outstanding capital stock
of our  subsidiaries  pursuant to a Stock Pledge  Agreement  (the "Stock  Pledge
Agreement")  executed  by us in favor of  Laurus,  and each of our  subsidiaries
executed  a  Subsidiary  Guaranty,  dated  February  6,  2006  (the  "Subsidiary
Guarantee"),  in favor of Laurus,  guaranteeing  all of our  present  and future
obligations to Laurus.

         Under the terms of the 2006  Facility,  if an event of  default  occurs
under any of our  agreements  with  Laurus,  Laurus has the right to  accelerate
payments in addition to any other remedies available to it and to foreclose upon
the assets securing the  borrowings.  If an event of default occurs under any of
our agreements with Laurus,  within five days after written notice to us, Laurus
may  require a payment of 125% of the unpaid  principal  balance,  plus  accrued
interest and fees, which will become  immediately due and payable.  Laurus would
also be entitled to payment of a default  interest rate of 1.5% per month on all
amounts due. No events of default exist at March 31, 2006.

         The 2006 Facility  contains certain negative  covenants that require us
to obtain the prior  written  consent or other actions of Laurus in order for us
to take certain actions at any time when borrowings remain outstanding under the
2006 Facility.

      Pursuant  to the terms of an  Amended  and  Restated  Registration  Rights
Agreement between us and Laurus (the  "Registration  Rights  Agreement"),  which
amends and  restates a  Registration  Rights  Agreement  between  Laurus and our
company dated May 13, 2004, we are obligated to file a post-effective  amendment
to our existing Registration Statement on Form SB-2 originally filed on June 29,
2004 to include the shares of common  stock  issuable  (i) upon  exercise of the
Option,  (ii) as a  result  of  adjustments  made to the  exercise  price of the
Option,  (iii) upon exercise of the warrant issued pursuant to the June 30, 2005
Security  Agreement,  and (iv) as a result of  adjustments  made to the exercise
price of such warrant.  We  anticipate  filing a  Registration  Statement in May
2006.

(D) ACQUISITION TERM NOTES

         On March 31,  2006,  we  consummated  a private  placement  with Laurus
pursuant  to which we issued to Laurus a secured  term note due May 31,  2009 in
the  principal  amount  of  $1,750,000  (the  "2006  Term  Note")  and a secured
convertible  term note due May 31, 2009 in the  principal  amount of  $1,500,000
(the "2006 Convertible  Note"). In connection with the issuance of the 2006 Term
Note and the 2006 Convertible  Note, we issued to Laurus a common stock purchase
warrant (the "2006 Warrant")  entitling the holder to purchase 417,857 shares of
common  stock (the  "2006  Warrant")  at $0.001  per  share,  subject to certain
antidilution  adjustments,  at any time after  March 31, 2007 and on or prior to
March 31, 2013. The 2006 Term Note, 2006  Convertible  Note and the 2006 Warrant
were sold to Laurus for a purchase  price of $3,250,000 and were funded on April
13, 2006 in connection with the acquisition discussed in Note 8.

         The 2006  Term  Note and 2006  Convertible  Note  provide  for  monthly
payments  of  interest  at a rate per  annum  equal to the  prime  rate plus 2%,
subject  to a floor of 9%.  The 2006  Term Note and 2006  Convertible  Note also
provide for monthly  amortization  of  principal,  which  commences on August 1,
2006, at the rate of $101,563 per month.  The  principal and unpaid  interest on
the 2006  Convertible  Note are convertible into shares of our common stock at a
fixed  conversion  price of $1.40 per share (which  exceeded the market price of
our  common  stock  on  March  31,  2006),   subject  to  certain   antidilution
adjustments.  The 2006 Term Note and 2006 Convertible Note are collateralized by
a security interest in all of our assets.
<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

         Pursuant to a Registration  Rights  Agreement  (the "2006  Registration
Rights") with Laurus,  we are obligated to: (a) file on or prior to May 15, 2006
a registration statement under the Securities Act ("Registration  Statement") to
register the resale of the shares of our common stock  issuable upon  conversion
of the 2006  Convertible  Note and exercise of the 2006 Warrant (b) use our best
efforts  to  have  the  Registration  Statement  declared  effective  under  the
Securities Act as promptly as possible,  but in any event prior to July 15, 2006
and (c) maintain  the  effectiveness  of the  Registration  Statement  until the
earliest  date  of  when  (i)  all  Registrable   Securities   covered  by  such
Registration  Statement  have  been  sold,  or (ii) all  Registrable  Securities
covered  by  such  Registration   Statement  may  be  sold  immediately  without
registration under the Securities Act and without volume  restrictions  pursuant
to Rule 144(k)  under the  Securities  Act, or (iii)  except with respect to the
shares issuable upon the exercise of the 2006 Warrant, all amounts payable under
the 2006  Convertible Note have been paid in full.  Laurus,  or other holders of
the  2006  Convertible  Note and the  2006  Warrant,  are  entitled  to  certain
specified remedies if we do not timely comply with our registration obligations.

         Pursuant to the 2006  Securities  Purchase  Agreement (the  "Securities
Purchase  Agreement") with Laurus,  for so long as 25% of the original principal
amount  of the 2006  Convertible  Note is  outstanding  or the 2006  Warrant  is
outstanding,  we may not  directly or  indirectly  declare or pay any  dividends
without  the prior  written  consent of  Laurus.  The 2006  Securities  Purchase
Agreement  also requires the written  consent of Laurus in  connection  with any
1iquidation,  material  reorganization,  merger  or  acquisition  involving  our
company, or the issuance of certain additional indebtedness by our company.

         The 2006 Term Note and 2006  Convertible Note contain certain events of
default  consistent  with those  encompassed  in our  previous  financings  with
Laurus. Following the occurrence and during the continuance of any such event of
default, we are required to pay additional interest in an amount equal to (1.5%)
per month, and all outstanding  obligations,  including  unpaid interest,  shall
continue to accrue  interest at such  additional  interest rate from the date of
such event of  default  until the date such event of default is cured or waived.
In addition,  following the  occurrence  and during the  continuance of any such
event of default,  Laurus,  at its option,  may demand  repayment in full of all
obligations and liabilities owing to Laurus and/or may elect, in addition to all
rights and  remedies of Laurus,  require us to make a default  payment  equal to
125% of the  outstanding  principal  amount of the Note, plus accrued but unpaid
interest, all other fees then remaining unpaid, and all other amounts payable by
us to Laurus.

(E) STAR NOTE

         Pursuant to the STAR Merger Agreement discussed in Note 4(A), we issued
an  unsecured  convertible  promissory  note  for  $2,500,000  to the  principal
stockholder  of  Incentra  of CA  (the  "STAR  Note")  that  is  payable  in ten
installments  and  matures on August 1, 2007.  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.

         On August 1, 2005, we elected not to make a scheduled payment due under
the STAR Note after we identified significant required post-closing  adjustments
to the purchase  price for the assets of STAR and,  consequently,

<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

the principal  amount of the STAR Note. On August 16, 2005, we received a demand
for arbitration from legal counsel of the principal stockholder. As of March 31,
2006, we have  classified  the entire  principal  amount to current  liabilities
based on the  default.  We have been  accruing  interest at the 12% default rate
since August 11, 2005.

         We are engaged in an  arbitration  proceeding  to resolve this dispute,
which if  resolved  unfavorably,  would  have a material  adverse  affect on our
liquidity and financial  condition since payment of the full outstanding balance
of the STAR Note could be  accelerated.  The  hearing  phase of the  arbitration
proceeding was completed in April 2006,  and both parties have  submitted  their
proposed  findings of fact and  conclusions of law to the  arbitrator.  A ruling
from the arbitrator is expected by the end of June 2006. As of the balance sheet
date,  the  entire  principal  balance  of $2.4  million  ($2.1  million  net of
discount) 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.


         The event of  default  on the STAR Note  created an event of default of
certain  provisions  of the Laurus  Note.  Because  Laurus has not  granted us a
waiver of the default on this  indebtedness at March 31, 2006, the entire amount
due under the Laurus Note has also been  classified  with  current  liabilities.
Other indebtedness with Laurus discussed in Notes 6(B) and 6(D) was not affected
by the event of default on the STAR Note.

(F) CAPITAL LEASES

         In 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. 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
granted to us a call option to purchase  equipment from the lessor.  The term of
the agreement is for 15 months with an interest rate of 14.96% per annum.

         On September  11, 2005,  we entered into  Amendment  No. 2 to the Lease
Line. Under this amendment,  we were able to draw an additional  $1,000,000 (the
"Amended Credit  Facility") for equipment  purchases  through December 31, 2005.
The amendment  also granted to us a call option to purchase  equipment  from the
lessor.  The terms of the  agreement  are for lease  terms of 12-15  months with
interest rates ranging from 14.964% to 15%. The Amended Credit Facility is to be
repaid in monthly  principal and interest  installments  through September 2006.
During the first  quarter  of 2006,  the period of time in which we were able to
draw under the Amended Credit Facility was informally  extended at no cost to us
to March 31, 2006.  During the quarter ended March 31, 2006, we drew $583,407 on
the Lease Line. The unpaid balance at March 31, 2006 was $522,873.
<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

(7) SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK

         We have designated 2.5 million  authorized shares of preferred stock as
Series A Preferred shares and issued 2,466,971 of such shares in connection with
an  acquisition  in 2004.  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.

         The Series A Preferred  shares are convertible at any time upon written
notice to us into shares of common stock on a two-for-one  basis.  So long as at
least 500,000  originally  issued shares of Series A Preferred are  outstanding,
the  holders  of  Series A  Preferred  shares  have the right to  appoint  three
directors to our Board of  Directors.  As a result,  our Board of Directors  has
been expanded to seven members to accommodate these three directors. On or after
August 16,  2008,  the holders of at least 80% of the Series A Preferred  shares
may elect to have us redeem  the  Series A  Preferred  for a price  equal to the
greater of (i) the original  issue price of $12.60 per share  ($31.5  million in
the aggregate) plus accrued  dividends,  to the extent dividends are declared by
us, or (ii) the fair market  value of the number of shares of common  stock into
which such shares of Series A Preferred are convertible. 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).

(8) SUBSEQUENT EVENT ACQUISITION OF NETWORK SYSTEM TECHNOLOGIES, INC.

         On April 13, 2006 (the "NST  Closing  Date"),  we acquired  all of the
outstanding  capital  stock (the "NST  Stock") of Network  System  Technologies,
Inc., an Illinois corporation  ("NST"),  pursuant to a Stock Purchase Agreement,
dated as of the Closing Date (the "NST Stock Purchase Agreement").

         The  consideration  paid for the NST Stock on the NST Closing  Date was
approximately  $8.2  million,  which  consisted  of $5.5  million  in cash,  the
issuance  of  1,034,483  shares  of our  common  stock  and the  issuance  of an
unsecured  promissory  note in the amount of $1.5 million  (the "NST Note").  In
addition,  the NST Stock  Purchase  Agreement  contains  an  earn-out  provision
pursuant  to  which  Transitional  Management   Consultants,   Inc.  ("TMC"),  a
newly-formed  corporation  owned by the  former  NST  shareholder,  may  receive
additional  unregistered shares of our common stock based upon certain levels of
EBITDA (as defined in the Stock Purchase  Agreement)  achieved by NST during the
twenty-four  month period  ending March 31, 2008.  The maximum  number of shares
issuable  under  the  earn-out  is  1,120,690   shares   (subject  to  customary
adjustments for stock splits, stock dividends and similar transactions) if NST's
EBITDA is $4 million or greater  during such period and provided  certain  other
conditions are met. In addition,  TMC's right to receive the earn-out  described
above is subject to the continued provision of consulting services by the former
shareholder  through TMC to us through March 31, 2008, with certain  exceptions.
If  the  services   terminate   prior  to  such  date,  TMC  may  under  certain
circumstances  receive a pro rated portion of the earn-out amount. The cash paid
on the NST Closing Date was provided pursuant to our existing line of credit and
term note from Laurus  Master Fund,  Ltd.,  which was amended on the NST Closing
Date to make NST a co-borrower thereunder.

         The NST Note  accrues  interest at an annual  rate of one-half  percent
(1/2%).  We are required to make eight equal  payments of principal and interest
in the  amount of  $190,190.38,  the first  payment  of which is due on July 15,
2006, and the seven remaining  payments being due on the first day of September,
December,  March and June during the period  beginning  on September 1, 2006 and
ending on March 1, 2008. The NST Note further provides that all unpaid principal
and  accrued  interest  shall  become  immediately  due  and  payable  upon  the
occurrence  of an event of default (as defined in the NST Note).  Such events of
default include, among others, the occurrence either of the following events:

<PAGE>

                    INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                    UNAUDITED

(i) our failure to make payment  when due,  subject to a five (5) day notice and
cure period or (ii) our failure to observe, keep or comply with any provision or
requirement contained in the NST Stock Purchase Agreement.

         Concurrently  with the  consummation  of the  acquisition,  we  granted
registration rights with respect to the shares of our common stock issued in the
acquisition and we granted registration rights to TMC with respect to the shares
issuable  under the  earn-out  provision  contained  in the NST  Stock  Purchase
Agreement.  Pursuant to each registration  rights agreement  executed on the NST
Closing Date, at any time after April 13, 2008, the holders of such rights shall
have the right to cause us to register under the  Securities  Act, the shares of
our common  stock  issued on the NST Closing Date and the shares of common stock
issuable  pursuant to the earn-out  described above. The agreements also provide
that,  after April 13, 2008,  the holders shall have  `piggy-back'  registration
rights with respect to such shares.

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

         In connection with the consummation of the acquisition, we entered into
a consulting and subcontractor  agreement (the "Consulting  Agreement") dated as
of the NST Closing Date with TMC that provides that TMC will provide  consulting
services to us relating to the business of NST and will receive a monthly fee of
$24,251.  The  agreement has a two-year term and provides that TMC may terminate
the agreement for any reason upon thirty (30) days prior written notice and that
we may  terminate  the  agreement,  for  cause  (as  defined  in the  Consulting
Agreement),  at any time upon written  notice to TMC. In  addition,  TMC has the
right to earn an annual  cash  bonus  based  upon  certain  levels of EBITDA (as
defined in the  Consulting  Agreement)  achieved  by NST during the twelve  (12)
months  ended March 31,  2007 and 2008.  The  maximum  bonus  amount is equal to
$150,000 plus twenty-five percent (25%) of the amount by which EBITDA exceeds $2
million during the relevant  annual period.  TMC's right to receive the earn-out
described above is subject to the continued  provision of consulting services by
TMC to us through end of each such period, with certain exceptions.

         In connection with our  acquisition of NST, we paid investment  banking
fees to a third party of $475,000.

(B) 2006 STOCK OPTION PLAN

         On May 4,  2006,  our  board of  directors  approved  and  adopted  the
Incentra Solutions, Inc. 2006 Stock Option Plan (the "Plan"), which provides for
the granting of options to key  employees,  officers and certain  individuals to
purchase  shares of the our common stock.  We currently have reserved  1,750,000
shares of common stock for issuance  under the Plan.  The Plan has a term of ten
years and  provides  for the  grant of  "incentive  stock  options"  within  the
meaining of Section 422 of the  Internal  Revenue  Code of 1986,  as amended and
nonstatutory  stock options.  Options granted under the plan may not have a term
of more  than a  ten-year  period  (five  years in the case of  incentive  stock
options  granted to employees who hold more than ten percent (10%) of the voting
power  of the  Company's  common  stock).  Subject  to the  terms  of any  award
agreement,  options  generally  terminate  three months after the termination of
employment,  except  in the  case of  termination  for  cause  or upon  death or
disability.  We plan to register under the Securities Act of 1933, the shares of
our common stock issuable upon exercise of the options  granted  pursuant to the
Plan.

<PAGE>

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

GENERAL

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

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


         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.

         Incentra  Solutions,  Inc. is a leading provider of complete  solutions
for the data  protection  needs of an  enterprise.  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
Incentra  Solutions  of  Colorado  ("Colorado"),   ManagedStorage  International
("MSI"),   Incentra   Solutions  of  California   ("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.

         Through Front Porch, we provide a software and management solution that
enables  searching,   browsing,  editing,  storage  and  on-demand  delivery  of
media-rich  content in nearly any digital format.  Our complete  digital archive
solution includes our proprietary  software bundled with professional  services,
hardware/software procurement and resale, remote monitoring/management services,
complete support for our proprietary  software  solutions and first call support
for third-party hardware and software maintenance.  Our software converts audio,
video, images, text and data into digital formats for ease of use and archiving.
With more than 115 installations worldwide, our DIVArchive software solution has
become one of the leading digital archive management applications among European
and Asian  broadcast and media  companies and is gaining an increasing  share of
the North American market. Front Porch's DIVArchive and transcoding applications
provide the essential  integration layer within the digital content creation and
broadcast environments. All of Front Porch's products were built on intelligent,
distributed  architecture.  As a result,  Front Porch's  archive  management and
transcoding  solutions  are  flexible,  scalable,  easily  upgradeable,  failure
resilient  and  integratable  with  leading   automation  and  asset  management
applications.

         Through  MSI,  we deliver  comprehensive  storage  services,  including
remote monitoring/management services, maintenance support services (first call)
for  third-party  hardware  and  software  maintenance,  professional  services,
third-party  hardware/software  procurement and resale and financing  solutions.
MSI  provides  data  protection  solutions  and  services  that  ensure that its
customers'  data is backed-up and  recoverable and meets internal data retention
compliance  policies.  MSI's  remote  monitoring  and  management  services  are
delivered  from its Storage  Network  Operations  Center  ("NOC") in Broomfield,
Colorado,  which  monitors  and  manages  a wide  spectrum  of  diverse  storage
infrastructures  on a 24x7  basis  throughout  the  United  States,  the  United
Kingdom,  the  Netherlands,  Bermuda  and Japan.  MSI  delivers  these  services
worldwide  using its proprietary  GridWorks  Operations  Support  System,  which
enables   automated  remote   monitoring  and  management  of  complete  storage
infrastructures and back-up applications. MSI provides outsourcing solutions for
customer data  protection  needs under long-term  contracts.  Customers pay on a
monthly basis for storage  services based on the number of assets managed and/or
the  volume of  storage  assets  utilized.  We believe  customers  benefit  from
improved operating  effectiveness with reduced operating costs and reductions in
capital expenditures.

         Through  Incentra  of CA and PWI,  we deliver  complete  IT  solutions,
including professional services,  third-party  hardware/software procurement and
resale,  financing  solutions,  maintenance  support  services  (first call) for
third-party  hardware and software  maintenance and managed  storage  solutions.
Solutions are sold primarily to enterprise  customers in the financial services,
government, hospitality, retail, security, healthcare and manufacturing sectors.
Incentra of CA and PWI primarily service customers in the western United States.

<PAGE>

         Through NST, Inc (which we acquired in April 2006), we provide storage,
networking and security solutions, as well as professional services, to over 300
existing customers in the financial services, healthcare,  education, non-profit
and  manufacturing  verticals in the Chicago,  Illinois  area and central  state
region of the U.S. NST's customer base will provide an immediate  market for our
other products,  such as First Call and Enhanced First Call support services and
our GridWorks  remote  monitoring and  management  system in an area of the U.S.
market not previously available to us with our direct sales force.

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

         For the three  months  ended March 31,  2006,  revenues  totaled  $12.9
million as compared to $6.0 million for the comparable prior period. The rate of
increase for the three-month  period ended March 31, 2006 was approximately 115%
when  compared to the same  period for 2005.  The  increase in revenue  from the
prior year quarter was a result of the  acquisitions  of Incentra of CA and PWI,
increased  sales of  hardware  as part of  complete  archive  solutions,  and an
increase in deliveries of broadcast solutions.

         We continue to invest in hardware and the  development  of our software
and digital archiving in the data storage and infrastructure  areas.  During the
three  months  ended  March 31,  2006,  we  invested  $0.4  million in  software
development and $0.6 million for data storage infrastructure.

         During the three months ended March 31, 2006, our loss from  operations
decreased by approximately $0.3 million to $1.6 million as compared to a loss of
$1.9 million for the comparable  prior-year  period.  This reduction in our loss
was due to the increase in gross margin generated primarily from increased sales
of our broadcast software solutions,  which was offset in part by an increase in
selling,  general and administrative  costs of approximately  $2.0 million.  The
increase in our  selling,  general and  administrative  expenses  was due to the
inclusion of the  operations of Incentra of CA and PWI for the entire quarter in
2006.

         During the three months ended March 31, 2006 and 2005, our results were
breakeven  on an adjusted  EBITDA(1)  basis.  Results for the three months ended
March 31,  2006 on an  adjusted  EBITDA  basis  include the add back of the $1.2
million loss on the early  extinguishment  of debt related to the 2005  Facility
and $427,000 of non-cash  compensation  expense  following  the adoption of SFAS
123R  effective  January 1, 2006.  Results  for the first  quarter of 2005 on an
adjusted  EBITDA  basis  included a gain of  approximately  $341,000  due to the
revaluation of a derivative warrant liability.

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

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

EBITDA Reconciliation
All amounts in (000's)

                                          FOR THE THREE MONTHS ENDING MARCH 31,
                                               2006            2005
                                              -------         -------
Net loss before deemed dividends
 and accretion on preferred stock             $(3,636)         (2,348)
Depreciation and amortization                   1,261           1,285
Taxes                                              94             318
Interest (cash portion)                           332              77
Interest (non-cash portion)                       297             462
                                              -------         -------

EBITDA                                         (1,652)           (206)

Loss on early extinguishment of debt            1,232              --
Non-cash stock based compensation                 427             156
Referral fees                                      --              43
                                              -------         -------
EBITDA, as adjusted                           $     7         $    (7)
                                              =======         =======
<PAGE>


         We  continue  to leverage  our unique  intellectual  property by taking
advantage of our position as a leading provider of archive  software  solutions.
We continue to expand our product and service offerings in an effort to position
our  company  as a provider  of a wide range of  services  and  products  to the
broadcast and media markets and to further solidify our leading market position.
We also continue to increase the number of products we have available for resale
to our customers both directly and through  existing channel  partners.  We have
increased  our  expenditures  for sales  and  marketing  initiatives  to meet an
increasing volume of digital archive  implementations  worldwide.  We introduced
the sales of  managed  services  along with our sales of  storage  products  and
professional services directly to enterprise  customers.  We also believe we can
increase  our sales of managed  services by  introducing  these  services to the
customers  of our  acquired  businesses.  We believe our  professional  services
business will be enhanced as we leverage our  engineering  resources  across our
entire customer base.

RESULTS OF  OPERATIONS - THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2005

         Our unaudited condensed  consolidated  financial statements as of March
31, 2006 and for the quarter  then ended have been  prepared on a going  concern
basis,   which  contemplates  the  realization  of  assets  and  settlements  of
liabilities  and  commitments  in the normal  course of  business.  Our  audited
consolidated financial statements for the year ended December 31, 2005 were also
prepared on a going concern  basis.  In our Annual Report on Form 10-KSB for the
year ended December 31, 2005, the Report of our  Independent  Registered  Public
Accounting  Firm includes an explanatory  paragraph  that describes  substantial
doubt  about our  ability  to  continue  as a going  concern  as a result of the
possibility that  substantially all of our long term debt may be accelerated due
to a  dispute  with a  creditor  as  discussed  in  Notes  4(A)  and 6(E) to our
unaudited condensed consolidated financial statements.

REVENUE.  Total revenue for the three months ended March 31, 2006 increased $6.9
million, or 115%, to $12.9 million compared to total revenue of $6.0 million for
the three months ended March 31, 2005.  This  increase was  attributable  to the
additional  revenues  of $1.7  million  resulting  from  increased  sales in our
broadcast  division and $5.3 million  related to the  inclusion of the operating
results of  Incentra  of CA and PWI in the full  period,  which  increases  were
offset by a reduction $0.1 million in managed service revenues. Revenue from the
sale  of  our  products  increased  to  $9.5  million  compared  to  revenue  of
approximately  $3.2 million for the comparable  prior year period.  Revenue from
the delivery of our services  increased $0.6 million to $3.4 million compared to
$2.8 million for the comparable prior year period. On a pro forma basis assuming
that the  acquisitions  of Incentra  of CA and PWI  occurred on January 1, 2005,
revenue for the three months ended March 31, 2006  decreased  $3.5  million,  or
22%,  to $12.9  million  due to lower  sales of  third-party  product  sales for
Incentra of CA and PWI of $4.9 million,  lower services revenues for Incentra of
CA  resulting  from the loss of a large  customer  representing  $0.6 million of
total revenues for the prior period and slightly lower service  revenues for MSI
of $0.1 million.  These decreases were offset by increases in revenues generated
by our broadcast  division of $1.7 million and higher services  revenues for PWI
of $0.3 million.

         For the quarter  ended March 31,  2006,  a  significant  portion of our
revenues was derived from the European and Asian geographic markets. During that
period,  aggregate revenues from customers located in Europe or Asia amounted to
$4.1 million, or 32% of total revenue,  while revenues from customers located in
North America  totaled $8.8 million,  or 68% of total  revenue.  For the quarter
ended  March 31,  2005,  revenues  from  customers  located  in Europe  and Asia
amounted to $3.0 million, or 50% of total revenue, while revenues from customers
located in North America totaled $3.0 million, or 50% of total revenue.

GROSS  MARGIN.  Total  gross  margin for the three  months  ended March 31, 2006
increased $2.2 million to $5.1 million,  or 40% of total revenue, as compared

<PAGE>

to gross margin of $2.9 million,  or 49% of total  revenue,  for the  comparable
prior year period.  The decline in gross  margin as a percentage  of revenue was
due to increased  sales of third-party  products at lower gross  margins,  which
offset  higher  margins  on the sales of our  software  and  service  solutions.
Product  gross  margin for the three  months  ended March 31, 2006  totaled $4.1
million,  or 43% of product  revenue.  Service gross margin for the three months
ended March 31, 2006 totaled $1.0 million,  or 30% of service revenue.  On a pro
forma basis,  gross  margin for the three months ended March 31, 2006  increased
$0.6 million due to the mix of higher-margin broadcast product sales.

SELLING,   GENERAL   AND   ADMINISTRATIVE   EXPENSES.   Selling,   general   and
administrative  ("SG&A")  expenses  for the three  months  ended  March 31, 2006
increased  by  approximately  $2.0 million to $6.0 million from $4.0 million for
the  comparable  prior year  period.  SG&A  expenses  included  $4.5  million in
salaries  and  related  benefits  for  employees  not  directly  related  to the
production of revenue, $0.5 million in general office expenses,  $0.4 million in
professional  fees, $0.3 million for  travel-related  costs, and $0.3 million in
facilities  costs.  SG&A expenses of $4.0 million for the comparable  prior year
period included $2.6 million in salaries and related  benefits for employees not
directly  related to the  production of revenue,  $0.5 million in general office
expenses,  $0.2 million in travel  related costs,  $0.5 million in  professional
fees and $0.2  million of  facilities  costs.  The increase for the three months
ended  March 31, 2006 was due to an  additional  $1.5  million of SG&A  expenses
relating  to  Incentra  of CA and PWI as a  result  of the  inclusion  of  those
operations  for the  entire  quarter in 2006,  an  increase  of $0.2  million in
salaries  related  to  the  broadcast  business  and  an  increase  in  employee
headcount.  Also  included in the 2006 increase in SG&A expenses was an increase
of $0.3  million  related  to the  adoption  of SFAS 123R and the  recording  of
additional  non-cash  compensation  expense. On a pro forma basis, SG&A expenses
for the three months ended March 31, 2006 increased $0.4 million,  primarily due
to the increase of non-cash compensation expense related to the adoption of SFAS
123R.

DEPRECIATION AND AMORTIZATION.  Amortization expense consists of amortization of
intellectual  property,  capitalized  research and  development  costs and other
intangible assets.  Depreciation  expense consists of depreciation of furniture,
equipment, software and improvements.  Depreciation and amortization expense was
approximately $1.3 million for each of the three months ended March 31, 2006 and
2005, of which  approximately $0.5 million and $0.4 million was included in cost
of  revenue  for the  three-month  periods  ending  March  31,  2006  and  2005,
respectively.

OPERATING LOSS. During the three months ended March 31, 2006, we incurred a loss
from  operations  of $1.6 million as compared to a loss from  operations of $1.9
million for the three months ended March 31,  2005.  This  decrease in operating
loss was primarily  the result of the increase in gross margin of  approximately
$2.2 million,  offset in part by an increase in SG&A  expenses of  approximately
$2.0 million.

LOSS ON EARLY  EXTINGUISHMENT  OF DEBT.  Refinancing of the 2005 Facility in the
first quarter of 2006 was accounted  for as an early  extinguishment  of debt. A
loss  of $1.2  million  was  recorded,  which  included  $375,000  for an  early
termination  fee and  $107,500  in costs  associated  with the  refinancing.  No
similar refinancing occurred in the first quarter of 2005.

INTEREST  EXPENSE.  Interest expense was $0.6 million for the three months ended
March 31, 2006  compared to $0.6  million for the three  months  ended March 31,
2005.

OTHER INCOME AND EXPENSE.  Other expense was approximately $60,000 for the three
months ended March 31, 2006 compared to other income of  approximately  $367,000
for the three months ended March 31, 2005. Other income of $0.4 million for 2005
included $0.3 million of income  resulting from the reassessment of the value of
contracts recorded under EITF 00-19 for outstanding warrants and $0.1 million of
investment  income from leased  equipment to  customers  and gains from sales of
fixed assets.
<PAGE>


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 March 31, 2006 and 2005 were
minimal for each period.

INCOME TAX  EXPENSE.  We incurred  income tax expense for the three months ended
March 31, 2006 of $0.1 million compared to $0.3 million for comparable period in
2005.  This  expense was  entirely  represented  by non-cash  income tax expense
related to our French subsidiary,  Front Porch Digital  International,  SAS, and
any  liability   otherwise   payable  was  offset  by  the  utilization  of  the
subsidiary's deferred tax assets during the period.

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.  During the three months ended March
31,  2006,  we incurred a net loss  applicable  to common  shareholders  of $4.3
million as  compared to a net loss  applicable  to common  shareholders  of $3.0
million for the three months ended March 31, 2005.  The increase in net loss for
the three  months  ended  March 31,  2006 was  primarily  due to an  increase in
interest expense.

LIQUIDITY AND CAPITAL RESOURCES

         At March 31, 2006,  we had $0.5  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  pursuant to which
we issued to Laurus Master Fund Ltd ("Laurus") a secured  convertible  term note
due May 13, 2007 in the principal amount of $5.0 million (the "2004 Note"),  and
a common stock purchase  warrant  entitling the  noteholder to purchase  443,500
shares of our common stock.  Subsequent  to that date,  the note and other terms
related to the indebtedness have been amended on several occasions.  On February
6, 2006 we entered into an Amendment and Deferral  Agreement (the "Amendment and
Deferral  Agreement")  with  Laurus  amending  the 2004  Note.  Pursuant  to the
Amendment and Deferral Agreement,  the monthly principal amount due Laurus under
the 2004 Note for each of January,  February,  March,  April, May and June 2006,
equal to an  aggregate of $952,495,  is deferred  until May 13, 2007.  Scheduled
payments will resume of July 1, 2006.

         On June 30,  2005,  we entered  into a Security  Agreement  with Laurus
pursuant to which Laurus provided us a $9 million revolving,  convertible credit
facility.  The outstanding  principal amount under this facility was paid off on
February 6, 2006 in connection  with our  execution of a new security  agreement
with Laurus  pursuant to which Laurus  provided us a  non-convertible  revolving
credit facility of up to $10 million (the "2006 Facility"). The term of the 2006
Facility is three years and borrowings  under the 2006 Facility  accrue interest
on the unpaid  principal  and  interest  at a rate per annum equal to the "prime
rate"  published in The Wall Street Journal from time to time,  plus 1%, subject
to a floor of seven percent (7%).

         In connection with the 2006 Facility,  we executed in favor of Laurus a
secured  non-convertible  revolving note in the principal  amount of $10 million
(the "2006 Revolver Note").  Interest on borrowings under the 2006 Revolver Note
is payable  monthly  on the first day of each month  during the term of the 2006
Revolver Note,  commencing on March 1, 2006. All outstanding  principal  amounts
are due and payable on February 6, 2009.  The  minimum  amount  available  to us
until April 30, 2006 was $6.5 million.  Thereafter, the maximum principal amount
outstanding  under the 2006  Revolver  Note  cannot  exceed 90% of the  combined
eligible accounts receivable of our company and all our U.S. subsidiaries.

         On March 31, 2006, we consummated a private placement pursuant to which
we  issued a  secured  term  note due May 31,  2009 in the  principal  amount of
<PAGE>

$1,750,000  (the "2006 Term Note") and a secured  convertible  term note due May
31, 2009 in the principal amount of $1,500,000 (the "2006 Convertible Note"). In
connection with the issuance of the 2006 Term Note and 2006 Convertible Note, we
issued a common stock  purchase  warrant  entitling  Laurus to purchase  417,857
shares of common  stock (the  "2006  Warrant")  at $0.001 per share.  Funding of
$3.25  million  under  the 2006  Term  note and the  2006  Convertible  Note was
completed on April 13, 2006 and was used to fund part of the cash portion of the
purchase price of our acquisition of NST.

         As of March 31, 2006,  we had current  assets of $12.0  million.  These
assets  were  primarily  derived  from  our  operations  in 2006  and  from  our
acquisitions  of  Incentra  of CA and PWI.  Long-term  assets  of $24.2  million
consisted of $12.9 million of intangible  assets resulting from the acquisitions
of MSI,  Incentra of CA and PWI,  $5.9  million of goodwill  resulting  from the
acquisitions  of Incentra of CA and PWI, $2.4 million of property and equipment,
$2.3 million of software  development  costs and $0.7  million of other  assets,
which consisted of $0.5 million of deferred  financing costs and $0.2 million of
deposits, prepaid expenses and other receivables.

         Current  liabilities  of $26.3  million at March 31, 2006  consisted of
$8.5  million of  accounts  payable;  $2.3  million of deferred  revenue,  which
consisted  of billings in excess of revenue  recognized,  deposits  and progress
payments received on engagements currently in progress;  $4.5 million of accrued
expenses;  and  $11.0 of  current  portion  of notes  payable,  other  long term
obligations, and capital leases.

         Our working  capital  deficit was $14.3  million as of March 31,  2006,
which included the  outstanding  principal  balance on the 2006 Facility of $5.3
million, net of debt discount of $1.2 million, which was 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 6(C) to the unaudited condensed  consolidated  financial  statements.  Also
included in the deficit was $1.3 million 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 and $2.4 million (net of discount) on
the  Laurus  Note  due  to  cross  default   provisions   with  other  long-term
indebtedness,  as  described  in Notes  6(A) and 6(E) in the notes to  unaudited
condensed consolidated financial statements as of March 31, 2006.

         We used net cash of $0.2  million in  operating  activities  during the
three  months  ended  March  31,  2006,  primarily  as a result  of the net loss
incurred  during  the  period.  We used net cash of $0.9  million  in  investing
activities  during the three months ended March 31, 2006,  of which $0.6 million
was used  primarily  to purchase or develop  computer  software  and  equipment.
Financing  activities  provided net cash of $0.5 million during the three months
ended March 31,  2006  primarily  from the new Laurus  financing.  Repayment  of
capital  leases,  long-term  obligations  and notes  payable of $5.3 million was
offset by  borrowings of $5.4 million under the 2006 Facility and $0.4 under the
lease line of credit.

         As  described  in Note  6(E) to the  condensed  consolidated  financial
statements,  we are  currently  in default of the STAR Note and in the event 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.
<PAGE>


         We are still in the early  stages of executing  our business  strategy,
have completed three  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 our cash and cash  equivalents  and borrowings
available  from the 2006  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 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 that may cause a change from our plan of  operations to
vary,  include,  without  limitation,  decisions of our  management and board of
directors not to pursue our stated plan of operations  based on its reassessment
of the plan and  general  economic  conditions.  Additionally,  there  can be no
assurance that our business will generate cash flows at or above current levels.
Accordingly,  we may choose to defer  capital  expenditures  and  extend  vendor
payments for additional cash flow flexibility.

         We expect capital  expenditures  to be  approximately  $2.0 million and
capitalized  software  development costs to be approximately $1.6 million during
the 12-month period ended March 31, 2007. It is expected that our principal uses
of cash will be for working  capital,  to finance capital  expenditures  and for
other  general  corporate  purposes,  including  financing  the expansion of 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.

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. During the course of the audit of our
consolidated  financial  statements  for the year ending  December 31, 2005,  we
discovered  that we  incorrectly  accounted  for  goodwill  and  changes  to our
additional  paid-in  capital at March 31, 2005 in  connection  with two business
acquisitions  recorded in the first quarter of 2005. The incorrect  amounts were
subsequently  included in the balance sheets included in our Form 10-QSB filings
for quarters  ending June 30, 2005, and September 30, 2005.  There was no impact
on our  interim  Statements  of  Operations  and Cash Flows as a result of these
errors.  The Audit Committee of our Board of Directors has directed us to create
a formal  review  process  covering  acquisition  accounting  and to  include  a
Statement of Changes in Shareholders' Deficit and Comprehensive Loss with future
filings on Form 10-QSB. We believe that these measures implemented in April 2006
fully address the accounting and financial  reporting  concerns  associated with
this matter.

<PAGE>

         Except for the above  matter,  there  have not been any  changes in our
internal  control  over  financial  reporting  (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of 2006
that have materially  affected,  or are reasonably likely to materially  affect,
our internal control over financial reporting.


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

STAR NOTE DEFAULT

         We are engaged in 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.  The hearing phase of
the  arbitration  proceeding  was completed in April 2006, and both parties have
submitted  their  proposed  findings  of  fact  and  conclusions  of  law to the
arbitrator. A ruling from the arbitrator is expected by June 2006. 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 to
cease making  payments 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 demand for arbitration  from legal counsel to Mr.
Curmi. As of December 31, 2005, we have reclassified the balance of $2.4 million
on the STAR Note to current  liabilities  due to the default and the possibility
that the  arbitrator  may rule in favor of Mr. Curmi in such  proceeding.  While
management does not believe the debt will be paid within one year of the balance
sheet date,  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 our  various
promissory  notes  with  Laurus  as  described  in the  notes  to our  unaudited
condensed consolidated financial statements.

ITEM 5.  OTHER INFORMATION

         On May 4,  2006,  our  board of  directors  approved  and  adopted  the
Incentra Solutions, Inc. 2006 Stock Option Plan (the "Plan"), which provides for
the granting of options to key  employees,  officers and certain  individuals to
purchase  shares of the our common stock.  We currently have reserved  1,750,000
shares of common stock for issuance  under the Plan.  The Plan has a term of ten
years and provides for the grant of "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended and nonstatutory
stock options. Options granted under the plan may not have a term of more than a
ten-year  period (five years in the case of incentive  stock options  granted to
employees  who hold  more  than ten  percent  (10%) of the  voting  power of the
Company's common stock).  Subject to the terms of any award  agreement,  options
generally terminate three months after the termination of employment,  except in
the case of  termination  for  cause or upon  death  or  disability.  We plan to
register  under the  Securities  Act of 1933,  the  shares of our  common  stock
issuable upon exercise of the options granted pursuant to the Plan.

ITEM 6. EXHIBITS.

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


<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: May 15, 2006                      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)



<PAGE>


                                            EXHIBIT INDEX

10.1 Incentra Solutions, Inc. 2006 Stock Option Plan, dated as of May 4, 2006.

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.