10KSB

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

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

For the Fiscal Year Ended: December 31, 2005

o 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 of incorporation or organization)	(IRS Employer Identification No.)
1140 Pearl Street Boulder, Colorado	80302
(Address of principal executive offices)	(Zip Code)

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

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

None

(Title of Class)

Not Applicable

(Name of each exchange on which registered)

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

Common Stock, par value $.001

(Title of Class)

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

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

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

          Revenues for the fiscal year ended December 31, 2005 were $50.8 million.

          The aggregate market value of shares of the Company’s common stock held by non-affiliates as of March 23, 2006 was $10,168,781 based upon the average bid and asked prices of the issuer’s common stock on the OTC Bulletin Board on March 23, 2006. Shares of common stock held by each executive officer or director and by each person who beneficially owns more than 5% of the outstanding common stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.

          As of March 23, 2006, there were 13,326,810 shares of common stock of the Company outstanding. The Company also had outstanding as of such date 2,466,971 shares of Series A convertible preferred stock, which were convertible into 4,933,942 shares of the Company’s common stock. The issuer’s common stock currently trades on the OTC Bulletin Board under the symbol “ICEN”.

          Transitional Small Business Disclosure Format (Check one): Yes o No x

          WHEN USED IN THIS REPORT, THE WORDS “BELIEVES”, “ANTICIPATES”, “EXPECTS” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED.

          OUR BUSINESS AND RESULTS OF OPERATIONS ARE AFFECTED BY A WIDE VARIETY OF FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT US AND OUR ACTUAL RESULTS, INCLUDING, BUT NOT LIMITED TO: (1) THE AVAILABILITY OF ADDITIONAL FUNDS TO ENABLE US TO SUCCESSFULLY PURSUE OUR BUSINESS PLAN; (2) THE UNCERTAINTIES RELATED TO THE EFFECTIVENESS OF OUR TECHNOLOGIES AND THE DEVELOPMENT OF OUR PRODUCTS AND SERVICES; (3) OUR ABILITY TO MAINTAIN, ATTRACT AND INTEGRATE MANAGEMENT PERSONNEL; (4) OUR ABILITY TO COMPLETE THE DEVELOPMENT OF OUR PROPOSED PRODUCTS IN A TIMELY MANNER; (5) OUR ABILITY TO EFFECTIVELY MARKET AND SELL OUR PRODUCTS AND SERVICES TO CURRENT AND NEW CUSTOMERS; (6) OUR ABILITY TO NEGOTIATE AND MAINTAIN SUITABLE STRATEGIC PARTNERSHIPS AND CORPORATE RELATIONSHIPS; (7) THE INTENSITY OF COMPETITION; AND (8) GENERAL ECONOMIC CONDITIONS. AS A RESULT OF THESE AND OTHER FACTORS, WE MAY EXPERIENCE MATERIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS ON A QUARTERLY OR ANNUAL BASIS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS AND STOCK PRICE.

          THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

          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 MSI, Incentra of CA and PWI, we provide complete IT solutions for enterprise and service provider clients, including engineering, hardware and software procurement, maintenance support services and remote storage operations services.

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

•	Hardware and software products and services
	•	Third party storage, servers, software, networking, and security
	•	Proprietary products DIVArchive solutions, GridWorks software/service platform
•	Monitoring and management solutions — Automated/remote monitoring, management and maintenance
	services:
	•	Alert Monitoring & Notification
	•	Health/Capacity/Performance
	•	Management of Data Protection Systems
•	Professional services — engineering/implementation:
	•	IT Assessments
	•	System Design Services
	•	Project Management Services
	•	Level 1-3 Engineering Support
	•	Staff Augmentation/Outsourcing of Operations
•	Capital/financing solutions

          Through Front Porch, we provide a software and management solution that enables searching, browsing, editing, storage and on-demand delivery of media-rich content in nearly any digital format. Our complete digital archive solution includes our proprietary software bundled with professional services, hardware/software procurement and resale, remote monitoring/management services, complete support for our proprietary software solutions and first call support for third-party hardware and software maintenance. Our software converts audio, video, images, text and data into digital formats for ease of use and archiving. With more than 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.

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          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.

Industry Trends

          Industry Data Corporation (“IDC”) estimates annual data growth at a compound rate of approximately 50% annually through 2007 and beyond. We believe that because of the ongoing growth in the creation and storage of data and the increasing strategic importance of having data available, secure and recoverable, the data storage markets in which we compete will continue to expand. We also believe this growth will include an accelerating growth rate in the demand for services, including data management and monitoring solutions. According to an August 2005 report of IDC worldwide IT spending for 2005 was estimated at $1 trillion, growing at a 5.9% compound annual growth rate (CAGR) through 2009. The total market for IT services worldwide according to Gartner Dataquest is forecast to grow to almost $800 billion by 2009 from $595 billion in 2004, with a 6% CAGR. More importantly, the worldwide market for storage services is expected to grow to $30 billion by 2008, with a 7% CAGR, according to Gartner Dataquest.

Worldwide: Storage Services Forecast (millions)

	2005		2006		2007		2008		CAGR%
Consulting		3,033		3,153		3,514		3,803		9
Implementation/Consolidation		3,467		3,645		3,879		4,182		6
Management Services		5,112		5,680		6,437		7,300		10
HW Support		8,848		9,169		9,497		9,871		4
SW Support		3,209		3,445		3,731		4,089		8
Total Worldwide		23,669		25,092		27,058		29,245		7

Source: Gartner Dataquest (January 2005)

          IT departments are faced with the challenges of rapidly expanding amounts of data to manage, increasing demands for availability for day-to-day business and to meet regulatory requirements, and increasing and more stringent compliance and governmental regulations regarding data storage, integrity and recoverability. Conversely, IT headcount is projected by IDC to increase by only 10% annually, which should increase the need for organizations to improve storage management productivity and to evaluate outsourced management solutions to accommodate the increasing demands being placed on the organization. We believe companies will consolidate their storage infrastructures and implement enhanced software and service capabilities, such as storage area network management, virtualization, storage resource management and outsourcing automated storage monitoring and management services.

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          Excluding hardware infrastructure, IDC estimates that worldwide revenue for backup and archive software solutions in 2003 totaled $2.4 billion and is expected to grow to an estimated $3.0 billion in 2008, or at a 4.1% CAGR. In Europe, our largest market for archive software, Datamonitor reports that European sales of archive software are expected to grow at a CAGR of 42% through 2008. The total market in Europe for complete archive and digital workflow solutions, including hardware infrastructure, (the broadcast value chain) is estimated at $2.6 billion currently and is expected to grow to $3.6 billion by 2008, or a CAGR of 8.4%. Datamonitor estimates that today only 15% of broadcasters in Europe have converted to a fully-digital environment. Based upon our experience in the industry, we believe the rate of adoption in North America is no greater than that in Europe, and likely significantly lower. Accordingly, we believe opportunities for the sale of complete archive solutions to broadcasters making the conversion to a fully-digital environment will continue to accelerate in 2006 and beyond. We also believe our business strategy to grow archive software sales as part of our complete solution offering, incorporating our proprietary storage management and monitoring services, professional services and third-party hardware and software solutions, will accelerate revenue growth and increase profitability.

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

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

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

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

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

          Continued migration to networked storage infrastructures. We expect that through a variety of storage networking technologies, organizations will attain shared (consolidated) storage capabilities. Consolidated storage benefits include increased flexibility in implementing and managing storage, increased storage device utilization levels, improved quality of service, reduced administration costs and increased operational efficiency.

          Evolution away from large, monolithic storage systems to modular storage systems. We expect that many organizations will implement modular storage systems as compared to large, monolithic storage systems. Smaller versions of their high-end, full-featured counterparts, modular disk systems enable organizations to cost-effectively implement storage, while enjoying the performance and functionality of large, enterprise systems.

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Business Strategy

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

•	Growth through Acquisition. Our acquisitions (two since January 2005, one in 2004) have expanded our customer base, provided a large suite of products and services, expedited the development of a strong 55 person sales force, added management talent, created a platform from which to extract revenue synergies among our various product and service offerings, and provided significant opportunities for consolidation/cost reduction. We believe the storage management and services industry is highly fragmented and that there are many smaller storage product and software/services providers with successful product offerings that are seeking merger or acquisition partners. We intend initially to seek acquisition candidates that have the following characteristics: a large percentage of product sales that are generated from storage solutions; reseller agreements with most major manufacturers, strong professional services organizations, recurring service revenues and strong sales, engineering and management personnel. Our initial focus for acquisition candidates is on candidates with facilities and targeted customers located in the United States.
•	Strategic Alliances. We intend to supplement our marketing efforts by aligning ourselves with complementary solutions providers and technology partners. Strategic alliances also will assist us in keeping pace with technological developments of the major software and hardware vendors and, in certain instances, provide us with product development services. We have entered into strategic alliances with a number of leading providers of storage products and storage management solutions. In the media and entertainment market, we have established similar strategic alliances with the leading broadcast systems integration firms. To advance the joint sales initiatives of these partnerships, the agreements often include co-marketing and technology-sharing arrangements targeting the large existing customer base of both companies, thus providing us access to a large existing customer base. Through similar alliances, we expect to gain greater exposure and acceptance of our products and services.
•	Offer Complete Digital Archive Solutions to Broadcasters. Through the sale of our complete digital archive solutions, we intend to capture an increasing portion of the total IT spending of our broadcast customers and position ourselves for follow on sales and services. Since the inception of this strategy, we have successfully sold complete solutions, often valued in excess of $1 million, to numerous global media brands. A complete digital archive solution includes: Archive Software, Archive Servers, Content Management Software, Transcoding Software, Professional Services, and Storage Hardware and Maintenance. We estimate that archive software comprises only 10-15% of the total spending of a broadcast customer for a complete digital archive solution. By increasing our penetration into these other areas, we believe we will generate significant increases in revenue and gross margin as these untapped components comprise the vast majority of a customer’s total spending. We believe by leveraging Front Porch’s longstanding customer relationships, the dominant market position of Front Porch’s DIVArchive solutions, Front Porch’s world-class customer list of broadcast entities and its reputation for superior service and support, Front Porch will continue to capture an increasingly larger portion of our customers’ total IT budget.
•	Offer Complete Data Protection Solutions. A complete data protection solution includes storage resource management, back-up applications, storage hardware, professional services, operations and financing solutions. Prior to 2005, we were primarily focused on the operations component of the complete data protection solution with limited participation in the other areas. We estimate that the operations component comprises only 10-15% of the total spending of an enterprise or service provider customer for a complete data protection solution. We believe our GridWorks proprietary monitoring and management solutions position us to offer a superior and more complete storage and data protection solution to our customers than that which is currently offered by our competitors.
	New Product Development. We intend to continue to produce a quality software product and service solution that meets client expectations in terms of functionality, flexibility, procurement cost, implementation cost and ongoing maintenance cost. We believe our storage and digital archive management product lines

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	meet these expectations and will continue to do so as these products evolve. We are committed to continuous product improvement through a software development program that is driven by industry focus groups and customer input. We intend to continue to utilize our industry, customer and supplier relationships to keep abreast of emerging standards, protocols and application programming interfaces as such trends are introduced and gain market acceptance.
•	Increase Marketing and Direct Sales Efforts. Our direct sales organization is organized into sales teams that are assigned to our operating units. We intend to leverage our successes by devoting significant marketing and direct sales resources to cross-marketing products and services offered by our operating units. Our sales teams intend to add established distributors with the skills necessary to sell our comprehensive storage solutions.
•	Foster a Culture of Excellence and Customer Service. We intend to continue to employ rigorous recruiting, training and evaluation practices to help us attract and retain employees who dedicate themselves to delivering outstanding products and consulting services to our customers. We have emphasized the creation of an environment of excellence and customer services and believe our commitment to excellence will continue to provide new customer referrals from satisfied customers that have used our products and services.

Customers

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

• Total storage is increasing 50% annually

• New technologies require integration across platforms

• Increasing levels of external and internal compliance policies

• Staffing is projected to grow only 10%

• Limited capital or operating expenses

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

          During 2005, a significant portion of our revenues was derived from the European and Asian geographic markets. For the year ended December 31, 2005, aggregate revenues from customers located in Europe or Asia amounted to $13.4 million, or 26% of total revenue as compared to $4.7 million, or 35% of total revenue in 2004. The portion of our business represented by these markets has grown significantly since 2004; however, it comprises a smaller percentage of our total revenue in 2005 due to our acquisitions of Incentra of CA and PWI.

Broadcast, media and entertainment

          Our customer base in the broadcast industry includes some of the largest and best-known entities worldwide, including CBS Television City, Comcast, Discovery Networks, A&E Television Networks, Rainbow Networks Communications, Inc., CHUM Television, Astral Media, Playboy Television, Canal +, Walt Disney Company, Oxygen, BBC Broadcast, Bayerischer Rundfunk, Turner Entertainment Networks Asia, Sony Pictures, Telecinco, France 3, SKY Perfect TV, Eastern Television/Taiwan, TV Azteca, Puma Television, Central China Television, Seven Networks and MTV Networks-Europe. Many of the customers are served in multiple locations worldwide.

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Datacenter Operators and IT Service Providers

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

Fortune 2000 Enterprises and mid market

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

Products and Services

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

Products

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

Digital video archive management software and solutions

          Under our Front Porch Digital brand, we offer a comprehensive integrated suite of digital video archive management solutions. Our proprietary DIVArchive (Distributed Intelligent Versatile Archive) software products enable customers to manage large-scale digital video archives in the broadcast, media and entertainment industry. With over 115 installations worldwide, we believe DIVArchive maintains a dominant position in Europe and Asia and is gaining market share in North America and South America. We believe participants in the entertainment industry are increasingly seeking to convert non-digitized data to digital formats that may easily be accessed, browsed, indexed, managed and distributed.

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

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

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

• Integration with the full range of TeleStream FlipFactory transcoding solutions

• Enhanced integration with leading non-linear editing platforms

• Greater control through the Storage Plan Manager Configuration Engine

• Expanded support for Tape Import/Export and Meta Source

• New capabilities for MXF devices including partial restore functionality

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

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

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

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

          DIVAnet: DIVAnet, which is expected to be released in April 2006, will enable customers that operate DIVArchive in more than one geographic location to network and operate multiple archive installations from one centralized archive management application. DIVAnet also enables enhanced worldwide content creation and distribution, as well as fail-safe disaster recovery protection.

GridWorks Operations Support System (OSS)

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

Resale of third-party hardware and software

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

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

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Products	Suppliers
Primary Storage	Sun Microsystems
	Hitachi Data Systems Corporation
	Network Appliance, Inc.
	StorageTek
	Xiotech
	EMC
Servers and Systems	Sun Microsystems
	HP Compaq
	Dell Computer
Tape Automation	Quantum Corporation
	Spectra Logic Corporation
	StorageTek
	Xiotech
Data Protection	VERITAS Software
	CommVault Software
	Data Domain
Networking and Security	Cisco Systems
	Brocade Communications Systems, Inc.
	Symantec Software
	Juniper Networks
	Checkpoint Software
	McData Corporation

Professional Services

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

• Storage & infrastructure assessments — providing critical feedback on the health, performance and utilization of storage and systems infrastructure, as well as a report card of business performance and compliance relative to established objectives and peer organizations.

• Storage system design services — defining the appropriate technical architecture and unbiased product selection to meet key business criteria and assure optimal results.

• Implementation and integration services — assuring technology purchases are installed and optimized to achieve the best possible performance and utilization of resources minimizing ongoing operations costs while assuring the best possible availability.

• Cost of ownership assessments — helping organizations identify key cost areas, most effectively align resources and leverage technology to reduce ongoing expenses and streamline operations.

• Project management services — supplying professional assistance to oversee deployment of assets, implementations of new applications while assisting in the alignment of scarce technical resources for timely solutions.

• Level 1, 2 & 3 engineering support — assisting in rapid problem diagnosis, vendor response and problem resolution across a very broad range of systems and storage applications.

24x7 First Call Operations and Maintenance Support

          We operate a 24x7 NOC in Broomfield, Colorado where all first call and maintenance in-coming calls are received, diagnosed and routed to the appropriate engineering personnel or vendor. Support services are provided on all proprietary

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and third party products and services. In many cases, the support personnel in our NOC have the ability, if enabled by a customer, to remotely access the customer’s infrastructure using our GridWork's platform to respond to alert notifications from the customer and remotely correct the problem. In other cases, the NOC notifies our customers of the problem and corrects (or instructs corrective action) or dispatches vendor support prior to the customer calling the NOC. We also have a secondary support desk in San Diego, California. Our engineering staff also provides level 2 and 3 support worldwide. These services are sold under long-term recurring service contracts ranging from one to three years.

Outsourcing Services

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

Managed storage and monitoring services

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

• Our GridWatch solution is a remote monitoring, alert and notification service. The service is performed on the customer’s existing storage infrastructure and includes monthly reporting on performance, efficiency, reliability and the integrity of the data storage networks.

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

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

Outsourcing and Staff Augmentation

          Our outsourcing solutions assist our customers in the management of their IT environment by augmenting their staff and operations with personnel as well as methodologies and technologies that are based on industry best practices. We assist with the design, implementation and management of new IT environments, or leverage an existing environment to unlock value and enhance business performance. Our flexible solutions are provided as full or partial outsourcing engagements as well as overflow support for existing service operations.

Financing Solutions

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

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Sales and Distribution

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

          At March 23, 2006, our direct sales force consisted of 55 sales people. Sales and marketing personnel are located at our offices in Broomfield, Colorado; Phoenix, Arizona; San Ramon, Los Angeles and San Diego, California; Boise, Idaho; Chicago, Illinois; Mount Laurel, New Jersey; Beaverton, Oregon; Dallas, Texas and Kirkland, Washington. Sales and marketing personnel are also located at our international sales and support offices in the United Kingdom, France and Hong Kong. We conduct comprehensive marketing programs that include telemarketing, public relations, direct mail, advertising, seminars, trade shows and ongoing customer communications programs.

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

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

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

          We have co-marketing relationships with national and regional distribution partners to drive regional and local market penetration, and market-specific regional marketing partners to drive vertical market penetration. Manufacturers and distributors make available to us certain funds for marketing expenses through various programs. These programs include direct mail, lead generation, advertising, event marketing, brand awareness and sales solutions. Manufacturing rebates are also applied to fund a significant portion of our marketing expenses. Our businesses earn marketing coop funds based on a percentage of product sales and associated volumes. In addition to a percentage of total sales volume, manufacturers also provide special rebate programs. These co-op funds are managed to support our marketing activities, including, but not limited to, marketing communications, training, certification, advertising, events, branding and lead generation programs.

Research and Development

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

          Through Front Porch, we seek to offer an extensive, integrated product line that provides digital archive management solutions to broadcasters and media companies worldwide. Through MSI, we seek to offer comprehensive storage services using our proprietary GridWorks Operations Support System, which enables automated remote

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monitoring and management of complete storage infrastructures and back-up applications. To effect this strategy, we intend to continue to introduce upgraded functionality and enhancements to existing products.

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

          Developing new technology, products and services is complex and involves uncertainties. There can be no assurance that our development efforts will be successful. For the years ended December 31, 2005 and December 31, 2004, we incurred total costs, of which a portion was capitalized and the remainder was expensed, related to research and development activities totaling $1,085,547 and $1,337,180, respectively. See Note 3 to Notes to Consolidated Financial Statements. On a pro forma basis for 2004, assuming the acquisitions of MSI, PWI and Incentra of California had occurred on January 1, 2004, we incurred total costs, of which a portion was capitalized and the remainder was expensed, related to research and development activities amounting to $1,909,373.

Patents, Trademarks and Licenses

          We regard our technology as proprietary and will attempt to protect our technology through patents, copyrights, trade secret laws, restrictions on disclosure and other methods. We currently hold one patent (#6,947,598), which we were awarded on September 20, 2005, covering key “methods and apparatus” that are critical to the archive management function within global broadcast facilities. This patent allows us to protect the valuable intellectual property that Front Porch has developed within DIVArchive. We believe that, because of the rapid pace of technological change in the data storage industry, patent and copyright protection are beneficial to the competitive position of our products and services. We continue to pursue patent protection around advanced developments in DIVArchive and in our GridWorks storage management software platform.

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

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

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

Competition

          The markets for our products and services are becoming increasingly competitive. We believe our ability to compete depends on a number of factors, both within and outside of our control. These factors include, among others, the functionality, price and performance our products and services relative to our competitors’ offerings, customer satisfaction and customer support capabilities, the breadth of product lines and support services, the strength of our sales force

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and channel partnership relationships and general economic and business conditions. We expect additional companies to begin offering products and services similar to those we offer. Many of these companies have significantly greater financial resources than we do.

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

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

          We believe the primary competitors for our data protection solutions and complete solutions to enterprises include Arsenal Digital, Electonic Data Systems (“EDS”) and IBM Global Services (“IBM”). However, EDS and IBM primarily deliver solutions from a total IT outsourcing and management solution perspective and do not focus on the storage layer as a core competency. In addition, these competitors often do not meet mid-tier enterprise budget constraints. We also compete with systems integrators such as Datalink Corporation, SANZ, Inc., Midrange Computer Solutions, Inc. (MCSI) and Foresyth Technologies, Inc.

Employees

          As of March 23, 2006, we employed 168 persons on a full-time basis, of which 11 were executive management, 27 were in finance and administration, 55 were in sales and marketing, 48 were in engineering/delivery and software development and 27 were in customer service and support.

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

Development of Business

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

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

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

          On August 18, 2004, we acquired all of the outstanding capital stock of MSI (the “Acquisition”). The Acquisition was accounted for as a reverse merger, as more fully described in Note 4(c) to the Consolidated Financial Statements in Item 7, and MSI was deemed to be the acquirer for accounting purposes. We changed our name on October 25, 2004 to Incentra Solutions, Inc.

          As a result of the acquisition, the consolidated financial statements presented herein include the financial statements of MSI for all periods prior to August 18, 2004 and the financial statements of the consolidated companies from the date of the Acquisition forward. In addition, we are disclosing pro forma financial information, which reflects

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the consolidated financial statements of both MSI and Front Porch prior to the Acquisition as if the Acquisition occurred at the beginning of the periods presented.

          On February 18, 2005, we acquired all of the outstanding capital stock of Incentra of CA (formerly Star Solutions of Delaware, Inc.), a privately-held company. In connection with this acquisition, we acquired all assets and liabilities of the business, primarily cash and accounts receivable/payable, and substantially all of the personnel (45) of this business.

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

ITEM 2. DESCRIPTION OF PROPERTY

          Our executive offices and certain administrative functions are located in Boulder, Colorado, where we lease approximately 5,000 square feet of office space under a month-to-month arrangement. We lease approximately 4,000 square feet of office space in Mount Laurel, New Jersey through September 2006. The New Jersey site houses our research and software development resources, our development/testing/staging laboratory facilities, and certain information management systems for domestic operations of our Front Porch business. International operations of the Front Porch business are located in 410 square meters of office and production space in Toulouse, France under a lease that expires in 2014 and 150 square meters of office space in Annecy, France.

          We lease approximately 10,700 square feet of office space in Broomfield, Colorado through September 2007. The Broomfield site houses our software development resources, engineering, managed storage and monitoring operations center, information management systems and administrative functions. We lease a total of approximately 17,000 square feet of office space in Kirkland, Washington; Beaverton, Oregon; and San Diego, California through March, 2008, which also house our sales, operations and administrative functions. We also have sales offices and operating locations in San Ramon, California, Geneva, Switzerland and London, England.

          At December 31, 2005, aggregate lease payments under the Mount Laurel, New Jersey, Broomfield, Colorado, Kirkland, Washington, Beaverton, Oregon, San Diego, California, San Ramon, California, Annecy, France and Toulouse, France leases through the end of the lease terms were as follows:

Mount Laurel, New Jersey	$	41,571
Broomfield, Colorado		275,604
Kirkland, Washington		298,370
Beaverton, Oregon		51,842
San Diego, California		214,685
San Ramon, California		53,346
Annecy, France		186,496
Toulouse, France		659,351
Total	$	1,781,265

          We believe our current facilities are adequate for our existing operations and that all of our properties are adequately covered by insurance.

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ITEM 3. LEGAL PROCEEDINGS

Star Note Default

          We are engaged in an arbitration proceeding, which is scheduled to begin on April 4, 2006, to resolve a dispute with one of our creditors that, if resolved unfavorably, would have a material adverse affect on our liquidity and financial condition. In connection with our acquisition of STAR (now known as Incentra of CA) in February 2005, we issued to Alfred Curmi, the principal stockholder of STAR, a promissory note (the “STAR Note”) in the principal amount of $2.5 million that is payable in ten installments and matures on August 1, 2007. On August 1, 2005, we elected 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. See Note 9(A) to the Notes to Consolidated Financial Statements.

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

          None

PART II

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

          Our common stock is currently quoted on the OTC Bulletin Board under the symbol “ICEN”. The following table sets forth the high and low bid prices for our common stock for each fiscal quarter within our last two fiscal years, as reported by the National Quotation Bureau. The prices set forth below represent interdealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions. Prices for periods prior to June 9, 2005 have been adjusted to reflect a ten-for-one reverse split of our common stock effective on that date.

	High Bid		Low Bid
Year ended December 31, 2004
First Quarter	$	11.25	$	1.20
Second Quarter		8.60		3.20
Third Quarter		3.90		1.60
Fourth Quarter		3.50		2.00
Year ended December 31, 2005
First Quarter	$	3.10	$	1.61
Second Quarter		2.80		0.51
Third Quarter		2.00		0.90
Fourth Quarter		1.90		0.85

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Holders

          At March 23, 2006, there were approximately 350 record holders of our common stock. This number excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.

Dividends

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

Securities Authorized for Issuance Under Equity Compensation Plans

          As of December 31, 2005, the following equity compensation plans were in effect:

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance
Equity compensation plans approved by security holders		-0-			N/A		-0-
Equity compensation plans not approved by security holders:
2000 Equity Incentive Plan (a)		2,217,016		$	2.92		45,484
MSI 2000 Stock Option Plan (b)		216,536		$	0.43		-0-
Total		2,433,552		$	2.70		45,484

          (a) Total number of securities remaining available for future issuance includes 2,262,500 shares for issuance under our 2000 Equity Incentive Plan, less options outstanding.

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

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

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

Critical Accounting Policies

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

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Revenue Recognition

          Given our diverse product and sales mix, as well as the complexities and estimates involved in measuring and determining revenue in accordance with generally accepted accounting principles, our accounting for revenue is crucial to the proper periodic reporting of revenue and deferred revenue.

          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 recognize revenue under the completed contract method of accounting as prescribed by American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2 in connection with an arrangement to deliver software or a software system requiring significant production, modification or customization of software. We recognize revenue when persuasive evidence of an arrangement exists, delivery and acceptance has occurred, the fee is fixed or determinable, and collection is reasonably assured.

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

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

          We sell computer equipment and software purchased from third parties to customers as part of an integrated solution and on a stand-alone basis. Hardware sales are recognized when the hardware is received by the customer.

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

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

Software Development Costs

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

Stock-Based Compensation

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

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

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

          In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R) “Share-Based Payment”, which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and generally requires instead that such transactions be accounted and recognized in the statement of income based on their fair value. SFAS No. 123(R) will be effective for us for our filing on Form 10-QSB for the first quarter of 2006. We have evaluated the provisions of this standard, and we expect that the implementation of this standard will have a material impact on our financial position and results of operations.

Accounting for Obligations and Instruments Potentially Settled in the Company’s Common Stock

          We account for obligations and instruments potentially to be settled in our stock in accordance with Emerging Issues Task Force (“EITF”) No. 00-19, “Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In a Company’s Own Stock”. This issue addresses the initial balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, our own stock.

          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.

Impairment of Long-Lived Assets

          Long-lived, tangible and intangible assets that do not have indefinite lives, such as fixed assets and intellectual property, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. As a result of the acquisitions in 2004 and 2005, we have approximately $13.7 million in intangible assets. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of such assets and their eventual disposition. Measurement of an impairment loss for such long-lived assets is based on the fair value of the assets.

          Goodwill is not amortized and is subject to write downs charged to results of operations only when its carrying amounts is determined to be more than its estimated fair value based upon impairment tests that are required to be made annually or more frequently under certain circumstances. Fair values are determined based on models that incorporate estimates of future probability and cash flows. As a result of the 2005 acquisitions, we have approximately $5.9 million in goodwill after recording an impairment loss of $4.2 million as discussed in Note 4 to the Notes to Consolidated Financial Statements.

          In connection with preparing the December 31, 2005, consolidated financial statements, we determined that an error was made in accounting for goodwill recognized in connection with business acquisitions that occurred in the first quarter of 2005. As a result of the error, goodwill was overstated by approximately $4.5 million and shareholders’ deficit was understated by the same amount at March 31, June 30, and September 30, 2005. There was no effect on the Company’s consolidated statements of operations for the year ended December 31, 2005 or for any quarter of 2005 as a result of this error. The error was corrected in the fourth quarter of 2005 by decreasing goodwill and increasing shareholders’ deficit by $4.5 million.

Concentration of Risk – Customers and Geographic

The following is a breakdown of our revenues and long lived assets by geographic area* (in thousands):

Year Ended December 31, 2005	North America		Europe/Asia			Total
Revenues	$	37,420		$	13,412	$	50,832
Long-lived assets, net		1,625			605		2,230
Year Ended December 31, 2004
Revenues		8,575			4,710		13,285
Long-lived assets, net		1,779			674		2,453

*The geographic breakout by country is not practical to obtain.
Long-lived assets includes Property, Plant and Equipment

          During 2005, one customer represented 16% of revenues. During 2004, revenues from two customers, each exceeding 10% of total revenues, aggregated 13% and 11%, respectively.

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General

Business Outlook

          The following discussion of financial results is based on actual results for the years ended December 31, 2005 and December 31, 2004. For the year ended December 31, 2005, revenues increased 283% to $50.8 million from $13.3 million for the comparable prior year period. The significant growth in revenue was a result of the added sales of products and services from two acquisitions completed in early 2005 and a full year for our Front Porch operations in 2005. Sales and deliveries of our proprietary DIVArchive solution and related professional services also increased in 2005. In addition, the revenue base created by our proprietary GridWorks OSS solution provides a monthly recurring revenue stream that adds stability and predictability in revenue, as well as a significant growth opportunity through the expansion of services to existing customers, the continued increase in the amount of data under protection, and new enterprise and service provider customer opportunities.

          During the year ended December 31, 2005, we completed two strategic acquisitions that allowed us to become a more complete solutions provider of IT infrastructure products and services. One of the major benefits from adding the IT solutions providers was our ability to leverage the existing capabilities of the MSI business which enables us to offer additional professional services, managed service solutions, and first call maintenance support on many of the products sold. The introduction of additional value-added services allows us to achieve higher gross margins than we realize by selling hardware and software alone. Prior to providing the capabilities of first call maintenance, maintenance was sold along side other products. All revenues and costs were recognized upon recording the sale. By creating the ability to provide first call maintenance support, we now are providing a service to the customer over time, and therefore the revenues and the costs are ratably recognized over the service period. The overall margin is enhanced as well. On the broadcast side of the business, we continued to sell and deliver fully integrated digital archives and storage infrastructure to customers throughout the world.

          We continue to invest in the development of our software in digital archiving, data storage and infrastructure areas. During the year ended December 31, 2005, we invested approximately $1.6 million in software development and approximately $1.1 million for data storage infrastructure. As we continue to grow, we will need to sustain and possibly increase the investment of capital into our software technologies, GridWorks and DIVArchive, to ensure they maintain their competitive advantage and to further enhance their interoperability and feature sets.

          For the year ended December 31, 2005, our loss from operations was $12.0 million, as compared to a loss of $7.7 million for the comparable prior year period. In 2005, we recorded a goodwill impairment loss related to the acquisition of Incentra of CA amounting to $4.2 million as compared to an impairment loss of $0.2 million related to an earlier acquisition in the prior year. For the year ended December 31, 2005, we incurred an EBITDA loss of $1.8 million compared to an EBITDA loss of $3.5 million for the comparable prior year period. Excluding the impact on EBITDA of non-cash stock option compensation expense, amortization of referral fees and merger costs, the adjusted EBITDA loss was $1.2 million in 2005 and $1.5 million in 2004.¹

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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 and acquisitions 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

	For the years ending December 31,
	2005			2004
	All amounts in (000’s)
Net loss before deemed dividends and accretion on preferred stock	$	(14,226	)	$	(10,438	)
Depreciation and amortization		5,424			3,974
Loss on impairment of goodwill		4,151			198
Taxes		469			400
Interest (cash portion)		768			181
Interest (non-cash portion)		1,623			2,226
EBITDA		1,791			(3,459	)
Non-cash stock based compensation		521			392
Merger costs		—			1,275
Referral fees		72			288
EBITDA, as adjusted	$	(1,198	)	$	(1,504	)

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          We continue to leverage our unique intellectual property by taking advantage of our position as a leading provider of archive software solutions. During 2005, we expanded our product and service offerings, positioning us as a provider of a wide range of services and products to the broadcast and media markets and further solidifying our leading market position. Revenues from the broadcast and media markets grew by over 40% on a pro forma basis due to sales to existing and new customers, from strong growth of DIVArchive software revenues, and by offering complete archive solutions, including storage hardware and software, servers and peripheral devices, as well as first call support services. We increased our volume of products available for resale to the customers both directly and through existing channel partners. We 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.

          The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Results of Operations—Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004

          Our Independent Registered Public Accounting Firm’s report on our consolidated financial statements as of December 31, 2005, and for each of the years in the two-year period then ended, includes a “going concern” explanatory paragraph, that describes factors that raise substantial doubt about our ability to continue as a growing concern.

          Revenue. Total revenue for the year ended December 31, 2005 increased $37.5 million, or 283%, to $50.8 million compared to total revenue of $13.3 million for the year ended December 31, 2004. Revenue from the sale of our products increased to $37.6 million compared to revenue of $5.2 million for the comparable prior year period. This increase was attributable to:(1) the additional revenues resulting from the acquisitions of Incentra of CA and PWI, (2) increased orders for our software and related products, consisting primarily of sales of our DIVArchive solutions, (3) revenues resulting from the conclusion of the results of operations of Front Porch for the full year 2005 and (4) sales of hardware as part of complete archive solutions. Revenue from delivery of our services increased $5.1 million, or 63%, to $13.2 million compared to $8.1 million for the comparable prior year period. The increase in service revenue was the result of the additional revenues resulting from the professional services provided by Incentra of CA and PWI to its customers, as well as the introduction of first call maintenance services by these businesses. Pro forma revenue for the year ended December 31, 2005 increased to $61.3 million compared to $56.5 million in the previous year. The increase was due to the increased revenue from PWI and the broadcast division, which was offset in part by the decline in the revenues of Incentra of CA and MSI.

          For the year ended December 31, 2005, 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, Asia and the Pacific Rim amounted to $13.4 million, or 26% of total revenue, while revenues from customers located in North America totaled $37.4 million, or 74% of total revenue. For the year ended December 31, 2004, our revenues from customers located in Europe and Asia amounted to $4.7 million, or 35% of total revenue, while revenues from customers located in North America totaled $8.6 million, or 65% of total revenue.

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          Gross Margin. Total gross margin for the year ended December 31, 2005 increased $10.3 million to $16.3 million, or 32% of total revenue, as compared to gross margin of $6.0 million, or 45% of total revenue, for the comparable prior year period. The decrease in margin percentage was due to the introduction of third-party product sales from the two acquisitions in 2005. Product gross margin for the year ended December 31, 2005 totaled $12.2 million, or 32% of product revenue. Service gross margin for the year ended December 31, 2005 totaled $4.2 million, or 32% of service revenue. The decrease in the margin percentage in product revenue was due to the introduction of third-party products offered by the new acquisitions compared to the heavier percentage of the DIVArchive products in the prior year. On a pro forma basis, the gross margin for the year ended December 31, 2005 was $17.9 million compared to $16.8 million in the comparable prior year period. The increase of $1.1 million was net of a decrease of $1.2 million in gross margin from Incentra of CA.

          Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2005 increased by approximately $10.2 million to $20.5 million from $10.3 million for the comparable prior year period. SG&A expenses for the year ended December 31, 2005 included $14.5 million in salaries and related benefits for employees not directly related to the production of revenue, $2.6 million in general office expenses, $1.6 million in professional fees, $1.1 million for travel-related costs, $1.1 million in facilities costs, $0.1 million in bad debt expense and $0.1 million in research and development costs. SG&A expenses of $10.3 million for the prior year ending December 31, 2004 included $5.9 million in salaries and related benefits for employees not directly related to the production of revenue, $1.7 million in general office expenses, $0.9 million in professional fees, $0.8 million in travel related costs, $0.6 million of facilities costs and $0.2 million of bad debt expense. The increase in SG&A expenses during the year ended December 31, 2005 was a direct result of the inclusion of the SG&A expenses for a full year of Front Porch and the inclusion of SG&A expenses relating to the Incentra of CA and PWI businesses from the dates of the acquisitions forward. On a pro forma basis, SG&A expenses were $21.8 million for the year ending December 31, 2005 compared to $20.4 million for the comparable prior year period, a slight increase.

          Merger Costs. Merger costs of $1.3 million in 2004 consisted of costs incurred in the acquisition of Front Porch. These costs consisted of $0.8 million in compensation expense related to the accelerated vesting of stock options, $0.4 million in professional fees for legal, banking and accounting services, and $0.1 million of severance-related costs due to reductions in staffing as result of the acquisition. There were no significant merger-related costs in 2005.

          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 $5.4 million and $4.0 million for the years ended December 31, 2005 and 2004, respectively, of which $1.1 million and $2.0 million respectively was included in cost of revenue. The increase of $1.4 million was primarily the result of the increase in amortization associated with the Front Porch intangible assets.

          Operating Loss. During the year ended December 31, 2005, we incurred a loss from operations of $12.0 million as compared to a loss from operations of $7.7 million for the year ended December 31, 2004. The increase in the loss for 2005 is due to a loss for impairment of the goodwill related to the acquisition of Incentra of CA of $4.2 million. Included in the operating loss for the year ended December 31, 2004 was $1.3 million of costs related to the acquisition of Front Porch. On a pro forma basis, the net operating loss for the year ended December 31, 2005 was $11.9 million compared to $8.9 million for the comparable prior year period. This increase was due to the impairment loss being offset in part by improved performance.

          Interest Expense. Interest expense was $2.4 million for the year ended December 31, 2005 compared to $2.4 million for the year ended December 31, 2004. Interest expense during 2005 included cash interest costs of $0.8 million on notes payable and capital leases and non-cash interest charges of $1.6 million, consisting of $0.7 million related to amortization of debt discounts, $0.3 million related to warrants, $0.2 million related to the beneficial conversion feature of the Laurus note, and $0.4 million related to amortization of financing costs. Interest expense during 2004 included cash interest costs of $0.2 million on notes payable and capital leases and non-cash interest charges of $2.2 million, consisting of $1.7 million of interest on MSI’s previously outstanding Series C preferred stock, $0.2 million related to amortization of debt discounts, $0.2 million related to warrants, and $0.1 million related to amortization of financing costs.

          Other Income and Expense. Other income of $0.7 million for 2005 included $0.2 million of income from the sale of New Jersey state net operating losses from prior years and $0.4 million related to a gain on the adjustment

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to the valuation of warrants classified as liabilities. Other income of $0.4 million for 2004 included $0.3 million of income for the sale of New Jersey state net operating losses from prior years and $0.1 million for investment income and gains from the sale of fixed assets.

          Foreign Currency Translation and Transactions. As discussed above, we conduct business in various countries outside the United States in which the functional currency of the country is not the U. S. dollar. As a result, we have foreign currency exchange translation exposure as the results of these foreign operations are translated into U.S. dollars in our consolidated financial statements. For the year ended December 31, 2005, we reported an accumulated translation loss of $103,235 as a component of accumulated other comprehensive loss. We are also subject to foreign exchange transaction exposure because we provide for intercompany funding between the U.S. and international operations, when we and/or our French subsidiary transacts business in a currency other than our own functional currency. The effect of exchange rate fluctuations in remeasuring foreign currency transactions for the years ended December 31, 2005 and 2004 was a loss of $43,209 and $24,756, respectively. In June 2004, we entered into two forward contracts, one of which expired on December 7, 2004 and the other on April 1, 2005. We recorded a $59,900 realized gain on these contracts as of December 31, 2005 which represented the change in the fair value of the foreign currency forward contract related to the difference between changes in the spot and forward rates excluded from the assessment of hedge effectiveness. We recorded a realized loss of $144,086 and an unrealized loss of $134,500 on these contracts as of December 31, 2004.

          Income Tax Expense. We incurred income tax expense for the years ended December 31, 2005 and 2004 of $0.5 million and $0.4 million, respectively. This charge represented non-cash deferred income tax expense related to our French subsidiary, Front Porch Digital International, S.A.S. The income taxes were incurred during the period from the date of the MSI acquisition through December 31, 2005 and represented the utilization of the subsidiary’s deferred tax assets (net operating losses) during that period, which was recorded as a deferred tax asset as part of the allocation of the purchase price of the subsidiary.

          Net Loss Applicable to Common Stockholders. During the year ended December 31, 2005, we incurred a net loss applicable to common stockholders of $16.8 million as compared to a net loss applicable to common stockholders of $11.8 million for the year ended December 31, 2004. Included in the net loss for the year ended December 31, 2004 was $1.3 million of costs related to the merger with Front Porch. The increase in net loss for the year ended December 31, 2005 was primarily due to the $4.2 million impairment loss related to Incentra of CA, additional amortization of $1.5 million and the net increase of the accretion and dividends on preferred stock of $1.3 million.

Liquidity and Capital Resources

          At December 31, 2005, we had $1.1 million of cash and cash equivalents. Issuance of convertible debt and equity securities and access to revolving lines of credit have been the principal sources 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 4,435,500 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.

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

          On June 30, 2005, we entered into a Security Agreement with Laurus pursuant to which Laurus provided us with a $9 million revolving, convertible credit facility (the “2005 Facility”). The term of the 2005 Facility was three years. In connection with the 2005 Facility, we executed in favor of Laurus a $9 million secured revolving note

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(the “Revolver Note”). Borrowings under the 2005 Facility accrue interest at a rate per annum equal to the “prime rate” (as published in The Wall Street Journal) plus 1%, which was subject to reduction if the market price of our common stock exceeded certain designated thresholds. Pursuant to the 2005 Facility, the minimum initial amount available to us, until December 31, 2005, was $6.0 million. Thereafter, the maximum principal amount of all borrowings under the 2005 Facility could not exceed 90% of the combined eligible accounts receivable of PWI and Incentra of CA. At December 31, 2005, the outstanding principal balance on the 2005 Facility was $5.5 million, net of debt discount of $0.5 million. At December 31, 2005, our accounts receivable did not meet the 90% threshold.

          The outstanding principal amount of the revolver note 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 is $6.5 million. Thereafter, the maximum principal amount outstanding under the 2006 Revolver Note cannot exceed 90% of the combined eligible accounts receivable of 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 $1,500,000 (the “2006 Term Note”) and a secured convertible term note due May 31, 2009 in the principal amount of $1,750,000 (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. The funding under the 2006 Term note and the 2006 Convertible Note is contingent upon meeting certain closing conditions which must be satisfied on or before April 21, 2006. In the event that such conditions are not satisfied on or before that date, the private placement will terminate and no funding will occur.

          As of December 31, 2005, we had current assets of $13.0 million. These assets were primarily derived from our operations in 2005 and from our acquisitions of Incentra of CA and PWI. Long-term assets of $24.9 million consisted of $13.7 million of intangible assets acquired during the transactions with MSI, Incentra of CA and PWI, $5.9 million of goodwill acquired during the Incentra of CA and PWI transactions, $2.2 million of property and equipment, $2.1 million of software development costs and $1.0 million of other assets, which consisted of $0.8 million of deferred financing costs, $0.1 million of restricted cash and $0.1 million of deposits, prepaid expenses and other receivables.

          Current liabilities of $26.1 million at December 31, 2005 consisted of $7.8 million of accounts payable; $1.9 million of deferred revenue, which consisted of billings in excess of revenue recognized, deposits and progress payments received on engagements currently in progress; $5.3 million of accrued expenses; and $11.1 million of current portion of notes payable, other long term obligations, and capital leases.

          Our working capital deficit was $13.0 million as of December 31, 2005, which included $5.5 million under a line of credit, net of debt discount of $0.5 million. Also included in the deficit is $1.3 million attributable to the reclassification of the promissory note issued to a former owner of an acquired company to current liabilities due to a default on such note and subsequent arbitration proceeding, as described in Note 16 in the Notes to Consolidated Financial Statements and an additional $1.5 million due to cross-default provisions in other long-term indebtedness (see Note 9(A) in the Notes to Consolidated Financial Statements). With the exclusion of these items, the working capital deficit is $4.7 million.

          We used net cash of $1.5 million in operating activities during the year ended December 31, 2005 primarily as a result of the net loss incurred during the periods. We used net cash of $1.1 million in investing activities during the year ended December 31, 2005, of which $1.7 million represented cash acquired from the acquisitions. This was offset in part by $2.7 million used primarily to purchase or develop computer software and equipment. Financing activities provided net cash of $0.7 million during the year ended December 31, 2005 primarily from a new line of credit which provided $1.3 million in net new borrowings, offset by repayment of capital leases, long-term obligations and notes payable.

          We are still in the early stages of executing our business strategy. Two acquisitions were completed in 2005. We expect to pursue additional acquisition opportunities during the next 12 months. Although we are achieving 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.

          We expect anticipated cash flow from operations combined with our cash and cash equivalents at April 1, 2006 will be sufficient to operate through March 31, 2007. However, there can be no assurance that we will not need to

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access the capital markets for additional financing to fund our organic growth and subsequent acquisitions and that sufficient capital will be available upon acceptable terms.

          During 2005, we continued to have success in deploying our marketing strategy for the sale and delivery of our DIVArchive software solutions. Our revenue backlog at December 31, 2005 was $2.4 million compared to $1.7 million at December 31, 2004.

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

          We expect capital expenditures to be approximately $3.5 million during the 12-month period ended December 31, 2006. It is expected that our principal uses of cash will be for working capital, to finance capital expenditures and for other general corporate purposes, including financing the expansion of our business and implementation of our sales and marketing strategy. The amount of spending in each respective area is dependent upon the total capital available to us.

Going Concern and Management’s Plans

          Our consolidated financial statements as of December 31, 2005 and for the year 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.

          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 STAR 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 December 31, 2005. 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 on terms acceptable to us. See Note 16.

          The event of default on the STAR Note created an event of default of certain provisions of debt outstanding with Laurus, our senior secured lender. As a result, the entire balance of amount owed to Laurus, which totals $8.8 million has been classified as a current liability at December 31, 2005. We believe we have a good relationship with Laurus; however, there is uncertainty regarding our ability to comply with required debt covenants in the future which places the debt in the 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 as well as the arbitration proceeding discussed above and, should we be in breach of the covenants on the debt, our ability to restructure or otherwise amend the terms of that debt. The 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 that we will execute our current business plan that calls for growth in the 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.

Recently Issued Accounting Pronouncements

          In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), Share-Based Payment, which addresses the accounting for share-based compensation transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted and recognized in the statement of operations based on their fair value. SFAS No. 123(R) will be effective for us during the first quarter of 2006. We have evaluated the provisions of this standard, and we expect that the implementation of this standard will have material impact on our financial position and results of operations.

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

ITEM 7. FINANCIAL STATEMENTS

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

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

          None

ITEM 8A. CONTROLS AND PROCEDURES.

          Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term

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is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act with the exception of the procedures surrounding the recording of the purchase price allocation for acquired businesses. These controls and procedures have been addressed and will be implemented on future acquisitions.

          Internal Control Over Financial Reporting. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 8B. OTHER INFORMATION

          None

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

MANAGEMENT AND BOARD OF DIRECTORS

          The following sets forth the name, age and position of each of our directors and executive officers as of March 31, 2006:

Name	Age	Position(s)
Thomas P. Sweeney III	45	Chairman of the Board and Chief Executive Officer
Shawn O’Grady	43	President and Chief Operating Officer
Michael Knaisch	49	President of Front Porch Digital Division
Paul McKnight	49	Chief Financial Officer
Matthew Richman	35	Senior Vice President – Corporate Development and Treasurer
Walter Hinton	43	Chief Technology Officer
Patrick Whittingham	57	Director
James Wolfinger	49	Director
Carmen J. Scarpa	41	Director
Thomas G. Hudson	59	Director
David E. Weiss	62	Director

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

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

          Thomas P. Sweeney III. Mr. Sweeney has been our Chief Executive Officer since August 18, 2004, the date of our acquisition of ManagedStorage International, Inc. (“MSI”), and Chairman of our Board of Directors since August 2002. Mr. Sweeney previously served on our Board of Directors for the period November 30, 2000 through February 12, 2002. From February 2001 until August 19, 2004, Mr. Sweeney was Chief Executive Officer and Chairman of the Board of MSI. Since such date, Mr. Sweeney has also served as President and a director of MSI. Mr. Sweeney is the founder of Equity Pier LLC, a business advisory and venture capital firm, and has served as its Managing Partner since May 2000.

          Shawn O’Grady. Mr. O’Grady has been our President and Chief Operating Officer since October 2005. Prior to his employment with our company, Mr. O’Grady was employed by Siemens Business Services (“SBS”), the information technology (IT) services division of Siemens AG. From June 2004 until October 2005, Mr. O’Grady was the Senior Vice President and Business Unit General Manager, Consulting and Integration, of SBS. From October 2002 until June 2004, he served as SBS’ Senior Vice President, Business Development. From October 2000 until October 2002, Mr. O’Grady was the Senior Vice President, Regional Business Unit of SBS.

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

          Paul McKnight. Mr. McKnight has been our Chief Financial Officer since October 2004. Mr. McKnight also served on our Board of Directors from August 2002 to November 2005. From August 2002 to January 2003, Mr. McKnight also served as our interim Chief Financial Officer. Since August 2001, Mr. McKnight has been the Chief Financial Officer of MSI. From May 2000 to August 2001, Mr. McKnight served as Chief Financial Officer of Equity Pier LLC, a business advisory and venture capital firm.

          Matthew Richman. Mr. Richman has been our Senior Vice President - Corporate Development and Treasurer since October 2004. From January 2003 to October 2004, Mr. Richman was our Chief Financial Officer and from June 2003 to October 2004, our Chief Operating Officer. From October 2002 to January 2003, Mr. Richman provided consulting services to us. From February 2001 to September 2002, Mr. Richman served as Chief Financial Officer of Advanced Data Center, Inc., a data center and managed technology services provider.

          Walter Hinton. Mr. Hinton has been our Chief Technology Officer since October 2004. Mr. Hinton was the Chief Technology Officer for MSI from March 2000 through October 2004.

          Patrick Whittingham. Mr. Whittingham has served on the Board of Directors since April 2004. Since April 2004, Mr. Whittingham has been a consultant in the area of broadcast and production technology, systems integration and digital cinema. Prior to February 2004, Mr. Whittingham had been for more than 28 years an employee of various affiliates of Sony Corporation, including President of the Sony Broadcast and Production Systems Division of Sony Electronics (USA), Inc. from June 2003 to January 2004; President of Sony Business Solution and System Company (USA) from June 2002 to June 2003; Senior Vice President of System Solutions Division (USA) from February 2001 to June 2002; and Executive Vice President of Sony of Canada Ltd. from May 1997 to February 2001.

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

          Carmen J. Scarpa. Mr. Scarpa has served on our Board of Directors since August 2004. Mr. Scarpa joined Tudor Ventures Group LLC (“Tudor Ventures”), a private equity firm specializing in mid- and late-stage technology and growth companies, in June 1996 and has been a partner and managing director of Tudor Ventures since January 2001.

          Thomas G. Hudson. Mr. Hudson has served on our Board of Directors since November 2005. From 1996 to June 2005, Mr. Hudson served as President, Chief Executive Officer and a director of Computer Network Technologies Corporation, a fiber switch company that was sold to McData Corporation, a storage networking solutions company, in June 2005. Since June 2005, Mr. Hudson has served as a director for McData Corporation. Since May 1999 until it was acquired by McData Corporation in 2005, he also served as its Chairman of the Board. Mr. Hudson currently serves as a director of Lawson Software, Inc., a publicly-held enterprise resource planning (ERP) software company, and Plato Learning, Inc., a publicly-held educational software company.

          David E. Weiss. Mr. Weiss has served on our Board of Directors since November 2005. From 2000 to 2005, Mr. Weiss served as a management consultant. From May 1996 until 2000, Mr. Weiss served as the Chairman, President and Chief Executive Officer of Storage Technology Corporation, a developer, manufacturer and distributor of data storage solutions for management, retrieval and protection of business information. Mr. Weiss currently serves as a director of Apogee Enterprises, Inc., a publicly-held holding company engaged in the design and development of value-added glass products, services and systems.

Section 16(a) Beneficial Ownership Reporting Compliance

          Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities (“10% Shareholders”), to file with the Securities and Exchange Commission (the “Commission”) initial reports of ownership

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and reports of changes in ownership of our common stock and other equity securities. Officers, directors and 10% Shareholders are required by Commission regulation to furnish us with copies of all Section 16(a) forms they file.

          Based solely on our review of the copies of such reports received by us, we believe that for the fiscal year ended December 31, 2005, all Section 16(a) filing requirements applicable to our officers, directors and 10% Shareholders were complied with, except (i) David E. Weiss, a director, was late in filing an Initial Statement of Beneficial Ownership of Securities on Form 3 for options granted to him on December 14, 2005 to purchase 25,000 shares of our common stock and (ii) Thomas G. Hudson, a director, was late in filing an Initial Statement of Beneficial Ownership of Securities on Form 3 for options granted to him on December 14, 2005 to purchase 25,000 shares of common stock.

Code of Ethics

          We have not yet adopted a formal code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Management expects to implement a formal code of ethics and related control for these persons during 2006.

ITEM 10. EXECUTIVE COMPENSATION

          The following Summary Compensation Table sets forth compensation we paid for services rendered to our Chief Executive Officer, and to our most highly compensated executive officers at December 31, 2005, other than our Chief Executive Officer (collectively, the “Named Executed Officers”).

									Long-Term Compensation
			Annual Compensation						Awards				Payouts
	Fiscal Year		Salary ($)		Bonus ($		Other Annual Compensation ($)		Restricted Stock Award(s) ($)		Securities Underlying Options/ SARs (#)		LTIP Payouts ($)		All Other Compensation ($)
Thomas P. Sweeney III(1)		2005	$	299,038	$	75,000		$-0-		$-0-		-0-		$-0-		$	12,600
Chief Executive Officer		2004	$	220,192	$	220,000		$-0-		$-0-		1,106,200		$-0-		$	12,010
		2003	$	125,000	$	150,000		$-0-		$-0-		151,009		$-0-		$	3,200
Michael Knaisch(2)		2005	$	200,000	$	162,500		$-0-		$-0-		-0-		$-0-		$	11,345
Chief Executive Officer		2004	$	200,000	$	142,667		$-0-		$-0-		60,000		$-0-		$	-0-
until August 2004		2003	$	217,000	$	129,000		$-0-		$-0-		75,000		$-0-		$	-0-
President of Front Porch
Digital Division since
August 2004
Matthew Richman(3)		2005	$	182,500	$	44,063		$-0-		$-0-		-0-		$-0-		$	-0-
Chief Financial Officer &		2004	$	160,000	$	119,133		$-0-		$-0-		42,500		$-0-		$	15,000
Chief Operating Officer		2003	$	168,000	$	105,000		$-0-		$-0-		50,000		$-0-		$	-0-
until October 2004
Sr. Vice President -
Corporate Development
and Treasurer since
October 2004
Paul McKnight(4)		2005	$	209,423	$	18,750		$-0-		$-0-		-0-		$-0-		$	-0-
Chief Financial Officer		2004	$	195,000	$	25,000		$-0-		$-0-		50,000		$-0-		$	-0-
since October 2004		2003	$	195,000	$	9,000		$-0-		$-0-		27,588		$-0-		$	-0-
Walter Hinton(5)		2005	$	224,423	$	20,000		$-0-		$-0-		-0-		$-0-		$	3,920
Chief Technical Officer		2004	$	210,000	$	50,000		$-0-		$-0-		70,000		$-0-		$	3,920
since October 2004		2003	$	210,000	$	45,000		$-0-		$-0-		33,642		$-0-		$	3,720

          (1) Mr. Sweeney was appointed as our Chief Executive Officer effective August 18, 2004 and has also served as our Chairman of the Board since August 2002. Prior to August 18, 2004, Mr. Sweeney served as the President and Chief Executive Officer of MSI, which we acquired on August 18, 2004. Included in the 2005 salary and bonus earned by Mr. Sweeney is $86,538 of accrued but unpaid compensation. Compensation paid to Mr. Sweeney in 2004 included salary of $93,077 paid by our company after the Acquisition and salary of $127,115 paid by MSI prior to the Acquisition. Compensation in 2003 represents compensation paid to Mr. Sweeney by MSI.

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          (2) Mr. Knaisch served as our Chief Executive Officer from June 2, 2003 to August 18, 2004 (the date of our acquisition of MSI), on which date he was appointed President of our Front Porch Digital Division. Included in the 2005 salary and bonus earned by Mr. Knaisch is $83,333 of accrued but unpaid compensation. From June 1, 2003 to December 31, 2003, Mr. Knaisch was an employee of ours and received $117,000 in salary for serving as our Chief Executive Officer. From January 1, 2003 to June 2, 2003, Mr. Knaisch provided consulting services to us and received $100,000 in consulting fees and $12,000 in bonus as compensation for services provided as our Chief Operating Officer.

          (3) Mr. Richman served as our Chief Financial Officer and Treasurer from January 2003 and our Chief Operating Officer from June 2003 until October 12, 2004, on which date he was appointed Senior Vice President -Corporate Development. Included in the 2005 salary and bonus earned by Mr. Richman is $21,980 of accrued but unpaid compensation. From June 1, 2003 to December 31, 2003, Mr. Richman was an employee of ours and received $93,000 in salary for serving in the capacities described above. From January 1, 2003 to May 31, 2003, Mr. Richman provided consulting services to us and received $75,000 in consulting fees and $12,000 in bonus as compensation for services provided as our Chief Financial Officer.

          (4) Mr. McKnight was appointed our Chief Financial Officer on October 12, 2004. Prior to August 18, 2004 (the date of our acquisition of MSI), Mr. McKnight served as the Chief Financial Officer of MSI. Included in the 2005 salary and bonus earned by Mr. McKnight is $26,827 of accrued but unpaid compensation. Compensation paid to Mr. McKnight in 2004 includes salary and bonus of $66,000 and $25,000, respectively, paid by us after the acquisition of MSI and salary of $129,000 paid by MSI prior to the acquisition of MSI. Compensation in 2003 represents compensation paid to Mr. McKnight by MSI.

          (5) Mr. Hinton has served as our Chief Technical Officer since October 12, 2004. Prior to such date, Mr. Hinton served as the Chief Technical Officer of MSI, which was acquired by us in August 2004. Included in the 2005 salary and bonus earned by Mr. Hinton is $27,404 of accrued but unpaid compensation. Compensation paid to Mr. Hinton in 2004 includes salary and bonus of $71,077 and $45,000, respectively, paid by us after the acquisition of MSI and salary and bonus of $138,923 and $50,000, respectively, paid by MSI prior to the acquisition of MSI. Compensation in 2003 represents compensation paid to Mr. Hinton by MSI.

Equity Incentive Plan

          In May 2000, we adopted our 2000 Equity Incentive Plan (the “Incentra Option Plan”) for the purpose of attracting, retaining and maximizing the performance of executive officers and key employees and consultants. We have reserved 2,265,000 shares for issuance under the Incentra Option Plan. The Incentra Option Plan has a term of ten years. The Incentra Option Plan provides for the grant of “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, non-statutory stock options, stock appreciation rights and restricted stock awards. The Incentra Option Plan is administered by the Compensation Committee of the Board of Directors (the “Compensation Committee”). The exercise price for non-statutory stock options may be equal to or more or less than 100 percent of the fair market value of shares of common stock on the date of grant. The exercise price for incentive stock options may not be less than 100 percent of the fair market value of shares of common stock on the date of grant (110 percent of fair market value in the case of incentive stock options granted to employees who hold more than ten percent of the voting power of our issued and outstanding shares of common stock).

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

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

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

Managed Storage International, Inc. – 2000 Stock Option and Grant Plan

          Prior to our acquisition of ManagedStorage International, Inc. (“MSI”), which is accounted for as a reverse merger, MSI adopted and administered its 2000 Stock Option and Grant Plan (the “MSI Plan”) for its employees, directors, consultants and other key persons. As a result of such acquisition, no additional grants will be made under the MSI Plan. However, outstanding stock options previously issued pursuant to the MSI Plan may be exercised for unregistered shares of our common stock. As provided in the MSI acquisition agreements, upon the exercise of any outstanding options issued under the MSI Plan, we will issue 0.3089 shares of our unregistered shares of common stock for each share of MSI common stock that would have been issuable upon the exercise of such options. Currently, there are outstanding under the MSI Plan options to purchase 216,536 shares of our common stock.

          The following table sets forth information with respect to each exercise of stock options during the year ended December 31, 2005 by each of the Named Executive Officers and the value at December 31, 2005 of all unexercised stock options held by such persons.

AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 2005
AND DECEMBER 31, 2005 OPTION VALUES

Name	Shares Acquired on Exercise (#)		Value Realized ($)		Number of Securities Underlying Unexercised Options at December 31, 2005 Exercisable/Unexercisable	Value of Unexercised In-the-money options at December 31, 2005 Exercisable/Unexercisable (a)
Thomas P. Sweeney III		-0-		$-0-	483,998/775,219(1)	$2,811/$-0-
Michael Knaisch		-0-		$-0-	135,000/0	$-0-/$-0-
Matthew Richman		-0-		$-0-	92,500/0	0/$-0-
Paul McKnight		-0-		$-0-	42,492/35,230(2)	$188/$-0-
Walter Hinton		-0-		$-0-	48,902/55,077(3)	$472/$-0-

          (a) Potential unrealized value is calculated as the fair market value at December 31, 2005 ($1.40 per share on the OTC-BB), less the option exercise price, times the number of shares.

          (1) Includes vested options to purchase 115,265 shares issued under the MSI Plan

          (2) Includes vested options to purchase 5,825 shares issued under the MSI Plan

          (3) Includes vested options to purchase 25,569 shares issued under the MSI Plan

Compensation of Directors

          With the exception of Mr. Carmen Scarpa, Non-employee directors receive $2,500 per month for their services and all are reimbursed for their reasonable out-of-pocket expenses incurred in attending meetings of the Board. In April 2004, James Wolfinger and Patrick Whittingham, non-employee directors, were each granted options to purchase up to 25,000 shares of our common stock at a price of $2.20 per share. In December 2005, Thomas G. Hudson and David E. Weiss, non-employee directors, were each granted options to purchase up to 25,000 shares of our common stock at $1.21 per share. The options vest pursuant to a three-year vesting schedule.

Employment Contracts

          On August 18, 2004, we entered into a two-year employment agreement with Thomas P. Sweeney III, our Chairman of the Board of Directors and Chief Executive Officer. Mr. Sweeney’s employment agreement contains the following

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provisions: annual base salary of $275,000 and $300,000 for the first and second years, respectively; annual bonus of up to 100% of the base salary; the payment of insurance premiums under Mr. Sweeney’s existing life insurance policy; the issuance of options to purchase up to 1,023,700 shares of our common stock at $2.80 per share, which options are subject to a three-year vesting schedule; severance provisions for the payment of one-year of base salary; a pro-rated bonus and certain benefits in the event of a change of control or the termination of Mr. Sweeney’s employment for any reason other than for cause (as defined).

          On December 6, 2004, we entered into a two-year employment agreement with Michael Knaisch, the President of our Front Porch Digital Division (and our former Chief Executive Officer). The employment agreement with Mr. Knaisch contains the following provisions: annual base salary of $200,000, subject to increase at the discretion of the compensation committee of our Board of Directors; quarterly performance-based bonuses of up to $37,500, as determined by our Board of Directors, during the fiscal year ending December 31, 2005; and additional life insurance for Mr. Knaisch paid by us with a benefit equal to three times the annual base salary. The agreement provides that Mr. Knaisch may terminate the agreement upon thirty (30) days prior written notice to us, and we may terminate the agreement with or without cause, upon written notice to Mr. Knaisch. If Mr. Knaisch is terminated without cause he will be entitled to receive his full salary and group health plan benefits for 12 months following such termination.

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

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

          On October 10, 2005, we entered into a two-year employment agreement with Shawn O’Grady, our President and Chief Operating Officer. Mr. O’Grady’s employment agreement contains the following provisions: annual base salary of $240,000, subject to increase at the discretion of the compensation committee of our Board of Directors; beginning in 2006, an annual performance-based bonus of up to $160,000, but in no event less than $40,000; an additional bonus at the discretion of our Board of Directors if performance objectives are exceeded by three percent (3%) or more; and termination of the agreement by Mr. O’Grady upon 30 days prior written notice and by us, with or without cause, upon written notice to Mr. O’Grady. Mr. O’Grady will be entitled to receive his full salary and group health plan benefits for 12 months following termination if he is terminated without cause (as defined).

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

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

          The following table sets forth information as of March 23, 2006 regarding beneficial stock ownership of (i) all persons known to us to be beneficial owners of more than five percent (5%) of our outstanding common stock and Series A preferred stock, (ii) each of our directors, (iii) the Named Executive Officers and (iv) all of our officers and directors as a group. Each of the persons in the table below has sole voting power and sole dispositive power as to all of the shares shown as beneficially owned by them, except as otherwise indicated:

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Name	Title of Class	Number of Shares Beneficially Owned(1)	Percent of Outstanding Shares(2)(3)
5% Beneficial Owners
Great Hill Equity Partners LP	Common Stock	3,732,612	24.9	%(4)
One Liberty Square	Series A Preferred Stock	843,170	34.2	%
Boston, MA 02109
Tudor Investment Corporation	Common Stock	2,684,547	17.5	%(5)
1275 King Street	Series A Preferred Stock	1,004,405	40.7	%
Greenwich, CT 06831
J.P. Morgan Direct Venture Capital	Common Stock	2,330,797	16.0	%(6)
Institutional Investors, LLC	Series A Preferred Stock	602,775	24.4	%
522 Fifth Avenue
New York, NY 10036
Alfred N. Curmi	Common Stock	1,135,580	8.5	%(7)
910 Seasage Drive
Delray Beach, Florida 33483
Directors and Named Executive Officers
Thomas P. Sweeney III	Common Stock	846,707	6.1	%(8)
1140 Pearl Street	Series A Preferred Stock	16,588	*
Boulder, CO 80302
Michael Knaisch	Common Stock	199,814	1.5	%(9)
Matthew Richman	Common Stock	152,514	1.1	%(10)
James Wolfinger	Common Stock	76,191	*	(11)
Walter Hinton	Common Stock	69,217	*	(12)
Paul McKnight	Common Stock	44,623	*	(13)
Patrick Whittingham	Common Stock	16,667	*	(14)
Carmen J. Scarpa	—	—	—
Thomas G. Hudson	—	—	—
David E. Weiss	—	—	—
All directors and executive	Common Stock	1,405,734	9.9	%
officers as a group (10 persons)	Series A Preferred Stock	16,588	0.7	%

*	Constitutes less than 1%
(1)	For the purposes of this table, a person is deemed to have “beneficial ownership” of any shares of capital stock that such person has the right to acquire within 60 days of March 23, 2006.
(2)	All percentages for common stock are calculated based upon a total of 13,326,810 shares outstanding as of March 23, 2006, plus, in the case of the person for whom the calculation is made, that number of shares of common stock that such person has the right to acquire within 60 days after March 23, 2006.
(3)	All percentages for Series A preferred stock are calculated based upon a total of 2,466,971 shares outstanding as of March 23, 2006.
(4)	Represents 3,611,082 shares of common stock owned of record by Great Hill Equity Partners LP (“GHEP”) (assuming conversion of 815,715 shares of Series A preferred stock into 1,631,430 shares of common stock) and 121,530 shares of common stock owned of record by Great Hill Investors, LLC (“GHI”) (assuming conversion of 27,455 shares of Series A preferred stock into 54,909 shares of common stock). The foregoing numbers represent shares for which GHEP and GHI each has shared dispositive and voting power. Such shares may be deemed to be beneficially owned by Great Hill Partners GP, LLC (“GP”), the general partner of GHEP, Great Hill Partners, LLC (“GHP”), a manager of GP and Messrs. Christopher S. Gaffney, John G. Hayes and Stephen F. Gormley, the managers of GHI, GHP and GP. Share information is furnished in reliance on the Schedule 13D dated August 18, 2004 filed by the persons named herein with the Securities and Exchange Commission. The persons named herein have each specifically disclaimed that they are a member of a group for purposes of Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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(5)	Represents 2,416,151 shares of common stock owned of record by Tudor Ventures II LP (“Tudor”) (assuming conversion of 903,994 shares of Series A preferred stock into 1,807,988 shares of common stock), 266,583 shares of common stock owned of record by The Raptor Global Portfolio Ltd. (“Raptor”) (assuming conversion of 99,741 shares of Series A preferred stock into 199,482 shares of common stock), and 1,813 shares of common stock held by The Altar Rock Fund LP (“Altar”) (assuming conversion of 670 shares of Series A preferred stock into 1,340 shares of common stock). The foregoing numbers represent shares for which Tudor, Raptor and Altar each has shared dispositive and voting power. Such shares may be deemed to be beneficially owned by Tudor Investment Corporation (“TIC”), the sole general partner of Altar and an investment advisor for Tudor and Raptor, and Paul Tudor Jones, II, the controlling shareholder of TIC. Tudor Ventures Group LP (“TV GP”), the general partner of Tudor, and Tudor Ventures Group LLC, the general partner of TV GP, may also be deemed to be beneficial owners of the shares held by Tudor. Share information is furnished in reliance on the Schedule 13D dated August 18, 2004 filed by the persons named herein with the Securities and Exchange Commission. The persons named herein have each specifically disclaimed that they are a member of a group for purposes of Section 13(d) or 13(g) of the Exchange Act.
(6)	Represents 1,924,580 shares of common stock owned of record by JP Morgan Direct Venture Capital Institutional Investors LLC (“JPM Institutional”) (assuming conversion of 497,532 shares of Series A preferred stock into 995,063 shares of common stock), 311,514 shares of common stock owned of record by JP Morgan Direct Venture Private Investors LLC (“JPM Private”) (assuming conversion of 81,136 shares of Series A preferred stock into 162,273 shares of common stock), and 94,703 shares of common stock owned of record by 522 Fifth Avenue Fund, LP (“522 Fund”) (assuming conversion of 24,107 shares of Series A preferred stock into 48,214 shares of common stock). The foregoing numbers represent shares for which JPM Institutional, JPM Private and 522 Fund each has shared dispositive and voting power. The shares held by JPM Institutional may be deemed to be beneficially owned by JPMorgan Chase Bank (“JPMCB”), its investment advisor, and JPMorgan Chase & Co., the parent of JPMCB. The shares held by JPM Private may be deemed to be beneficially owned by J.P. Morgan Investment Management Inc. (“JPMIM”), its investment advisor. The shares held by 522 Fund may be deemed to be beneficially owned by 522 Fifth Avenue Corp. (“522 Corp.”), its general partner, JPMIM, its investment advisor and the sole stockholder of 522 Corp., J.P. Morgan Fleming Asset Management Holdings Inc. (“Fleming”), the sole stockholder of JPMIM, and JPMCB, the sole stockholder of Fleming and the indirect parent of JPMIM. Share information is furnished in reliance on the Schedule 13D dated August 18, 2004 filed by the persons named herein with the Securities and Exchange Commission. The persons named herein have each specifically disclaimed that they are a member of a group for purposes of Section 13(d) or 13(g) of the Exchange Act.
(7)	Share information is furnished in reliance on the Schedule 13G dated March 2, 2005 filed by the person named herein with the Securities and Exchange Commission.
(8)	Represents 122,443 shares of common stock owned of record by Equity Pier LLC, of which Mr. Sweeney is the founder and managing member, 141,837 shares of common stock owned of record by Mr. Sweeney, and 549,250 shares issuable upon the exercise of presently exercisable options held by Mr. Sweeney and assumes conversion of 16,588 shares of Series A preferred stock owned of record by Mr. Sweeney into 33,177 shares of common stock.
(9)	Represents 64,814 shares of common stock owned of record by Mr. Knaisch and 135,000 shares of common stock issuable upon the exercise of presently exercisable options held by Mr. Knaisch.
(10)	Represents 60,014 shares of common stock owned of record by Mr. Richman and 92,500 shares of common stock issuable upon the exercise of presently exercisable options held by Mr. Richman.
(11)	Represents 59,524 shares owned of record by Mr. Wolfinger and 16,667 shares of common stock issuable upon the exercise of presently exercisable options held by Mr. Wolfinger.
(12)	Represents 11,905 shares of common stock owned of record by Mr. Hinton and 57,312 shares issuable upon the exercise of presently exercisable options held by Mr. Hinton.
(13)	Represents 134 shares of common stock owned of record by Mr. McKnight, 100 shares of common stock owned by Mr. McKnight’s spouse and 44,389 shares issuable upon the exercise of presently exercisable options held by Mr. McKnight. Mr. McKnight is a member of Equity Pier LLC and disclaims beneficial ownership of the shares of common stock beneficially owned by such entity.
(14)	Represents shares of common stock issuable upon the exercise of presently exercisable options held by Mr. Whittingham.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          Thomas P. Sweeney III, our Chairman and Chief Executive Officer, is the founder and Managing Partner of Equity Pier LLC (“Equity Pier”), a beneficial owner of 6.1% of our outstanding common stock. We leased office space from Equity Pier in 2005 and 2004. Total costs incurred under the leasing arrangement and associated expenses (utilities, supplies and insurances) amounted to approximately $190,178 and $84,529, respectively.

ITEM 13. EXHIBITS

          (A)(1) Financial Statements:

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheet as of December 31, 2005	F-2
Consolidated Statements of Operations for the years ended December 31, 2005 and 2004	F-3
Consolidated Statements of Mandatorily and Convertible Redeemable Preferred Stock for the years ended December 31, 2005 and 2004	F-4
Consolidated Statements of Shareholders’ Deficit and Comprehensive Loss for the years ended December 31, 2005 and 2004	F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004	F-7
Notes to Consolidated Financial Statements	F-9

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          (A)(2) Exhibits:

          (a) Exhibits

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

Exhibit No.	Exhibit Description
2.1	Stock Purchase Agreement, dated as of March 30, 2005, by and among our company, Incentra Merger Corp., Barry R. Andersen and Gary L. Henderson (incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on April 1, 2005).
3.1	Articles of Incorporation dated as of April 10, 1995 (incorporated by reference to the exhibit of the same number filed with our Registration Statement on Form SB-2, filed on November 13, 1996).
3.2	Certificate of Amendment to the Articles of Incorporation dated as of August 22, 1996 (incorporated by reference to the exhibit of the same number filed with our Registration Statement on Form SB-2, filed November 13, 1996).
3.3	Certificate of Amendment to Articles of Incorporation dated as of March 12, 1998 (incorporated by reference to Exhibit 3.1 filed with our Current Report on Form 8-K, filed on March 27, 1998).
3.4	Certificate of Amendment to Articles of Incorporation dated as April 12, 2000 (incorporated by reference to the exhibit of thsame number filed with our Annual Report on Form 10-KSB for the period ended December 31, 2000, filed on April 2, 2001).
3.5	Certificate of Amendment to Articles of Incorporation dated as of May 1, 2000 (incorporated by reference to Exhibit 2 filed with our Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000, filed on August 15, 2000).
3.6	Certificate of Amendment to Articles of Incorporation dated as of May 25, 2004 (incorporated by reference to the Exhibit of the same number with Amendment Number 1 to our Registration Statement on Form SB-2, filed on July 15, 2004).
3.7	Certificate of Amendment to Articles of Incorporation dated as of October 18, 2004 (incorporated by reference to Exhibit A to the Definitive Schedule 14C Information Statement, filed on October 14, 2004).
3.8	Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of our company (incorporated by reference to Exhibit 3.2 filed with our Current Report on Form 8-K, filed on August 20, 2004).
3.9	By-Laws of the Company dated as of May 8, 1995 (incorporated by reference to the Exhibit of the same number filed with our Registration Statement on Form SB-2, filed on November 13, 1996).
3.10	Certificate of Amendment to Articles of Incorporation dated as June 9, 2005 (incorporated by reference to Exhibit 3.1 filed with our Current Report on Form 8-K, filed June 9, 2005.
10.1	2000 Equity Incentive Plan dated as of May 2, 2000 (incorporated by reference to Exhibit 10.9 filed with our Annual Report on Form 10-KSB for the period ended December 31, 2000, filed on April 2, 2001).
10.2	Registration Rights Agreement dated as of October 10, 2000 between us and Equity Pier LLC (incorporated by reference to Exhibit 10.11 filed with our Annual Report Form 10-KSB for the period ended December 31, 2000, filed on April 2, 2001).

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Exhibit No.	Exhibit Description
10.3	Securities Purchase Agreement, dated as of May 13, 2004, by and between our company and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.1 filed with our Quarterly Report on Form 10-QSB for the period ended March 31, 2004, filed on May 17, 2004).
10.4	Secured Convertible Term Note, dated as of May 13, 2004, made by our company in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.2 filed with our Quarterly Report on Form 10-QSB for the period ended March 31, 2004, filed on May 17, 2004).
10.5	Master Security Agreement, dated May 13, 2004, by and between our company and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.3 filed with our Quarterly Report on Form 10-QSB for the period ended March 31, 2004, filed on May 17, 2004).
10.6	Registration Rights Agreement, dated as of May 13, 2004, by and between our company and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.4 filed with our Quarterly Report on Form 10-QSB for the period ended March 31, 2004, filed on May 17, 2004).
10.7	Common Stock Purchase Warrant, dated May 13, 2004, issued by our company in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.5 filed with our Quarterly Report on Form 10-QSB for the period ended March 31, 2004, filed on May 17, 2004).
10.8	Registration Rights Agreement dated as of August 18, 2004 by and among our company and the other signatory parties thereto (incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on August 20, 2004).
10.9	Registration Rights Agreement dated as of August 18, 2004 by and among our company and the other signatory parties thereto (incorporated by reference to Exhibit 10.2 filed with our Current Report on Form 8-K filed on August 20, 2004).
10.10	Lock Up and Voting Agreement dated as of August 18, 2004 by and among our company, Thomas P. Sweeney III, Equity Pier, LLC and the other signatory parties thereto (incorporated by reference to Exhibit 10.3 filed with our Current Report on Form 8-K filed on August 20, 2004).
10.11	Lock Up and Voting Agreement dated as of August 18, 2004 by and among our company and the other signatory parties thereto (incorporated by reference to Exhibit 10.4 filed with our Current Report on Form 8-K filed on August 20, 2004).
10.12	Director Indemnification Agreement dated as of August 18, 2004 by and between our company and Thomas P. Sweeney III (incorporated by reference to Exhibit 10.5 filed with our Current Report on Form 8-K filed on August 20, 2004).
10.13	Director Indemnification Agreement dated as of August 18, 2004 by and between our company and Paul McKnight (incorporated by reference to Exhibit 10.6 filed with our Current Report on Form 8-K filed on August 20, 2004).
10.14	Director Indemnification Agreement dated as of August 18, 2004 by and between our company and James Wolfinger (incorporated by reference to Exhibit 10.7 filed with our Current Report on Form 8-K filed on August 20, 2004).
10.15	Director Indemnification Agreement dated as of August 18, 2004 by and between our company and Patrick Whittingham (incorporated by reference to Exhibit 10.8 filed with our Current Report on Form 8-K filed on August 20, 2004).
10.16	Director Indemnification Agreement dated as of August 18, 2004 by and between our company and Carmen J. Scarpa (incorporated by reference to Exhibit 10.9 filed with our Current Report on Form 8-K filed on August 20, 2004).

33

Exhibit No.	Exhibit Description
10.17	Director Indemnification Agreement dated as of August 18, 2004 by and between our company and Christopher S. Gaffney (incorporated by reference to Exhibit 10.10 filed with our Current Report on Form 8-K filed on August 20, 2004).
10.18	Employment Agreement dated as of August 18, 2004 by and between our company and Thomas P. Sweeney III (incorporated by reference to Exhibit 10.11 filed with our Current Report on Form 8-K filed on August 20, 2004).
10.19	Stock Pledge Agreement dated as of August 18, 2004 by and between our company and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.1 filed with our Quarterly Report on Form 10-QSB for the period ended September 30, 2004, filed on December 10, 2004).
10.20	Subsidiary Guaranty dated as of August 18, 2004, executed by ManagedStorage International, Inc. (incorporated by reference to Exhibit 10.2 filed with our Quarterly Report on Form 10-QSB for the period ended September 30, 2004, filed on December 10, 2004).
10.21	Joinder in the Master Security Agreement dated as of August 18, 2004, executed by our company and ManagedStorage International, Inc. (incorporated by reference to Exhibit 10.3 filed with our Quarterly Report on Form 10-QSB for the period ended September 30, 2004, filed on December 10, 2004).
10.22	Employment Agreement dated as of December 21, 2004 by and between our company and Paul McKnight (incorporated by reference to Exhibit 10.11 filed with our Current Report on Form 8-K filed on December 22, 2004).
10.23	Employment Agreement dated as of December 21, 2004 by and between our company and Walter Hinton (incorporated by reference to Exhibit 10.11 filed with our Current Report on Form 8-K filed on December 22, 2004).
10.24	Amendment and Waiver, dated as of October 25, 2004, our company and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.6 filed with our Current Report on Form 8-K filed on October 29, 2004).
10.25	Common Stock Purchase Warrant, dated October 25, 2004, issued by our company in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.6 filed with our Current Report on Form 8-K filed on October 29, 2004).
10.26	Employment Agreement dated as of December 6, 2004 between our company and Michael Knaisch. (incorporated by reference to Exhibit 10.28 filed with our Annual Report on Form 10-KSB for the year ended December 31, 2004).
10.27	Office Lease, dated as of March 15, 2002, by and between W9/MTN Real Estate Limited Partnership and ManagedStorage International, Inc. (incorporated by reference to Exhibit 10.29 filed with our Annual Report on Form 10-KSB for the year ended December 31, 2004).
10.28	First Amendment to Office Lease, dated as of June 30, 2002, by and between W9/MTN Real Estate Limited Partnership and ManagedStorage International, Inc. (incorporated by reference to Exhibit 10.30 filed with our Annual Report on Form 10-KSB for the year ended December 31, 2004).
10.29	2000 Stock Option and Grant Plan of ManagedStorage International, Inc., as amended (incorporated by reference to Exhibit 10.31 filed with our Annual Report on Form 10-KSB for the year ended December 31, 2004).
10.30	$2,500,000 Convertible Promissory Note, dated as of February 18, 2005, by our company in favor of Alfred Curmi (incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on February 23, 2005).
10.31	Registration Rights Agreement, dated as of February 18, 2005, by and between our company and Alfred Curmi (incorporated by reference to Exhibit 10.2 filed with our Current Report on Form 8-K filed on February 23, 2005).
10.32	Employment Agreement, dated as of February 18, 2005, by and between STAR Solutions of Delaware, Inc. and Elaine Bellock (incorporated by reference to Exhibit 10.3 filed with our Current Report on Form 8-K filed on February 23, 2005).

34

Exhibit No.	Exhibit Description
10.33	Consulting Agreement, dated as of February 18, 2005, by and between our company and FGBB, Inc. (incorporated by reference to Exhibit 10.4 filed with our Current Report on Form 8-K filed on February 23, 2005).
10.34	Amendment and Waiver, dated as of February 17, 2005, by and between our company and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.10 filed with our Current Report on Form 8-K filed on February 23, 2005).
10.35	Common Stock Purchase Warrant, dated as of February 17, 2005, issued by our company to Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.11 filed with our Current Report on Form 8-K filed on February 23, 2005).
10.36	Employment Agreement, dated as of March 30, 2005, by and between PWI Technologies, Inc. and Barry R. Andersen (incorporated by reference to Exhibit 10.2 filed with our Current Report on Form 8-K filed on April 4, 2005).
10.37	Registration Rights Agreement, dated as of March 30, 2005 by and between Incentra Solutions, Inc. and MRA Systems, Inc. (d/b/a GE Access) (incorporated by reference to Exhibit 10.3 filed with our Current Report on Form 8-K filed on April 4, 2005).
10.38	First Amendment to Credit Agreement, dated as of March 20, 2005, by and between STAR Solutions of Delaware, Inc. and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.4 filed with our Current Report on Form 8-K filed on April 4, 2005).

35

Exhibit No.	Exhibit Description
10.39	Security Agreement, dated as of June 30, 2005, by and among Incentra Solutions, Inc., PWI Technologies, Inc., Star Solutions of Delaware, Inc. and Laurus Master Fund. Ltd. (incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on June 30, 2005).
10.40	Secured Revolving Note, dated as of June 30, 2005, by Incentra Solutions, Inc., PWI Technologies, Inc. and Star Solutions of Delaware, Inc. in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.2 filed with our Current Report on Form 8-K filed on June 30, 2005).
10.41	Secured Convertible Minimum Borrowing Note, dated as of June 30, 2005, by Incentra Solutions, Inc. in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.3 filed with our Current Report on Form 8-K filed on June 30, 2005).
10.42	Stock Pledge Agreement, dated as of June 30, 2005, by and between Incentra Solutions, Inc. and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.4 filed with our Current Report on Form 8-K filed on June 30, 2005).
10.43	Minimum Borrowing Note Registration Rights Agreement, dated as of June 30, 2005, by and between Incentra Solutions, Inc. and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.5 filed with our Current Report on Form 8-K filed on June 30, 2005).
10.44	Common Stock Purchase Warrant, dated as of June 30, 2005, by Incentra Solutions, Inc. in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.6 filed with our Current Report on Form 8- K filed on June 30, 2005).
10.45	Subsidiary Guaranty, dated as of June 30, 2005, by and among PWI Technologies, Inc., Star Solutions of Delaware, Inc. and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.7 filed with our Current Report on Form 8-K filed on June 30, 2005).
10.46	Amendment and Waiver, dated as of June 30, 2005, by and between Incentra Solutions, Inc. and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.8 filed with our Current Report on Form 8- K filed on June 30, 2005).
10.47	Employment Agreement, effective October 17, 2005, between Incentra Solutions, Inc. and Shawn O’Grady (incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on October 17, 2005.)
10.48	Security Agreement, dated as of February 6, 2006, by and among our company, PWI Technologies, Inc., Incentra Solutions of California, Inc., ManagedStorage International, Inc., and Incentra Solutions International, Inc. and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on February 6, 2006).

36

Exhibit No.	Exhibit Description
10.49	Secured Non-Convertible Revolving Note, dated as of February 6, 2006, executed by our company, PWI Technologies, Inc., Incentra Solutions of California, Inc., ManagedStorage International, Inc., and Incentra Solutions, International, Inc. in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.2 filed with our Current Report on Form 8-K filed on February 6, 2006).
10.50	Stock Pledge Agreement, dated as of February 6, 2006, executed by our company and ManagedStorage International, Inc. in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.3 filed with our Current Report on Form 8-K filed on February 6, 2006).
10.51	Subsidiary Guaranty, dated as of February 6, 2006, executed by PWI Technologies, Inc., Incentra Solutions of California, Inc., ManagedStorage International, Inc., and Incentra Solutions International, Inc. in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.4 filed with our Current Report on Form 8-K filed on February 6, 2006).
10.52	Registration Rights Agreement, dated as of February 6, 2006 by and between our company and Laurus Master Fund, Ltd. (as incorporated by reference to Exhibit 10.5 filed with our Current Report on Form 8-K on February 6, 2006).
10.53	Common Stock Purchase Option, dated as of February 6, 2006, executed by our company in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.6 filed with our Current Report on Form 8-K filed on February 6, 2006).
10.54	Grant of Security Interest in Patents and Trademarks, dated as of February 6, 2006, executed by our company and ManagedStorage International, Inc. in favor of Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.7 filed with our Current Report on Form 8-K filed on February 6, 2006).
10.55	Amendment and Deferral Agreement, dated as of February 6, 2006, by and between our company and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.8 filed with our Current Report on Form 8-K filed on February 6, 2006).
10.56	Securities Purchased Agreement, dated as of March 31, 2006, by and between our company and Laurus Master Fund, Ltd.
10.57	Secured Convertible Term Note, dated as of March 31, 2006, by Incentra Solutions, Inc. in favor of Laurus Master Fund, Ltd.
10.58	Non-convertible Secured Term Note, dated as of March 31, 2006, by Incentra Solutions, Inc. in favor of Laurus Master Fund, Ltd.
10.59	Common Stock Purchase Warrant, dated as of March 31, 2006, issued by our company to Laurus Master Fund, Ltd.
10.60	Registration Rights Agreement, dated as of March 31, 2006, by and between our company and Laurus Master Fund, Ltd.
10.61	Joinder Agreement, dated as of March 31, 2006, executed by PWI Technologies, Inc., Incentra Solutions of California, Inc. and Incentra Solutions International, Inc. and delivered to Laurus Master Fund, Ltd.
23.1	Consent of GHP Horwath, P.C., independent registered public accounting firm.
31.1	Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

37

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

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

          The aggregate fees billed and to be billed for the audit of our 2005 financial statements included in our annual report on Form 10-KSB and for the reviews of our financial statements included in our quarterly reports on Form 10-QSB for our fiscal year ended December 31, 2005 are approximately $197,000. For the year ended December 31, 2004, the aggregate audit fees billed by GHP Horwath, P.C. and J.H. Cohn LLP were $100,000 and $23,000, respectively.

Audit-Related Fees

          The aggregate fees billed in each of fiscal 2005 and 2004 for assurance and related services that are reasonably related to the audit or review of our financial statements and that were not covered in the Audit Fees disclosure above were $14,600 and $72,706 (comprised of $23,811 by J.H. Cohn LLP, $20,365 by Ernst & Young LLP and $28,530 by KPMG LLP), respectively. Services rendered by Ernst & Young LLP and KPMG LLP in 2004 were for MSI.

Tax Fees

           J.H. Cohn LLP billed aggregate fees for tax compliance, advice, or planning of $66,310 and $72,655 for fiscal 2005 and 2004, respectively.

All Other Fees

          There were no fees billed in fiscal 2005 or 2004 for professional services rendered by authorized independent registered public accounting firms except as disclosed above.

Board of Directors Pre-Approval

          Our Board of Directors reviews and approves audit and non-audit services performed by our authorized independent registered public accounting firms as well as the fees charged by the authorized Independent registered public accounting firms for such services. All of the services provided and fees charged by the authorized independent registered public accounting firms were pre-approved in 2005 and approved in 2004 by our Board of Directors.

38

SIGNATURES

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

Dated: April 4, 2006	Incentra Solutions, Inc.
	By:	/s/ Thomas P. Sweeney III
		Thomas P. Sweeney III
		Chief Executive Officer

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

Signature	Title
/s/ Thomas P. Sweeney III	Chief Executive Officer and Director
	(principal executive officer)
Thomas P. Sweeney III April 4, 2006
/s/ Paul McKnight	Chief Financial Officer
	(principal financial and accounting officer)
Paul McKnight April 4, 2006
/s/ James Wolfinger	Director
James Wolfinger April 4, 2006
/s/ Patrick Whittingham	Director
Patrick Whittingham April 4, 2006
/s/ Carmen J. Scarpa	Director
Carmen J. Scarpa April 4, 2006
/s/ Thomas G. Hudson	Director
Thomas G. Hudson
April 4, 2006
/s/ David E. Weiss	Director
David E. Weiss
April 4, 2006

39

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2005 and 2004

Table of Contents

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheet as of December 31, 2005	F-2
Consolidated Statements of Operations for the years ended December 31, 2005 and 2004	F-3
Consolidated Statements of Mandatorily and Convertible Redeemable Preferred Stock for the years ended December 31, 2005 and 2004	F-4
Consolidated Statements of Shareholders’ Deficit and Comprehensive Loss for the years ended December 31, 2005 and 2004	F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004	F-7
Notes to Consolidated Financial Statements	F-9

40

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Incentra Solutions, Inc.

We have audited the accompanying consolidated balance sheet of Incentra Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2005, and the related consolidated statements of operations, mandatorily and convertible redeemable preferred stock, shareholders’ deficit and comprehensive loss, and cash flows for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Incentra Solutions, Inc. and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, as of December 31, 2005, the Company is in default on a note payable in the amount of $2,374,139. This event of default created an event of default with regard to other indebtedness of the Company. The events of default make debt in the amount of $11,231,420 callable. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 3 to the consolidated financial statements, during the fourth quarter of 2005, the Company corrected its accounting for goodwill recorded in connection with business acquisitions that occurred in the first quarter of 2005.

/s/ GHP Horwath, P.C.
Denver, Colorado

March 24, 2006, except for Note 17(B) as to which the date is March 31, 2006

F-1

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
December 31, 2005

ASSETS
Current assets:
Cash and cash equivalents	$	1,108,642
Accounts receivable, net of allowance for doubtful accounts of $219,234		10,576,172
Other current assets		1,284,505
Total current assets		12,969,319
Property and equipment, net		2,230,201
Capitalized software development costs, net		2,133,203
Intangible assets, net		13,685,359
Goodwill		5,857,770
Restricted cash		80,956
Other assets		926,535
		24,914,024
Total assets	$	37,883,343
Liabilities and shareholders’ deficit
Current liabilities:
Current portion of notes payable, capital leases and other long-term obligations	$	11,066,921
Accounts payable		7,787,603
Accrued expenses		5,344,475
Current portion of deferred revenue		1,874,636
Total current liabilities		26,073,635
Notes payable, capital leases and other long-term obligations, net of current portion		303,652
Deferred revenue, net of current portion		104,796
Total liabilities		26,482,083
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		24,618,333
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 shares issued and outstanding		13,327
Additional paid-in capital		119,517,168
Accumulated other comprehensive loss		(103,235	)
Accumulated deficit		(132,644,333	)
Total shareholders’ deficit		(13,217,073	)
Total liabilities and shareholders’ deficit	$	37,883,343

See accompanying Notes to Consolidated Financial Statements

F-2

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2005			2004
REVENUES:
Products	$	37,607,872		$	5,155,101
Services		13,224,064			8,129,569
Total revenue		50,831,936			13,284,670
Cost of revenue:
Products		25,448,135			1,479,580
Services		9,058,835			5,820,755
Total cost of revenue		34,506,970			7,300,335
Gross margin		16,324,966			5,984,335
Selling, general and administrative		20,516,251			10,262,730
Acquisition costs		—			1,275,189
Amortization		3,229,919			1,776,473
Depreciation		465,747			183,057
Impairment of goodwill		4,151,450			198,280
		28,363,367			13,695,729
Loss from operations		(12,038,401	)		(7,711,394	)
Other income (expense):
Interest income		33,317			22,096
Interest expense		(2,424,218	)		(2,428,643	)
Other income		656,088			382,989
Foreign currency transaction gain (loss)		16,691			(303,342	)
		(1,718,122	)		(2,326,900	)
Loss before income tax		(13,756,523	)		(10,038,294	)
Income tax expense		(469,034	)		(400,000	)
Net loss		(14,225,557	)		(10,438,294	)
Deemed dividends on redeemable preferred stock		—			(348,493	)
Accretion of redeemable preferred stock to redemption amount		(2,617,566	)		(990,826	)
Net loss applicable to common shareholders	$	(16,843,123	)	$	(11,777,613	)
Weighted average number of common shares outstanding – basic and diluted		12,541,642			5,102,733
Basic and diluted net loss per share applicable to common shareholders	$	(1.34	)	$	(2.31	)

See accompanying Notes to Consolidated Financial Statements

F-3

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MANDATORILY AND CONVERTIBLE REDEEMABLE
PREFERRED STOCK
Years ended December 31, 2005 and 2004

	MSI Series A redeemable						MSI Series B convertible						FPDI Series A convertible
	preferred stock						preferred stock						preferred stock
	Shares			Amount			Shares			Amount			Shares		Amount		Total
Balance at December 31, 2003		50,000		$	5,000,000			650,000		$	8,587,011						$	13,587,011
Exchange of MSI Series A redeemable preferred stock for common stock of FPDI in merger		(50,000	)		(5,000,000	)		—			—							(5,000,000	)
Deemed dividends on MSI redeemable preferred stock		—			—			—			348,493							348,493
Accretion of MSI mandatorily redeemable preferred stock to redemption amount		—			—			—			19,793							19,793
Exchange of MSI Series B convertible redeemable preferred stock for common stock of FPDI in merger		—			—			(650,000	)		(8,955,297	)						(8,955,297	)
Issuance of FPDI Series A convertible redeemable preferred stock due to merger														2,466,971	$	21,029,734		21,029,734
Accretion of FPDI convertible preferred stock to redemption amount																971,033		971,033
Balance at December 31, 2004		—			—			—			—			2,466,971		22,000,767		22,000,767
Accretion of FPDI convertible preferred stock to redemption amount		—			—			—			—					2,617,566		2,617,566
Balance at December 31, 2005		—		$	—			—		$	—			2,466,971	$	24,618,333	$	24,618,333

See accompanying Notes to Consolidated Financial Statements

F-4

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT AND COMPREHENSIVE LOSS
Years ended December 31, 2005 and 2004

							Class A common stock warrants			Series C redeemable preferred stock warrants			Deferred compensation			Additional paid-in capital			Accumulated other comprehensive income (loss)
	Common stock																				Accumulated deficit			Total
	Shares			Amount
Balance at December 31, 2003		1,949,827		$	1,950		$	65,571		$	115,652		$	(362,140	)	$	85,123,989			—	$	(107,980,482	)	$	(23,035,460	)
Accretion of MSI mandatorily redeemable preferred stock to redemption amount		—			—			—			—			—			(19,793	)		—		—			(19,793	)
Accretion of FPDI mandatorily redeemable preferred stock to redemption amount		—			—			—			—			—			(971,033	)		—		—			(971,033	)
Deemed dividends on MSI redeemable preferred stock		—			—			—			—			—			(348,493	)		—		—			(348,493	)
Exercise of MSI stock options		3,480			4			—			—			—			1,835			—		—			1,839
Repurchase of MSI common stock		(7,284	)		(7	)		—			—			—			(4,769	)		—		—			(4,776	)
Cancellations of MSI stock options		—			—			—			—			11,519			(11,519	)		—		—			—
Transactions related to reverse acquisition of FPDI by MSI:		—			—			—			—			—			—			—		—			—
Common stock issued in exchange for MSI Series A preferred stock in merger		1,000,000			1,000			—			—			—			4,999,000			—		—			5,000,000
Common stock issued in exchange for MSI Series B preferred stock in merger		1,806,285			1,806			—			—			—			8,953,491			—		—			8,955,297
Stock-based compensation incurred in connection with merger		—			—			—			—			—			798,598			—		—			798,598
Acquisition of FPDI by MSI based on fair value of common stock; options and warrants		5,723,870			5,724			—			—			—			16,468,706			—		—			16,474,430
Class A common stock warrants of MSI exchanged for common stock warrants of FPDI		—			—			(65,571	)		—			—			65,571			—		—			—
Series C warrants of MSI exchanged for Series A stock warrants of FPDI		—			—			—			(115,652	)		—			115,652			—		—			—
Reclassification of deferred compensation to additional paid-in capital due to merger		—			—			—			—			238,388			(238,388	)		—		—			—
Cancellation of MSI common stock exchanged for common stock of FPDI		—			—			—			—			—			6,277			—		—			6,277
Amortization of deferred compensation and stock option expense		—			—			—			—			112,233			280,446			—		—			392,679
FPDI common stock issued in lieu of interest payment		29,365			29			—			—			—			12,471			—		—			12,500
Reclassification of derivative warrant to liability																	(1,836,534	)		—		—			(1,836,534	)
Exercise of FPDI stock options		455			—			—			—			—			138			—		—			138
Acquisition costs		—			—			—			—			—			(30,000	)		—		—			(30,000	)
Components of comprehensive loss:
Net loss		—			—			—			—			—			—			—		(10,438,294	)		(10,438,294	)
Change in foreign currency translation adjustments		—			—			—			—			—			—		$	19,184		—			19,184
Total comprehensive loss		—			—			—			—			—			—			—		—			(10,419,110	)
Balance at December 31, 2004		10,505,998		$	10,506			—			—			—		$	113,365,645		$	19,184	$	(118,418,776	)	$	(5,023,441	)

(continued)

F-5

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT AND COMPREHENSIVE LOSS
(Continued)
Years ended December 31, 2005 and 2004

					Additional paid-in capital			Accumulated other comprehensive income (loss)			Accumulated deficit			Total
	Common stock
	Shares		Amount
Balance at December 31, 2004		10,505,998	$	10,506	$	113,365,645		$	19,184		$	(118,418,776	)	$	(5,023,441	)
Common stock issued in the acquisition of Incentra of CA (formerly Star Solutions) (Note 4)		1,261,756		1,262		3,135,102			—			—			3,136,364
Common stock issued in the acquisition of PWI Technologies (Note 4)		841,934		842		1,683,026			—			—			1,683,868
Accretion of FPDI convertible preferred stock to redemption amount		—		—		(2,617,566	)		—			—			(2,617,566	)
Exercise of MSI stock options		453		—		134			—			—			134
Amortization of stock based compensation expense		—		—		520,641			—			—			520,641
Reclassification of derivative warrant to equity						1,910,254									1,910,254
Warrant issued to Laurus related to line of credit		—		—		538,240			—			—			538,240
Conversion of notes payable and accrued interest in exchange for common stock		716,669		717		994,114			—			—			994,831
Acquisition costs		—		—		(12,422	)		—			—			(12,422	)
Components of comprehensive loss:
Net loss		—		—		—			—			(14,225,557	)		(14,225,557	)
Change in foreign currency translation adjustments		—		—		—		$	(122,419	)		—			(122,419	)
Total comprehensive loss		—		—		—									(14,347,976	)
Balance at December 31, 2005		13,326,810	$	13,327	$	119,517,168		$	(103,235	)	$	(132,644,333	)	$	(13,217,073	)

See accompanying Notes to Consolidated Financial Statements

F-6

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years ended December 31,
	2005			2004
Cash flows from operating activities:
Net loss	$	(14,225,557	)	$	(10,438,294	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,557,068			2,197,213
Amortization of intangible assets and software development costs		3,867,068			1,776,473
Amortization of non-cash loan discount		12,735			—
Stock-based compensation		520,641			1,191,277
Interest expense paid with common stock		—			12,500
Non-cash interest expense		1,610,030			447,797
Non-cash interest expense on Series C mandatorily redeemable preferred stock liability		—			1,703,332
Non-cash tax expense		469,034			400,000
Share of losses of Front Porch Digital, Inc. and related impairment of goodwill		—			198,280
Loss on disposal of assets		47,809			22,291
Impairment of goodwill		4,151,450			—
Gain on revaluation of warrant liability		(390,280	)		—
Bad debt expense		60,608			233,864
Changes in operating assets and liabilities, net of business acquisitions:
Accounts and other receivables		513,921			(942,174	)
Other current assets		(562,078	)		91,811
Other assets		30,771			45,295
Accounts payable		(544,337	)		(73,065	)
Accrued liabilities		1,133,631			339,287
Deferred revenue		787,671			(738,456	)
Other liabilities		(513,048	)		(11,784	)
Net cash used in operating activities		(1,472,863	)		(3,544,353	)
Cash flows from investing activities:
Purchases of property and equipment		(1,065,172	)		(1,152,120	)
Capitalized software development costs		(1,604,404	)		(1,044,325	)
Acquisition costs		—			(198,597	)
Proceeds from sale of property and equipment		2,808			126,084
Cash and restricted cash acquired in FPDI acquisition (Note 4)		—			4,005,685
Cash acquired in STAR acquisition (Note 4)		1,597,498			—
Cash acquired in PWI acquisition (Note 4)		74,297			—
Earnout payment related to PWI acquisition (Note 4)		(100,000	)		—
Net change in restricted cash		(908	)		(638	)
Maturities of short-term investments		—			3,793,099
Net cash (used in) provided by investing activities		(1,095,881	)		5,529,188
Cash flows from financing activities:
Payments on capital leases, notes payable and other long term liabilities		(11,422,289	)		(1,966,973	)
Proceeds from exercise of stock options and purchase of restricted stock		136			1,977
Proceeds from capital lease line and line of credit		12,099,320			815,654
Repurchase of common stock		—			(31,427	)
Net cash provided by (used in) financing activities		677,167			(1,180,769	)
Effect of exchange rate changes on cash and cash equivalents		(68,239	)		63,200
Net (decrease) increase in cash and cash equivalents		(1,959,816	)		867,266
Cash and cash equivalents at beginning of year		3,068,458			2,201,192
Cash and cash equivalents at end of year	$	1,108,642		$	3,068,458

(continued)

F-7

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

	Years ended December 31,
	2005		2004
Supplemental disclosures of cash flow information:
Cash paid during the year for interest	$	801,454	$	202,516
Supplemental disclosures of non-cash investing and financing activities:
Net liabilities acquired in FPDI acquisition, excluding cash (Note 4)	$	—	$	3,122,007
Net liabilities acquired in Incentra of CA acquisition excluding cash (Note 4)		620,178		—
Net assets aquired in PWI acquisition excluding cash (Note 4)		269,306		—
Conversion of notes payable and accrued interest in exchange for common stock		994,831		—
Reclassification of derivative contract to liability		—		1,836,534
Reclassification of derivative contract to equity		1,910,254		—
Purchases of property and equipment included in accounts payable		93,766		130,471

See accompanying Notes to Consolidated Financial Statements

F-8

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

(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, 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 America, Europe, Asia and the Pacific Rim.

Basis of Presentation

          At December 31, 2005, the consolidated financial statements include Incentra Solutions, Inc. and its wholly-owned subsidiaries, Front Porch Digital International, SAS, which is based in France, MSI, which is based in Colorado, and MSI’s wholly-owned subsidiaries, ManagedStorage UK, Inc. and Seabrook Technologies, Inc., 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 year ended December 31, 2005. All significant intercompany accounts and transactions have been eliminated in consolidation.

Going Concern and Management’s Plans

          Our consolidated financial statements as of December 31, 2005 and for the year 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.

          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

F-9

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(1) Organization (continued)

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 December 31, 2005 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 16.

          The event of default on the STAR Note created an event of default of certain provisions of debt outstanding with Laurus Master Fund Ltd. (Laurus), our senior secured lender. As a result, the entire balance of the amount owed to Laurus, which totaled $8.8 million at December 31, 2005 has been classified as a current liability at December 31, 2005 as it is callable. We believe we have a good 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 as well as 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. The 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 that calls for growth in the 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) Share and Per Share Data

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

          On April 12, 2005, our Board of Directors (the “Board”) and the holders of the required number of shares of our capital stock approved an amendment to our Articles of Incorporation to effect a one-for-ten reverse stock split effective June 9, 2005. All references to shares, options, and warrants in the year ended December 31, 2005 and in prior periods, have been adjusted to reflect the post-reverse split amounts.

(3) Summary of Significant Accounting Policies

Use of Estimates

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires 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.

Reclassifications

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

F-10

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(3) Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

          We consider all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Restricted Cash

          We have restricted cash of $80,956 at December 31, 2005, (classified as a non-current asset) which secures a letter of credit issued in connection with an operating lease (Note 9).

Property and Equipment

          Property and equipment, if acquired at the formation date of MSI or through acquisition, have been recorded at the estimated fair value at the acquisition date. Otherwise, all other property and equipment have been recorded at cost. Property and equipment are depreciated on a straight-line basis over their respective estimated useful lives ranging from two to seven years. Equipment recorded under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the respective lease term or estimated useful life of the asset.

Impairment of Long-Lived Assets

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

Goodwill and Correction of Error in Accounting for 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 each year.

          With the acquisitions of Incentra of CA in February 2005 and PWI in March 2005, we recorded goodwill of $6,177,686 and $3,831,534, respectively. The fair value of our reporting units used in determination of the goodwill impairment is computed using the expected present value of associated future cash flows. As more fully discussed in Note 16, operating profits and cash flows were lower than expected in the fourth quarter of 2005 for Incentra of CA. Based on that trend, the earnings forecast for the next five years was revised. Therefore, during the fourth quarter of 2005 we determined that the goodwill associated with the Incentra of CA acquisition was impaired and accordingly recorded an impairment loss of $4,151,450.

          Prior to the MSI acquisition, MSI accounted for an investment in common stock and warrants of FPDI using the equity method of accounting. The excess estimated fair value of FPDI’s common stock and warrants over MSI’s share of FPDI’s net assets at the date of the investment purchase (July 31, 2002), was recognized as goodwill. In 2004, MSI reviewed such goodwill for impairment and recognized an impairment loss when there was a loss in value in the equity method investment, which was other than a temporary decline. For the year ended December 31, 2004, MSI recorded an impairment loss of $198,280.

          In connection with preparing the December 31, 2005, consolidated financial statements, management determined that an error was made in accounting for goodwill recognized in connection with business acquisitions that occurred in the first quarter of 2005. As a result of the error, goodwill was overstated by approximately $4.5 million and shareholders’ deficit was understated by the same amount at March 31, June 30, and September 30, 2005. There was no effect on the Company’s consolidated statements of operations for the year ended December 31, 2005 or for any quarter of 2005 as a result of this error. The error was corrected in the fourth quarter of 2005 by decreasing goodwill and increasing shareholders’ deficit by $4.5 million.

Income Taxes

          Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which

F-11

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(3) Summary of Significant Accounting Policie (continued)

those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Revenue Recognition

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

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

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

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

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

          Revenues from storage services are recognized at the time the services are provided and are billed on a monthly basis. Fees received for up-front implementation services are deferred and recognized over the term of the arrangement. Deferred revenue is recorded for billings sent to or paid by customers for 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.

Cost of Revenue

          Cost of revenue consists primarily of direct labor, cost of hardware, depreciation ($1,091,321 in 2005 and $2,014,156 in 2004), amortization, third party royalties and licenses and facilities costs.

Advertising Expenses

          All advertising and promotion costs are expensed as incurred. Total advertising expenses incurred were $60,586 and $80,844 for the years ended December 31, 2005 and 2004, respectively.

Software Development Costs

          We account for costs related to software developed for internal use and marketed for external use in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. 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

F-12

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(3) Summary of Significant Accounting Policies—(continued)

amortization amount at least equal to the straight-line amortization over an estimated useful life of three years. For the years ended December 31, 2005 and 2004, capitalized software development costs, which related primarily to enhancements to the Company’s GridWorks and DIVArchive software solutions totaled $1,604,404 and $1,044,325, respectively. These costs are amortized on a straight-line basis over the estimated life, typically three years. For the years ended December 31, 2005 and 2004, $592,259 and $384,974, respectively, were charged to expense. As of December 31, 2005, the unamortized portion of software development costs was $2,133,203.

Deferred Loan Costs

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

Research and Development Costs

          Research and development costs are expensed as incurred. For the years ended December 31, 2005 and 2004, research and development costs were $101,760 and $134,793, respectively.

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 year. At December 31, 2005, we reported a cumulative translation loss of $103,235, 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 years ended December 31, 2005 and 2004 were losses of $43,209 and $24,756, respectively.

          In June 2004, we began managing our foreign currency cash flow exposure through the use of $/Euro forward contracts, which are considered derivative instruments and which are recorded as either an asset or liability, measured at fair value. Changes in fair value are recognized in the statement of operations. We recorded a $59,900 realized gain on these contracts during the year ended December 31, 2005, which represented the change in the fair value of the foreign currency forward contract related to the difference between changes in the spot and forward rates excluded from the assessment of hedge effectiveness. We recorded a realized loss of $144,086 and an unrealized loss of $134,500 on these contracts during the year ended December 31, 2004. We had no contracts outstanding at December 31, 2005.

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, “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

          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 years ended December 31, 2005 and 2004 because the effect would be antidilutive. 13.2 million and 10.1 million shares of common stock issuable upon the conversion of outstanding convertible preferred stock, the exercise of options and warrants, and restricted stock totaling 23.3 million shares have been omitted from the computations of basic and diluted loss per share for the year ended December 31, 2005 and 2004, respectively, because the effect would be antidilutive.

F-13

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(3) Summary of Significant Accounting Policies (continued)

Stock-Based Compensation

          We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25), “Accounting for Stock Issued to Employees”, and related interpretations, including Financial Accounting Standards Board (“FASB”) Interpretation No. 44 (FIN 44), “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25”, to account for our fixed-plan stock options. Under this method, compensation expense is generally recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123”, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted only the disclosure requirements of Statement 123, as amended. The following table illustrates the effect on net loss if the fair value-based method had been applied to all outstanding and unvested awards in the years ended December 31, 2005 and 2004. All amounts except per share amounts in (000’s):

	Years ended December 31,
	2005			2004
Net loss before amounts attributable to common shareholders, as reported	$	(14,226	)	$	(10,438	)
Add stock-based employee compensation expense included in reported net loss, net of tax		521			1,191
Deduct total stock-based employee compensation expense determined under
fair value-based method for all awards, net of tax		(1,837	)		(1,853	)
Pro forma net loss before deemed dividends and accretion on preferred stock	$	(15,542	)	$	(11,100	)
Net loss per weighted average common share outstanding—basic and diluted — pro forma	$	(1.45	)	$	(2.44	)
Net loss per weighted average common share outstanding—basic and diluted — as reported	$	(1.34	)	$	(2.31	)

          In determining the fair value of stock options granted by us in 2005, and thus determining pro forma compensation expense under the fair value method, we utilized the Black-Scholes valuation model with the following weighted average assumptions: dividend yield of 0%, risk free interest rates ranging from 3.64% to 4.36%, expected volatility ranging from 111% to 113%, and expected lives of three years. The weighted average fair value of these options granted during 2005 was $1.62.

          In determining the fair value of stock options granted by us in 2004, and thus determining pro forma compensation expense under the fair value method, we utilized the Black-Scholes valuation model with the following weighted average assumptions: dividend yield of 0%, risk free interest rates ranging from 1.2% to 2.09%, expected volatility of 143%, and expected lives of three years. The weighted average fair value of these options granted during 2004 was $2.80.

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

F-14

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(3) Summary of Significant Accounting Policies (continued)

Financial Instruments

          The carrying amounts of financial instruments held by us, which include cash equivalents, restricted cash, accounts receivable, and accounts payable, approximate fair value due to their short duration. The carrying values of note payable and other non-current obligations approximate fair values based upon market rates currently available us. The fair value of a Letter of Credit issued in conjunction with a lease agreement (Note 8) approximates the fees paid to obtain it.

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 specific customers’ ability to pay and current economic trends. We write off accounts receivable against the allowance when a balance is determined to be uncollectible. Credit losses have been within management’s expectations. For the year ended December 31, 2005, aggregate revenues from customers located in Europe, Asia and the Pacific Rim amounted to $13.4 million or 26% of total revenue, while revenues from customers located in North America totaled $37.4 million or 74% of total revenue. For the year ended December 31, 2004, aggregate revenues from customers located in Europe, Asia and the Pacific Rim amounted to $4.7 million or 35% of total revenue, while revenues from customers located in North America totaled $8.6 million or 65% of total revenue. For the year ended December 31, 2005, one customer accounted for 11% of total revenues. One customer accounted for 16% of accounts receivable at December 31, 2005. For the year ended December 31, 2004, revenue from two customers individually accounted for approximately 13% and 11% of total revenues.

          The following is a breakdown of our revenues and long-lived assets by geographic area (in thousands):

Year Ended December 31, 2005
	North America		Europe/Asia*		Total
Revenues	$	37,420	$	13,412	$	50,832
Long-lived assets, net		1,625		605		2,230
Year Ended December 31, 2004
Revenues		8,575		4,710		13,285
Long-lived assets, net		1,779		674		2,453

*The geographic breakout by country is not practical to obtain.
Long-lived assets includes Property, Plant and Equipment

Recently Issued Accounting Pronouncements

          In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which addresses the accounting for share-based compensation transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted and recognized in the statement of operations based on their fair value. SFAS No. 123(R) will be effective for us during the first quarter of 2006. We have evaluated the provisions of this standard, and we expect that the implementation of this standard will have a material impact on our financial position and results of operations.

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

(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.

F-15

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(4) Acquisitions (continued)

A) Acquisition of Incentra of CA, formerly known as STAR Solutions of Delaware, Inc. (continued)

          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 December 31, 2005, we reclassified $1.3 million of the debt to current liabilities based on the default, as the debt is now callable. Refer to Note 16.

          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 December 31, 2005 and pending the results of the arbitration proceedings described in Note 16, 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

          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 a loss of $4,151,450 was charged to income in the fourth quarter of 2005.

          In connection with the acquisition, on February 18, 2005, Incentra of CA obtained a revolving line of credit from a bank that provided for borrowings until March 1, 2007, of up to $5,000,000. This line of credit and all the related accrued interest were paid in full on July 5, 2005 in connection with the New Laurus Financing Agreement as discussed in Note 9(C).

F-16

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(4) Acquisitions (continued)

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, the former PWI shareholders have the opportunity to earn an additional $200,000 in cash and $1,000,000 in our common stock based upon achieving certain earn out requirements. During the 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. Should PWI exceed the earn-out requirements, its former shareholders can earn additional common stock having a value equal to PWI’s EBITDA contribution over the earn out requirement. We paid approximately $250,000 in investment banking fees in connection with the transaction.

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

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

          The following represents the 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.

          Financing for the cash component of the acquisition was provided by a bank through an existing line of credit (“LOC”) that was established as part of the acquisition of Incentra of CA. In connection with the financing, the LOC was amended to make PWI a co-borrower under the agreements and to modify certain financial covenants to accommodate the addition of PWI to the LOC. The LOC and related accrued interest were paid in full on July 5, 2005, in connection with the New Laurus Financing Agreement, as discussed in Note 9 (C) to these consolidated financial statements.

F-17

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(4) Acquisitions (continued)

C) Acquisition of ManagedStorage International, Inc.

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

D) Proforma Results

          The following unaudited pro forma financial information presents our combined results of operations as if the acquisitions described in (A), (B) and (C) above had occurred as of the beginning of each of the periods reported below. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations that would have been reported by us had the acquisitions been completed as of the beginning of the periods presented, and should not be taken as representative of our future consolidated results of operations or financial condition. Unaudited pro forma results were as follows for the years ended December 31, 2005 and 2004:

	For the years ended December 31,
	2005			2004
	(Unaudited)			(Unaudited)
Revenue	$	61,275,697		$	56,517,509
Cost of revenue		43,412,888			39,744,908
Gross margin		17,862,809			16,772,601
Operating expenses		29,720,088			25,677,685
Loss from operations		(11,857,279	)		(8,905,084	)
Other expense, net		(1,795,951	)		(3,403,691	)
Income tax expense		(470,641	)		(400,000	)
Net loss		(14,123,871	)		(12,708,775	)
Dividends on redeemable preferred stock		—			(348,493	)
Accretion of redeemable preferred stock to redemption amount		(2,617,566	)		(990,826	)
Net loss applicable to common shareholders	$	(16,741,437	)	$	(14,048,094	)
Net loss per share applicable to common shareholders-basic and diluted	$	(1.33	)	$	(1.31	)

F-18

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(5) Property and Equipment

          Property and equipment consists of the following as of December 31, 2005:

Computer equipment	$	4,865,823
Software		1,591,440
Office furniture and equipment		631,135
Leasehold improvements		63,246
Assets under construction		114,886
		7,266,530
Less accumulated depreciation		(5,036,329	)
	$	2,230,201

          Depreciation expense for the years ended December 31, 2005 and 2004 was $1,557,068 and $2,197,213, respectively.

          Included in property and equipment is equipment under capital lease with a cost of $1,512,476 and accumulated depreciation of $669,278 at December 31, 2005.

(6) Intangible Assets

          Intangible assets consist of the following as of December 31, 2005:

Acquired customer base—FPDI (life of 10 years)	$	10,039,786
Intellectual property—DIVArchive (life of 5 years)		6,600,000
Acquired customer base—MSI (life of 3 years)		2,599,714
Acquired customer relationships—Incentra of CA (life 5 years)		540,000
Acquired customer relationships—PWI (life 5 years)		310,000
		20,089,500
Less accumulated amortization		(6,404,141	)
Intangible assets, net	$	13,685,359

          Amortization expense for the years ended December 31, 2005 and 2004 was $3,867,068 and $1,776,473, respectively. Estimated amortization expense for each of the five succeeding years is as follows:

Year ending December 31:
2006	$	2,515,030
2007		2,493,978
2008		2,493,978
2009		1,979,007
2010		1,032,978
Thereafter		3,170,388
	$	13,685,359

F-19

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(7) Accrued expenses

          Accrued expenses consisted of the following as of December 31, 2005:

Wages, benefits and payroll taxes	$	2,687,296
Professional fees		420,229
Customer Deposits		263,738
Taxes, other than income taxes		632,074
Other accrued payables		1,341,138
	$	5,344,475

(8) Commitments and Contingencies

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

          We lease facilities and equipment under non-cancelable capital and operating leases. Rental expense relating to operating leases was $1,176,399 and $536,192 for the years ended December 31, 2005 and 2004, respectively. Certain of the operating lease agreements have renewal provisions, which range from month-to-month to 24-month terms.

          A letter of credit was entered into as additional security for an operating lease due to our limited cash resources at the time the lease was signed. The agreement requires a letter of credit in decreasing amounts through the expiration of the lease on September 30, 2007. The letter of credit expires on April 1st of every year and is automatically extended without written amendment every year and would be used to pay rent on the Broomfield, Colorado facility if we were unable to make the monthly rent payments. At December 31, 2005, the amount of the letter of credit is $80,956. The letter of credit is secured by restricted cash in the same amount.

          Future minimum lease payments as of December 31, 2005 are as follows:

	Capital leases			Operating leases
Year ending December 31:
2006	$	853,936		$	706,781
2007		28,035			538,251
2008		7,314			184,823
2009		—			113,038
2010 and thereafter		—			440,311
Total minimum lease payments		889,285		$	1,983,204
Less amounts representing interest		(57,750	)
Present value of minimum lease payments	$	831,535

F-20

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(9) Note Payable, Capital Leases, and Other Long-Term Obligations

          The following is a summary of our long-term debt as of December 31, 2005:

Senior secured convertible note (A)	$	2,262,968
Capital leases (B)		831,535
Line of credit (C)		5,513,244
STAR Note (D)		2,106,281
Other obligations (E)		656,545
		11,370,573
Less current portion		(11,066,921	)
Long-term portion	$	303,652

(A) Senior Secured Convertible Note

          On the MSI Acquisition Date, liabilities assumed in the MSI Acquisition included the fair value of a convertible note. This convertible note originated on May 13, 2004, when we consummated a private placement pursuant to which we issued a secured convertible term note due May 13, 2007 in the principal amount of $5,000,000 (the “Laurus Note”), and we issued a common stock purchase warrant entitling the holder to purchase 443,500 shares of common stock (the “Laurus Warrant”) at $4.80 per share. The Laurus Note and the Laurus Warrant were sold to Laurus Master Fund, Ltd. (“Laurus”), for a purchase price of $5,000,000. The principal and unpaid interest on the Laurus Note is convertible into shares of our common stock at a price of $3.00 per share, subject to 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 $500,096 and $209,317 of additional non-cash interest expense relating to the amortization of the discount for the years ended December 31, 2005 and 2004, 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 are now sufficient authorized and unissued common shares to settle the Laurus Warrant, and it is again included in equity at December 31, 2005. During the years ended December 31, 2005 and 2004, we recorded a gain of $390,280 and $0, respectively, on these contracts. The appropriateness of the classification of the Laurus Warrant is reassessed at each balance sheet date.

          The Laurus Note provides for monthly payments of interest at a rate per annum equal to the prime rate plus 1%, which is subject to reduction if the market price of our common stock exceeds certain designated thresholds. However, the rate cannot be less than 5% per annum. The Laurus Note also provides for monthly amortization of principal, which commenced on September 1, 2004, 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 Notes 4(A) and 16), all amounts due under the Laurus Note have been reclassified to current liabilities at December 31, 2005. 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.

F-21

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(9) Note Payable, Capital Leases, and Other Long-Term Obligations (continued)

(A) Senior Secured Convertible Note (continued)

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

          On October 26, 2004, we entered into an Amendment and Waiver (the “Amendment and Waiver”) with Laurus that amended the Securities Purchase Agreement and certain other documents and waived certain events of default under certain of such loan documents. Pursuant to the Amendment and Waiver, the parties agreed to reduce the “Fixed Conversion Price” set forth in the Laurus Note from $5.00 to $3.00 per share and to amend the Master Security Agreement to provide for a “Lockbox Deposit Account” to be maintained by us and our subsidiaries under the Master Security Agreement. Lockbox remittances do not automatically reduce the debt outstanding unless an event of default has occurred. Laurus further agreed to (i) release to us approximately $3 million, which represented all funds then remaining in a restricted account (less outstanding accrued interest and fees); (ii) postpone until the maturity date of the Laurus Note the monthly principal payable by us under the Laurus Note from November 1, 2004 through February1, 2005; (iii) waive certain events of default, and all fees and default interest rates applicable to such events of default; (iv) extend the time for our subsidiaries to be joined as a party to the Master Security Agreement; (v) waive all fees and default interest arising from our failure to pay the liquidated damages set forth in the Registration Rights Agreement and further waive any liquidated damages due and payable to Laurus by us.

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

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

          On February 18, 2005, in satisfaction of $375,000 of liquidated damages to be incurred due to our failure to maintain the effectiveness of the registration statement, we issued to Laurus an immediately exercisable seven-year warrant to purchase 362,500 shares of common stock at an exercise price of $2.60 per share (the “Additional Warrant”) and further agreed to register under the Securities Act the resale of the shares of common stock issuable upon exercise of the Additional Warrant. The Additional Warrant was valued at $375,000 and was recorded as a liability on the issuance date. We amended our registration statement on April 14, 2005 to include the shares issuable upon exercise of the additional warrant and such registration statement was declared effective by the Securities and Exchange Commission on April 25, 2005. As a result, we expensed $300,000 for the liquidated damages. In connection with the reverse stock split discussed above, the fair value of this additional warrant was reclassified to additional paid-in capital on June 9, 2005.

F-22

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(9) Note Payable, Capital Leases, and Other Long-Term Obligations (continued)

(A) Senior Secured Convertible Note (continued)

          During the year ended December 31, 2005, we agreed to five amendments with Laurus to the Laurus Note pursuant to which $884,903 of principal was converted to our common stock on or after April 28, 2005. The conversion price for each amendment was $1.48, $1.40, $1.52, $1.30 and $1.30, respectively, following each amendment. During the year ended December 31, 2005, Laurus converted this $884,903 under the Laurus Note into 716,669 shares of our common stock. The conversion was deemed beneficial, and, as a result, additional interest expense of $226,000 was recorded during the year ended December 31, 2005.

          See Note 17 for subsequent changes to the senior credit facility with Laurus effective February 6, 2006.

(B) Capital Leases

          On November 20, 2003, we entered into a capital lease line of credit agreement (the “Lease Line”) for $1,500,000 with a third-party lender. The term of the agreement was for term leases ranging from 12 to 18 months. The interest rate on the Lease Line ranges from 10.514% per annum to 10.731% per annum. As of December 31, 2005, we had drawn $1,470,507 on the Lease Line and $29,493 of the Lease Line expired unused. The original borrowing under the Lease Line was repaid in full on October 1, 2005.

          On March 2, 2005, we entered into an amendment to the Lease Line. Under this amendment, we could draw an additional $500,000 (the “New Credit Facility”) for equipment purchases through June 30, 2005 of which we used $497,667. The amendment also grants us a call option to purchase equipment from the lessor. With respect to $2,333 of the New Credit Facility amount that was unfunded on June 30, 2005, we paid the lessor 5% of such unfunded amount upon demand by the lessor. The term of the agreement is for 15 months with an interest rate of 14.96% per annum. The New Credit Facility is to be repaid in monthly principal and interest installments through September 2006. The unpaid balance at December 31, 2005 was $278,207.

          On September 11, 2005, we entered into Amendment No. 2 to the Lease Line. Under this amendment, we may draw an additional $1,000,000 (the “Amended Credit Facility”) for equipment purchases through December 31, 2005. The amendment also grants us a call option to purchase equipment from the lessor. 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 year ended December 31, 2005, we have drawn $546,527 on the lease line. The unpaid balance at December 31, 2005 was $465,564.

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

(C) Line of Credit

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

          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 “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 accrue interest at a rate per annum equal to the “prime rate” (as published in The Wall Street Journal) plus 1%, which is subject to reduction if the market price of our common stock exceeds certain designated thresholds. Pursuant to the 2005 Facility, the minimum initial amount available to us, until December 31, 2005, was $6.0 million. Thereafter, the maximum principal amount of all borrowings under

F-23

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(9) Note Payable, Capital Leases, and Other Long-Term Obligations (continued)

(C) Line of Credit (continued)

the 2005 Facility cannot exceed 90% of the combined eligible accounts receivable of PWI and Incentra of CA. At December 31, 2005, the outstanding principal balance on the 2005 Facility was $5.5 million, net of debt discount of $0.5 million.

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

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

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

          In connection with the financing, we issued Laurus a warrant that entitles Laurus to purchase, at any time through June 30, 2012, up to 400,000 shares of our common stock at a price of $2.63 per share, 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 is recorded as a debt discount at September 30, 2005. The discount is being amortized to earnings as additional interest expense over the term of the 2005 Facility.

          In connection with the 2005 Facility, we paid Laurus approximately $359,000, comprised of a facility fee of $324,000 (representing an annual fee equal to 1.2% of the 2005 Facility payable in advance at closing) and reimbursement of $35,000 of Laurus’ expenses, of which $344,000 were recorded as deferred financing costs. The deferred financing costs will be amortized to interest expense over the life of the 2005 Facility.

          The LOC Note was repaid in full in February 2006 in connection with the New Laurus LOC financing, discussed in Note 17.

(D) STAR Note

          Pursuant to the STAR Merger Agreement, we issued an unsecured convertible promissory note for $2,500,000 as more fully described in Note 4(A) and in Note 16.

(E) Other Obligations

          At December 31, 2005, we have $656,545 in other long-term obligations related to contracts with vendors and certain consulting agreements.

F-24

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(9) Note Payable, Capital Leases, and Other Long-Term Obligations (continued)

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

	Senior secured convertible note, net of discount (1)			Capital Leases			Line of Credit (1)			STAR Note (1)		Other obligations
2006		$	2,262,968		$	797,867		$	5,513,244	$	2,106,281		$	386,561
2007						26,569								202,567
2008			—			7,099								67,417
		$	2,262,968		$	831,535		$	5,513,244	$	2,106,281		$	656,545

(1)	As a result of the events of default, these balances have been reported as current obligations regardless of stated maturity dates.
(10)	Convertible Redeemable Preferred Stock and Common Stock

          The Company’s authorized capital stock at December 31, 2005 consists of the following:

(a) Preferred Stock

Preferred Stock

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

Series A Convertible Redeemable Preferred Stock

          In connection with the MSI acquisition, we designated 2.5 million authorized shares of preferred stock as Series A Preferred shares and issued 2,466,971 of such shares. Warrants are outstanding for the purchase of 26,075 Series A Preferred shares at a purchase price of $10.35 per share and 6,954 Series A Preferred shares at a purchase price of $6.02 per share, per the Amendment described below.

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

(b) Common Stock

          At December 31, 2005, we had 13,326,810 shares issued and outstanding.

(11) Employee Stock Option Plans

          We currently have two employee stock option plans - one plan that was originally established under MSI, and one that was originally established under Front Porch Digital, Inc. (“Incentra Option Plan”). As of the date of the MSI acquisition, we adopted the Incentra Option Plan. In connection with the MSI acquisition, no additional grants will be made under the MSI Plan, however, outstanding stock options issued pursuant to the MSI Plan may be exercised for unregistered common shares.

F-25

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(11) Employee Stock Option Plans (continued)

Employee Equity Incentive Plan

          The Incentra Option Plan provides for the granting of options to key employees, officers and certain individuals to purchase shares of the Company’s common stock. We currently have reserved 2,262,500 shares of common stock for issuance under the Incentra Option Plan. The Incentra Option 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, non-statutory stock options, stock appreciation rights and restricted stock awards. The Incentra Option Plan is administered by our Board of Directors. The exercise price of non-statutory stock options may be equal to or more or less than 100 percent (100%) of the fair market value of shares of common stock on the date of grant. The exercise price for incentive stock options may not be less than 100 percent (100%) of the fair market value of shares of common stock on the date of the grant (110 percent (110%) of fair market value in the case of incentive stock options granted to employees who hold more than ten percent (10%) of the voting power of the issued and outstanding shares of common stock).

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

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

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

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

F-26

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(11) Employee Stock Option Plans (continued)

Employee Equity Incentive Plan (continued)

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

	Number of options			Weighted average exercise price
Balance, January 1, 2004		262,371		$	6.20
Granted		1,584,966			2.70
Exercised		(10,000	)		2.80
Forfeited		(8,277	)		3.30
Balance, December 31, 2004		1,829,060			3.20
Granted		456,450			1.62
Exercised		—			—
Forfeited		(68,494	)		2.25
Balance, December 31, 2005		2,217,016		$	2.92

		Outstanding options								Exercisable options
Exercise price			Weighted average remaining shares under option		Weighted contractual life (years)		Shares average exercise price			Shares currently exercisable		Weighted average exercise price
	$   1.21 - 13.90			2,188,516		8.60		$	2.52		808,992		$	2.69
	20.00 - 29.00			11,000		3.40			24.06		11,000			24.06
	40.00			17,500		0.60			40.00		17,500			40.00
				2,217,016		8.50			2.92		837,492			3.75

ManagedStorage International, Inc.—2000 Stock Option and Grant Plan

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

          The maximum number of shares of unregistered common stock available for issuance to eligible employees, consultants, and directors of the Company under the MSI Plan pursuant to options previously granted is 216,536 at December 31, 2005. Options to purchase our unregistered common stock are exercisable at a price as determined by the board of directors at the time the options were granted. Under the terms of the MSI Plan, the exercise prices for incentive stock options granted shall not be less than 100% of the fair market value of the unregistered common stock or our common stock at the date of grant, or if a participant owns more than 10% of the Company, the option price may not be less than 110% of the fair market value of the unregistered common stock or common stock. No incentive stock options may be exercised more than 10 years from the date of grant, or when an employee owns more than 10% of the Company, the incentive stock options may not be exercised more than five years from the date of grant. Options generally vested over a four-year period, 25% per year, commencing on the one-year anniversary of the grant and/or the employee hire date. Unless terminated or otherwise canceled under the MSI Plan provisions, the contractual life of all such options is no greater than ten years.

F-27

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(11)    Employee Stock Option Plans (continued)

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

	Number of options			Weighted average exercise price
Balance, December 31, 2003		229,206		$	0.50
Granted		22,225			3.20
Exercised		(3,947	)		3.26
Forfeited		(27,883	)		2.80
Balance, December 31, 2004		219,601		$	0.50
Granted
Exercised		(454	)		0.30
Forfeited		(2,611	)		0.26
Balance, December 31, 2005		216,536		$	0.43

		Outstanding options					Exercisable options
Exercise price		Shares under option		Weighted average remaining contractual life (years)	Weighted average exercise price			Shares currently exercisable			Weighted average exercise price
	$  0.30		207,146	7.12	$	0.30			154,865	$		0.30
	3.20		9,359	8.12		3.20			5,382			3.20
	16.20		31	6.31		16.20			31			16.20
			216,536	7.16		0.43			160,278			0.40

(12)    Warrants

          In determining the fair value of warrants granted in 2005, we utilized the Black-Scholes valuation model with the following weighted average assumptions: dividend yield of 0%, risk free interest rate of 1.16%, expected volatility of 143%, and expected lives of seven years.

          At December 31, 2005, we had the following warrants outstanding for the purchase of our common stock:

Description	Expiration Date		Number of Shares Issuable			Exercise Price
Issued to original Front Porch Shareholders		March 31, 2007		30,000	$	6.50
Issued to note holder		December 31, 2007		22,500	$	1.00
Issued to Equity Pier in exchange for consulting services (Note 14)		February 28, 2006		332,470	$	20.00
Issued to noteholder		May 1, 2008		10,000	$	1.00
Issued to noteholder		May 1, 2008		50,000	$	1.00
Issued in connection with debt issuance		May 13, 2011		517,850	$	4.80
Issued to Laurus in exchange for liquidated damages		October 25, 2011		50,000	$	5.00
Issued in exchange for services in financing transaction		January 10, 2008		20,274	$	0.003
Issued to Laurus in exchange for liquidated damages		February 17, 2012		362,500	$	2.60
Issued to Laurus in connection with debt issuance		June 30, 2012		400,000	$	2.63
Total warrants outstanding				1,795,594

F-28

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(12) Warrants (continued)

          At December 31, 2005, we had the following warrants outstanding for the purchase of our Series A Convertible Preferred Stock:

		Number of		Exercise
Description	Expiration Date	Shares Issuable		Price
Issued to lease holder in connection with equipment lease facility	November 20, 2010	6,954	$	6.02
Issued in exchange for services in financing transaction	January 10, 2008	26,075	$	10.35
Total warrants outstanding		33,029

(13) Employee Contribution Plan

          We sponsor a 401(k) Savings Plan (the Plan). The Plan is a defined contribution plan for all of our regular domestic employees who have attained at least 18 years of age. Employees who meet these requirements may become a participant in the Plan on the first day of the following month after meeting the eligibility requirements.

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

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

(14) Related-Party Transactions

          Our Chairman of the Board and Chief Executive Officer (the “CEO”) is the founder and managing partner of Equity Pier LLC (“Equity Pier”). During 2004, we incurred liabilities to Equity Pier totaling $6,866, primarily related to the reimbursement of travel and business expenses incurred by the CEO and other executives. In addition, we leased office space from Equity Pier in 2005 and 2004. Total costs incurred under the leasing arrangement and associated expenses (utilities, supplies and insurance) amounted to $190,178 and $84,529 in 2005 and 2004, respectively. During 2004, we paid consulting fees and other reimbursable expenses to shareholders of Equity Pier, excluding salaries paid to shareholders of Equity Pier in their capacity as employees of MSI, of $18,613.

          During 2004, a director of our company entered into a consulting agreement with our company to provide consulting services in the broadcast industry. The agreement began on June 1, 2004 and expired on May 31, 2005. The agreement required monthly payments of $2,500 plus expenses. During 2005 and 2004, we paid the director $13,274 and $18,711, respectively, in consulting fees and expenses.

(15) Income Taxes

          The domestic and foreign components of loss before income taxes for the years ended December 31, 2005 and 2004 are as follows:

		2005			2004
Domestic	$	(15,123,970	)	$	(11,343,294	)
Foreign		1,367,447			1,305,000
	$	(13,756,523	)	$	(10,038,294	)

F-29

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(15) Income Taxes (continued)

          We account for income taxes in accordance with Statement of Financial Standard No. 109 “Accounting For Income Taxes” (SFAS 109). Under the provisions of SFAS 109, a deferred tax liability or asset (net of a valuation allowance) is provided for in the financial statements by applying the provisions of applicable laws to measure the deferred tax consequences of temporary differences that will result in net taxable or deductible amounts in future years as a result of events recognized in the financial statements in the current or preceding years.

          The income tax provisions of $469,034 and $400,000 for the year ended December 31, 2005 and December 31, 2004, respectively, consisted solely of deferred, foreign income tax expense, related to our French subsidiary. During the first three quarters of 2005, we recorded foreign income tax expense of $1.1 million based on the earnings of our French subsidiary. In the fourth quarter of 2005, we executed a license agreement for the sale of DIVArchive products owned by us and sold to our French subsidiary with an effective date for payment of the royalty for 2005 as of January 1, 2005. As a result of recording the cross charge for royalties in the fourth quarter, earnings of the subsidiary decreased, resulting in a fourth quarter reduction in deferred income tax expense of $587,216.

          The reconciliation between the federal statutory tax rate and our effective tax rate on loss for 2005 and 2004 is as follows:

	2005		2004
Expected tax benefit of federal statutory tax rate	(35.0	%)	(34.0	%)
Increase (reduction) resulting from:
State tax—net of federal tax benefit	(2.4	%)	(4.4	%)
Effect of permanent differences	17.7	%	10.3	%
Foreign taxes	0.1	%	4.0	%
Other	—		—
Change in valuation allowance	23.0	%	28.1	%
Actual income tax expense	3.4	%	4.0	%

          At December 31, 2005, approximately $95.9 million of federal and $80.1 million of state net operating loss carryforwards were available to offset future taxable income through the year 2025. These net operating loss carryforwards begin to expire in 2011. At December 31, 2005, the Company had foreign loss carryforwards of approximately $14.8 million with no expiration date.

          The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss and tax credit carry forwards if there has been a change in ownership as described in Section 382 of the Internal Revenue Code. As a result of a private placement in 2003 and a reverse acquisition in 2004, we believe that there are substantial limitations on the utilization of its net operating loss carry forwards. We have not prepared an analysis to determine if a change of ownership occurred or the effect on the utilization of the loss and credit carryforwards.

          Significant components of our deferred tax assets and liabilities for federal and state income taxes consist of the following as of December 31, 2005:

Deferred tax assets:
Accrued liabilities and other	$	1,003,248
Property and equipment		317,075
Loss carryforwards		43,369,422
Deferred tax assets		44,689,745
Deferred tax liabilities:
Intangible assets—Front Porch Digital Acquisition		(5,011,325	)
Unremitted earnings of French subsidiary		(1,357,960	)
Deferred tax liabilities		(6,369,285	)
Net deferred tax assets		38,320,460
Valuation allowance		(38,320,460	)
Net deferred tax assets	$	—

F-30

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(15) Income Taxes (continued)

          Management has recorded a valuation allowance against the entire net deferred tax asset, as management does not consider the realization of this asset to be more likely than not.

          In addition, any tax benefits recognized in future periods for deferred tax assets of MSI allowed for at the date of the Acquisition, are to be first applied to reduce to zero, intangible assets related to the Acquisition. U.S. income taxes were not provided for on undistributed earnings of non-U.S. subsidiaries as we intend to reinvest these earnings indefinitely in operations outside the United States.

(16) Incentra of CA Note Default and Arbitration

          We are engaged in the early stages of an arbitration proceeding to resolve a dispute with one of our creditors that, if resolved unfavorably, would have a material adverse affect on our liquidity and financial condition.

          In connection with our acquisition of Incentra of CA in February 2005, we issued to the principal stockholder of Incentra of CA 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. 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, 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 the balance sheet date, we have reclassified approximately $1.3 million of the debt to current liabilities based on the default. We have been accruing interest at the 12% default rate since August 11, 2005.

          In the event the dispute is not resolved in a mediation and the parties proceed to arbitration, the full outstanding balance of the STAR Note could be accelerated if the arbitrator does not rule in our favor in such proceeding. 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.

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

          The event of default on the STAR Note created an event of default of certain provisions of the 2005 Facility and the Term Note with Laurus.

(17)	Subsequent Events
(A)	New Laurus LOC

          On February 6, 2006, we entered into a 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 shall accrue interest on the

F-31

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(17) Subsequent Events (continued)

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 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 “NOTE”). Interest on borrowings under the Note is payable monthly on the first day of each month during the term of the Note, commencing on March 1, 2006. All outstanding principal amounts are due and payable on February 6, 2009.

          We entered into the New Security Agreement to pay off our existing $9 million convertible revolving credit facility with Laurus (the “Existing Facility”), of which approximately $6 million was outstanding as of February 6, 2006. Prior to such date, the outstanding principal amount under the Existing Facility was potentially convertible into approximately 3.6 million shares of our common stock, par value $.01 per share (the “Common Stock”). In connection with the 2006 facility, we issued to Laurus an option to purchase 1,071,428 shares of common stock. We also entered into an Amendment and Deferral Agreement (the “Amendment and Deferral Agreement”) with Laurus amending the Amended and Restated Secured Convertible Term Note (the “2004 Note”) we issued to Laurus on May 13, 2004 in the aggregate original principal amount of $5,000,000, that is payable in full on May 13, 2007 (the “Maturity Date”). 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 the Maturity Date. The Security Agreement increased the minimum initial amount available to us and our subsidiaries from $6 million under the Existing 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 each subsidiary, minus such 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 Existing Facility, (ii) $375,000 was paid to Laurus as an early termination fee for the Existing Facility, and (iii) $107,500 was applied towards expenses of the 2006 Facility.

          All loans and obligations owed by us to Laurus arising under the New Security Agreement, the Securities Purchase Agreement, dated as of May 13, 2004, between us and Laurus (the “2004 Securities Purchase Agreement”), the Note, the Option (as defined), the Registration Rights Agreement (as defined), the Stock Pledge Agreement (as defined), or any other agreements or documents relating to the relationship between us and Laurus (collectively, the “Ancillary Documents”) or otherwise are secured by a security interest in substantially all of the assets of our company and the 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 the 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, whether arising under the 2004 Securities Purchase Agreement and the Related Documents (referred to therein), or under any other obligations now existing or hereafter arising.

          Under the terms of the New Security Agreement, if an event of default occurs under any of the Ancillary Documents, Laurus has the right to accelerate payments under the Note and, in addition to any other remedies available to it, to foreclose upon the assets securing the Note. If an event of default occurs under any of the Ancillary Documents, within five days after written notice to us, Laurus may require a payment of 125% of the unpaid principal balance of the Note, plus accrued interest and fees, which will become immediately due and payable. Laurus shall also be entitled to payment of a default interest rate of 1.5% per month

F-32

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(17) Subsequent Events (continued)

on all amounts due and such other remedies specified in the Ancillary Documents and under the Uniform Commercial Code. Such events of default include, without limitation, the following:

• a failure to make payments of principal and interest under the Note within three (3) days of when due;

• a material breach by us of any provision contained in any of the Ancillary Documents (that is not cured within the stated cure period);

• the filing of any money judgment or similar final process against us for more than $100,000, which remains unvacated, unstayed or unbonded for a period of thirty (30) days;

• if we make an assignment for the benefit of our creditors, or a receiver or trustee is appointed for us, or any form of bankruptcy or insolvency proceeding is instituted by us, or any involuntary proceeding is instituted against us if not vacated within thirty (30) days;

• if our Common Stock is suspended for five (5) consecutive days or for five (5) days during a ten (10) consecutive day period from a principal market or pursuant to a stop order issued by the Securities and Exchange Commission (the “SEC”) (provided that we shall not have been able to cure such trading suspension within thirty (30) days of our receipt of notice thereof or list our Common Stock on another principal market within sixty (60) days of such notice); and

• a failure by us to timely deliver shares of our Common Stock to Laurus when due upon exercise of the Option.

          The Security Agreement 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. These negative covenants include, without limitation, restrictions on our ability to:

• incur or assume indebtedness (exclusive of trade debt) in excess of $100,000;

• guarantee or assume any liability in connection with any obligations of another person or entity (except on behalf of the Subsidiaries in the ordinary course of business);

• pay or make any dividend or distribution on any class of our capital stock or the capital stock of the Subsidiary or issue any preferred stock; or

• enter into any merger, consolidation or reorganization, with limited exceptions.

          OPTION. We issued to Laurus a common stock purchase option (the “Option”), entitling Laurus to purchase up to 1,071,428 shares of our Common Stock at an exercise price of $.001 per share (subject to applicable adjustments) (the “Exercise Price”). The Option expires on February 26, 2026. Pursuant to the Security Agreement, Laurus may not sell any shares of 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.

          Laurus may not exercise the Option in connection with a number of shares of Common Stock which would exceed the difference between (i) 4.99% of the issued and outstanding shares of Common Stock and (ii) the number of shares of Common Stock beneficially owned by Laurus except upon (i) seventy-five (75) days’ prior notice from Laurus to us or (ii) upon the occurrence and continuance of an event of default under the Security Agreement.

          REGISTRATION RIGHTS AGREEMENT. Pursuant to the terms of an Amended and Restated Registration Rights Agreement between us and Laurus (the “Registration Rights Agreement”), which amends and restates in its entirety that certain 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

F-33

INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005 and 2004

(17) Subsequent Events (continued)

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 pursuant to 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 pursuant to such warrant.

(B) NEW LAURUS 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 $1,500,000 (the “2006 Note”) and a secured convertible term note due May 31, 2009 in the principal amount of $1,750,000 (the “2006 Convertible Note”) In connection with the issuance of the 2006 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 Note, 2006 Convertible Note and the 2006 Warrant were sold to Laurus for a purchase price of $3,250,000.

          The 2006 Note and 2006 Convertible Note provide for monthly payments of interest at a rate per annum equal to the “prime rate” published in the Wall Street Journal from time to time, plus 2%, subject to a floor of 9%. The 2006 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 is convertible into shares of our common stock at a fixed conversion price of $1.40 per share, subject to certain antidilution adjustments. The 2006 Note and 2006 Convertible Note are collateralized by a security interest in all of our assets.

          The March 31, 2006 financing with Laurus is contingent upon meeting certain closing conditions that must be satisfied on or before April 21, 2006. In the event that such conditions are not satisfied on or before that date, the private placement will terminate and no funding will occur.

          Pursuant to a Registration Rights Agreement (the “2006 Registration Rights”) with Laurus, we are obligated to: (a) file a registration statement under the Act to register the resale of the shares of our (“Registration Statement”) common stock issuable upon conversion of the 2006 Convertible Note and exercise of the 2006 Warrant on or prior to May 15, 2006. (b) use our best efforts to have the Registration Statement declared effective under the Act as promptly as possible, but in any event prior to 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 and 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 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 the us to make a default payment which shall be 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.

F-34

EX-10.70

                            INCENTRA SOLUTIONS, INC.

                          SECURITIES PURCHASE AGREEMENT

                                 MARCH 31, 2006



                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

1.    Agreement to Sell and Purchase...........................................1

2.    Fees and Warrant.........................................................1

3.    Closing, Delivery and Payment............................................2
      3.1        Closing.......................................................2
      3.2        Delivery......................................................2

4.    Representations and Warranties of the Company............................3
      4.1        Organization, Good Standing and Qualification.................3
      4.2        Subsidiaries..................................................3
      4.3        Capitalization; Voting Rights.................................4
      4.4        Authorization; Binding Obligations............................4
      4.5        Liabilities...................................................5
      4.6        Agreements; Action............................................5
      4.7        Obligations to Related Parties................................6
      4.8        Changes.......................................................6
      4.9        Title to Properties and Assets; Liens, Etc....................7
      4.10       Intellectual Property.........................................8
      4.11       Compliance with Other Instruments.............................8
      4.12       Litigation....................................................9
      4.13       Tax Returns and Payments......................................9
      4.14       Employees.....................................................9
      4.15       Registration Rights and Voting Rights........................10
      4.16       Compliance with Laws; Permits................................10
      4.17       Environmental and Safety Laws................................11
      4.18       Valid Offering...............................................11
      4.19       Full Disclosure..............................................11
      4.20       Insurance....................................................11
      4.21       SEC Reports..................................................11
      4.22       Listing......................................................12
      4.23       No Integrated Offering.......................................12
      4.24       Stop Transfer................................................12
      4.25       Dilution.....................................................12
      4.26       Patriot Act..................................................12
      4.27       ERISA........................................................12

5.    Representations and Warranties of the Purchaser.........................13
      5.1        No Shorting..................................................13
      5.2        Requisite Power and Authority................................13
      5.3        Investment Representations...................................14
      5.4        Purchaser Bears Economic Risk................................14
      5.5        Acquisition for Own Account..................................14
      5.6        Purchaser Can Protect Its Interest...........................14


                                       i


      5.7        Accredited Investor..........................................15
      5.8        Legends......................................................15

6.    Covenants of the Company................................................16
      6.1        Stop-Orders..................................................16
      6.2        Listing......................................................16
      6.3        Market Regulations...........................................16
      6.4        Reporting Requirements.......................................16
      6.5        Use of Funds.................................................17
      6.6        Access to Facilities.........................................17
      6.7        Taxes........................................................17
      6.8        Insurance....................................................17
      6.9        Intellectual Property........................................18
      6.10       Properties...................................................18
      6.11       Confidentiality..............................................19
      6.12       Required Approvals...........................................19
      6.13       Reissuance of Securities.....................................20
      6.14       Opinion......................................................20
      6.15       Margin Stock.................................................20
      6.16       [Intentionally Deleted]......................................20
      6.17        Notice of Default...........................................19

7.    Covenants of the Purchaser..............................................21
      7.1        Confidentiality..............................................21
      7.2        Non-Public Information.......................................21
      7.3        LIMITATION ON ACQUISITION OF COMMON STOCK OF THE COMPANY.....19

8.    Covenants of the Company and Purchaser Regarding Indemnification........21
      8.1        Company Indemnification......................................21
      8.2        Purchaser's Indemnification..................................21
      8.3        Procedures...................................................22

9.    Registration Rights.....................................................22
      9.1        Registration Rights Granted..................................22
      9.2        Offering Restrictions........................................22

10.   Miscellaneous...........................................................22
      10.1       Governing Law................................................22
      10.2       Survival.....................................................23
      10.3       Successors...................................................23
      10.4       Entire Agreement.............................................23
      10.5       Severability.................................................24
      10.6       Amendment and Waiver.........................................24
      10.7       Delays or Omissions..........................................24
      10.8       Notices......................................................24
      10.9       Titles and Subtitles.........................................25


                                       ii


      10.10      Facsimile Signatures; Counterparts...........................25
      10.11      Broker's Fees................................................25
      10.12      Construction.................................................25
      10.13      Proxy........................................................25


                                      iii


                                LIST OF EXHIBITS

Form of Convertible Note...........................................  Exhibit A-1
Form of Non-Convertible Note                                         Exhibit A-2
Form of Warrant....................................................  Exhibit B
Form of Opinion....................................................  Exhibit C
Form of Escrow Agreement...........................................  Exhibit D
Form of Disbursement Letter........................................  Exhibit E
Form of Subsidiary Guarantee.......................................  Exhibit F


                                       i


                          SECURITIES PURCHASE AGREEMENT

      THIS SECURITIES  PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of March 31, 2006,  by and between  INCENTRA  SOLUTIONS,  INC., a Nevada
corporation  (the  "Company"),  and LAURUS MASTER FUND,  LTD., a Cayman  Islands
company (the "Purchaser").

                                    RECITALS

      WHEREAS,  the Company has  authorized  the sale to the  Purchaser of (x) a
Secured  Convertible Term Note in the aggregate  principal amount of One Million
Five Hundred Thousand  Dollars  ($1,500,000)  (the  "Convertible  Note"),  which
Convertible  Note is  convertible  into shares of the  Company's  common  stock,
$0.001 par value per share (the "Common Stock"),  at an initial fixed conversion
price of $1.40 per share of Common Stock  ("Fixed  Conversion  Price") and (y) a
non-convertible  Secured  Term  Note in the  aggregate  principal  amount of One
Million Seven Hundred Fifty Thousand Dollars ($1,750,000) (the  "Non-Convertible
Note" and, together with the Convertible Note, the "Notes" and each, a "Note");

      WHEREAS,  the  Company  wishes  to issue a  warrant  to the  Purchaser  to
purchase  up to  417,857  shares  of the  Company's  Common  Stock  (subject  to
adjustment as set forth therein) in connection with Purchaser's  purchase of the
Notes;

      WHEREAS,  Purchaser  desires to  purchase  the Notes and the  Warrant  (as
defined in Section 2) on the terms and conditions set forth herein; and

      WHEREAS,  the  Company  desires to issue and sell the Notes and Warrant to
Purchaser on the terms and conditions set forth herein.

                                    AGREEMENT

      NOW, THEREFORE,  in consideration of the foregoing recitals and the mutual
promises,  representations,  warranties and covenants  hereinafter set forth and
for other good and valuable consideration,  the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

      1.  AGREEMENT TO SELL AND PURCHASE.  Pursuant to the terms and  conditions
set forth in this Agreement,  on the Closing Date (as defined in Section 3), the
Company  agrees to sell to the  Purchaser,  and the  Purchaser  hereby agrees to
purchase from the Company, the Notes and the Warrant.. The offering of the Notes
and the Warrant  purchased on the Closing Date shall be known as the "Offering."
A form of the  Convertible  Note is annexed  hereto as Exhibit A-1 and a form of
the Non-Convertible Note is annexed hereto as Exhibit A-2. The Notes will mature
on  the  respective   Maturity  Date  (as  defined  in  the  respective   Note).
Collectively, the Notes and the Warrant (as defined in Section 2) and the Common
Stock  issuable  in payment of the  Convertible  Note,  upon  conversion  of the
Convertible  Note  and upon  exercise  of the  Warrant  are  referred  to as the
"Securities."

      2. FEES AND WARRANT. On the Closing Date:



            (a) The Company will issue and deliver to the Purchaser a Warrant to
      purchase  up to  417,857  shares of Common  Stock in  connection  with the
      Offering (the "Warrant") pursuant to Section 1 hereof. The Warrant must be
      delivered  on the  Closing  Date.  A form of Warrant is annexed  hereto as
      Exhibit  B. The  shares of Common  Stock  issuable  upon  exercise  of the
      Warrant are hereinafter as referred to as the "Warrant Shares".

            (b) Subject to the terms of Section  2(d) below,  the Company  shall
      pay to Laurus Capital  Management,  LLC, the manager of the  Purchaser,  a
      closing  payment in an amount equal to three and one-half  percent (3.50%)
      of the  aggregate  principal  amount of the Notes.  The  foregoing  fee is
      referred to herein as the "Closing Payment."

            (c) The Company shall  reimburse  the  Purchaser for its  reasonable
      legal fees for services  rendered to the Purchaser in  preparation of this
      Agreement  and  the  Related  Agreements  (as  hereinafter  defined),  and
      reasonable   out-of-pocket   expenses  incurred  in  connection  with  the
      Purchaser's due diligence  review of the Company and its  Subsidiaries (as
      defined in Section 6.8) and all related  matters.  Amounts  required to be
      paid under this  Section  2(c) will be paid on the Closing  Date and shall
      not exceed $20,000.

            (d) The  Closing  Payment,  the  legal  fees  and the due  diligence
      expenses (net of deposits previously paid by the Company) shall be paid at
      closing out of funds held  pursuant to a Funds  Escrow  Agreement  of even
      date herewith among the Company, Purchaser and an Escrow Agent in the form
      attached  hereto  as  Exhibit  D  (the  "Funds  Escrow  Agreement")  and a
      disbursement  letter  in  the  form  attached  hereto  as  Exhibit  E (the
      "Disbursement Letter").

      3. CLOSING, DELIVERY AND PAYMENT.

            3.1 CLOSING.  Subject to the terms and  conditions set forth herein,
the closing of the transactions contemplated hereby (the "Closing"),  shall take
place on such date,  and at such time or place,  as the  Company  and  Purchaser
shall  mutually  agree (such date is  hereinafter  referred  to as the  "Closing
Date").

            3.2  DELIVERY.  Pursuant to the Funds  Escrow  Agreement in the form
attached  hereto as Exhibit C, at the Closing on the Closing  Date,  the Company
will deliver to the  Purchaser,  among other things,  a Convertible  Note in the
form attached as Exhibit A-1 representing the aggregate  principal amount of One
Million Five Hundred Thousand Dollars  ($1,500,000),  a Non-Convertible  Note in
the form attached as Exhibit A-2 representing the aggregate  principal amount of
One Million Seven Hundred Fifty Thousand  Dollars  ($1,750,000) and a Warrant in
the form  attached as Exhibit B in the  Purchaser's  name  representing  417,857
Warrant  Shares and the  Purchaser  will  deliver to the  Company,  among  other
things,  the amounts set forth in the  Disbursement  Letter by wire  transfer of
immediately  available  funds to an account of the Company as the Company  shall
direct in writing.  The Company hereby  acknowledges and agrees that Purchaser's
obligation  to purchase  the Note from the Company on the Closing  Date shall be
contingent upon the satisfaction (or waiver by the Purchaser in its sole


                                       2


discretion) of the items and matters set forth in the closing checklist provided
by the Purchaser to the Company on or prior to the Closing Date.

      4.  REPRESENTATIONS  AND  WARRANTIES  OF THE COMPANY.  The Company  hereby
represents and warrants to the Purchaser as follows:

            4.1  ORGANIZATION,  GOOD  STANDING  AND  QUALIFICATION.  Each of the
Company and each of its  Subsidiaries  is a corporation,  partnership or limited
liability company,  as the case may be, duly organized,  validly existing and in
good standing under the laws of its  jurisdiction of  organization.  Each of the
Company and each of its  Subsidiaries  has the corporate  power and authority to
own and operate its properties and assets.  The Company has the corporate  power
and authority to execute and deliver (i) this Agreement,  (ii) the Notes and the
Warrant to be issued in connection with this Agreement,  (iii) the Reaffirmation
and  Ratification  Agreement  dated as of the date hereof  between the  Company,
certain  subsidiaries of the Company and the Purchaser (as amended,  modified or
supplemented  from  time to  time,  the  "Reaffirmation  Agreement"),  (iv)  the
Registration  Rights Agreement  relating to the Convertible Note and the Warrant
dated as of the date hereof  between the Company and the  Purchaser (as amended,
modified  or  supplemented   from  time  to  time,  the   "Registration   Rights
Agreement"),  (v) the Funds Escrow  Agreement  dated as of the date hereof among
the Company, the Purchaser and the escrow agent referred to therein (as amended,
modified or  supplemented  from time to time, the "Funds Escrow  Agreement") and
(vi) all other  agreements  related to this  Agreement  and the  Securities  and
referred to herein (the preceding  clauses (ii) through (vi),  together with (a)
that certain Master  Security  Agreement,  dated as of May 13, 2004 by and among
the Company,  certain subsidiaries of the Company and the Purchaser (as amended,
modified  or  supplemented   from  time  to  time,  the  "2004  Master  Security
Agreement"),  (b) that certain Stock Pledge  Agreement,  dated as of February 6,
2006,  by and among the  Company,  certain  Subsidiaries  of the Company and the
Purchaser (as amended,  modified or  supplemented  from time to time,  the "2006
Stock Pledge  Agreement",  (c) that certain  Subsidiary  Guarantee,  dated as of
February 6, 2006,  made by certain  subsidiaries of the Company to the Purchaser
(as amended,  modified or supplemented  from time to time, the "2006  Subsidiary
Guarantee")  and (d) that certain  Security  Agreement,  dated as of February 6,
2006,  by and among the  Company,  certain  subsidiaries  of the Company and the
Purchaser (as amended,  modified or  supplemented  from time to time,  the "2006
Security Agreement"), collectively, the "Related Agreements"), to issue and sell
the  Notes and the  shares  of Common  Stock  issuable  upon  conversion  of the
Convertible  Note (the "Note  Shares"),  to issue and sell the  Warrant  and the
Warrant  Shares,  and to carry  out the  provisions  of this  Agreement  and the
Related Agreements and to carry on its business as presently conducted.  Each of
the Company and each of its  Subsidiaries is duly qualified and is authorized to
do business and is in good  standing as a foreign  corporation,  partnership  or
limited liability company, as the case may be, in all jurisdictions in which the
nature of its  activities  and of its  properties  (both owned and leased) makes
such qualification necessary, except for those jurisdictions in which failure to
do so has not, or could not reasonably be expected to have,  individually  or in
the aggregate, a material adverse effect on the business,  assets,  liabilities,
condition (financial or otherwise),  properties,  operations or prospects of the
Company and it  Subsidiaries,  taken  individually  and as a whole (a  "Material
Adverse Effect").

            4.2  SUBSIDIARIES.  Each  direct  and  indirect  Subsidiary  of  the
Company,  the  direct  owner of such  Subsidiary  and its  percentage  ownership
thereof, is set forth on Schedule


                                       3


4.2. For the purpose of this  Agreement,  a "SUBSIDIARY" of any person or entity
means (i) a corporation or other entity whose shares of stock or other ownership
interests  having  ordinary  voting power  (other than stock or other  ownership
interests having such power only by reason of the happening of a contingency) to
elect a majority  of the  directors  of such  corporation,  or other  persons or
entities  performing  similar  functions  for such person or entity,  are owned,
directly or indirectly,  by such person or entity or (ii) a corporation or other
entity in which such person or entity owns,  directly or  indirectly,  more than
50% of the equity interests at such time.

            4.3 CAPITALIZATION; VOTING RIGHTS.

            (a) The  authorized  capital  stock of the  Company,  as of the date
      hereof  consists of  205,000,000  shares,  of which  200,000 are shares of
      Common Stock,  13,326,810 shares of which are issued and outstanding,  and
      5,000,000  are  shares of  preferred  stock,  par value  $0.001 per share,
      2,466,971 of which shares of preferred  stock are issued and  outstanding.
      The  authorized  capital  stock of each  Subsidiary  of the Company is set
      forth on Schedule 4.3.

            (b) Except as disclosed on Schedule 4.3,  other than: (i) the shares
      reserved for issuance  under the Company's  2000 Equity  Incentive Plan or
      the Company's  Executive  Bonus Plan; and (ii) shares which may be granted
      pursuant to this Agreement,  the Related  Agreements and other  agreements
      between the Company and the Purchaser,  there are no outstanding  options,
      warrants,  rights (including conversion or preemptive rights and rights of
      first  refusal),  proxy or  stockholder  agreements,  or  arrangements  or
      agreements of any kind for the purchase or acquisition from the Company of
      any of its  securities.  Except as disclosed on Schedule 4.3,  neither the
      offer,  issuance or sale of the Notes or the  Warrant,  or the issuance of
      any of the Note  Shares or Warrant  Shares,  nor the  consummation  of any
      transaction  contemplated  hereby  will result in a change in the price or
      number of any securities of the Company  outstanding,  under anti-dilution
      or other similar provisions contained in or affecting any such securities.

            (c) All issued and outstanding shares of the Company's Common Stock:
      (i) have been duly  authorized  and validly  issued and are fully paid and
      nonassessable;  and (ii) were  issued in  compliance  with all  applicable
      state and federal laws concerning the issuance of securities.

            (d) The rights,  preferences,  privileges  and  restrictions  of the
      shares of the Common Stock are as stated in the Company's  Certificate  of
      Incorporation  (the  "Charter").  The Note Shares and Warrant  Shares have
      been duly and validly  reserved for  issuance.  When issued in  compliance
      with the  provisions  of this  Agreement and the  Company's  Charter,  the
      Securities will be validly issued, fully paid and nonassessable,  and will
      be  free  of any  liens  or  encumbrances;  provided,  however,  that  the
      Securities may be subject to  restrictions  on transfer under state and/or
      federal  securities  laws as set forth herein or as otherwise  required by
      such laws at the time a transfer is proposed.

            4.4 AUTHORIZATION;  BINDING OBLIGATIONS. All corporate action on the
part of the Company  (including  its officers and  directors)  necessary for the
authorization of this Agreement and the Related  Agreements,  the performance of
all obligations of the Company


                                       4


hereunder  and  under the other  Related  Agreements  at the  Closing  and,  the
authorization,  sale,  issuance  and  delivery of the Notes and Warrant has been
taken or will be taken  prior  to the  Closing.  This  Agreement  and the  other
Related  Agreements,  when  executed  and  delivered,  will be valid and binding
obligations of the Company,  enforceable  against the Company in accordance with
their terms, except:

            (a) as limited by applicable bankruptcy, insolvency, reorganization,
      moratorium or other laws of general application  affecting  enforcement of
      creditors' rights; and

            (b) general  principles of equity that restrict the  availability of
      equitable or legal remedies.

The sale of the Notes and the subsequent conversion of the Convertible Note into
Note Shares are not and will not be subject to any  preemptive  rights or rights
of first  refusal  that have not been  properly  waived or  complied  with.  The
issuance of the Warrant and the  subsequent  exercise of the Warrant for Warrant
Shares  are not and will not be subject  to any  preemptive  rights or rights of
first refusal that have not been properly waived or complied with.

            4.5 LIABILITIES. To the Company's knowledge, neither the Company nor
any of its Subsidiaries has any material contingent liabilities,  except current
liabilities  incurred  in  the  ordinary  course  of  business  and  liabilities
disclosed in any of the Company's  filings under the Securities  Exchange Act of
1934  ("Exchange  Act") made prior to the date of this Agreement  (collectively,
the  "Exchange  Act  Filings"),  copies  of  which  have  been  provided  to the
Purchaser.

            4.6 AGREEMENTS; ACTION. Except as set forth on Schedule 4.6:

            (a) there are no agreements, understandings, instruments, contracts,
      proposed  transactions,  judgments,  orders, writs or decrees to which the
      Company  or any of its  Subsidiaries  is a party  or by  which it is bound
      which may  involve:  (i)  obligations  (contingent  or  otherwise)  of, or
      payments to, the Company in excess of $100,000 (other than obligations of,
      or  payments  to,  the  Company  arising  from  purchase,  sale or license
      agreements  entered into in the ordinary course of business);  or (ii) the
      transfer  or  license  of any  patent,  copyright,  trade  secret or other
      proprietary right to or from the Company (other than licenses arising from
      the  purchase  of "off the shelf" or other  standard  products);  or (iii)
      provisions restricting the development, manufacture or distribution of the
      Company's  products or services;  or (iv)  indemnification  by the Company
      with respect to infringements of proprietary rights.

            (b) Since  December  31,  2004,  except  equipment  leasing  through
      CommVest,  LLC,  as  previously  consented  to by  Purchaser,  neither the
      Company  nor  any of its  Subsidiaries  has:  (i)  declared  or  paid  any
      dividends,  or authorized or made any distribution upon or with respect to
      any class or series of its capital stock;  (ii) incurred any  indebtedness
      for money borrowed or any other  liabilities  (other than ordinary  course
      obligations)  individually  in  excess  of  $50,000  or,  in the  case  of
      indebtedness and/or liabilities  individually less than $50,000, in excess
      of  $100,000  in the  aggregate;  (iii) made any loans or  advances to any
      person not in excess, individually or in the aggregate,


                                       5


      of $100,000,  other than ordinary course advances for travel expenses;  or
      (iv) sold,  exchanged or otherwise disposed of any of its assets or rights
      valued  in  excess  of  $50,000,  other  than in the  ordinary  course  of
      business.

            (c)  For  the  purposes  of  subsections  (a)  and  (b)  above,  all
      indebtedness,   liabilities,  agreements,   understandings,   instruments,
      contracts  and proposed  transactions  involving the same person or entity
      (including  persons or  entities  the  Company  has reason to believe  are
      affiliated  therewith)  shall be aggregated for the purpose of meeting the
      individual minimum dollar amounts of such subsections.

            4.7 OBLIGATIONS TO RELATED PARTIES.  Except as set forth on Schedule
4.7,  there are no  obligations  of the  Company or any of its  Subsidiaries  to
officers,  directors,  stockholders  or  employees  of the Company or any of its
Subsidiaries other than:

            (a) for  payment  of  salary  for  services  rendered  and for bonus
      payments;

            (b) reimbursement for reasonable  expenses incurred on behalf of the
      Company and its Subsidiaries;

            (c) for other standard employee benefits made generally available to
      all employees  (including stock option  agreements  outstanding  under any
      stock option plan approved by the Board of Directors of the Company); and

            (d)  obligations  listed in the  Company's  financial  statements or
      disclosed in any of its Exchange Act Filings.

Except as  described  above or set  forth on  Schedule  4.7 or in the  Company's
Exchange Act Filings,  none of the  officers,  directors  or, to the best of the
Company's knowledge, key employees or stockholders of the Company or any members
of their immediate families, are indebted to the Company, individually or in the
aggregate,  in excess  of  $50,000  or have any  direct  or  indirect  ownership
interest in any firm or corporation with which the Company is affiliated or with
which the Company has a business relationship,  or any firm or corporation which
competes with the Company,  other than passive  investments  in publicly  traded
companies  (representing  less than one percent (1%) of such company)  which may
compete with the Company.  Except as described  above,  no officer,  director or
stockholder,  or any  member  of  their  immediate  families,  is,  directly  or
indirectly,  interested  in  any  material  contract  with  the  Company  and no
agreements, understandings or proposed transactions are contemplated between the
Company and any such person. Except as set forth on Schedule 4.7, the Company is
not a guarantor or indemnitor of any  indebtedness of any other person,  firm or
corporation.

            4.8 CHANGES.  Since  December  31, 2004,  except as disclosed in any
Exchange  Act  Filing  or in any  Schedule  to this  Agreement  or to any of the
Related Agreements, there has not been:

            (a) any  change  in the  business,  assets,  liabilities,  condition
      (financial  or  otherwise),  properties,  operations  or  prospects of the
      Company or any of its Subsidiaries, which individually or in the aggregate
      has had, or could  reasonably be expected to have,  individually or in the
      aggregate, a Material Adverse Effect;


                                       6


            (b) any  resignation or termination of any officer,  key employee or
      group of employees of the Company or any of its Subsidiaries;

            (c) any material change,  except in the ordinary course of business,
      in the contingent obligations of the Company or any of its Subsidiaries by
      way of guaranty, endorsement, indemnity, warranty or otherwise;

            (d) any  damage,  destruction  or loss,  whether  or not  covered by
      insurance,  has had, or could reasonably be expected to have, individually
      or in the aggregate, a Material Adverse Effect;

            (e)  any  waiver  by the  Company  or any of its  Subsidiaries  of a
      valuable right or of a material debt owed to it;

            (f) any direct or  indirect  loans made by the Company or any of its
      Subsidiaries  to any  stockholder,  employee,  officer or  director of the
      Company  or any of its  Subsidiaries,  other  than  advances  made  in the
      ordinary course of business;

            (g) any material change in any compensation arrangement or agreement
      with any employee,  officer, director or stockholder of the Company or any
      of its Subsidiaries;

            (h) any declaration or payment of any dividend or other distribution
      of the assets of the Company or any of its Subsidiaries;

            (i) any labor organization activity related to the Company or any of
      its Subsidiaries;

            (j)  any  debt,   obligation  or  liability  incurred,   assumed  or
      guaranteed  by the Company or any of its  Subsidiaries,  except  those for
      immaterial  amounts and for current  liabilities  incurred in the ordinary
      course of business;

            (k) any sale,  assignment  or transfer of any  patents,  trademarks,
      copyrights,  trade secrets or other intangible assets owned by the Company
      or any of its Subsidiaries;

            (l) any change in any material agreement to which the Company or any
      of its  Subsidiaries  is a party or by which  either the Company or any of
      its  Subsidiaries  is bound which either  individually or in the aggregate
      has had, or could  reasonably be expected to have,  individually or in the
      aggregate, a Material Adverse Effect;

            (m) any other  event or  condition  of any  character  that,  either
      individually or in the aggregate, has had, or could reasonably be expected
      to have, individually or in the aggregate, a Material Adverse Effect; or

            (n) any  arrangement  or  commitment  by the  Company  or any of its
      Subsidiaries to do any of the acts described in subsection (a) through (m)
      above.

            4.9 TITLE TO PROPERTIES AND ASSETS;  LIENS, ETC. Except as set forth
on Schedule 4.9, each of the Company and each of its  Subsidiaries  has good and
marketable title to its


                                       7


properties  and assets,  and good title to its leasehold  estates,  in each case
subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than:

            (a) those resulting from taxes which have not yet become delinquent;

            (b) minor liens and  encumbrances  which do not  materially  detract
      from the value of the property  subject  thereto or materially  impair the
      operations of the Company or any of its Subsidiaries; and

            (c) those  that have  otherwise  arisen  in the  ordinary  course of
      business.

All facilities,  machinery,  equipment,  fixtures, vehicles and other properties
owned,  leased or used by the Company and its Subsidiaries are in good operating
condition and repair  (ordinary  wear and tear  excepted) and are reasonably fit
and usable for the purposes  for which they are being used.  Except as set forth
on Schedule 4.9, the Company and its  Subsidiaries  are in  compliance  with all
material terms of each lease to which it is a party or is otherwise bound.

            4.10 INTELLECTUAL  PROPERTY. (a) Each of the Company and each of its
      Subsidiaries  owns or  possesses  sufficient  legal rights to all patents,
      trademarks,   service  marks,  trade  names,  copyrights,  trade  secrets,
      licenses, information and other proprietary rights and processes necessary
      for its  business as now  conducted  and to the  Company's  knowledge,  as
      presently proposed to be conducted (the "Intellectual Property"),  without
      any known  infringement of the rights of others.  There are no outstanding
      options,  licenses or  agreements  of any kind  relating to the  foregoing
      proprietary rights, nor is the Company or any of its Subsidiaries bound by
      or a party to any options, licenses or agreements of any kind with respect
      to the patents, trademarks,  service marks, trade names, copyrights, trade
      secrets, licenses,  information and other proprietary rights and processes
      of any other  person or entity  other  than such  licenses  or  agreements
      arising from the purchase of "off the shelf" or standard products.

            (b) Neither the Company nor any of its Subsidiaries has received any
      communications  alleging that the Company or any of its  Subsidiaries  has
      violated  any of the  patents,  trademarks,  service  marks,  trade names,
      copyrights  or trade  secrets  or other  proprietary  rights  of any other
      person or entity,  nor is the Company or any of its Subsidiaries  aware of
      any basis therefor.

            (c) The  Company  does not  believe  it is or will be  necessary  to
      utilize any inventions, trade secrets or proprietary information of any of
      its employees made prior to their  employment by the Company or any of its
      Subsidiaries,   except  for  inventions,   trade  secrets  or  proprietary
      information  that have been  rightfully  assigned to the Company or any of
      its Subsidiaries.

            4.11  COMPLIANCE  WITH OTHER  INSTRUMENTS.  Except as  disclosed  on
Schedule 4.11,  neither the Company nor any of its  Subsidiaries is in violation
or default of (x) any term of its Charter or Bylaws,  or (y) of any provision of
any  indebtedness,  mortgage,  indenture,  contract,  agreement or instrument to
which it is party or by which it is bound or of any judgment,  decree,  order or
writ,  which  violation or default,  in the case of this clause (y), has had, or
could reasonably be expected to have, either individually or in the aggregate, a
Material Adverse


                                       8


Effect.  The execution,  delivery and  performance  of and compliance  with this
Agreement and the Related  Agreements  to which it is a party,  and the issuance
and sale of the Notes by the Company and the other  Securities  by the  Company,
each pursuant hereto and thereto,  will not, with or without the passage of time
or giving of notice,  result in any such material  violation,  or be in conflict
with or constitute a default under any such term or provision,  or result in the
creation of any mortgage,  pledge,  lien,  encumbrance or charge upon any of the
properties  or  assets  of  the  Company  or  any  of  its  Subsidiaries  or the
suspension,  revocation,  impairment,  forfeiture  or  nonrenewal of any permit,
license,  authorization or approval  applicable to the Company,  its business or
operations or any of its assets or properties.

            4.12 LITIGATION.  Except as set forth on Schedule 4.12 hereto, there
is no action,  suit,  proceeding or  investigation  pending or, to the Company's
knowledge,  currently  threatened against the Company or any of its Subsidiaries
that  prevents the Company or any of its  Subsidiaries  from  entering into this
Agreement or the other Related Agreements, or from consummating the transactions
contemplated  hereby  or  thereby,  or which  has had,  or could  reasonably  be
expected to have,  either  individually or in the aggregate,  a Material Adverse
Effect or any change in the current  equity  ownership  of the Company or any of
its Subsidiaries, nor is the Company aware that there is any basis to assert any
of the foregoing.  Neither the Company nor any of its Subsidiaries is a party or
subject to the provisions of any order, writ, injunction,  judgment or decree of
any court or government  agency or  instrumentality.  There is no action,  suit,
proceeding or investigation by the Company or any of its Subsidiaries  currently
pending or which the Company or any of its Subsidiaries intends to initiate.

            4.13 TAX RETURNS AND PAYMENTS. Except as set forth on Schedule 4.13,
each of the  Company  and each of its  Subsidiaries  has  timely  filed  all tax
returns  (federal,  state and local) required to be filed by it. All taxes shown
to be due and payable on such returns,  any assessments  imposed,  and all other
taxes due and payable by the Company or any of its Subsidiaries on or before the
Closing,  have  been  paid or  will  be  paid  prior  to the  time  they  become
delinquent. Except as set forth on Schedule 4.13, neither the Company nor any of
its Subsidiaries has been advised:

            (a) that any of its returns,  federal,  state or other, have been or
      are being audited as of the date hereof; or

            (b) of any  deficiency  in  assessment  or proposed  judgment to its
      federal, state or other taxes.

The Company has no knowledge of any  liability of any tax to be imposed upon its
properties  or assets as of the date of this  Agreement  that is not  adequately
provided for.

            4.14  EMPLOYEES.  Except as set forth on Schedule 4.14,  neither the
Company nor any of its  Subsidiaries  has any collective  bargaining  agreements
with any of its employees.  There is no labor union organizing  activity pending
or, to the Company's knowledge, threatened with respect to the Company or any of
its Subsidiaries. Except as disclosed in the Exchange Act Filings or on Schedule
4.14,  neither the Company nor any of its Subsidiaries is a party to or bound by
any currently effective employment contract,  deferred compensation arrangement,
bonus plan,  incentive plan, profit sharing plan,  retirement agreement or other
employee


                                       9


compensation plan or agreement.  To the Company's knowledge,  no employee of the
Company or any of its Subsidiaries,  nor any consultant with whom the Company or
any of its  Subsidiaries  has  contracted,  is in  violation  of any term of any
employment contract,  proprietary  information  agreement or any other agreement
relating to the right of any such  individual  to be employed by, or to contract
with,  the  Company  or any of its  Subsidiaries  because  of the  nature of the
business to be conducted by the Company or any of its  Subsidiaries;  and to the
Company's  knowledge  the  continued  employment  by the  Company  or any of its
Subsidiaries of its present employees,  and the performance of the Company's and
its Subsidiaries' contracts with its independent contractors, will not result in
any such  violation.  Neither the Company nor any of its  Subsidiaries  is aware
that any of its employees is obligated under any contract  (including  licenses,
covenants or  commitments of any nature) or other  agreement,  or subject to any
judgment,  decree or order of any court or  administrative  agency,  that  would
interfere with their duties to the Company or any of its  Subsidiaries.  Neither
the Company nor any of its  Subsidiaries  has received any notice  alleging that
any such  violation  has  occurred.  Except  for  employees  who have a  current
effective employment  agreement with the Company or any of its Subsidiaries,  no
employee of the Company or any of its Subsidiaries has been granted the right to
continued  employment  by the  Company  or any  of  its  Subsidiaries  or to any
material  compensation  following  termination of employment with the Company or
any of its  Subsidiaries.  Except as set forth on Schedule  4.14, the Company is
not aware  that any  officer,  key  employee  or group of  employees  intends to
terminate  his,  her  or  their  employment  with  the  Company  or  any  of its
Subsidiaries,  nor does the  Company or any of its  Subsidiaries  have a present
intention to terminate the  employment of any officer,  key employee or group of
employees.

            4.15 REGISTRATION  RIGHTS AND VOTING RIGHTS.  Except as set forth on
Schedule  4.15 and except as  disclosed  in Exchange  Act  Filings,  neither the
Company nor any of its  Subsidiaries  is  presently  under any  obligation,  and
neither  the  Company nor any of its  Subsidiaries  has  granted any rights,  to
register  any  of  the  Company's  or its  Subsidiaries'  presently  outstanding
securities or any of its securities that may hereafter be issued.  Except as set
forth on Schedule  4.15 and except as disclosed in Exchange Act Filings,  to the
Company's  knowledge,  no stockholder of the Company or any of its  Subsidiaries
has entered into any agreement  with respect to the voting of equity  securities
of the Company or any of its Subsidiaries.

            4.16 COMPLIANCE WITH LAWS;  PERMITS.  Neither the Company nor any of
its Subsidiaries is in violation of any applicable  statute,  rule,  regulation,
order  or   restriction   of  any   domestic  or  foreign   government   or  any
instrumentality  or agency  thereof in respect of the conduct of its business or
the ownership of its properties  which has had, or could  reasonably be expected
to have, either individually or in the aggregate,  a Material Adverse Effect. No
governmental  orders,  permissions,  consents,  approvals or authorizations  are
required to be obtained and no  registrations or declarations are required to be
filed in connection  with the  execution  and delivery of this  Agreement or any
other Related  Agreement and the issuance of any of the Securities,  except such
as has been duly and validly  obtained or filed,  or with respect to any filings
that must be made after the Closing,  as will be filed in a timely manner.  Each
of the  Company  and its  Subsidiaries  has all  material  franchises,  permits,
licenses and any similar authority  necessary for the conduct of its business as
now being  conducted by it, the lack of which could,  either  individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.


                                       10


            4.17  ENVIRONMENTAL AND SAFETY LAWS.  Neither the Company nor any of
its  Subsidiaries is in violation of any applicable  statute,  law or regulation
relating  to the  environment  or  occupational  health and  safety,  and to its
knowledge,  no material  expenditures are or will be required in order to comply
with any such  existing  statute,  law or  regulation.  Except  as set  forth on
Schedule  4.17, no Hazardous  Materials (as defined below) are used or have been
used,  stored,  or disposed of by the Company or any of its  Subsidiaries or, to
the Company's  knowledge,  by any other person or entity on any property  owned,
leased or used by the Company or any of its  Subsidiaries.  For the  purposes of
the preceding sentence, "Hazardous Materials" shall mean:

            (a) materials  which are listed or otherwise  defined as "hazardous"
      or "toxic" under any applicable local, state,  federal and/or foreign laws
      and regulations  that govern the existence  and/or remedy of contamination
      on property,  the protection of the environment  from  contamination,  the
      control of  hazardous  wastes,  or other  activities  involving  hazardous
      substances, including building materials; or

            (b) any petroleum products or nuclear materials.

            4.18 VALID  OFFERING.  Assuming the accuracy of the  representations
and warranties of the Purchaser contained in this Agreement, the offer, sale and
issuance of the Securities will be exempt from the registration  requirements of
the Securities  Act of 1933, as amended (the  "Securities  Act"),  and will have
been registered or qualified (or are exempt from registration and qualification)
under the registration,  permit or qualification  requirements of all applicable
state securities laws.

            4.19  FULL  DISCLOSURE.   Each  of  the  Company  and  each  of  its
Subsidiaries  has provided the Purchaser with all  information  requested by the
Purchaser  in  connection  with its  decision to purchase the Notes and Warrant.
Neither this  Agreement,  the Related  Agreements,  the  exhibits and  schedules
hereto and thereto nor any other document delivered by the Company or any of its
Subsidiaries  to Purchaser or its attorneys or agents in connection  herewith or
therewith or with the transactions  contemplated hereby or thereby,  contain any
untrue  statement of a material fact nor omit to state a material fact necessary
in order to make the  statements  contained  herein or therein,  in light of the
circumstances in which they are made, not misleading.  Any financial projections
and other  estimates  provided  to the  Purchaser  by the  Company or any of its
Subsidiaries were based on the Company's and its Subsidiaries' experience in the
industry and on  assumptions  of fact and opinion as to future  events which the
Company  or  any of its  Subsidiaries,  at the  date  of the  issuance  of  such
projections or estimates, believed to be reasonable.

            4.20 INSURANCE. Each of the Company and each of its Subsidiaries has
general commercial, product liability, fire and casualty insurance policies with
coverages  which the Company  believes are  customary  for  companies  similarly
situated to the Company and its Subsidiaries in the same or similar business.

            4.21 SEC REPORTS.  Except as set forth on Schedule 4.21, the Company
has filed all proxy statements, reports and other documents required to be filed
by it under the Securities  Exchange Act 1934, as amended (the "Exchange  Act").
The Company has furnished


                                       11


the  Purchaser  with a copy of its Annual  Report on Form  10-KSB for its fiscal
years ended December 31, 2003 and December 31, 2004 and its Quarterly Reports on
Form 10-Q for the  fiscal  quarters  ended  March 31,  2005,  June 30,  2005 and
September 30, 2005 (the "SEC Reports"). To the knowledge of the Company, the SEC
Reports  were, at the time of its filing,  in  substantial  compliance  with the
requirements  of its  form  and  neither  the SEC  Reports,  nor  the  financial
statements (and the notes thereto) included in the SEC Reports, as of its filing
date,  contained  any untrue  statement of a material fact or omitted to state a
material fact required to be stated  therein or necessary to make the statements
therein,  in  light  of the  circumstances  under  which  they  were  made,  not
misleading.

            4.22 LISTING.  The  Company's  Common Stock is listed for trading on
the National Association of Securities Dealers, Inc.  Over-the-Counter  Bulletin
Board ("OTC BB") and satisfies all  requirements  for the  continuation  of such
listing.  The Company has not  received any notice that its Common Stock will be
delisted from OTC BB or that its Common Stock does not meet all requirements for
listing.

            4.23 NO  INTEGRATED  OFFERING.  Neither the Company,  nor any of its
Subsidiaries  or affiliates,  nor any person acting on its or their behalf,  has
directly or indirectly made any offers or sales of any security or solicited any
offers to buy any security under  circumstances that would cause the offering of
the Securities pursuant to this Agreement or any of the Related Agreements to be
integrated  with prior  offerings by the Company for purposes of the  Securities
Act which would prevent the Company from selling the Securities pursuant to Rule
506 under the  Securities  Act, or any applicable  exchange-related  stockholder
approval  provisions,  nor  will  the  Company  or  any  of  its  affiliates  or
Subsidiaries  take any  action or steps  that would  cause the  offering  of the
Securities to be integrated with other offerings.

            4.24 STOP TRANSFER.  The Securities are restricted  securities as of
the date of this Agreement. Neither the Company nor any of its Subsidiaries will
issue any stop transfer  order or other order  impeding the sale and delivery of
any of the  Securities at such time as the  Securities are registered for public
sale or an exemption from registration is available, except as required by state
and federal securities laws.

            4.25  DILUTION.  The  Company  specifically  acknowledges  that  its
obligation  to  issue  the  shares  of  Common  Stock  upon  conversion  of  the
Convertible  Note and  exercise of the  Warrant is binding  upon the Company and
enforceable  regardless  of the dilution such issuance may have on the ownership
interests of other shareholders of the Company.

            4.26  PATRIOT  ACT.  The  Company  certifies  that,  to the  best of
Company's  knowledge,  neither the Company nor any of its  Subsidiaries has been
designated,  and is not  owned or  controlled,  by a  "suspected  terrorist"  as
defined in  Executive  Order 13224.  The Company  hereby  acknowledges  that the
Purchaser seeks to comply with all applicable laws concerning  money  laundering
and related  activities.  In furtherance  of those  efforts,  the Company hereby
represents,  warrants and agrees that: (i) none of the cash or property that the
Company or any of its Subsidiaries  will pay or will contribute to the Purchaser
has been or shall be derived  from,  or related to, any activity  that is deemed
criminal  under United  States law; and (ii) no  contribution  or payment by the
Company or any of its Subsidiaries to the Purchaser, to the


                                       12


extent that they are within the Company's and/or its Subsidiaries' control shall
cause the  Purchaser to be in  violation of the United  States Bank Secrecy Act,
the United  States  International  Money  Laundering  Control Act of 1986 or the
United  States  International  Money  Laundering  Abatement  and  Anti-Terrorist
Financing Act of 2001. The Company shall promptly notify the Purchaser if any of
these  representations  ceases to be true and accurate  regarding the Company or
any of its  Subsidiaries.  The  Company  agrees to  provide  the  Purchaser  any
additional information regarding the Company or any of its Subsidiaries that the
Purchaser deems necessary or convenient to ensure compliance with all applicable
laws concerning money laundering and similar activities. The Company understands
and  agrees  that if at any  time it is  discovered  that  any of the  foregoing
representations  are  incorrect,  or if otherwise  required by applicable law or
regulation related to money laundering or similar activities,  the Purchaser may
undertake  appropriate  actions  to ensure  compliance  with  applicable  law or
regulation,  including but not limited to segregation  and/or  redemption of the
Purchaser's  investment in the Company. The Company further understands that the
Purchaser  may  release  confidential  information  about  the  Company  and its
Subsidiaries  and, if applicable,  any underlying  beneficial  owners, to proper
authorities if the Purchaser,  in its sole discretion,  determines that it is in
the best interests of the Purchaser in light of relevant  rules and  regulations
under the laws set forth in subsection (ii) above.

      4.27 ERISA. Based upon the Employee Retirement Income Security Act of 1974
("ERISA"),  and the regulations and published  interpretations  thereunder:  (i)
neither the Company nor any of its  Subsidiaries  has engaged in any  Prohibited
Transactions  (as  defined  in  Section  406 of ERISA  and  Section  4975 of the
Internal  Revenue  Code of 1986,  as  amended  (the  "CODE"));  (ii) each of the
Company and each of its  Subsidiaries  has met all  applicable  minimum  funding
requirements  under Section 302 of ERISA in respect of its plans;  (iii) neither
the  Company  nor any of its  Subsidiaries  has any  knowledge  of any  event or
occurrence  which  would  cause the  Pension  Benefit  Guaranty  Corporation  to
institute  proceedings under Title IV of ERISA to terminate any employee benefit
plan(s);  (iv) neither the Company nor any of its Subsidiaries has any fiduciary
responsibility for investments with respect to any plan existing for the benefit
of persons  other than the  Company's or such  Subsidiary's  employees;  and (v)
neither the Company nor any of its  Subsidiaries  has  withdrawn,  completely or
partially,  from any multi-employer  pension plan so as to incur liability under
the Multiemployer Pension Plan Amendments Act of 1980.

      5.  REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.  The Purchaser hereby
represents  and  warrants to the Company as follows  (such  representations  and
warranties do not lessen or obviate the  representations  and  warranties of the
Company set forth in this Agreement):

            5.1 NO SHORTING. Neither the Purchaser nor any of its affiliates and
investment partners has, will nor will cause any person or entity,  directly, to
engage in "short  sales" of the Company's  Common Stock,  , as long as the Notes
shall be outstanding.

            5.2 REQUISITE  POWER AND AUTHORITY.  The Purchaser has all necessary
power and  authority  under all  applicable  provisions  of law to  execute  and
deliver  this  Agreement  and the  Related  Agreements  and to carry  out  their
provisions.  All corporate  action on  Purchaser's  part required for the lawful
execution and delivery of this Agreement and the Related Agreements have been or
will be effectively taken prior to the Closing. Upon their execution and


                                       13


delivery,  this Agreement and the Related  Agreements  will be valid and binding
obligations of Purchaser, enforceable in accordance with their terms, except:

            (a) as limited by applicable bankruptcy, insolvency, reorganization,
      moratorium or other laws of general application  affecting  enforcement of
      creditors' rights; and

            (b) as limited by general  principles  of equity that  restrict  the
      availability of equitable and legal remedies.

            5.3  INVESTMENT  REPRESENTATIONS.  Purchaser  understands  that  the
Securities are being offered and sold pursuant to an exemption from registration
contained in the Securities Act based in part upon  Purchaser's  representations
contained in the Agreement, including, without limitation, that the Purchaser is
an "accredited investor" within the meaning of Regulation D under the Securities
Act. The  Purchaser  confirms that it has received or has had full access to all
the  information  it  considers  necessary  or  appropriate  to make an informed
investment decision with respect to the Notes and the Warrant to be purchased by
it under this Agreement and the Note Shares and the Warrant  Shares  acquired by
it upon the conversion of the Convertible  Note and the exercise of the Warrant,
respectively.  The Purchaser  further confirms that it has had an opportunity to
ask questions and receive  answers from the Company  regarding the Company's and
its Subsidiaries'  business,  management and financial affairs and the terms and
conditions of the Offering,  the Notes,  the Warrant and the  Securities  and to
obtain  additional  information  (to  the  extent  the  Company  possessed  such
information  or  could  acquire  it  without  unreasonable  effort  or  expense)
necessary to verify any  information  furnished to the Purchaser or to which the
Purchaser had access.

            5.4 PURCHASER  BEARS ECONOMIC  RISK.  The Purchaser has  substantial
experience in  evaluating  and investing in private  placement  transactions  of
securities  in  companies  similar  to the  Company  so  that it is  capable  of
evaluating  the merits and risks of its  investment  in the  Company and has the
capacity to protect its own interests. The Purchaser must bear the economic risk
of this  investment  until the Securities are sold pursuant to: (i) an effective
registration  statement  under the  Securities  Act; or (ii) an  exemption  from
registration is available with respect to such sale.

            5.5  ACQUISITION  FOR OWN ACCOUNT.  The  Purchaser is acquiring  the
Notes and Warrant and the Note Shares and the Warrant Shares for the Purchaser's
own account for  investment  only,  and not as a nominee or agent and not with a
view towards or for resale in connection with their distribution.

            5.6 PURCHASER CAN PROTECT ITS INTEREST.  By reason of its, or of its
management's,  business and financial experience, the Purchaser has the capacity
to evaluate the merits and risks of its investment in the Notes, the Warrant and
the  Securities  and to  protect  its  own  interests  in  connection  with  the
transactions  contemplated  in this Agreement and the other Related  Agreements.
Further, Purchaser is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement or the Related Agreements.


                                       14


            5.7  ACCREDITED  INVESTOR.  The Purchaser is an accredited  investor
within the meaning of Regulation D under the Securities Act.

            5.8 LEGENDS.

            (a) The  Convertible  Note shall bear  substantially  the  following
      legend:

            "THIS NOTE AND THE COMMON STOCK  ISSUABLE  UPON  CONVERSION  OF THIS
            NOTE HAVE NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS
            AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE
            COMMON STOCK ISSUABLE UPON  CONVERSION OF THIS NOTE MAY NOT BE SOLD,
            OFFERED  FOR SALE,  PLEDGED  OR  HYPOTHECATED  IN THE  ABSENCE OF AN
            EFFECTIVE  REGISTRATION  STATEMENT  AS TO THIS  NOTE OR SUCH  SHARES
            UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
            COUNSEL  REASONABLY  SATISFACTORY TO INCENTRA  SOLUTIONS,  INC. THAT
            SUCH REGISTRATION IS NOT REQUIRED."

            (b) The Non-Convertible  Note shall bear substantially the following
      legend:

            THIS NOTE HAS NOT BEEN REGISTERED  UNDER THE SECURITIES ACT OF 1933,
            AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD,
            OFFERED  FOR SALE,  PLEDGED  OR  HYPOTHECATED  IN THE  ABSENCE OF AN
            EFFECTIVE  REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND
            ANY  APPLICABLE  STATE  SECURITIES  LAWS OR AN  OPINION  OF  COUNSEL
            REASONABLY  SATISFACTORY  TO  INCENTRA  SOLUTIONS,  INC.  THAT  SUCH
            REGISTRATION IS NOT REQUIRED.

            (c) The Note  Shares and the Warrant  Shares,  if not issued by DWAC
      system (as  hereinafter  defined),  shall bear a legend  which shall be in
      substantially  the  following  form  until such  shares are  covered by an
      effective registration statement filed with the SEC:

            "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
            UNDER THE  SECURITIES  ACT OF 1933,  AS AMENDED,  OR ANY  APPLICABLE
            STATE  SECURITIES  LAWS.  THESE SHARES MAY NOT BE SOLD,  OFFERED FOR
            SALE,  PLEDGED  OR  HYPOTHECATED  IN  THE  ABSENCE  OF AN  EFFECTIVE
            REGISTRATION  STATEMENT  UNDER SUCH  SECURITIES  ACT AND  APPLICABLE
            STATE  LAWS OR AN  OPINION OF  COUNSEL  REASONABLY  SATISFACTORY  TO
            INCENTRA SOLUTIONS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."


                                       15


            (d) The Warrant shall bear substantially the following legend:

            "THIS WARRANT AND THE COMMON  SHARES  ISSUABLE UPON EXERCISE OF THIS
            WARRANT HAVE NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF 1933,
            AS AMENDED,  OR ANY APPLICABLE  STATE  SECURITIES LAWS. THIS WARRANT
            AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT
            BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
            AN  EFFECTIVE  REGISTRATION  STATEMENT  AS TO  THIS  WARRANT  OR THE
            UNDERLYING  SHARES OF COMMON  STOCK  UNDER  SAID ACT AND  APPLICABLE
            STATE   SECURITIES   LAWS  OR  AN  OPINION  OF  COUNSEL   REASONABLY
            SATISFACTORY TO INCENTRA  SOLUTIONS,  INC. THAT SUCH REGISTRATION IS
            NOT REQUIRED."

      6.  COVENANTS OF THE COMPANY.  The Company  covenants  and agrees with the
Purchaser that, so long as the Notes remains outstanding:

            6.1  STOP-ORDERS.  The Company will advise the  Purchaser,  promptly
after it receives  notice of issuance by the Securities and Exchange  Commission
(the "SEC"), any state securities  commission or any other regulatory  authority
of any stop order or of any order  preventing or suspending  any offering of any
securities  of the Company,  or of the  suspension of the  qualification  of the
Common  Stock of the Company for  offering or sale in any  jurisdiction,  or the
initiation of any proceeding for any such purpose.

            6.2 LISTING.  The Company shall  promptly  secure the listing of the
shares of Common Stock issuable upon conversion of the Convertible Note and upon
the exercise of the Warrant on the OTC BB (the  "Principal  Market"),  and shall
maintain  such  listing so long as any other  shares of Common Stock shall be so
listed.  The  Company  will  maintain  the  listing of its  Common  Stock on the
Principal  Market or on  Nasdaq or any  securities  exchange  acceptable  to the
Purchaser,  and, to the extent  applicable  to the  Company,  will comply in all
material  respects with the Company's  reporting,  filing and other  obligations
under the bylaws or rules of the  National  Association  of  Securities  Dealers
("NASD") and such exchanges, as applicable.

            6.3 MARKET  REGULATIONS.  The Company shall notify the SEC, NASD and
applicable  state  authorities,  in accordance with their  requirements,  to the
extent  applicable  to the Company,  of the  transactions  contemplated  by this
Agreement,  and shall take all other necessary  action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal and
valid  issuance of the  Securities to the Purchaser and promptly  provide copies
thereof to the Purchaser.

            6.4  REPORTING  REQUIREMENTS.  The Company will timely file with the
SEC all reports  required to be filed  pursuant to the  Exchange Act and refrain
from  terminating  its status as an issuer  required by the Exchange Act to file
reports  thereunder  even  if  the  Exchange  Act or the  rules  or  regulations
thereunder would permit such termination.


                                       16


            6.5 USE OF FUNDS. The Company agrees that it will use (i) $3,250,000
of the  proceeds  of the  sale  of the  Notes  to  consummate  the  Contemplated
Acquisition previously disclosed to the Purchaser. and (ii) the remainder of the
proceeds  of the sale of the Notes and the  proceeds  of the sale of the Warrant
for general working capital and general business purposes of the Company and its
Subsidiaries.

            6.6  ACCESS  TO  FACILITIES.  Each of the  Company  and  each of its
Subsidiaries will permit any representatives designated by the Purchaser (or any
successor of the Purchaser),  upon reasonable  notice and during normal business
hours,  at such person's  expense and  accompanied  by a  representative  of the
Company, to:

            (a) visit and inspect any of the properties of the Company or any of
      its Subsidiaries;

            (b) examine the corporate  and  financial  records of the Company or
      any of its  Subsidiaries  (unless  such  examination  is not  permitted by
      federal,  state or local law or by  contract)  and make copies  thereof or
      extracts therefrom; and

            (c) discuss the affairs, finances and accounts of the Company or any
      of  its  Subsidiaries   with  the  directors,   officers  and  independent
      accountants of the Company or any of its Subsidiaries.

Notwithstanding  the foregoing,  neither the Company nor any of its Subsidiaries
will provide any material,  non-public  information to the Purchaser  unless the
Purchaser  signs  a  confidentiality   agreement  and  otherwise  complies  with
Regulation FD, under the federal securities laws.

            6.7 TAXES.  Each of the  Company and each of its  Subsidiaries  will
promptly pay and  discharge,  or cause to be paid and  discharged,  when due and
payable,  all  lawful  taxes,  assessments  and  governmental  charges or levies
imposed  upon the income,  profits,  property or business of the Company and its
Subsidiaries;  provided, however, that any such tax, assessment,  charge or levy
need not be paid if the validity  thereof  shall  currently be contested in good
faith by appropriate proceedings and if the Company and/or such Subsidiary shall
have set  aside  on its  books  adequate  reserves  with  respect  thereto,  and
provided,  further,  that the  Company  and its  Subsidiaries  will pay all such
taxes,  assessments,  charges  or  levies  forthwith  upon the  commencement  of
proceedings to foreclose any lien which may have attached as security therefor.

            6.8 INSURANCE.  Each of the Company and its  Subsidiaries  will keep
its assets which are of an insurable  character insured by financially sound and
reputable  insurers  against loss or damage by fire,  explosion  and other risks
customarily  insured against by companies in similar business similarly situated
as the Company and its  Subsidiaries;  and the Company and its Subsidiaries will
maintain, with financially sound and reputable insurers, insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner  which the Company  reasonably  believes is  customary  for  companies in
similar business  similarly  situated as the Company and its Subsidiaries and to
the extent available on commercially  reasonable  terms. The Company and each of
its Subsidiaries  will jointly and severally bear the full risk of loss from any
loss  of any  nature  whatsoever  with  respect  to the  assets  pledged  to the
Purchaser as


                                       17


security for its obligations hereunder and under the Related Agreements.  At the
Company's  and each of its  Subsidiaries'  joint and several cost and expense in
amounts and with carriers  reasonably  acceptable to Purchaser,  the Company and
each of its  Subsidiaries  shall  (i)  keep  all its  insurable  properties  and
properties  in which it has an  interest  insured  against  the hazards of fire,
flood,  sprinkler leakage,  those hazards covered by extended coverage insurance
and such other  hazards,  and for such  amounts,  as is customary in the case of
companies  engaged in  businesses  similar to the  Company's  or the  respective
Subsidiary's including business interruption insurance; (ii) maintain public and
product  liability  insurance  against  claims  for  personal  injury,  death or
property damage suffered by others, in each case consistent with past practices;
(iii)  maintain all such worker's  compensation  or similar  insurance as may be
required under the laws of any state or jurisdiction in which the Company or the
respective Subsidiary is engaged in business; and (iv) furnish Purchase with (x)
copies of all policies and evidence of the maintenance of such policies at least
thirty  (30) days  before any  expiration  date,  (y)  excepting  the  Company's
workers'  compensation policy,  endorsements to such polices naming Purchaser as
"co insured" or "additional  insured" and appropriate loss payable  endorsements
in form and substance satisfactory to Purchaser, naming Purchaser as loss payee,
an (z)  evidence  that as to  Purchaser  the  insurance  coverage  shall  not be
impaired or  invalidated  by any act or neglect of the Company or any Subsidiary
and the insurer  will  provide  Purchaser  with at least thirty (30) days notice
prior to  cancellation.  The  Company and each  Subsidiary  shall  instruct  the
insurance carriers that in the event of any loss thereunder,  the carriers shall
make payment for such loss to the Company  and/or the  Subsidiary  and Purchaser
jointly.  In the event that as of the date of receipt of each loss recovery upon
any such  insurance,  the  Purchaser  has not  declared an Event of Default with
respect to this  Agreement  or any of the Related  Agreements,  then the Company
and/or such Subsidiary shall be permitted to direct the application of such loss
recovery proceeds toward investment in property,  plant and equipment that would
comprise  "Collateral"  secured by Purchaser's  security  interest pursuant to a
security  agreement,  with any  surplus  funds to be applied by the  Company for
working capital  purposes.  In the event that Purchaser has properly declared an
Event  of  Default  with  respect  to  this  Agreement  or any  of  the  Related
Agreements,  then  all  loss  recoveries  received  by  Purchaser  upon any such
insurance  thereafter may be applied to the obligations of the Company hereunder
and under the Related Agreements,  in such order as the Purchaser may determine.
Any surplus  (following  satisfaction  of all Company  obligations to Purchaser)
shall  be paid by  Purchaser  to the  Company  or  applied  as may be  otherwise
required  by law.  Any  deficiency  thereon  shall be paid by the Company or the
Subsidiary, as applicable, to Purchaser, on demand.

            6.9  INTELLECTUAL  PROPERTY.  Each of the  Company  and  each of its
material  Subsidiaries  shall  maintain in full force and effect its  existence,
rights and  franchises  and all licenses  and other  rights to use  Intellectual
Property owned or possessed by it and  reasonably  deemed to be necessary to the
conduct of its business.

            6.10  PROPERTIES.  Each of the Company and each of its  Subsidiaries
will keep its properties in good repair, working order and condition, reasonable
wear and tear  excepted,  and from  time to time  make all  needful  and  proper
repairs, renewals, replacements, additions and improvements thereto; and each of
the  Company  and each of its  Subsidiaries  will at all times  comply with each
provision  of all  leases  to which it is a party  or  under  which it  occupies
property if the breach of such provision  could,  either  individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.


                                       18


            6.11 CONFIDENTIALITY.  The Company agrees that it will not disclose,
and will not  include in any  public  announcement,  the name of the  Purchaser,
unless  expressly agreed to by the Purchaser or unless and until such disclosure
is required by law or applicable regulation, and then only to the extent of such
requirement. Notwithstanding the foregoing, the Company may disclose Purchaser's
identity and the terms of this Agreement to its current and prospective debt and
equity financing sources.

            6.12  REQUIRED  APPROVALS.  (I) For so long as  twenty-five  percent
(25%) of the principal amount of the Notes is outstanding,  the Company, without
the  prior  written  consent  of  the  Purchaser  (which  consent  shall  not be
unreasonably withheld), shall not:

            (a) directly or indirectly declare or pay any dividends,  other than
      dividends paid to the Company or any of its wholly owned Subsidiaries;

            (b)  liquidate,  dissolve  or effect a material  reorganization  (it
      being understood that in no event shall the Company dissolve, liquidate or
      merge with any other person or entity (unless the Company is the surviving
      entity);

            (c) become  subject to  (including,  without  limitation,  by way of
      amendment to or modification  of) any agreement or instrument which by its
      terms would (under any circumstances) restrict the Company's or any of its
      Subsidiaries right to perform the provisions of this Agreement,  any other
      Related Agreement or any of the agreements contemplated hereby or thereby;
      and/or

            (d) (i)  create,  incur,  assume  or  suffer  to exist  any  secured
      indebtedness  (exclusive  of trade debt and debt  incurred  to finance the
      purchase of equipment (not in excess of five percent (5%) per annum of the
      fair market value of the  Company's  assets)  other than (x) the Company's
      indebtedness to Laurus,  (y)  indebtedness  set forth on SCHEDULE  6.12(C)
      attached   hereto  and  made  a  part  hereof  and  any   refinancings  or
      replacements  thereof on terms no less favorable to the Purchaser than the
      indebtedness  being  refinanced or replaced,  and (z) any debt incurred in
      connection with the purchase of assets in the ordinary course of business,
      or any refinancings or replacements  thereof on terms no less favorable to
      the Purchaser than the indebtedness being refinanced or replaced;  or (ii)
      cancel any debt owning to it in excess of $250,000 in the aggregate during
      any 12 month period; and/or

      (II) The Company  shall not, and shall not permit any of its  Subsidiaries
to:

            (a)   create or acquire any Subsidiary  after the date hereof unless
                  (i)  such  Subsidiary  is a  wholly-owned  Subsidiary  of  the
                  Company  and (ii) such  Subsidiary  becomes  party to the 2004
                  Master Security Agreement,  the 2006 Security  Agreement,  the
                  2006 Stock Pledge Agreement and the 2006 Subsidiary  Guarantee
                  (either by executing a counterpart thereof or an assumption or
                  joinder  agreement  in  respect  thereof)  and,  to the extent
                  required by the  Purchaser,  satisfies  each condition of this
                  Agreement  and the Related  Agreements  as if such  Subsidiary
                  were a Subsidiary on the Closing Date; and/or


                                       19


            (b)   (i) make  investments  in, make any loans or  advances  to, or
                  transfer assets to, Front Porch Digital International,  SAS or
                  (ii) permit any  Subsidiary to make  investments  in, make any
                  loans or  advances  to, or  transfer  assets to,  Front  Porch
                  Digital  International,  SAS (the "French Subsidiary"),  other
                  than,  in the case of each of the  foregoing  clauses  (i) and
                  (ii), (a) immaterial investments, loans, advances and/or asset
                  transfers  made in the  ordinary  course of  business  and (b)
                  payments to the French Subsidiary to pay operating expenses of
                  the  French  Subsidiary  incurred  in the  ordinary  course of
                  business and  consistent  with past  practices,  in an amount,
                  taken in the aggregate  for the Company and its  Subsidiaries,
                  not to exceed $_______ in any fiscal quarter of the Company .

            6.13  REISSUANCE  OF  SECURITIES.  The  Company  agrees  to  reissue
certificates  representing  the  Securities  without  the  legends  set forth in
Section 5.7 above at such time as:

            (a) the holder  thereof is permitted  to dispose of such  Securities
      pursuant to Rule 144(k) under the Securities Act; or

            (b) upon resale subject to an effective registration statement after
      such Securities are registered under the Securities Act.

The Company  agrees to  cooperate  with the  Purchaser  in  connection  with all
resales  pursuant  to Rule 144(d) and Rule  144(k) and  provide  legal  opinions
necessary  to allow such resales  provided  the Company and its counsel  receive
reasonably  requested  representations from the selling Purchaser and broker, if
any.

            6.14 OPINION.  On the Closing Date,  the Company will deliver to the
Purchaser an opinion in substantially the form attached hereto as Exhibit C. The
Company will provide, at the Company's expense, such other legal opinions in the
future as are reasonably  necessary for the conversion of the  Convertible  Note
and exercise of the Warrant.

            6.15 MARGIN  STOCK.  The Company will not permit any of the proceeds
of the Notes or the Warrant to be used  directly or  indirectly to "purchase" or
"carry"  "margin  stock" or to repay  indebtedness  incurred  to  "purchase"  or
"carry"  "margin  stock"  within the  respective  meanings of each of the quoted
terms under Regulation U of the Board of Governors of the Federal Reserve System
as now and from time to time hereafter in effect.

            6.16 [Intentionally Deleted]

            6.17  NOTICE  OF  DEFAULT.  The  Company  shall  from  time  to time
diligently review its obligations  hereunder and under the Related Agreements to
confirm its  compliance in all material  respects with its duties  hereunder and
thereunder, and shall promptly notify the Purchaser of any event or circumstance
that has  resulted  in,  or could  reasonably  be  expected  to result  in,  the
occurrence  of any  default or Event of  Default  (as  defined  in either  Note)
hereunder or  thereunder.  For purposes of this Section 6.17, the term "default"
shall mean an event or condition  the  occurrence of which is, or with the lapse
of time or the giving of notice or both would be, an Event of Default.


                                       20


      7. COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees with the
Company as follows:

            7.1 CONFIDENTIALITY. The Purchaser agrees that it will not disclose,
and will not include in any public announcement, the name of the Company, unless
expressly  agreed to by the  Company  or unless  and until  such  disclosure  is
required by law or  applicable  regulation,  and then only to the extent of such
requirement.

            7.2 NON-PUBLIC  INFORMATION.  The Purchaser agrees not to effect any
sales in the  shares  of the  Company's  Common  Stock  while in  possession  of
material,  non-public  information  regarding  the  Company if such sales  would
violate applicable securities law.

            7.3  LIMITATION  ON  ACQUISITION  OF  COMMON  STOCK OF THE  COMPANY.
Notwithstanding  anything  to the  contrary  contained  in this  Agreement,  any
Related  Agreement or any  document,  instrument  or  agreement  entered into in
connection  with any other  transactions  between the Purchaser and the Company,
the  Purchaser  may  not  acquire  stock  in  the  Company  (including,  without
limitation,  pursuant  to a contract to  purchase,  by  exercising  an option or
warrant,  by  converting  any other  security or  instrument,  by  acquiring  or
exercising  any  other  right to  acquire,  shares  of  stock or other  security
convertible  into  shares  of  stock  in the  Company,  or  otherwise,  and such
contracts,   options,  warrants,   conversion  or  other  rights  shall  not  be
enforceable or exercisable) to the extent such stock acquisition would cause any
interest  (including any original issue discount)  payable by the Company to the
Purchaser not to qualify as "portfolio  interest"  within the meaning of Section
881(c)(2) of the Code, by reason of Section  881(c)(3) of the Code,  taking into
account the constructive  ownership rules under Section 871(h)(3)(C) of the Code
(the "Stock Acquisition Limitation").

      8. COVENANTS OF THE COMPANY AND PURCHASER REGARDING INDEMNIFICATION.

            8.1 COMPANY INDEMNIFICATION.  The Company agrees to indemnify,  hold
harmless,  reimburse and defend the Purchaser, each of the Purchaser's officers,
directors,  agents,  affiliates,  control persons,  and principal  shareholders,
against  any  claim,  cost,  expense,  liability,  obligation,  loss  or  damage
(including reasonable legal fees) of any nature, incurred by or imposed upon the
Purchaser   which   results,   arises  out  of  or  is  based   upon:   (i)  any
misrepresentation  by the  Company or any of its  Subsidiaries  or breach of any
warranty by the Company or any of its Subsidiaries in this Agreement,  any other
Related Agreement or in any exhibits or schedules attached hereto or thereto; or
(ii) any breach or default in performance by Company or any of its  Subsidiaries
of any  covenant or  undertaking  to be  performed  by the Company or any of its
Subsidiaries hereunder, under any other Related Agreement or any other agreement
entered  into  by the  Company  and/or  any of its  Subsidiaries  and  Purchaser
relating hereto or thereto.

            8.2 PURCHASER'S INDEMNIFICATION. Purchaser agrees to indemnify, hold
harmless,  reimburse and defend the Company and each of the Company's  officers,
directors,  agents, affiliates,  control persons and principal shareholders,  at
all times  against any claim,  cost,  expense,  liability,  obligation,  loss or
damage (including  reasonable legal fees) of any nature,  incurred by or imposed
upon  the  Company  which  results,  arises  out of or is  based  upon:  (i) any
misrepresentation  by  Purchaser  or breach of any warranty by Purchaser in this
Agreement or any Related  Agreement  or in any  exhibits or  schedules  attached
hereto; or (ii) any breach or default


                                       21


in  performance  by Purchaser of any covenant or  undertaking to be performed by
Purchaser hereunder,  under any Related Agreement or any other agreement entered
into by the Company and Purchaser relating hereto or thereto.

            8.3 PROCEDURES.  The procedures and limitations set forth in Section
10.2(c) and (d) shall apply to the  indemnifications  set forth in Sections  8.1
and 8.2 above.

      9. Registration Rights.

            9.1 REGISTRATION RIGHTS GRANTED.  At the Closing,  the Company shall
grant  registration  rights to the Purchaser  pursuant to a Registration  Rights
Agreement dated as of even date herewith between the Company and the Purchaser.

            9.2 OFFERING RESTRICTIONS. Except as previously disclosed in the SEC
Reports or in the  Exchange Act Filings,  or stock or stock  options  granted to
employees or directors of the Company (these exceptions  hereinafter referred to
as the "Excepted  Issuances"),  neither the Company nor any of its  Subsidiaries
will  issue any  securities  with a  continuously  variable/floating  conversion
feature  which  are or could be (by  conversion  or  registration)  free-trading
securities (i.e. common stock subject to a registration  statement) prior to the
full  repayment or conversion of the Notes (as  applicable)  (together  with all
accrued and unpaid interest and fees related thereto) (the "Exclusion Period").

      10. MISCELLANEOUS.

            10.1  GOVERNING  LAW(a).   THIS  AGREEMENT  AND  THE  OTHER  RELATED
      AGREEMENTS  SHALL BE GOVERNED BY AND  CONSTRUED AND ENFORCED IN ACCORDANCE
      WITH THE LAWS OF THE STATE OF NEW YORK  APPLICABLE  TO CONTRACTS  MADE AND
      PERFORMED  IN SUCH STATE,  WITHOUT  REGARD TO  PRINCIPLES  OF CONFLICTS OF
      LAWS.

            (b) THE COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
      COURTS  LOCATED  IN THE  COUNTY OF NEW YORK,  STATE OF NEW YORK SHALL HAVE
      EXCLUSIVE  JURISDICTION  TO HEAR AND  DETERMINE  ANY  CLAIMS  OR  DISPUTES
      BETWEEN THE  COMPANY,  ON THE ONE HAND,  AND THE  PURCHASER,  ON THE OTHER
      HAND,  PERTAINING TO THIS AGREEMENT OR ANY OF THE RELATED AGREEMENTS OR TO
      ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE OTHER
      RELATED  AGREEMENTS;   PROVIDED,   THAT  THE  PURCHASER  AND  THE  COMPANY
      ACKNOWLEDGE  THAT ANY APPEALS  FROM THOSE COURTS MAY HAVE TO BE HEARD BY A
      COURT LOCATED  OUTSIDE OF THE COUNTY OF NEW YORK,  STATE OF NEW YORK;  AND
      FURTHER  PROVIDED,  THAT,  NOTHING  IN THIS  AGREEMENT  SHALL BE DEEMED OR
      OPERATE TO PRECLUDE THE PURCHASER FROM BRINGING SUIT OR TAKING OTHER LEGAL
      ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON
      THE COLLATERAL (AS DEFINED IN THE MASTER SECURITY  AGREEMENT) OR ANY OTHER
      SECURITY FOR


                                       22


      THE  OBLIGATIONS  (AS  DEFINED IN THE MASTER  SECURITY  AGREEMENT),  OR TO
      ENFORCE A JUDGMENT  OR OTHER COURT  ORDER IN FAVOR OF THE  PURCHASER.  THE
      COMPANY  EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN
      ANY ACTION OR SUIT  COMMENCED  IN ANY SUCH COURT,  AND THE COMPANY  HEREBY
      WAIVES  ANY  OBJECTION  THAT IT MAY  HAVE  BASED  UPON  LACK  OF  PERSONAL
      JURISDICTION,  IMPROPER VENUE OR FORUM NON CONVENIENS.  THE COMPANY HEREBY
      WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED
      IN ANY SUCH  ACTION  OR SUIT AND  AGREES  THAT  SERVICE  OF SUCH  SUMMONS,
      COMPLAINT AND OTHER  PROCESS MAY BE MADE BY  REGISTERED OR CERTIFIED  MAIL
      ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN SECTION 11.9 AND THAT
      SERVICE  SO MADE  SHALL  BE  DEEMED  COMPLETED  UPON  THE  EARLIER  OF THE
      COMPANY'S  ACTUAL  RECEIPT  THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE
      U.S. MAILS, PROPER POSTAGE PREPAID.

      (c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING
      SUCH APPLICABLE  LAWS.  THEREFORE,  TO ACHIEVE THE BEST COMBINATION OF THE
      BENEFITS OF THE JUDICIAL  SYSTEM AND OF  ARBITRATION,  THE PARTIES  HERETO
      WAIVE  ALL  RIGHTS TO TRIAL BY JURY IN ANY  ACTION,  SUIT,  OR  PROCEEDING
      BROUGHT TO RESOLVE ANY  DISPUTE,  WHETHER  ARISING IN CONTRACT,  TORT,  OR
      OTHERWISE  BETWEEN  THE  PURCHASER  AND/OR  THE  COMPANY  ARISING  OUT OF,
      CONNECTED  WITH,  RELATED OR  INCIDENTAL TO THE  RELATIONSHIP  ESTABLISHED
      BETWEEN  THEM  IN  CONNECTION  WITH  THIS  AGREEMENT,  ANY  OTHER  RELATED
      AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

            10.2  SURVIVAL.  The  representations,   warranties,  covenants  and
agreements made herein shall survive any investigation made by the Purchaser and
the  closing of the  transactions  contemplated  hereby to the  extent  provided
therein.  All statements as to factual  matters  contained in any certificate or
other  instrument  delivered by or on behalf of the Company  pursuant  hereto in
connection  with the  transactions  contemplated  hereby  shall be  deemed to be
representations and warranties by the Company hereunder solely as of the date of
such certificate or instrument.

            10.3 SUCCESSORS.  Except as otherwise expressly provided herein, the
provisions  hereof  shall  inure to the  benefit  of, and be binding  upon,  the
successors,  heirs, executors and administrators of the parties hereto and shall
inure to the benefit of and be  enforceable by each person who shall be a holder
of the  Securities  from time to time,  other than the  holders of Common  Stock
which  has been  sold by the  Purchaser  pursuant  to Rule  144 or an  effective
registration  statement.  The  Purchaser  shall not be  permitted  to assign its
rights  hereunder or under any Related  Agreement to a competitor of the Company
unless an Event of Default  (as  defined  in either  Note) has  occurred  and is
continuing.

            10.4 ENTIRE AGREEMENT.  This Agreement, the Related Agreements,  the
exhibits  and  schedules  hereto and thereto and the other  documents  delivered
pursuant hereto constitute


                                       23


the full and entire  understanding and agreement between the parties with regard
to the subjects hereof and no party shall be liable or bound to any other in any
manner by any  representations,  warranties,  covenants and agreements except as
specifically set forth herein and therein.

            10.5  SEVERABILITY.  In case any provision of the Agreement shall be
invalid, illegal or unenforceable,  the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

            10.6 AMENDMENT AND WAIVER.

            (a) This  Agreement may be amended or modified only upon the written
      consent of the Company and the Purchaser.

            (b) The  obligations  of the Company and the rights of the Purchaser
      under this  Agreement  may be waived only with the written  consent of the
      Purchaser.

            (c) The  obligations  of the Purchaser and the rights of the Company
      under this  Agreement  may be waived only with the written  consent of the
      Company.

            10.7 DELAYS OR OMISSIONS.  It is agreed that no delay or omission to
exercise  any right,  power or remedy  accruing  to any party,  upon any breach,
default or  noncompliance  by another party under this  Agreement or the Related
Agreements,  shall  impair  any such  right,  power or  remedy,  nor shall it be
construed to be a waiver of any such breach,  default or  noncompliance,  or any
acquiescence  therein, or of or in any similar breach,  default or noncompliance
thereafter occurring.  All remedies,  either under this Agreement or the Related
Agreements,  by law or otherwise  afforded to any party, shall be cumulative and
not alternative.

            10.8 NOTICES.  All notices required or permitted  hereunder shall be
in writing and shall be deemed effectively given:

            (a) upon personal delivery to the party to be notified;

            (b) when sent by confirmed  facsimile if sent during normal business
      hours of the recipient, if not, then on the next business day;

            (c) three (3) business  days after having been sent by registered or
      certified mail, return receipt requested, postage prepaid; or

            (d) one (1) day after deposit with a nationally recognized overnight
      courier,  specifying  next day  delivery,  with  written  verification  of
      receipt.

All communications shall be sent as follows:

      IF TO THE COMPANY, TO:        Incentra Solutions, Inc.
                                    1140 Pearl Street
                                    Boulder, Colorado  80302
                                    Attention: Chief Financial Officer
                                    Facsimile: (303) 449-9584


                                       24


      WITH A COPY TO:               Law Offices of Karl Reed Guest
                                    94 Underhill Road
                                    Orinda, CA 94563
                                    Attention: Reed Guest, Esq.
                                    Facsimile: (925) 254-9226

      IF TO THE PURCHASER, TO:      Laurus Master Fund, Ltd.
                                    c/o M&C Corporate Services Limited
                                    P.O. Box 309 GT
                                    Ugland House
                                    George Town
                                    South Church Street
                                    Grand Cayman, Cayman Islands
                                    Facsimile: 345-949-8080

      WITH A COPY TO:               John E. Tucker, Esq.
                                    825 Third Avenue, 14th Floor
                                    New York, New York 10022
                                    Facsimile: 212-541-4434

or at such  other  address as the  Company or the  Purchaser  may  designate  by
written notice to the other parties hereto given in accordance herewith.

            10.9  TITLES  AND   SUBTITLES.   The  titles  of  the  sections  and
subsections of this Agreement are for  convenience of reference only and are not
to be considered in construing this Agreement.

            10.10  FACSIMILE  SIGNATURES;  COUNTERPARTS.  This  Agreement may be
executed by  facsimile  signatures  and in any number of  counterparts,  each of
which shall be an  original,  but all of which  together  shall  constitute  one
instrument.

            10.11 BROKER'S  FEES.  Except as set forth on Schedule 10.11 hereof,
each party hereto  represents  and warrants  that no agent,  broker,  investment
banker,  person or firm acting on behalf of or under the authority of such party
hereto is or will be  entitled  to any  broker's  or  finder's  fee or any other
commission   directly  or  indirectly  in  connection   with  the   transactions
contemplated  herein.  Each party hereto  further agrees to indemnify each other
party for any  claims,  losses or  expenses  incurred  by such other  party as a
result of the representation in this Section 10.11 being untrue.

            10.12  CONSTRUCTION.  Each party acknowledges that its legal counsel
participated  in the  preparation of this  Agreement and the Related  Agreements
and, therefore, stipulates that the rule of construction that ambiguities are to
be  resolved   against  the   drafting   party  shall  not  be  applied  in  the
interpretation of this Agreement to favor any party against the other.


                                       25


                  10.13 Proxy. For good and valuable  consideration,  receipt of
which is hereby  acknowledged,  the Purchaser,  hereby appoints the Company (the
"Proxy Holder"), with a mailing address set forth in Section 29, with full power
of  substitution,  as proxy,  to vote all shares of Common Stock of the Company,
now or in the future owned by the  Purchaser  (including  shares  acquired  upon
conversion  of any  convertible  security  or  exercise of any option or warrant
(other  than the  Warrant))  but not  including  those  shares of  Common  Stock
issuable upon conversion of the Warrant (the "Shares").

            This proxy is  irrevocable  and coupled with an  interest.  Upon the
sale or other  transfer  of the  Shares,  in whole or in part,  this proxy shall
automatically  terminate (x) with respect to such sold or transferred  Shares at
the time of such sale and/or  transfer and (y) with respect to all Shares in the
case of an assignment, at the time of such assignment, in each case, without any
further action required by any person.

            The Purchaser  shall use its best efforts to forward to Proxy Holder
within two (2) business days following the Purchaser's  receipt thereof,  at the
address  for Proxy  Holder set forth in Section  10.8,  copies of all  materials
received by the Purchaser  relating,  in each case, to the  solicitation  of the
vote of shareholders of the Company.

            This proxy shall  remain in effect with respect to the Shares of the
Company during the period commencing on the date hereof and continuing until the
earlier of (a) payment in full of all obligations  and liabilities  owing by the
Company to Purchaser (as the same may be amended, restated, extended or modified
from time to time) and (b) the occurrence and  continuance of a default or event
of default under any document,  instrument or agreement between the Company and,
or made by the Company in favor of, the Purchaser.

            [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]


                                       26


      IN WITNESS  WHEREOF,  the parties  hereto  have  executed  the  SECURITIES
PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof.

COMPANY:                                   PURCHASER:

INCENTRA SOLUTIONS, INC.                   LAURUS MASTER FUND, LTD.


By:    /s/ Thomas P. Sweeney III           By:    /s/ David Grin
       ------------------------------             ------------------------------
Name:  Thomas P. Sweeney III               Name:  David Grin
       ------------------------------             ------------------------------
Title: Chief Executive Officer             Title: Managing Partner
       ------------------------------             ------------------------------


                                       27

EX-10.71

THIS NOTE AND THE COMMON SHARES  ISSUABLE UPON  CONVERSION OF THIS NOTE HAVE NOT
BEEN  REGISTERED  UNDER THE  SECURITIES  ACT OF 1933,  AS AMENDED,  OR ANY STATE
SECURITIES  LAWS.  THIS NOTE AND THE COMMON SHARES  ISSUABLE UPON  CONVERSION OF
THIS NOTE MAY NOT BE SOLD,  OFFERED  FOR SALE,  PLEDGED OR  HYPOTHECATED  IN THE
ABSENCE OF AN  EFFECTIVE  REGISTRATION  STATEMENT AS TO THIS NOTE UNDER SAID ACT
AND ANY APPLICABLE  STATE  SECURITIES  LAWS OR AN OPINION OF COUNSEL  REASONABLY
SATISFACTORY TO INCENTRA SOLUTIONS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

                          SECURED CONVERTIBLE TERM NOTE

            FOR VALUE RECEIVED,  INCENTRA SOLUTIONS,  INC., a Nevada Corporation
(the "COMPANY"),  promises to pay to LAURUS MASTER FUND, LTD., c/o M&C Corporate
Services  Limited,  P.O. Box 309 GT, Ugland House,  South Church Street,  George
Town,  Grand Cayman,  Cayman Islands,  Fax:  345-949-8080  (the "HOLDER") or its
registered  assigns or  successors  in  interest,  the sum of One  Million  Five
Hundred  Thousand  Dollars  ($1,500,000),  together  with any accrued and unpaid
interest hereon, on March 31, 2009 (the "MATURITY DATE") if not sooner paid.

            Capitalized  terms used  herein  without  definition  shall have the
meanings ascribed to such terms in that certain  Securities  Purchase  Agreement
dated as of the date  hereof by and  between  the  Company  and the  Holder  (as
amended,   modified  and/or  supplemented  from  time  to  time,  the  "PURCHASE
AGREEMENT").  For the  avoidance of doubt the Company and the Holder  understand
and agree that this Secured  Convertible Term Note (this "NOTE") is being issued
by the Company  together with that certain  Non-Convertible  Note referred to in
the Purchase Agreement as part of the same financing transaction.

            The following terms shall apply to this Note:

                                    ARTICLE I
                         CONTRACT RATE AND AMORTIZATION

            1.1  CONTRACT  RATE.  Subject  to  Sections  4.2 and 5.10,  interest
payable  on the  outstanding  principal  amount  of this  Note  (the  "PRINCIPAL
AMOUNT") shall accrue at a rate per annum equal to the "prime rate" published in
THE WALL STREET JOURNAL from time to time (the "PRIME  RATE"),  plus two percent
(2.0%) (the "CONTRACT RATE").  The Contract Rate shall be increased or decreased
as the case may be for each  increase or decrease in the Prime Rate in an amount
equal to such  increase  or  decrease  in the  Prime  Rate;  each  change  to be
effective as of the day of the change in the Prime Rate. The Contract Rate shall
not at any  time be  less  than  nine  percent  (9.0%).  Interest  shall  be (i)
calculated on the basis of a 360 day year, and (ii) payable monthly, in arrears,
commencing  on May 1,  2006,  on the  first  business  day of  each  consecutive
calendar  month  thereafter  through and including the Maturity Date, and on the
Maturity Date, whether by acceleration or otherwise.



            1.2 CONTRACT RATE PAYMENTS. The Contract Rate shall be calculated on
the last business day of each calendar month hereafter (other than for increases
or decreases in the Prime Rate which shall be calculated and become effective in
accordance with the terms of Section 1.1) until the Maturity Date.

            1.3  PRINCIPAL  PAYMENTS.   Amortizing  payments  of  the  aggregate
principal  amount  outstanding  under  this  Note at any  time  (the  "PRINCIPAL
AMOUNT")  shall be made by the  Company  on  August  1,  2006  and on the  first
business day of each  succeeding  month  thereafter  through and  including  the
Maturity  Date (each,  an  "AMORTIZATION  DATE").  Subject to Article III below,
commencing  on the first  Amortization  Date,  the  Company  shall make  monthly
payments  to the  Holder on each  Amortization  Date,  each such  payment in the
amount of $46,875  together with any accrued and unpaid interest on such portion
of the  Principal  Amount plus any and all other unpaid  amounts  which are then
owing under this Note, the Purchase Agreement and/or any other Related Agreement
(collectively,  the "MONTHLY AMOUNT"). Any outstanding Principal Amount together
with any accrued and unpaid  interest and any and all other unpaid amounts which
are then  owing by the  Company to the Holder  under  this  Note,  the  Purchase
Agreement  and/or any other  Related  Agreement  shall be due and payable on the
Maturity Date.

                                   ARTICLE II
                            CONVERSION AND REDEMPTION

            2.1 PAYMENT OF MONTHLY AMOUNT.

                  (a) PAYMENT IN CASH OR COMMON STOCK. If the Monthly Amount (or
a  portion  of such  Monthly  Amount  if not all of the  Monthly  Amount  may be
converted into shares of Common Stock pursuant to Section 3.2) is required to be
paid in cash pursuant to Section  2.1(b),  then the Company shall pay the Holder
an amount in cash equal to 100% of the Monthly  Amount (or such  portion of such
Monthly  Amount  to be  paid  in  cash)  due  and  owing  to the  Holder  on the
Amortization Date. If the Monthly Amount (or a portion of such Monthly Amount if
not all of the  Monthly  Amount may be  converted  into  shares of Common  Stock
pursuant  to  Section  3.2) is  required  to be paid in shares  of Common  Stock
pursuant  to  Section  2.1(b),  the  number  of such  shares to be issued by the
Company to the Holder on such  Amortization  Date (in respect of such portion of
the Monthly  Amount  converted  into shares of Common Stock  pursuant to Section
2.1(b)),  shall be the number  determined  by  dividing  (i) the  portion of the
Monthly  Amount  converted  into  shares  of  Common  Stock,  by (ii)  the  then
applicable Fixed Conversion  Price. For purposes hereof,  subject to Section 3.6
hereof, the initial "FIXED CONVERSION PRICE" means $1.40.

                  (b) MONTHLY AMOUNT CONVERSION CONDITIONS.  Subject to Sections
2.1(a),  2.2,  and 3.2 hereof,  the Holder  shall  convert into shares of Common
Stock all or a portion of the Monthly  Amount due on each  Amortization  Date if
the following  conditions  (the  "CONVERSION  CRITERIA") are satisfied:  (i) the
average closing price of the Common Stock as reported by Bloomberg,  L.P. on the
Principal  Market  for the five (5)  trading  days  immediately  preceding  such
Amortization Date shall be greater than or equal to 110% of the Fixed Conversion
Price and (ii) the  amount of such  conversion  does not exceed  twenty  percent
(20%) of the aggregate  dollar trading volume of the Common Stock for the period
of twenty-two (22) trading days immediately preceding such Amortization Date. If
subsection (i) of the Conversion


                                       2


Criteria is met but subsection (ii) of the Conversion  Criteria is not met as to
the entire  Monthly  Amount,  the  Holder  shall  convert  only such part of the
Monthly  Amount  that meets  subsection  (ii) of the  Conversion  Criteria.  Any
portion of the Monthly  Amount due on an  Amortization  Date that the Holder has
not been able to convert  into shares of Common Stock due to the failure to meet
the  Conversion  Criteria,  shall be paid in cash by the  Company at the rate of
100% of the Monthly Amount otherwise due on such Amortization Date, within three
(3) business days of such Amortization Date.

            2.2  NO  EFFECTIVE  REGISTRATION.  Notwithstanding  anything  to the
contrary  herein,  none  of  the  Company's  obligations  to the  Holder  may be
converted  into  Common  Stock  unless  (a)  either  (i)  an  effective  current
Registration  Statement  (as  defined  in  the  Registration  Rights  Agreement)
covering the shares of Common Stock to be issued in connection with satisfaction
of such obligations  exists or (ii) an exemption from registration for resale of
all of the Common Stock issued and issuable is available pursuant to Rule 144 of
the Securities Act and (b) no Event of Default (as  hereinafter  defined) exists
and is  continuing,  unless such Event of Default is cured within any applicable
cure period or otherwise waived in writing by the Holder.

            2.3 OPTIONAL  REDEMPTION  IN CASH.  The Company may prepay this Note
("OPTIONAL  REDEMPTION")  by  paying to the  Holder a sum of money  equal to one
hundred ten percent  (110%) of the  Principal  Amount  outstanding  at such time
together  with  accrued but unpaid  interest  thereon and any and all other sums
due,  accrued or payable to the Holder  arising  under this Note,  the  Purchase
Agreement or any other Related Agreement (the "REDEMPTION  AMOUNT")  outstanding
on the Redemption  Payment Date (as defined below). The Company shall deliver to
the  Holder  a  written  notice  of  redemption  (the  "NOTICE  OF  REDEMPTION")
specifying  the date for  such  Optional  Redemption  (the  "REDEMPTION  PAYMENT
DATE"), which date shall be seven (7) business days after the date of the Notice
of Redemption (the  "REDEMPTION  PERIOD").  A Notice of Redemption  shall not be
effective  with  respect  to any  portion  of this Note for which the Holder has
previously  delivered a Notice of  Conversion  (as  hereinafter  defined) or for
conversions  elected to be made by the Holder pursuant to Article III during the
Redemption  Period. The Redemption Amount shall be determined as if the Holder's
conversion  elections had been  completed  immediately  prior to the date of the
Notice of Redemption. On the Redemption Payment Date, the Redemption Amount must
be paid in good funds to the Holder.  In the event the Company  fails to pay the
Redemption Amount on the Redemption Payment Date as set forth herein,  then such
Redemption Notice will be null and void.

                                   ARTICLE III
                           HOLDER'S CONVERSION RIGHTS

            3.1  OPTIONAL  CONVERSION.  Subject  to the  terms set forth in this
Article III, the Holder shall have the right, but not the obligation, to convert
all or any portion of the issued and outstanding Principal Amount and/or accrued
interest  and fees due and payable into fully paid and  nonassessable  shares of
Common  Stock at the Fixed  Conversion  Price.  The shares of Common Stock to be
issued upon such conversion are herein referred to as, the "CONVERSION SHARES."


                                       3


      3.2  CONVERSION  LIMITATION.   Notwithstanding   anything  herein  to  the
contrary,  in no event  shall the Holder be  entitled  to convert any portion of
this Note in excess of that portion of this Note upon  exercise of which the sum
of (1) the number of shares of Common Stock beneficially owned by the Holder and
its  Affiliates  (other  than  shares  of  Common  Stock  which  may  be  deemed
beneficially owned through the ownership of the unconverted portion of this Note
or the  unexercised or  unconverted  portion of any other security of the Holder
subject to a limitation on  conversion  analogous to the  limitations  contained
herein)  and (2) the  number  of  shares  of  Common  Stock  issuable  upon  the
conversion  of the portion of this Note with respect to which the  determination
of this  proviso is being made,  would  result in  beneficial  ownership  by the
Holder  and  its  Affiliates  of any  amount  greater  than  4.99%  of the  then
outstanding  shares  of  Common  Stock  (whether  or  not,  at the  time of such
conversion,  the Holder and its Affiliates  beneficially  own more than 4.99% of
the  then  outstanding  shares  of  Common  Stock).  As used  herein,  the  term
"AFFILIATE" means any person or entity that,  directly or indirectly through one
or more intermediaries,  controls or is controlled by or is under common control
with a person or entity,  as such terms are used in and construed under Rule 144
under the  Securities  Act. For purposes of the proviso to the second  preceding
sentence,  beneficial  ownership  shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended,  and Regulations 13D-G
thereunder,  except as  otherwise  provided in clause (1) of such  proviso.  The
limitations  set forth herein (x) may be waived by the Holder upon  provision of
no less than  sixty-one  (61) days  prior  notice to the  Company  and (y) shall
automatically  become null and void (i) following notice to the Company upon the
occurrence  and  during the  continuance  of an Event of  Default,  or (ii) upon
receipt by the Holder of a Notice of Redemption.


                                       4


            3.3 MECHANICS OF HOLDER'S  CONVERSION.  In the event that the Holder
elects to convert this Note into Common  Stock,  the Holder shall give notice of
such election by  delivering  an executed and completed  notice of conversion in
substantially the form of Exhibit A hereto  (appropriate  completed) ("NOTICE OF
CONVERSION")  to the  Company  and such  Notice of  Conversion  shall  provide a
breakdown in reasonable  detail of the Principal  Amount,  accrued  interest and
fees that are being converted.  On each Conversion Date (as hereinafter defined)
and in  accordance  with its Notice of  Conversion,  the  Holder  shall make the
appropriate  reduction to the  Principal  Amount,  accrued  interest and fees as
entered in its records and shall provide  written  notice thereof to the Company
within two (2) business  days after the  Conversion  Date.  Each date on which a
Notice of  Conversion  is delivered or  telecopied  to the Company in accordance
with the provisions  hereof shall be deemed a Conversion  Date (the  "CONVERSION
DATE").  Pursuant to the terms of the Notice of  Conversion,  the  Company  will
issue  instructions  to the transfer agent  accompanied by an opinion of counsel
within two (2)  business  day of the date of the  delivery to the Company of the
Notice  of  Conversion  and shall  cause  the  transfer  agent to  transmit  the
certificates  representing the Conversion  Shares to the Holder by crediting the
account of the Holder's  designated broker with the Depository Trust Corporation
("DTC") through its Deposit  Withdrawal Agent Commission  ("DWAC") system within
three (3) business days after receipt by the Company of the Notice of Conversion
(the "DELIVERY  DATE"). In the case of the exercise of the conversion rights set
forth herein the conversion privilege shall be deemed to have been exercised and
the Conversion Shares issuable upon such conversion shall be deemed to have been
issued upon the date of receipt by the Company of the Notice of Conversion.  The
Holder shall be treated for all purposes as the record holder of the  Conversion
Shares,  unless the Holder  provides  the Company  written  instructions  to the
contrary.

            3.4  LATE  PAYMENTS.  The  Company  understands  that a delay in the
delivery of the Conversion  Shares in the form required pursuant to this Article
beyond the  Delivery  Date  could  result in  economic  loss to the  Holder.  As
compensation  to the Holder for such loss,  in addition to all other  rights and
remedies which the Holder may have under this Note, applicable law or otherwise,
the  Company  shall pay late  payments  to the Holder for any late  issuance  of
Conversion  Shares  in the  form  required  pursuant  to  this  Article  II upon
conversion  of this Note, in the amount equal to $500 per business day after the
Delivery Date.  The Company shall make any payments  incurred under this Section
in immediately available funds upon demand.

            3.5 CONVERSION MECHANICS. The number of shares of Common Stock to be
issued upon each  conversion  of this Note shall be  determined by dividing that
portion of the principal  and interest and fees to be converted,  if any, by the
then  applicable  Fixed  Conversion  Price. In the event of any conversions of a
portion of the outstanding  Principal  Amount pursuant to this Article III, such
conversions  shall  be  deemed  to  constitute  conversions  of the  outstanding
Principal  Amount  applying to Monthly  Amounts for the  remaining  Amortization
Dates in chronological order.

            3.6 ADJUSTMENT PROVISIONS. The Fixed Conversion Price and number and
kind of  shares or other  securities  to be issued  upon  conversion  determined
pursuant to this Note shall be subject to adjustment  from time to time upon the
occurrence  of  certain  events  during the period  that this  conversion  right
remains outstanding, as follows:


                                       5


                  (a)  RECLASSIFICATION.  If the Company at any time  shall,  by
reclassification  or  otherwise,  change  the  Common  Stock  into the same or a
different  number of  securities  of any class or classes,  this Note, as to the
unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed
to evidence the right to purchase an adjusted number of such securities and kind
of  securities  as would have been  issuable  as the result of such  change with
respect to the Common Stock (i) immediately prior to or (ii) immediately  after,
such reclassification or other change at the sole election of the Holder.

                  (b) STOCK SPLITS, COMBINATIONS AND DIVIDENDS. If the shares of
Common  Stock are  subdivided  or combined  into a greater or smaller  number of
shares of Common  Stock,  or if a dividend  is paid on the  Common  Stock or any
preferred  stock  issued by the  Company  in shares of Common  Stock,  the Fixed
Conversion  Price shall be  proportionately  reduced in case of  subdivision  of
shares or stock dividend or proportionately increased in the case of combination
of shares,  in each such case by the ratio  which the total  number of shares of
Common Stock outstanding  immediately after such event bears to the total number
of shares of Common Stock outstanding immediately prior to such event.

            3.7  RESERVATION OF SHARES.  During the period the conversion  right
exists, the Company will reserve from its authorized and unissued Common Stock a
sufficient  number of shares to provide for the  issuance of  Conversion  Shares
upon the full  conversion of this Note and the Warrant.  The Company  represents
that upon issuance, the Conversion Shares will be duly and validly issued, fully
paid and non-assessable. The Company agrees that its issuance of this Note shall
constitute full authority to its officers,  agents,  and transfer agents who are
charged with the duty of executing and issuing stock certificates to execute and
issue the necessary  certificates for the Conversion  Shares upon the conversion
of this Note.

            3.8 REGISTRATION  RIGHTS.  The Holder has been granted  registration
rights with respect to the  Conversion  Shares as set forth in the  Registration
Rights Agreement.

            3.9 ISSUANCE OF NEW NOTE. Upon any partial  conversion of this Note,
a new Note  containing the same date and  provisions of this Note shall,  at the
request of the Holder,  be issued by the Company to the Holder for the principal
balance of this Note and interest  which shall not have been  converted or paid.
Subject to the  provisions of Article IV of this Note, the Company shall not pay
any costs, fees or any other  consideration to the Holder for the production and
issuance of a new Note.

                                   ARTICLE IV
                                EVENTS OF DEFAULT

            4.1 EVENTS OF DEFAULT. The occurrence of any of the following events
set forth in this Section 4.1 shall  constitute  an event of default  ("EVENT OF
DEFAULT") hereunder:

                  (a)  FAILURE  TO PAY.  The  Company  fails to pay when due any
installment of principal,  interest or other fees hereon in accordance herewith,
or the Company fails to pay any of the other  Obligations  (under and as defined
in the Master Security  Agreement) when due, and, in any such case, such failure
shall  continue for a period of five (5) days  following the date upon which any
such payment was due.


                                       6


                  (b) BREACH OF COVENANT. The Company or any of its Subsidiaries
breaches  any  covenant  or any  other  term or  condition  of this  Note in any
material respect and such breach, if subject to cure,  continues for a period of
fifteen (15) days after the occurrence thereof.

                  (c)   BREACH   OF   REPRESENTATIONS   AND   WARRANTIES.    Any
representation, warranty or statement made or furnished by the Company or any of
its  Subsidiaries  in this Note,  the Purchase  Agreement  or any other  Related
Agreement  shall at any time be false or misleading  in any material  respect on
the date as of which made or deemed made.

                  (d) DEFAULT  UNDER OTHER  AGREEMENTS.  The  occurrence  of any
default  (or  similar  term)  in the  observance  or  performance  of any  other
agreement or condition relating to any indebtedness or contingent  obligation of
the  Company or any of its  Subsidiaries  (including,  without  limitation,  the
indebtedness  evidenced by (i) the 2006 Security  Agreement and/or any Ancillary
Agreement  referred to in the 2006 Security  Agreement  and/or (ii) that certain
Securities  Purchase  Agreement,  dated as of May 13,  2004,  by and between the
Company and the Purchaser  (as amended,  modified or  supplemented  from time to
time, the "2004 Securities  Purchase  Agreement")  and/or any Related  Agreement
referred to in the 2004 Securities Purchase Agreement,  as amended,  modified or
supplemented  from time to time),  in each case,  beyond the period of grace (if
any),  the effect of which default is to cause,  or permit the holder or holders
of  such  indebtedness  or  beneficiary  or  beneficiaries  of  such  contingent
obligation  to  cause,  such  indebtedness  to become  due  prior to its  stated
maturity or such contingent obligation to become payable;

                  (e) BANKRUPTCY.  The Company or any of its Subsidiaries  shall
(i) apply for,  consent to or suffer to exist the  appointment of, or the taking
of possession by, a receiver,  custodian,  trustee or liquidator of itself or of
all or a substantial  part of its property,  (ii) make a general  assignment for
the benefit of  creditors,  (iii)  commence a  voluntary  case under the federal
bankruptcy laws (as now or hereafter in effect),  (iv) be adjudicated a bankrupt
or  insolvent,  (v) file a petition  seeking to take  advantage of any other law
providing for the relief of debtors, (vi) acquiesce to, without challenge within
ten (10) days of the filing thereof, or failure to have dismissed, within thirty
(30) days,  any petition  filed  against it in any  involuntary  case under such
bankruptcy  laws,  or (vii) take any action for the purpose of effecting  any of
the foregoing;

                  (f) JUDGMENTS.  Attachments or levies in excess of $250,000 in
the aggregate are made upon the Company or any of its  Subsidiary's  assets or a
judgment is rendered  against the  Company's  property  involving a liability of
more than  $250,000  which shall not have been  vacated,  discharged,  stayed or
bonded within ninety (90) days from the entry thereof;

                  (g) INSOLVENCY.  The Company or any of its Subsidiaries  shall
admit in writing its inability, or be generally unable, to pay its debts as they
become due or cease operations of its present business;

                  (h) CHANGE OF CONTROL.  A Change of Control (as defined below)
shall occur with respect to the  Company,  unless  Holder  shall have  expressly
consented to such Change of Control in writing. A "Change of Control" shall mean
any event or circumstance as a result of


                                       7


which (i) any  "Person" or "group" (as such terms are defined in Sections  13(d)
and 14(d) of the Exchange Act, as in effect on the date hereof),  other than the
Holder,  is or becomes the  "beneficial  owner" (as defined in Rules 13(d)-3 and
13(d)-5 under the Exchange  Act),  directly or  indirectly,  of 35% or more on a
fully  diluted  basis of the then  outstanding  voting  equity  interest  of the
Company (other than a "Person" or "group" that  beneficially owns 35% or more of
such  outstanding  voting  equity  interests of the Company on the date hereof),
(ii) the Board of Directors of the Company  shall cease to consist of a majority
of the Company's  board of directors on the date hereof (or directors  appointed
by a majority  of the board of  directors  in effect  immediately  prior to such
appointment)  or  (iii)  the  Company  or  any  of its  Subsidiaries  merges  or
consolidates with, or sells all or substantially all of its assets to, any other
person or entity;

                  (i)  INDICTMENT;  PROCEEDINGS.  The  indictment  or threatened
indictment of the Company or any of its Subsidiaries or any executive officer of
the  Company  or  any  of  its  Subsidiaries  under  any  criminal  statute,  or
commencement or threatened  commencement of criminal or civil proceeding against
the Company or any of its  Subsidiaries or any executive  officer of the Company
or any of its Subsidiaries  pursuant to which statute or proceeding penalties or
remedies  sought or available  include  forfeiture of any of the property of the
Company or any of its Subsidiaries;

                  (j) THE  PURCHASE  AGREEMENT  AND RELATED  AGREEMENTS.  (i) An
Event of Default  shall occur under and as defined in the Purchase  Agreement or
any Related Agreement,  (ii) the Company or any of its Subsidiaries shall breach
any term or provision of the Purchase  Agreement or any other Related  Agreement
in any  material  respect  and  such  breach,  if  capable  of  cure,  continues
unremedied for a period of fifteen (15) days after the occurrence thereof, (iii)
the Company or any of its  Subsidiaries  attempts to terminate,  challenges  the
validity  of, or its  liability  under,  the  Purchase  Agreement or any Related
Agreement,  (iv) any  proceeding  shall be brought to  challenge  the  validity,
binding  effect of the Purchase  Agreement  or any Related  Agreement or (v) the
Purchase  Agreement or any Related  Agreement ceases to be a valid,  binding and
enforceable  obligation of the Company or any of its Subsidiaries (to the extent
such persons or entities are a party thereto);

                  (k) STOP TRADE.  An SEC stop trade order or  Principal  Market
trading  suspension  of the  Common  Stock  shall  be in  effect  for  five  (5)
consecutive days or five (5) days during a period of ten (10) consecutive  days,
excluding  in all cases a  suspension  of all  trading  on a  Principal  Market,
provided  that  the  Company  shall  not have  been  able to cure  such  trading
suspension  within  thirty  (30) days of the  notice  thereof or list the Common
Stock on another Principal Market within sixty (60) days of such notice; or

                  (l) FAILURE TO DELIVER COMMON STOCK OR  REPLACEMENT  NOTE. The
Company's  failure to deliver Common Stock to the Holder  pursuant to and in the
form  required by this Note and the Purchase  Agreement  and, if such failure to
deliver  Common  Stock shall not be cured  within two (2)  business  days or the
Company is  required to issue a  replacement  Note to the Holder and the Company
shall fail to deliver such replacement Note within seven (7) business days.


                                       8


            4.2  DEFAULT  INTEREST.  Following  the  occurrence  and  during the
continuance of an Event of Default, the Company shall pay additional interest on
this Note in an amount equal to one and one half percent  (1.5%) per month,  and
all  outstanding  obligations  under this Note, the Purchase  Agreement and each
other Related  Agreement,  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.

            4.3  DEFAULT  PAYMENT.  Following  the  occurrence  and  during  the
continuance  of an Event of  Default,  the  Holder,  at its  option,  may demand
repayment in full of all  obligations  and  liabilities  owing by Company to the
Holder  under  this  Note,  the  Purchase  Agreement  and/or  any other  Related
Agreement and/or may elect, in addition to all rights and remedies of the Holder
under  the  Purchase   Agreement  and  the  other  Related  Agreements  and  all
obligations and liabilities of the Company under the Purchase  Agreement and the
other  Related  Agreements,  to require  the  Company to make a Default  Payment
("DEFAULT  PAYMENT").  The  Default  Payment  shall  be 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  hereunder.  The Default
Payment  shall  be  applied  first to any fees  due and  payable  to the  Holder
pursuant  to this  Note,  the  Purchase  Agreement,  and/or  the  other  Related
Agreements, then to accrued and unpaid interest due on this Note and then to the
outstanding principal balance of this Note. The Default Payment shall be due and
payable  immediately  on the date  that the  Holder  has  exercised  its  rights
pursuant to this Section 4.3.

                                    ARTICLE V
                                  MISCELLANEOUS

            5.1 CONVERSION  PRIVILEGES.  The conversion  privileges set forth in
Article  III shall  remain in full  force and effect  immediately  from the date
hereof  until the date this Note is  indefeasibly  paid in full and  irrevocably
terminated.

            5.2  CUMULATIVE  REMEDIES.  The  remedies  under  this Note shall be
cumulative.

            5.3 FAILURE OR  INDULGENCE  NOT  WAIVER.  No failure or delay on the
part of the  Holder  hereof in the  exercise  of any power,  right or  privilege
hereunder  shall  operate as a waiver  thereof,  nor shall any single or partial
exercise  of any  such  power,  right or  privilege  preclude  other or  further
exercise  thereof  or of any other  right,  power or  privilege.  All rights and
remedies existing  hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.

            5.4  NOTICES.  Any notice  herein  required or permitted to be given
shall be in writing and shall be deemed  effectively  given:  (a) upon  personal
delivery to the party notified, (b) when sent by confirmed telex or facsimile if
sent during normal  business  hours of the  recipient,  if not, then on the next
business  day, (c) five days after having been sent by  registered  or certified
mail, return receipt  requested,  postage prepaid,  or (d) one day after deposit
with a nationally  recognized  overnight courier,  specifying next day delivery,
with written  verification of receipt.  All communications  shall be sent to the
Company at the address provided in the Purchase Agreement executed in connection
herewith,  and to the Holder at the address  provided in the Purchase  Agreement
for such Holder,  with a copy to John E. Tucker,  Esq.,  825 Third


                                       9


Avenue,  14th Floor, New York, New York 10022,  facsimile number (212) 541-4434,
or at such other  address as the Company or the Holder may designate by ten days
advance written notice to the other parties hereto. A Notice of Conversion shall
be deemed given when made to the Company pursuant to the Purchase Agreement.

            5.5 AMENDMENT PROVISION. The term "Note" and all references thereto,
as used  throughout  this  instrument,  shall mean this instrument as originally
executed,  or  if  later  amended  or  supplemented,   then  as  so  amended  or
supplemented,  and any successor  instrument as such successor instrument may be
amended or supplemented.

            5.6  ASSIGNABILITY.  This Note shall be binding upon the Company and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements  of the Purchase  Agreement.  The Company may not assign any of its
obligations under this Note without the prior written consent of the Holder, any
such purported assignment without such consent being null and void.

            5.7 COST OF  COLLECTION.  In case of any Event of Default under this
Note, the Company shall pay the Holder reasonable costs of collection, including
reasonable attorneys' fees.

            5.8 GOVERNING LAW, JURISDICTION AND WAIVER OF JURY TRIAL.

                  (a) THIS NOTE SHALL BE GOVERNED BY AND  CONSTRUED AND ENFORCED
IN  ACCORDANCE  WITH  THE LAWS OF THE  STATE  OF NEW  YORK,  WITHOUT  REGARD  TO
PRINCIPLES OF CONFLICTS OF LAW.

                  (b) THE COMPANY  HEREBY  CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS  LOCATED IN THE COUNTY OF NEW YORK,  STATE OF NEW YORK SHALL HAVE
EXCLUSIVE  JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE
COMPANY, ON THE ONE HAND, AND THE HOLDER, ON THE OTHER HAND,  PERTAINING TO THIS
NOTE OR ANY OF THE OTHER RELATED  AGREEMENTS OR TO ANY MATTER  ARISING OUT OF OR
RELATED  TO THIS  NOTE OR ANY OF THE  RELATED  AGREEMENTS;  PROVIDED,  THAT  THE
COMPANY  ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY
A COURT  LOCATED  OUTSIDE  OF THE  COUNTY  OF NEW YORK,  STATE OF NEW YORK;  AND
FURTHER  PROVIDED,  THAT  NOTHING  IN THIS NOTE  SHALL BE DEEMED OR  OPERATE  TO
PRECLUDE THE HOLDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION  TO COLLECT THE  OBLIGATIONS,  TO REALIZE ON THE  COLLATERAL OR ANY
OTHER  SECURITY  FOR THE  OBLIGATIONS,  OR TO ENFORCE A JUDGMENT  OR OTHER COURT
ORDER IN FAVOR OF THE HOLDER.  THE  COMPANY  EXPRESSLY  SUBMITS AND  CONSENTS IN
ADVANCE TO SUCH  JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,
AND THE COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF
PERSONAL  JURISDICTION,  IMPROPER  VENUE OR FORUM NON  CONVENIENS.  THE  COMPANY
HEREBY WAIVES PERSONAL SERVICE OF THE


                                       10


SUMMONS,  COMPLAINT  AND OTHER  PROCESS  ISSUED  IN ANY SUCH  ACTION OR SUIT AND
AGREES THAT SERVICE OF SUCH SUMMONS,  COMPLAINT AND OTHER PROCESS MAY BE MADE BY
REGISTERED OR CERTIFIED  MAIL  ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH
IN THE PURCHASE  AGREEMENT  AND THAT  SERVICE SO MADE SHALL BE DEEMED  COMPLETED
UPON THE EARLIER OF THE COMPANY'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER
DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

                  (c) THE  COMPANY  DESIRES  THAT ITS  DISPUTES BE RESOLVED BY A
JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE,  TO ACHIEVE THE BEST COMBINATION
OF THE BENEFITS OF THE JUDICIAL  SYSTEM AND OF  ARBITRATION,  THE COMPANY HERETO
WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE
HOLDER AND THE COMPANY ARISING OUT OF, CONNECTED WITH,  RELATED OR INCIDENTAL TO
THE  RELATIONSHIP  ESTABLISHED  BETWEEN THEM IN CONNECTION  WITH THIS NOTE,  ANY
OTHER RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

            5.9  SEVERABILITY.  In the event that any  provision of this Note is
invalid or unenforceable  under any applicable statute or rule of law, then such
provision  shall  be  deemed  inoperative  to the  extent  that it may  conflict
therewith  and shall be deemed  modified to conform with such statute or rule of
law. Any such provision which may prove invalid or  unenforceable  under any law
shall not affect the validity or  enforceability  of any other provision of this
Note.

            5.10 MAXIMUM  PAYMENTS.  Nothing contained herein shall be deemed to
establish  or require  the  payment of a rate of  interest  or other  charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest  required to be paid or other charges hereunder exceed the maximum rate
permitted  by such law,  any  payments in excess of such  maximum  rate shall be
credited  against amounts owed by the Company to the Holder and thus refunded to
the Company.

            5.11 SECURITY INTEREST AND GUARANTEE.  The Holder has been granted a
security  interest (i) in certain assets of the Company and its  Subsidiaries as
more fully described in the 2004 Master Security Agreement and the 2006 Security
Agreement  and  (ii) in the  equity  interests  of the  Companies'  Subsidiaries
pursuant to the 2006 Stock  Pledge  Agreement.  The  obligations  of the Company
under this Note are guaranteed by certain  Subsidiaries of the Company  pursuant
to the 2006 Subsidiary Guarantee.

            5.12  CONSTRUCTION.  Each party  acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction  that  ambiguities are to be resolved  against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.

            5.13 REGISTERED OBLIGATION. This Note is intended to be a registered
obligation within the meaning of Treasury  Regulation Section  1.871-14(c)(1)(i)
and the Company (or its agent) shall  register this Note (and  thereafter  shall
maintain such registration) as to both principal


                                       11


and any stated interest.  Notwithstanding any document,  instrument or agreement
relating  to this Note to the  contrary,  transfer of this Note (or the right to
any payments of principal or stated interest thereunder) may only be effected by
(i) surrender of this Note and either the reissuance by the Company of this Note
to the new holder or the issuance by the Company of a new  instrument to the new
holder,  or (ii) transfer through a book entry system  maintained by the Company
(or  its   agent),   within  the   meaning  of   Treasury   Regulation   Section
1.871-14(c)(1)(i)(B).

       [Balance of page intentionally left blank; signature page follows]


                                       12


            IN WITNESS WHEREOF,  the Company has caused this Secured Convertible
Term Note to be signed in its name effective as of this 31st day of March, 2006.

                                             INCENTRA SOLUTIONS, INC.


                                             By: /s/ Thomas P. Sweeney III
                                                 -------------------------------
                                                 Name:  Thomas P. Sweeney III
                                                 Title: Chief Executive Officer

WITNESS:


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


                                       13

EX-10.72

THIS NOTE HAS NOT BEEN REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY  STATE  SECURITIES  LAWS.  THIS NOTE MAY NOT BE SOLD,  OFFERED  FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THIS NOTE  UNDER  SAID ACT AND ANY  APPLICABLE  STATE  SECURITIES  LAWS OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO INCENTRA SOLUTIONS, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.

                                SECURED TERM NOTE

            FOR VALUE RECEIVED,  INCENTRA SOLUTIONS,  INC., a Nevada Corporation
(the "COMPANY"),  promises to pay to LAURUS MASTER FUND, LTD., c/o M&C Corporate
Services  Limited,  P.O. Box 309 GT, Ugland House,  South Church Street,  George
Town,  Grand Cayman,  Cayman Islands,  Fax:  345-949-8080  (the "HOLDER") or its
registered  assigns or  successors  in  interest,  the sum of One Million  Seven
Hundred  Fifty  Thousand  Dollars  ($1,750,000),  together  with any accrued and
unpaid interest  hereon,  on March 31, 2009 (the "MATURITY  DATE") if not sooner
paid.

            Capitalized  terms used  herein  without  definition  shall have the
meanings ascribed to such terms in that certain  Securities  Purchase  Agreement
dated as of the date  hereof by and  between  the  Company  and the  Holder  (as
amended,   modified  and/or  supplemented  from  time  to  time,  the  "PURCHASE
AGREEMENT").  For the  avoidance of doubt the Company and the Holder  understand
and agree  that this  Secured  Term Note (this  "NOTE")  is being  issued by the
Company together with that certain  Convertible Note referred to in the Purchase
Agreement as part of the same financing transaction.

            The following terms shall apply to this Note:

                                    ARTICLE I
                         CONTRACT RATE AND AMORTIZATION

            1.1 CONTRACT RATE. Subject to Sections 2.2 and 3.9, interest payable
on the outstanding  principal amount of this Note (the "PRINCIPAL AMOUNT") shall
accrue at a rate per  annum  equal to the  "prime  rate"  published  in THE WALL
STREET  JOURNAL from time to time (the "PRIME  RATE"),  plus two percent  (2.0%)
(the "CONTRACT RATE").  The Contract Rate shall be increased or decreased as the
case may be for each  increase or decrease in the Prime Rate in an amount  equal
to such  increase or decrease in the Prime Rate;  each change to be effective as
of the day of the change in the Prime Rate.  The Contract  Rate shall not at any
time be less than nine percent  (9.0%).  Interest shall be (i) calculated on the
basis of a 360 day year, and (ii) payable monthly, in arrears, commencing on May
1, 2006, on the first business day of each consecutive calendar month thereafter
through and including the Maturity Date,  and on the Maturity  Date,  whether by
acceleration or otherwise.



            1.2 CONTRACT RATE PAYMENTS. The Contract Rate shall be calculated on
the last business day of each calendar month hereafter (other than for increases
or decreases in the Prime Rate which shall be calculated and become effective in
accordance with the terms of Section 1.1) until the Maturity Date.

            1.3  PRINCIPAL  PAYMENTS.   Amortizing  payments  of  the  aggregate
principal  amount  outstanding  under  this  Note at any  time  (the  "PRINCIPAL
AMOUNT") shall be made in cash by the Company on August 1, 2006 and on the first
business day of each  succeeding  month  thereafter  through and  including  the
Maturity  Date  (each,  an  "AMORTIZATION   DATE").   Commencing  on  the  first
Amortization Date, the Company shall make monthly payments to the Holder on each
Amortization  Date, each such payment in the amount of $54,688 together with any
accrued and unpaid interest on such portion of the Principal Amount plus any and
all other  unpaid  amounts  which are then owing under this Note,  the  Purchase
Agreement  and/or  any  other  Related  Agreement  (collectively,  the  "MONTHLY
AMOUNT").  Any outstanding Principal Amount together with any accrued and unpaid
interest  and any and all  other  unpaid  amounts  which  are then  owing by the
Company to the Holder under this Note, the Purchase  Agreement  and/or any other
Related Agreement shall be due and payable on the Maturity Date.

            1.4 OPTIONAL  REDEMPTION  IN CASH.  The Company may prepay this Note
("OPTIONAL  REDEMPTION")  by  paying to the  Holder a sum of money  equal to one
hundred ten percent  (110%) of the  Principal  Amount  outstanding  at such time
together  with  accrued but unpaid  interest  thereon and any and all other sums
due,  accrued or payable to the Holder  arising  under this Note,  the  Purchase
Agreement or any other Related Agreement (the "REDEMPTION  AMOUNT")  outstanding
on the Redemption  Payment Date (as defined below). The Company shall deliver to
the  Holder  a  written  notice  of  redemption  (the  "NOTICE  OF  REDEMPTION")
specifying  the date for  such  Optional  Redemption  (the  "REDEMPTION  PAYMENT
DATE"), which date shall be seven (7) business days after the date of the Notice
of Redemption (the  "REDEMPTION  PERIOD").  On the Redemption  Payment Date, the
Redemption  Amount  must be paid in good funds to the  Holder.  In the event the
Company fails to pay the Redemption Amount on the Redemption Payment Date as set
forth herein, then such Redemption Notice will be null and void.

                                   ARTICLE II
                                EVENTS OF DEFAULT

            2.1 EVENTS OF DEFAULT. The occurrence of any of the following events
set forth in this Section 4.1 shall  constitute  an event of default  ("EVENT OF
DEFAULT") hereunder:

                  (a)  FAILURE  TO PAY.  The  Company  fails to pay when due any
installment of principal,  interest or other fees hereon in accordance herewith,
or the Company fails to pay any of the  obligations of the Company or any of its
Subsidiaries  under the Purchase  Agreement or any Related  Agreement  when due,
and, in any such case, such failure shall continue for a period of five (5) days
following the date upon which any such payment was due.


                                       2


                  (b) BREACH OF COVENANT. The Company or any of its Subsidiaries
breaches  any  covenant  or any  other  term or  condition  of this  Note in any
material respect and such breach, if subject to cure,  continues for a period of
fifteen (15) days after the occurrence thereof.

                  (c)   BREACH   OF   REPRESENTATIONS   AND   WARRANTIES.    Any
representation, warranty or statement made or furnished by the Company or any of
its  Subsidiaries  in this Note,  the Purchase  Agreement  or any other  Related
Agreement  shall at any time be false or misleading  in any material  respect on
the date as of which made or deemed made.

                  (d) DEFAULT  UNDER OTHER  AGREEMENTS.  The  occurrence  of any
default  (or  similar  term)  in the  observance  or  performance  of any  other
agreement or condition relating to any indebtedness or contingent  obligation of
the  Company or any of its  Subsidiaries  (including,  without  limitation,  the
indebtedness  evidenced by (i) the 2006 Security  Agreement and/or any Ancillary
Agreement  referred to in the 2006 Security  Agreement  and/or (ii) that certain
Securities  Purchase  Agreement,  dated as of May 13,  2004,  by and between the
Company and the Purchaser  (as amended,  modified or  supplemented  from time to
time, the "2004 Securities  Purchase  Agreement")  and/or any Related  Agreement
referred to in the 2004 Securities Purchase Agreement,  as amended,  modified or
supplemented  from time to time),  in each case,  beyond the period of grace (if
any),  the effect of which default is to cause,  or permit the holder or holders
of  such  indebtedness  or  beneficiary  or  beneficiaries  of  such  contingent
obligation  to  cause,  such  indebtedness  to become  due  prior to its  stated
maturity or such contingent obligation to become payable;

                  (e) BANKRUPTCY.  The Company or any of its Subsidiaries  shall
(i) apply for,  consent to or suffer to exist the  appointment of, or the taking
of possession by, a receiver,  custodian,  trustee or liquidator of itself or of
all or a substantial  part of its property,  (ii) make a general  assignment for
the benefit of  creditors,  (iii)  commence a  voluntary  case under the federal
bankruptcy laws (as now or hereafter in effect),  (iv) be adjudicated a bankrupt
or  insolvent,  (v) file a petition  seeking to take  advantage of any other law
providing for the relief of debtors, (vi) acquiesce to, without challenge within
ten (10) days of the filing thereof, or failure to have dismissed, within thirty
(30) days,  any petition  filed  against it in any  involuntary  case under such
bankruptcy  laws,  or (vii) take any action for the purpose of effecting  any of
the foregoing;

                  (f) JUDGMENTS.  Attachments or levies in excess of $250,000 in
the aggregate are made upon the Company or any of its  Subsidiary's  assets or a
judgment is rendered  against the  Company's  property  involving a liability of
more than  $250,000  which shall not have been  vacated,  discharged,  stayed or
bonded within ninety (90) days from the entry thereof;

                  (g) INSOLVENCY.  The Company or any of its Subsidiaries  shall
admit in writing its inability, or be generally unable, to pay its debts as they
become due or cease operations of its present business;

                  (h) CHANGE OF CONTROL.  A Change of Control (as defined below)
shall occur with respect to the  Company,  unless  Holder  shall have  expressly
consented to such Change of Control in writing. A "Change of Control" shall mean
any event or circumstance as a result of


                                       3


which (i) any  "Person" or "group" (as such terms are defined in Sections  13(d)
and 14(d) of the Exchange Act, as in effect on the date hereof),  other than the
Holder,  is or becomes the  "beneficial  owner" (as defined in Rules 13(d)-3 and
13(d)-5 under the Exchange  Act),  directly or  indirectly,  of 35% or more on a
fully  diluted  basis of the then  outstanding  voting  equity  interest  of the
Company (other than a "Person" or "group" that  beneficially owns 35% or more of
such  outstanding  voting  equity  interests of the Company on the date hereof),
(ii) the Board of Directors of the Company  shall cease to consist of a majority
of the Company's  board of directors on the date hereof (or directors  appointed
by a majority  of the board of  directors  in effect  immediately  prior to such
appointment)  or  (iii)  the  Company  or  any  of its  Subsidiaries  merges  or
consolidates with, or sells all or substantially all of its assets to, any other
person or entity;

                  (i)  INDICTMENT;  PROCEEDINGS.  The  indictment  or threatened
indictment of the Company or any of its Subsidiaries or any executive officer of
the  Company  or  any  of  its  Subsidiaries  under  any  criminal  statute,  or
commencement or threatened  commencement of criminal or civil proceeding against
the Company or any of its  Subsidiaries or any executive  officer of the Company
or any of its Subsidiaries  pursuant to which statute or proceeding penalties or
remedies  sought or available  include  forfeiture of any of the property of the
Company or any of its Subsidiaries;

                  (j) THE  PURCHASE  AGREEMENT  AND RELATED  AGREEMENTS.  (i) An
Event of Default  shall occur under and as defined in the Purchase  Agreement or
any Related Agreement,  (ii) the Company or any of its Subsidiaries shall breach
any term or provision of the Purchase  Agreement or any other Related  Agreement
in any  material  respect  and  such  breach,  if  capable  of  cure,  continues
unremedied for a period of fifteen (15) days after the occurrence thereof, (iii)
the Company or any of its  Subsidiaries  attempts to terminate,  challenges  the
validity  of, or its  liability  under,  the  Purchase  Agreement or any Related
Agreement,  (iv) any  proceeding  shall be brought to  challenge  the  validity,
binding  effect of the Purchase  Agreement  or any Related  Agreement or (v) the
Purchase  Agreement or any Related  Agreement ceases to be a valid,  binding and
enforceable  obligation of the Company or any of its Subsidiaries (to the extent
such persons or entities are a party thereto);

                  (k) STOP TRADE.  An SEC stop trade order or  Principal  Market
trading  suspension  of the  Common  Stock  shall  be in  effect  for  five  (5)
consecutive days or five (5) days during a period of ten (10) consecutive  days,
excluding  in all cases a  suspension  of all  trading  on a  Principal  Market,
provided  that  the  Company  shall  not have  been  able to cure  such  trading
suspension  within  thirty  (30) days of the  notice  thereof or list the Common
Stock on another Principal Market within sixty (60) days of such notice; or

            2.2  DEFAULT  INTEREST.  Following  the  occurrence  and  during the
continuance of an Event of Default, the Company shall pay additional interest on
this Note in an amount equal to one and one half percent  (1.5%) per month,  and
all  outstanding  obligations  under this Note, the Purchase  Agreement and each
other Related  Agreement,  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.


                                       4


            2.3  DEFAULT  PAYMENT.  Following  the  occurrence  and  during  the
continuance  of an Event of  Default,  the  Holder,  at its  option,  may demand
repayment in full of all  obligations  and  liabilities  owing by Company to the
Holder  under  this  Note,  the  Purchase  Agreement  and/or  any other  Related
Agreement and/or may elect, in addition to all rights and remedies of the Holder
under  the  Purchase   Agreement  and  the  other  Related  Agreements  and  all
obligations and liabilities of the Company under the Purchase  Agreement and the
other  Related  Agreements,  to require  the  Company to make a Default  Payment
("DEFAULT  PAYMENT").  The  Default  Payment  shall  be 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  hereunder.  The Default
Payment  shall  be  applied  first to any fees  due and  payable  to the  Holder
pursuant  to this  Note,  the  Purchase  Agreement,  and/or  the  other  Related
Agreements, then to accrued and unpaid interest due on this Note and then to the
outstanding principal balance of this Note. The Default Payment shall be due and
payable  immediately  on the date  that the  Holder  has  exercised  its  rights
pursuant to this Section 4.3.

                                   ARTICLE III
                                  MISCELLANEOUS

            3.1  CUMULATIVE  REMEDIES.  The  remedies  under  this Note shall be
cumulative.

            3.2 FAILURE OR  INDULGENCE  NOT  WAIVER.  No failure or delay on the
part of the  Holder  hereof in the  exercise  of any power,  right or  privilege
hereunder  shall  operate as a waiver  thereof,  nor shall any single or partial
exercise  of any  such  power,  right or  privilege  preclude  other or  further
exercise  thereof  or of any other  right,  power or  privilege.  All rights and
remedies existing  hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.

            3.3  NOTICES.  Any notice  herein  required or permitted to be given
shall be in writing and shall be deemed  effectively  given:  (a) upon  personal
delivery to the party notified, (b) when sent by confirmed telex or facsimile if
sent during normal  business  hours of the  recipient,  if not, then on the next
business  day, (c) five days after having been sent by  registered  or certified
mail, return receipt  requested,  postage prepaid,  or (d) one day after deposit
with a nationally  recognized  overnight courier,  specifying next day delivery,
with written  verification of receipt.  All communications  shall be sent to the
Company at the address provided in the Purchase Agreement executed in connection
herewith,  and to the Holder at the address  provided in the Purchase  Agreement
for such Holder,  with a copy to John E. Tucker,  Esq.,  825 Third Avenue,  14th
Floor,  New York, New York 10022,  facsimile  number (212) 541-4434,  or at such
other  address as the Company or the Holder may  designate  by ten days  advance
written  notice to the other parties  hereto.  A Notice of  Conversion  shall be
deemed given when made to the Company pursuant to the Purchase Agreement.

            3.4 AMENDMENT PROVISION. The term "Note" and all references thereto,
as used  throughout  this  instrument,  shall mean this instrument as originally
executed,  or  if  later  amended  or  supplemented,   then  as  so  amended  or
supplemented,  and any successor  instrument as such successor instrument may be
amended or supplemented.


                                       5


            3.5  ASSIGNABILITY.  This Note shall be binding upon the Company and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements  of the Purchase  Agreement.  The Company may not assign any of its
obligations under this Note without the prior written consent of the Holder, any
such purported assignment without such consent being null and void.

            3.6 COST OF  COLLECTION.  In case of any Event of Default under this
Note, the Company shall pay the Holder reasonable costs of collection, including
reasonable attorneys' fees.

            3.7 GOVERNING LAW, JURISDICTION AND WAIVER OF JURY TRIAL.

                  (a) THIS NOTE SHALL BE GOVERNED BY AND  CONSTRUED AND ENFORCED
IN  ACCORDANCE  WITH  THE LAWS OF THE  STATE  OF NEW  YORK,  WITHOUT  REGARD  TO
PRINCIPLES OF CONFLICTS OF LAW.

                  (b) THE COMPANY  HEREBY  CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS  LOCATED IN THE COUNTY OF NEW YORK,  STATE OF NEW YORK SHALL HAVE
EXCLUSIVE  JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE
COMPANY, ON THE ONE HAND, AND THE HOLDER, ON THE OTHER HAND,  PERTAINING TO THIS
NOTE OR ANY OF THE OTHER RELATED  AGREEMENTS OR TO ANY MATTER  ARISING OUT OF OR
RELATED  TO THIS  NOTE OR ANY OF THE  RELATED  AGREEMENTS;  PROVIDED,  THAT  THE
COMPANY  ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY
A COURT  LOCATED  OUTSIDE  OF THE  COUNTY  OF NEW YORK,  STATE OF NEW YORK;  AND
FURTHER  PROVIDED,  THAT  NOTHING  IN THIS NOTE  SHALL BE DEEMED OR  OPERATE  TO
PRECLUDE THE HOLDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION  TO COLLECT THE  OBLIGATIONS,  TO REALIZE ON THE  COLLATERAL OR ANY
OTHER  SECURITY  FOR THE  OBLIGATIONS,  OR TO ENFORCE A JUDGMENT  OR OTHER COURT
ORDER IN FAVOR OF THE HOLDER.  THE  COMPANY  EXPRESSLY  SUBMITS AND  CONSENTS IN
ADVANCE TO SUCH  JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,
AND THE COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF
PERSONAL  JURISDICTION,  IMPROPER  VENUE OR FORUM NON  CONVENIENS.  THE  COMPANY
HEREBY  WAIVES  PERSONAL  SERVICE OF THE SUMMONS,  COMPLAINT  AND OTHER  PROCESS
ISSUED IN ANY SUCH  ACTION OR SUIT AND  AGREES  THAT  SERVICE  OF SUCH  SUMMONS,
COMPLAINT  AND  OTHER  PROCESS  MAY BE  MADE BY  REGISTERED  OR  CERTIFIED  MAIL
ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN THE PURCHASE  AGREEMENT AND
THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY'S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.

                  (c) THE  COMPANY  DESIRES  THAT ITS  DISPUTES BE RESOLVED BY A
JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO


                                       6


ACHIEVE  THE BEST  COMBINATION  OF THE  BENEFITS OF THE  JUDICIAL  SYSTEM AND OF
ARBITRATION,  THE  COMPANY  HERETO  WAIVES  ALL  RIGHTS  TO TRIAL BY JURY IN ANY
ACTION,  SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,  WHETHER ARISING IN
CONTRACT,  TORT, OR OTHERWISE BETWEEN THE HOLDER AND THE COMPANY ARISING OUT OF,
CONNECTED WITH,  RELATED OR INCIDENTAL TO THE RELATIONSHIP  ESTABLISHED  BETWEEN
THEM  IN  CONNECTION  WITH  THIS  NOTE,  ANY  OTHER  RELATED  AGREEMENT  OR  THE
TRANSACTIONS RELATED HERETO OR THERETO.

            3.8  SEVERABILITY.  In the event that any  provision of this Note is
invalid or unenforceable  under any applicable statute or rule of law, then such
provision  shall  be  deemed  inoperative  to the  extent  that it may  conflict
therewith  and shall be deemed  modified to conform with such statute or rule of
law. Any such provision which may prove invalid or  unenforceable  under any law
shall not affect the validity or  enforceability  of any other provision of this
Note.

            3.9 MAXIMUM  PAYMENTS.  Nothing  contained herein shall be deemed to
establish  or require  the  payment of a rate of  interest  or other  charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest  required to be paid or other charges hereunder exceed the maximum rate
permitted  by such law,  any  payments in excess of such  maximum  rate shall be
credited  against amounts owed by the Company to the Holder and thus refunded to
the Company.

            3.10 SECURITY INTEREST AND GUARANTEE.  The Holder has been granted a
security  interest (i) in certain assets of the Company and its  Subsidiaries as
more fully described in the 2004 Master Security Agreement and the 2006 Security
Agreement  and  (ii) in the  equity  interests  of the  Companies'  Subsidiaries
pursuant to the 2006 Stock  Pledge  Agreement.  The  obligations  of the Company
under this Note are guaranteed by certain  Subsidiaries of the Company  pursuant
to the 2006 Subsidiary Guarantee.

            3.11  CONSTRUCTION.  Each party  acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction  that  ambiguities are to be resolved  against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.

            5.13 REGISTERED OBLIGATION. This Note is intended to be a registered
obligation within the meaning of Treasury  Regulation Section  1.871-14(c)(1)(i)
and the Company (or its agent) shall  register this Note (and  thereafter  shall
maintain  such  registration)  as to both  principal  and any  stated  interest.
Notwithstanding  any document,  instrument or agreement relating to this Note to
the  contrary,  transfer of this Note (or the right to any payments of principal
or stated  interest  thereunder)  may only be effected by (i)  surrender of this
Note and either the  reissuance by the Company of this Note to the new holder or
the  issuance by the  Company of a new  instrument  to the new  holder,  or (ii)
transfer  through a book entry system  maintained by the Company (or its agent),
within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).

       [Balance of page intentionally left blank; signature page follows]


                                       7


            IN WITNESS WHEREOF, the Company has caused this Secured Term Note to
be signed in its name effective as of this 31st day of March, 2006.

                                            INCENTRA SOLUTIONS, INC.


                                            By: /s/ Thomas P. Sweeney III
                                                --------------------------------
                                                Name:  Thomas P. Sweeney III
                                                Title: Chief Executive Officer

WITNESS:


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


                                       8

EX-10.73

      THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
      WARRANT HAVE NOT BEEN  REGISTERED  UNDER THE  SECURITIES  ACT OF 1933,  AS
      AMENDED,  OR ANY STATE  SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK
      ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,  OFFERED FOR SALE,
      PLEDGED  OR  HYPOTHECATED  IN THE  ABSENCE  OF AN  EFFECTIVE  REGISTRATION
      STATEMENT  AS TO THIS  WARRANT  UNDER  SAID ACT AND ANY  APPLICABLE  STATE
      SECURITIES  LAWS OR AN  OPINION  OF  COUNSEL  REASONABLY  SATISFACTORY  TO
      INCENTRA SOLUTIONS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

            Right to Purchase up to 417,857 Shares of Common Stock of
                            Incentra Solutions, Inc.
                   (subject to adjustment as provided herein)

                          COMMON STOCK PURCHASE WARRANT

No. _________________                                 Issue Date: March 31, 2006

      INCENTRA  SOLUTIONS,  INC., a corporation  organized under the laws of the
State of Nevada  ("ICNS"),  hereby  certifies that, for value  received,  LAURUS
MASTER FUND, LTD., or assigns (the "Holder"), is entitled,  subject to the terms
set forth below, to purchase from the Company (as defined herein) from and after
the Issue Date of this  Warrant and at any time or from time to time before 5:00
p.m.,  New York  time,  through  the  close of  business  March  31,  2026  (the
"Expiration Date"), up to 417,857 fully paid and nonassessable  shares of Common
Stock (as  hereinafter  defined),  at the applicable  Exercise Price (as defined
below) per share.  The number and  character  of such shares of Common Stock and
the  applicable  Exercise  Price per share are subject to adjustment as provided
herein.

      As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:

            (a) The term "Company" shall include ICNS and any corporation  which
      shall succeed, or assume the obligations of, ICNS hereunder.

            (b) The term "Common Stock" includes (i) the Company's Common Stock,
      par value $0.001 per share;  and (ii) any other  securities  into which or
      for which  any of the  securities  described  in (a) may be  converted  or
      exchanged pursuant to a plan of recapitalization,  reorganization, merger,
      sale of assets or otherwise.

            (c) The term  "Other  Securities"  refers to any stock  (other  than
      Common  Stock) and other  securities  of the  Company or any other  person
      (corporate  or  otherwise)  which the  Holder of this  Warrant at any time
      shall be entitled to receive,  or shall have received,  on the exercise of
      the Warrant, in lieu of or in addition to Common Stock, or



      which at any time shall be  issuable or shall have been issued in exchange
      for or in  replacement  of Common  Stock or Other  Securities  pursuant to
      Section 4 or otherwise.

            (d) The  "Exercise  Price"  applicable  under this Warrant  shall be
      $0.001.

1. EXERCISE OF WARRANT.

            1.1 NUMBER OF SHARES ISSUABLE UPON EXERCISE. From and after the date
hereof,  the Holder shall be entitled to receive,  upon exercise of this Warrant
in whole or in part,  by  delivery  of an  original  or fax copy of an  exercise
notice in the form attached  hereto as Exhibit A (the  "Exercise  Notice") up to
417,857 shares of Common Stock of the Company, subject to adjustment pursuant to
Section 4.

            1.2 FAIR MARKET VALUE. For purposes hereof,  the "Fair Market Value"
of a share of Common Stock as of a particular  date (the  "Determination  Date")
shall mean:

            (a) If the  Company's  Common Stock is traded on the American  Stock
      Exchange  or another  national  exchange  or is quoted on the  National or
      SmallCap  Market of The Nasdaq Stock  Market,  Inc.  ("Nasdaq"),  then the
      closing or last sale price,  respectively,  reported for the last business
      day immediately preceding the Determination Date.

            (b) If the  Company's  Common  Stock is not  traded on the  American
      Stock Exchange or another national exchange or on the Nasdaq but is traded
      on the National Association of Securities Dealers,  Inc.  Over-the-Counter
      Bulletin Board,  then the mean of the average of the closing bid and asked
      prices  reported  for the last  business  day  immediately  preceding  the
      Determination Date.

            (c) Except as provided in clause (d) below, if the Company's  Common
      Stock is not publicly traded,  then as the Holder and the Company agree or
      in the absence of agreement by  arbitration  in accordance  with the rules
      then in effect of the American  Arbitration  Association,  before a single
      arbitrator to be chosen from a panel of persons qualified by education and
      training to pass on the matter to be decided.

            (d)  If  the  Determination  Date  is  the  date  of a  liquidation,
      dissolution  or  winding  up,  or any event  deemed  to be a  liquidation,
      dissolution  or winding up pursuant  to the  Company's  charter,  then all
      amounts to be payable per share to holders of the Common Stock pursuant to
      the charter in the event of such  liquidation,  dissolution or winding up,
      plus all other  amounts to be  payable  per share in respect of the Common
      Stock in liquidation under the charter,  assuming for the purposes of this
      clause  (d) that all of the  shares of Common  Stock  then  issuable  upon
      exercise of the Warrant are outstanding at the Determination Date.

            1.3 COMPANY  ACKNOWLEDGMENT.  The Company  will,  at the time of the
exercise of this Warrant, upon the request of the Holder hereof,  acknowledge in
writing its  continuing  obligation to afford to such Holder any rights to which
such Holder shall continue to be entitled after such exercise in accordance with
the provisions of this Warrant. If the Holder


                                       2


shall  fail to make  any  such  request,  such  failure  shall  not  affect  the
continuing obligation of the Company to afford to such Holder any such rights.

            1.4 TRUSTEE FOR WARRANT  HOLDERS.  In the event that a bank or trust
company  shall have been  appointed  as trustee  for the Holder of this  Warrant
pursuant to Subsection 3.2, such bank or trust company shall have all the powers
and duties of an Warrant agent (as hereinafter  described) and shall accept,  in
its own name for the account of the Company or such  successor  person as may be
entitled  thereto,  all  amounts  otherwise  payable  to  the  Company  or  such
successor,  as the case may be, on  exercise  of this  Warrant  pursuant to this
Section 1.

2. PROCEDURE FOR EXERCISE.

            2.1 DELIVERY OF STOCK CERTIFICATES,  ETC., ON EXERCISE.  The Company
agrees that the shares of Common Stock  purchased  upon exercise of this Warrant
shall be deemed to be issued to the Holder as the record owner of such shares as
of the close of  business  on the date on which  this  Warrant  shall  have been
surrendered and payment made for such shares in accordance herewith.  As soon as
practicable  after the exercise of this  Warrant in full or in part,  and in any
event  within  three (3) business  days  thereafter,  the Company at its expense
(including  the payment by it of any  applicable  issue  taxes) will cause to be
issued in the name of and  delivered  to the  Holder,  or as such  Holder  (upon
payment  by  such  Holder  of any  applicable  transfer  taxes)  may  direct  in
compliance with applicable  securities  laws, a certificate or certificates  for
the number of duly and validly issued,  fully paid and  nonassessable  shares of
Common  Stock (or Other  Securities)  to which such Holder  shall be entitled on
such exercise,  plus, in lieu of any fractional share to which such Holder would
otherwise be entitled,  cash equal to such fraction  multiplied by the then Fair
Market  Value  of one  full  share,  together  with  any  other  stock  or other
securities and property  (including cash, where applicable) to which such Holder
is entitled upon such exercise pursuant to Section 1 or otherwise.

            2.2  EXERCISE.  (a)  Payment  may be made  either  (i) in cash or by
certified or official  bank check  payable to the order of the Company  equal to
the applicable  aggregate  Exercise Price, (ii) by delivery of this Warrant,  or
shares of Common Stock  and/or  Common Stock  receivable  upon  exercise of this
Warrant in accordance  with Section (b) below,  or (iii) by a combination of any
of the  foregoing  methods,  for the number of Common  Shares  specified in such
Exercise  Notice (as such  exercise  number  shall be  adjusted  to reflect  any
adjustment in the total number of shares of Common Stock  issuable to the Holder
per the  terms  of this  Warrant);  provided,  however,  that if at the  time of
delivery  of an  Exercise  Notice the shares of Common  Stock to be issued  upon
payment of the Exercise Price have been  registered  under the Securities Act of
1933,  as amended  (the  "Securities  Act"),  and are  covered  by an  effective
registration  statement under the Securities Act,  payment of the Exercise Price
may only be made  pursuant  to clause (i) above and may not be made  pursuant to
clause (ii) or (iii) above.  Upon  receipt by the Company of an Exercise  Notice
and proper payment of the aggregate  Exercise Price,  the Holder shall thereupon
be entitled to receive the number of duly authorized, validly issued, fully-paid
and  non-assessable  shares of Common Stock (or Other Securities)  determined as
provided herein.

      (b)  Notwithstanding  any provisions  herein to the contrary,  if the Fair
Market Value of one share of Common Stock is greater than the Exercise Price (at
the date of calculation as set


                                       3


forth below),  in lieu of exercising this Warrant for cash, the Holder may elect
to receive shares equal to the value (as  determined  below) of this Warrant (or
the  portion  thereof  being  exercised)  by  surrender  of this  Warrant at the
principal  office of the Company  together with the properly  endorsed  Exercise
Notice,  in which event the Company shall issue to the Holder a number of shares
of Common Stock computed using the following formula:

      X=Y   (A-B)
            -----
              A

      Where X = the number of shares of Common Stock to be issued to the Holder

      Y =       the  number of shares of Common  Stock  purchasable  under  this
                Warrant  or,  if  only  a  portion  of  this  Warrant  is  being
                exercised,  the portion of this Warrant being  exercised (at the
                date of such calculation)

      A =       the Fair Market Value of one share of the Company's Common Stock
                (at the date of such calculation)

      B =       the Exercise Price (as adjusted to the date of such calculation)

3. EFFECT OF REORGANIZATION, ETC.; ADJUSTMENT OF EXERCISE PRICE.

            3.1 REORGANIZATION,  CONSOLIDATION, MERGER, ETC. In case at any time
or from  time to time,  the  Company  shall  (a)  effect a  reorganization,  (b)
consolidate  with or  merge  into  any  other  person,  or (c)  transfer  all or
substantially all of its properties or assets to any other person under any plan
or arrangement  contemplating the dissolution of the Company, then, in each such
case,  as a condition  to the  consummation  of such a  transaction,  proper and
adequate  provision  shall be made by the  Company  whereby  the  Holder of this
Warrant,  on the exercise  hereof as provided in Section 1 at any time after the
consummation of such  reorganization,  consolidation  or merger or the effective
date of such  dissolution,  as the case may be,  shall  receive,  in lieu of the
Common  Stock (or Other  Securities)  issuable  on such  exercise  prior to such
consummation or such effective date, the stock and other securities and property
(including  cash) to which  such  Holder  would  have  been  entitled  upon such
consummation or in connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant,  immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.

            3.2  DISSOLUTION.  In the event of any  dissolution  of the  Company
following the transfer of all or substantially  all of its properties or assets,
the Company,  concurrently with any distributions  made to holders of its Common
Stock,  shall at its expense  deliver or cause to be delivered to the Holder the
stock and other  securities  and property  (including  cash,  where  applicable)
receivable  by the Holder of this  Warrant  pursuant to Section  3.1, or, if the
Holder shall so instruct the Company,  to a bank or trust  company  specified by
the Holder and having its  principal  office in New York,  NY as trustee for the
Holder of this Warrant (the "Trustee").

            3.3 CONTINUATION OF TERMS. Upon any  reorganization,  consolidation,
merger or transfer (and any dissolution  following any transfer)  referred to in
this  Section 3, this  Warrant  shall  continue in full force and effect and the
terms hereof shall be applicable to the shares of


                                       4


stock and other  securities  and  property  receivable  on the  exercise of this
Warrant after the consummation of such  reorganization,  consolidation or merger
or the effective  date of dissolution  following any such transfer,  as the case
may be,  and  shall be  binding  upon  the  issuer  of any  such  stock or other
securities,  including,  in the case of any such transfer,  the person acquiring
all or substantially all of the properties or assets of the Company,  whether or
not such  person  shall  have  expressly  assumed  the terms of this  Warrant as
provided in Section 4. In the event this Warrant does not continue in full force
and effect after the consummation of the transactions  described in this Section
3, then the Company's securities and property (including cash, where applicable)
receivable  by the Holders of the  Warrant  will be  delivered  to Holder or the
Trustee as contemplated by Section 3.2.

4.  EXTRAORDINARY  EVENTS  REGARDING COMMON STOCK. In the event that the Company
      shall (a) issue  additional  shares of the Common  Stock as a dividend  or
      other  distribution  on  outstanding  Common Stock or any preferred  stock
      issued by the Company,  (b)  subdivide  its  outstanding  shares of Common
      Stock,  or (c) combine its  outstanding  shares of the Common Stock into a
      smaller  number of  shares  of the  Common  Stock  (each of the  preceding
      clauses (a) through (c), inclusive, an "Event"), then, in each such event,
      the number of shares of Common Stock that the Holder shall thereafter,  on
      the exercise hereof as provided in Section 1, be entitled to receive shall
      be increased or decreased to a number determined by multiplying the number
      of shares of Common Stock that would,  immediately prior to such Event, be
      issuable  upon the exercise of this Warrant by a fraction of which (a) the
      numerator is the number of issued and  outstanding  shares of Common Stock
      immediately  after such Event,  and (b) the  denominator  is the number of
      issued and outstanding  shares of Common Stock  immediately  prior to such
      Event.

5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment
      in the  shares of  Common  Stock (or  Other  Securities)  issuable  on the
      exercise of this Warrant,  the Company at its expense will promptly  cause
      its Chief Financial Officer or other appropriate  designee to compute such
      adjustment or  readjustment  in accordance  with the terms of this Warrant
      and prepare a certificate  setting forth such  adjustment or  readjustment
      and showing in detail the facts upon which such adjustment or readjustment
      is based,  including  a  statement  of (a) the  consideration  received or
      receivable  by the Company for any  additional  shares of Common Stock (or
      Other  Securities)  issued or sold or deemed to have been  issued or sold,
      (b) the number of shares of Common Stock (or Other Securities) outstanding
      or deemed to be outstanding,  and (c) the Exercise Price and the number of
      shares of Common Stock to be received upon  exercise of this  Warrant,  in
      effect  immediately  prior  to  such  adjustment  or  readjustment  and as
      adjusted  or  readjusted  as provided in this  Warrant.  The Company  will
      forthwith  mail a copy of each  such  certificate  to the  Holder  of this
      Warrant  and any  Warrant  agent of the  Company  (appointed  pursuant  to
      Section 11 hereof).

6. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANT. The Company will
      at all times reserve and keep available,  solely for issuance and delivery
      on the  exercise  of this  Warrant,  shares  of  Common  Stock  (or  Other
      Securities) from time to time issuable on the exercise of this Warrant.


                                       5


7.  ASSIGNMENT;  EXCHANGE  OF WARRANT.  Subject to  compliance  with  applicable
      securities  laws, this Warrant,  and the rights evidenced  hereby,  may be
      transferred by any registered  holder hereof (a  "Transferor") in whole or
      in  part.  On the  surrender  for  exchange  of  this  Warrant,  with  the
      Transferor's  endorsement  in the form of Exhibit B attached  hereto  (the
      "Transferor  Endorsement  Form") and  together  with  evidence  reasonably
      satisfactory  to the  Company  demonstrating  compliance  with  applicable
      securities laws, which shall include, without limitation, the provision of
      a legal opinion from the Transferor's counsel that such transfer is exempt
      from the registration requirements of applicable securities laws, and with
      payment by the Transferor of any applicable transfer taxes) will issue and
      deliver to or on the order of the Transferor thereof a new Warrant of like
      tenor, in the name of the Transferor and/or the transferee(s) specified in
      such Transferor  Endorsement  Form (each a  "Transferee"),  calling in the
      aggregate on the face or faces  thereof for the number of shares of Common
      Stock called for on the face or faces of the Warrant so surrendered by the
      Transferor.

8. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the
      Company of the loss, theft, destruction or mutilation of this Warrant and,
      in the case of any such loss,  theft or  destruction  of this Warrant,  on
      delivery of an indemnity agreement or security reasonably  satisfactory in
      form and amount to the Company or, in the case of any such mutilation,  on
      surrender and  cancellation  of this  Warrant,  the Company at its expense
      will execute and deliver, in lieu thereof, a new Warrant of like tenor.

9.  REGISTRATION  RIGHTS.  The Holder of this Warrant has been  granted  certain
      registration  rights by the  Company.  These  registration  rights are set
      forth in the  Registration  Rights  Agreement  dated as of March 31,  2006
      entered  into by the Company and the initial  Holder of this  Warrant,  as
      amended, modified or supplemented from time to time.

10. MAXIMUM  EXERCISE.  Notwithstanding  anything herein to the contrary,  in no
      event shall the Holder be entitled to exercise any portion of this Warrant
      in excess of that portion of this  Warrant upon  exercise of which the sum
      of (1) the  number of shares of  Common  Stock  beneficially  owned by the
      Holder and its Affiliates  (other than shares of Common Stock which may be
      deemed beneficially owned through the ownership of the unexercised portion
      of the  Warrant or the  unexercised  or  unconverted  portion of any other
      security of the Holder subject to a limitation on conversion  analogous to
      the limitations  contained  herein) and (2) the number of shares of Common
      Stock  issuable  upon the  exercise  of the portion of this  Warrant  with
      respect to which the  determination  of this proviso is being made,  would
      result in  beneficial  ownership by the Holder and its  Affiliates  of any
      amount greater than 4.99% of the then  outstanding  shares of Common Stock
      (whether  or not,  at the  time  of  such  exercise,  the  Holder  and its
      Affiliates beneficially own more than 4.99% of the then outstanding shares
      of Common Stock). As used herein, the term "Affiliate" means any person or
      entity that,  directly or indirectly  through one or more  intermediaries,
      controls or is controlled  by or is under common  control with a person or
      entity,  as such terms are used in and construed  under Rule 144 under the
      Securities  Act.  For  purposes  of the  proviso to the  second  preceding
      sentence,  beneficial  ownership  shall be determined  in accordance  with
      Section  13(d) of the  Securities  Exchange Act of 1934,  as amended,  and
      Regulations 13D-G thereunder,  except as otherwise  provided in clause (1)
      of such proviso. The limitations set forth herein (x) may be waived by the
      Holder upon provision


                                       6


      of no less than  sixty-one  (61) days prior  notice to the Company and (y)
      shall  automatically  become null and void following notice to the Company
      upon the occurrence and during the  continuance of an Event of Default (as
      defined in either Note referred to in the Purchase  Agreement  dated as of
      the date hereof  among the Holder and the Company (as  amended,  modified,
      restated   and/or   supplemented   from  time  to  time,   the   "Purchase
      Agreement")).

      11.  RESTRICTION.  Notwithstanding  anything  to  the  contrary  contained
herein,  the Holder  hereby agrees that during the period on and after the Issue
Date and prior to the date that is the one year  anniversary  of the Issue Date,
it shall not sell any Common Stock acquired upon exercise of this Warrant..

12. WARRANT  AGENT.  The Company  may, by  written  notice to the Holder of this
      Warrant,  appoint an agent for the  purpose of  issuing  Common  Stock (or
      Other  Securities) on the exercise of this Warrant  pursuant to Section 1,
      exchanging this Warrant  pursuant to Section 7, and replacing this Warrant
      pursuant to Section 8, or any of the  foregoing,  and  thereafter any such
      issuance,  exchange or  replacement,  as the case may be, shall be made at
      such office by such agent.

13. TRANSFER  ON THE COMPANY'S  BOOKS.  Until this Warrant is transferred on the
      books of the Company,  the Company may treat the registered  Holder hereof
      as the absolute owner hereof for all purposes,  notwithstanding any notice
      to the contrary.

14. NOTICES,  ETC. All notices and other  communications from the Company to the
      Holder  of this  Warrant  shall be  mailed by first  class  registered  or
      certified  mail,  postage  prepaid,  at  such  address  as may  have  been
      furnished  to the  Company in writing  by such  Holder or,  until any such
      Holder  furnishes  to the Company an address,  then to, and at the address
      of, the last Holder of this Warrant who has so furnished an address to the
      Company.

15. MISCELLANEOUS.  This  Warrant  and any term  hereof may be changed,  waived,
      discharged  or terminated  only by an instrument in writing  signed by the
      party  against  which  enforcement  of such change,  waiver,  discharge or
      termination is sought.  This Warrant shall be governed by and construed in
      accordance with the laws of State of New York without regard to principles
      of conflicts  of laws.  Any action  brought  concerning  the  transactions
      contemplated  by this Warrant shall be brought only in the state courts of
      New York or in the  federal  courts  located  in the  state  of New  York;
      provided,  however, that the Holder may choose to waive this provision and
      bring an action outside the State of New York. The  individuals  executing
      this Warrant on behalf of the Company agree to submit to the  jurisdiction
      of such courts and waive trial by jury. In the event that any provision of
      this Warrant is invalid or unenforceable  under any applicable  statute or
      rule of law, then such provision shall be deemed inoperative to the extent
      that it may  conflict  therewith  and shall be deemed  modified to conform
      with  such  statute  or rule of law.  Any such  provision  which may prove
      invalid or  unenforceable  under any law shall not affect the  validity or
      enforceability  of any other  provision of this  Warrant.  The headings in
      this Warrant are for purposes of  reference  only,  and shall not limit or
      otherwise   affect   any  of  the  terms   hereof.   The   invalidity   or
      unenforceability  of any  provision  hereof  shall  in no way  affect  the
      validity or enforceability of any other provision hereof. The Company


                                       7


      acknowledges  that legal counsel  participated  in the preparation of this
      Warrant and,  therefore,  stipulates  that the rule of  construction  that
      ambiguities  are to be resolved  against the  drafting  party shall not be
      applied in the  interpretation  of this Warrant to favor any party against
      the other party.

16.   PROXY.  For good and  valuable  consideration,  receipt of which is hereby
      acknowledged,  Laurus Master Fund, Ltd.,  hereby appoints the Company (the
      "Proxy  Holder"),  with a mailing  address at 1140 Pearl Street,  Boulder,
      Colorado  80302,  with full power of  substitution,  as proxy, to vote all
      shares of  Common  Stock of the  Company,  now or in the  future  owned by
      Laurus Master Fund,  Ltd., but solely to the extent issuable upon exercise
      of this Warrant (the "Shares").

            This proxy is  irrevocable  and coupled with an  interest.  Upon the
      sale or  other  transfer  of the  Shares,  in  whole  or in  part,  or the
      assignment of this Warrant,  this proxy shall automatically  terminate (x)
      with respect to such sold or  transferred  Shares at the time of such sale
      and/or  transfer,  or (y) with  respect  to all  Shares  in the case of an
      assignment of this Warrant, at the time of such assignment,  in each case,
      without any further action required by any person.

            Laurus  Master Fund,  Ltd.  shall use its best efforts to forward to
      Proxy Holder  within two (2) business days  following  Laurus Master Fund,
      Ltd.'s receipt  thereof,  at the address for Proxy Holder set forth above,
      copies of all materials received by Laurus Master Fund, Ltd. relating,  in
      each case, to the solicitation of the vote of shareholders of the Company.

            This proxy shall  remain in effect with respect to the Shares of the
      Company  during the period  commencing  on the date hereof and  continuing
      until the payment in full of all obligations and liabilities  owing by the
      Company to Laurus Master Fund, Ltd. (as the same may be amended, restated,
      extended or modified from time to time).

                   [BALANCE OF PAGE INTENTIONALLY LEFT BLANK;
                            SIGNATURE PAGE FOLLOWS.]


                                       8


      IN WITNESS  WHEREOF,  the Company has executed this Warrant as of the date
first written above.

                                          INCENTRA SOLUTIONS, INC.

WITNESS:
                                          By:    /s/ Thomas P. Sweeney III
                                                 -------------------------------
                                          Name:  Thomas P. Sweeney III
                                                 -------------------------------
                                          Title: Chief Executive Officer
- ---------------------------------                -------------------------------


                                       9

EX-10.74

                          REGISTRATION RIGHTS AGREEMENT

      This Registration  Rights Agreement (this "Agreement") is made and entered
into as of March 31, 2006,  by and between  INCENTRA  SOLUTIONS,  INC., a Nevada
corporation (the "Company"), and Laurus Master Fund, Ltd. (the "Purchaser").

      This  Agreement is made  pursuant to the  Securities  Purchase  Agreement,
dated as of the date hereof,  by and between the  Purchaser  and the Company (as
amended,  modified or supplemented  from time to time, the "Securities  Purchase
Agreement"),  and pursuant to the Convertible  Note and the Warrant  referred to
therein..

      The Company and the Purchaser hereby agree as follows:

      1.  DEFINITIONS.  Capitalized  terms used and not otherwise defined herein
that are defined in the Securities  Purchase  Agreement  shall have the meanings
given  such  terms  in the  Securities  Purchase  Agreement.  As  used  in  this
Agreement, the following terms shall have the following meanings:

            "COMMISSION" means the Securities and Exchange Commission.

            "COMMON STOCK" means shares of the Company's common stock, par value
$0.001 per share.

            "CONVERTIBLE   NOTE"  shall  have  the  meaning  set  forth  in  the
Securities Purchase Agreement.

            "EFFECTIVENESS   DATE"  means  (i)  with   respect  to  the  initial
Registration  Statement required to be filed hereunder, a date no later than one
hundred  thirty five (135) days  following the date hereof and (ii) with respect
to each additional Registration Statement required to be filed hereunder, a date
no later than thirty (30) days following the applicable Filing Date.

            "EFFECTIVENESS PERIOD" has the meaning set forth in Section 2(a).

            "EXCHANGE  ACT"  means  the  Securities  Exchange  Act of  1934,  as
amended, and any successor statute.

            "FILING DATE" means, with respect to (i) the Registration  Statement
required to be filed hereunder in respect of the shares of Common Stock issuable
upon conversion of the Convertible  Note, a date no later than seventy five (75)
days  following the date hereof,  (ii) the shares of Common Stock  issuable upon
exercise  of  the  initial  Warrant  referred  to  in  the  Securities  Purchase
Agreement,  a date no later  than  seventy  five  (75) days  following  the date
hereof, (iii) the shares of Common Stock issuable upon the exercise of any other
Warrant issued in connection with the Securities  Purchase  Agremeent,  the date
which is thirty (30) days after the



date of the  issuance  of such  Warrant,  and (iii) the  shares of Common  Stock
issuable to the Holder as a result of adjustments to the Fixed  Conversion Price
or Exercise Price, as the case may be, made pursuant to the Convertible  Note or
the Warrant or otherwise,  thirty (30) days after the  occurrence  such event or
the date of the adjustment of the Fixed  Conversion  Price or Exercise Price, as
the case may be.

            "HOLDER" or "HOLDERS"  means the Purchaser or any of its  affiliates
or transferees to the extent any of them hold Registrable Securities, other than
those purchasing Registrable Securities in a market transaction.

            "INDEMNIFIED PARTY" has the meaning set forth in Section 5(c).

            "INDEMNIFYING PARTY" has the meaning set forth in Section 5(c).

            "PROCEEDING"  means  an  action,   claim,  suit,   investigation  or
proceeding   (including,   without  limitation,   an  investigation  or  partial
proceeding, such as a deposition), whether commenced or threatened.

            "PROSPECTUS"  means  the  prospectus  included  in the  Registration
Statement  (including,  without  limitation,  a  prospectus  that  includes  any
information  previously  omitted from a prospectus filed as part of an effective
registration  statement  in  reliance  upon  Rule  430A  promulgated  under  the
Securities Act), as amended or supplemented by any prospectus  supplement,  with
respect  to  the  terms  of  the  offering  of any  portion  of the  Registrable
Securities covered by the Registration  Statement,  and all other amendments and
supplements to the  Prospectus,  including  post-effective  amendments,  and all
material  incorporated by reference or deemed to be incorporated by reference in
such Prospectus.

            "REGISTRABLE  SECURITIES"  means the shares of Common  Stock  issued
upon the  conversion  of the  Convertible  Note and  upon  the  exercise  of the
Warrants.

            "REGISTRATION  STATEMENT" means each registration statement required
to  be  filed  hereunder,  including  the  Prospectus  therein,  amendments  and
supplements to such  registration  statement or  Prospectus,  including pre- and
post-effective  amendments,  all exhibits thereto, and all material incorporated
by reference  or deemed to be  incorporated  by  reference in such  registration
statement.

            "RULE 144" means Rule 144 promulgated by the Commission  pursuant to
the  Securities  Act,  as such Rule may be  amended  from  time to time,  or any
similar  rule  or  regulation   hereafter   adopted  by  the  Commission  having
substantially the same effect as such Rule.

            "RULE 415" means Rule 415 promulgated by the Commission  pursuant to
the  Securities  Act,  as such Rule may be  amended  from  time to time,  or any
similar  rule  or  regulation   hereafter   adopted  by  the  Commission  having
substantially the same effect as such Rule.

            "SECURITIES  ACT" means the Securities Act of 1933, as amended,  and
any successor statute.


                                       2


            "SECURITIES  PURCHASE AGREEMENT" shall have the meaning set forth in
the second paragraph of this Agreement.

            "TRADING  MARKET"  means any of the NASD Over the  Counter  Bulletin
Board,  NASDAQ Capital Market,  the NASDAQ National  Market,  the American Stock
Exchange or the New York Stock Exchange.

      2.  "WARRANTS"  means  the  Common  Stock  purchase   warrants  issued  in
connection with the Securities Purchase Agreement, whether on the date hereof or
thereafter.REGISTRATION.

            (a) On or prior to each Filing Date the  Company  shall  prepare and
      file with the Commission a Registration Statement covering the Registrable
      Securities  for a  selling  stockholder  resale  offering  to be made on a
      continuous basis pursuant to Rule 415. The Registration Statement shall be
      on Form SB-2 or Form S-3  (except if the  Company is not then  eligible to
      register for resale the  Registrable  Securities  on such Forms,  in which
      case such registration shall be on another  appropriate form in accordance
      herewith).  The Company shall cause the  Registration  Statement to become
      effective and remain effective as provided  herein.  The Company shall use
      its reasonable commercial efforts to cause each Registration  Statement to
      be declared  effective  under the  Securities  Act as promptly as possible
      after the filing thereof, but in any event no later than the Effectiveness
      Date. The Company shall use its reasonable commercial efforts to keep each
      Registration  Statement  continuously  effective  under the Securities Act
      until  the date  which  is the  earlier  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), as determined by the counsel
      to the  Company  pursuant  to a written  opinion  letter  to such  effect,
      addressed and acceptable to the Company's  transfer agent and the affected
      Holders or (iii)  except  with  respect to the  shares  issuable  upon the
      exercise of the Options and the  Warrants  issued in  connection  with the
      revolving  credit  facility,  all amounts payable under the Note have been
      paid in full (each, an "Effectiveness Period").

            (b)  Within  three  business  days of the  Effectiveness  Date,  the
      Company shall cause its counsel to issue a blanket  opinion  substantially
      in the form  attached  hereto as Exhibit A, to the transfer  agent stating
      that the shares are subject to an effective registration statement and can
      be  reissued  free of  restrictive  legend  upon  notice  of a sale by the
      Purchaser and  confirmation by the Purchaser that it has complied with the
      prospectus  delivery  requirements,  provided  that  the  Company  or such
      counsel has not advised the  transfer  agent orally or in writing that the
      opinion has been withdrawn. Copies of the blanket opinion required by this
      Section 2(b) shall be delivered to the Purchaser within the time frame set
      forth above.


                                       3


      3. REGISTRATION PROCEDURES. If and whenever the Company is required by the
provisions hereof to effect the registration of any Registrable Securities under
the Securities Act, the Company will, as expeditiously as possible:

            (a) prepare and file with the Commission the Registration  Statement
      with  respect  to such  Registrable  Securities,  respond as  promptly  as
      possible  to any  comments  received  from  the  Commission,  and  use its
      reasonable  commercial  efforts to cause such  Registration  Statement  to
      become and remain  effective  for the  Effectiveness  Period with  respect
      thereto,  and promptly  provide to the Purchaser copies of all filings and
      Commission letters of comment relating thereto;

            (b)  prepare  and  file  with the  Commission  such  amendments  and
      supplements  to such  Registration  Statement and the  Prospectus  used in
      connection  therewith as may be necessary to comply with the provisions of
      the  Securities  Act with respect to the  disposition  of all  Registrable
      Securities  covered  by  such  Registration  Statement  and to  keep  such
      Registration Statement effective until the expiration of the Effectiveness
      Period applicable to such Registration Statement;

            (c)  furnish  to  the  Purchaser   such  number  of  copies  of  the
      Registration Statement and the Prospectus included therein (including each
      preliminary  Prospectus)  as  the  Purchaser  reasonably  may  request  to
      facilitate the public sale or disposition  of the  Registrable  Securities
      covered by such Registration Statement;

            (d) use its reasonable commercial efforts to register or qualify the
      Purchaser's  Registrable Securities covered by such Registration Statement
      under the securities or "blue sky" laws of such  jurisdictions  within the
      United States as the Purchaser may reasonably request, provided,  however,
      that the  Company  shall not for any such  purpose be  required to qualify
      generally  to  transact   business  as  a  foreign   corporation   in  any
      jurisdiction where it is not so qualified or to consent to general service
      of process in any such jurisdiction;

            (e) list the  Registrable  Securities  covered by such  Registration
      Statement  with any  securities  exchange on which the Common Stock of the
      Company is then listed;

            (f)  immediately  notify the Purchaser at any time when a Prospectus
      relating  thereto is required to be delivered under the Securities Act, of
      the  happening of any event of which the Company has knowledge as a result
      of which the Prospectus contained in such Registration  Statement, as then
      in effect,  includes an untrue  statement  of a material  fact or omits to
      state a material fact  required to be stated  therein or necessary to make
      the statements  therein not misleading in light of the circumstances  then
      existing; and

            (g) make available for inspection by the Purchaser and any attorney,
      accountant  or  other  agent  retained  by  the  Purchaser,  all  publicly
      available,   non-confidential   financial  and  other  records,  pertinent
      corporate documents and properties of the Company, and cause the Company's
      officers, directors and employees to supply all


                                       4


      publicly available,  non-confidential  information reasonably requested by
      the attorney, accountant or agent of the Purchaser.

      4.  REGISTRATION   EXPENSES.   All  expenses  relating  to  the  Company's
compliance  with Sections 2 and 3 hereof,  including,  without  limitation,  all
registration  and filing fees,  printing  expenses,  fees and  disbursements  of
counsel and independent  public  accountants for the Company,  fees and expenses
(including  reasonable  counsel fees) incurred in connection with complying with
state securities or "blue sky" laws, fees of the NASD,  transfer taxes,  fees of
transfer  agents and  registrars,  fees of, and  disbursements  incurred by, one
counsel  for the  Holders,  are  called  "Registration  Expenses".  All  selling
commissions applicable to the sale of Registrable Securities, including any fees
and disbursements of any special counsel to the Holders beyond those included in
Registration  Expenses, are called "Selling Expenses." The Company shall only be
responsible for all Registration Expenses.

      5. INDEMNIFICATION.

            (a) In the event of a  registration  of any  Registrable  Securities
      under the  Securities  Act  pursuant to this  Agreement,  the Company will
      indemnify and hold harmless each Holder,  and its officers,  directors and
      each other person,  if any, who controls each Holder within the meaning of
      the Securities Act,  against any losses,  claims,  damages or liabilities,
      joint or several, to which such Holder, or such persons may become subject
      under the  Securities  Act or otherwise,  insofar as such losses,  claims,
      damages or liabilities (or actions in respect thereof) arise out of or are
      based  upon any  untrue  statement  or  alleged  untrue  statement  of any
      material fact  contained in any  Registration  Statement  under which such
      Registrable  Securities were registered  under the Securities Act pursuant
      to  this  Agreement,   any  preliminary  Prospectus  or  final  Prospectus
      contained therein, or any amendment or supplement thereof, or arise out of
      or are based upon the  omission  or alleged  omission  to state  therein a
      material  fact  required  to be stated  therein or  necessary  to make the
      statements  therein not  misleading,  and will reimburse such Holder,  and
      each such person for any reasonable  legal or other  expenses  incurred by
      them in connection with  investigating or defending any such loss,  claim,
      damage, liability or action; provided,  however, that the Company will not
      be liable in any such case if and to the extent that any such loss, claim,
      damage or liability  arises out of or is based upon an untrue statement or
      alleged  untrue  statement  or  omission  or alleged  omission  so made in
      conformity with information  furnished by or on behalf of the Purchaser or
      any such person in writing specifically for use in any such document.

            (b) In the event of a  registration  of the  Registrable  Securities
      under the  Securities Act pursuant to this  Agreement,  the Purchaser will
      indemnify and hold harmless the Company,  and its officers,  directors and
      each other person,  if any, who controls the Company within the meaning of
      the Securities Act,  against all losses,  claims,  damages or liabilities,
      joint or several,  to which the Company or such persons may become subject
      under the  Securities  Act or otherwise,  insofar as such losses,  claims,
      damages or liabilities (or actions in respect thereof) arise out of or are
      based  upon any  untrue  statement  or  alleged  untrue  statement  of any
      material  fact which was  furnished  in writing  by the  Purchaser  to the
      Company expressly for use in (and such information is


                                       5


      contained  in) the  Registration  Statement  under which such  Registrable
      Securities  were  registered  under the  Securities  Act  pursuant to this
      Agreement,  any  preliminary  Prospectus  or  final  Prospectus  contained
      therein,  or any amendment or supplement  thereof,  or arise out of or are
      based upon the  omission or alleged  omission to state  therein a material
      fact  required to be stated  therein or necessary  to make the  statements
      therein  not  misleading,  and will  reimburse  the  Company and each such
      person for any  reasonable  legal or other  expenses  incurred  by them in
      connection with  investigating or defending any such loss, claim,  damage,
      liability or action, provided,  however, that the Purchaser will be liable
      in any such  case if and only to the  extent  that any such  loss,  claim,
      damage or liability  arises out of or is based upon an untrue statement or
      alleged  untrue  statement  or  omission  or alleged  omission  so made in
      conformity with  information  furnished in writing to the Company by or on
      behalf  of the  Purchaser  specifically  for  use in  any  such  document.
      Notwithstanding the provisions of this paragraph,  the Purchaser shall not
      be required to  indemnify  any person or entity in excess of the amount of
      the  aggregate  net  proceeds  received  by the  Purchaser  in  respect of
      Registrable  Securities in connection with any such registration under the
      Securities Act.

            (c)   Promptly   after   receipt  by  a  party   entitled  to  claim
      indemnification  hereunder  (an  "Indemnified  Party")  of  notice  of the
      commencement of any action,  such Indemnified  Party shall, if a claim for
      indemnification  in respect  thereof is to be made  against a party hereto
      obligated to indemnify such Indemnified Party (an  "Indemnifying  Party"),
      notify the Indemnifying  Party in writing thereof,  but the omission so to
      notify the  Indemnifying  Party  shall not  relieve it from any  liability
      which it may have to such Indemnified  Party other than under this Section
      5(c) and shall  only  relieve it from any  liability  which it may have to
      such  Indemnified  Party under this  Section 5(c) if and to the extent the
      Indemnifying Party is prejudiced by such omission. In case any such action
      shall be brought  against any  Indemnified  Party and it shall  notify the
      Indemnifying  Party of the commencement  thereof,  the Indemnifying  Party
      shall be entitled to  participate  in and, to the extent it shall wish, to
      assume and undertake the defense thereof with counsel satisfactory to such
      Indemnified  Party, and, after notice from the Indemnifying  Party to such
      Indemnified  Party of its election so to assume and  undertake the defense
      thereof,  the  Indemnifying  Party shall not be liable to such Indemnified
      Party under this Section 5(c) for any legal expenses subsequently incurred
      by such Indemnified  Party in connection with the defense thereof;  if the
      Indemnified  Party  retains its own counsel,  then the  Indemnified  Party
      shall pay all fees, costs and expenses of such counsel, provided, however,
      that, if the  defendants in any such action  include both the  Indemnified
      Party and the  Indemnifying  Party and the  Indemnified  Party  shall have
      reasonably concluded that there may be reasonable defenses available to it
      which  are  different  from  or  additional  to  those  available  to  the
      Indemnifying Party or if the interests of the Indemnified Party reasonably
      may be deemed to conflict  with the interests of the  Indemnifying  Party,
      the Indemnified  Party shall have the right to select one separate counsel
      and to assume such legal  defenses  and  otherwise to  participate  in the
      defense of such  action,  with the  reasonable  expenses  and fees of such
      separate  counsel and other expenses  related to such  participation to be
      reimbursed by the Indemnifying Party as incurred.


                                       6


            (d) In order to provide for just and equitable  contribution  in the
      event of joint  liability  under the  Securities  Act in any case in which
      either (i) the Purchaser,  or any officer,  director or controlling person
      of the  Purchaser,  makes a claim  for  indemnification  pursuant  to this
      Section  5 but it is  judicially  determined  (by  the  entry  of a  final
      judgment or decree by a court of competent jurisdiction and the expiration
      of time to appeal or the  denial of the last  right of  appeal)  that such
      indemnification may not be enforced in such case  notwithstanding the fact
      that this Section 5 provides  for  indemnification  in such case,  or (ii)
      contribution  under the  Securities Act may be required on the part of the
      Purchaser or such officer, director or controlling person of the Purchaser
      in circumstances for which  indemnification is provided under this Section
      5;  then,  and in each such  case,  the  Company  and the  Purchaser  will
      contribute to the aggregate  losses,  claims,  damages or  liabilities  to
      which  they  may be  subject  (after  contribution  from  others)  in such
      proportion  so that the  Purchaser  is  responsible  only for the  portion
      represented  by the  percentage  that  the  public  offering  price of its
      securities  offered  by the  Registration  Statement  bears to the  public
      offering price of all securities  offered by such Registration  Statement,
      provided,  however,  that, in any such case, (A) the Purchaser will not be
      required to contribute  any amount in excess of the public  offering price
      of all  such  securities  offered  by it  pursuant  to  such  Registration
      Statement;   and  (B)  no   person  or   entity   guilty   of   fraudulent
      misrepresentation (within the meaning of Section 10(f) of the Act) will be
      entitled to  contribution  from any person or entity who was not guilty of
      such fraudulent misrepresentation.

      6. REPRESENTATIONS AND WARRANTIES.

            (a) The  Common  Stock of the  Company  is  registered  pursuant  to
      Section  12(b) or 12(g) of the  Exchange  Act and,  except with respect to
      certain  matters  which the  Company has  disclosed  to the  Purchaser  on
      Schedule 4.21 to the Securities Purchase Agreement, the Company has timely
      filed all proxy  statements,  reports,  schedules,  forms,  statements and
      other  documents  required to be filed by it under the  Exchange  Act. The
      Company  has filed its  Annual  Report on Form 10-K for its  fiscal  years
      ended December 31, 2003 and December 31, 2004 and its Quarterly Reports on
      Form 10-Q for the fiscal  quarters ended March 31, 2005, June 30, 2005 and
      September 30, 2005 (collectively,  the "SEC Reports"). To the knowledge of
      the Company, the SEC Report was, at the time of its filing, in substantial
      compliance  with the  requirements  of its respective form and none of the
      SEC Reports, nor the financial statements (and the notes thereto) included
      in the SEC Reports, as of its respective filing date, contained any untrue
      statement of a material  fact or omitted to state a material fact required
      to be stated therein or necessary to make the statements therein, in light
      of the  circumstances  under  which they were made,  not  misleading.  The
      financial  statements of the Company included in the SEC Reports comply as
      to form in all material respects with applicable  accounting  requirements
      and the  published  rules  and  regulations  of the  Commission  or  other
      applicable  rules and  regulations  with respect  thereto.  Such financial
      statements  have been  prepared  in  accordance  with  generally  accepted
      accounting  principles  ("GAAP")  applied on a consistent basis during the
      periods  involved  (except  (i) as  may be  otherwise  indicated  in  such
      financial statements or the notes thereto or (ii) in the case of unaudited
      interim statements, to the extent they may not include footnotes or may be
      condensed) and fairly


                                       7


      present in all material respects the financial  condition,  the results of
      operations  and the cash flows of the Company and its  subsidiaries,  on a
      consolidated basis, as of, and for, the periods presented in each such SEC
      Report.

            (b)  The   Common   Stock  is  listed   for   trading  on  the  NASD
      Over-the-Counter  Bulletin Board ("OTCBB") and satisfies all  requirements
      for the  continuation  of such  listing.  The Company has not received any
      notice that its Common Stock will be no longer quoted on the OTCBB (except
      for prior notices which have been fully remedied) or that the Common Stock
      does not meet all requirements for the continuation of such listing.

            (c) Neither the Company,  nor any of its affiliates,  nor any person
      acting on its or their behalf,  has directly or indirectly made any offers
      or sales of any security or solicited any offers to buy any security under
      circumstances that would cause the offering of the Securities  pursuant to
      the Securities Purchase Agreement to be integrated with prior offerings by
      the Company for  purposes of the  Securities  Act which would  prevent the
      Company  from  selling  the Common  Stock  pursuant  to Rule 506 under the
      Securities Act, or any applicable  exchange-related  stockholder  approval
      provisions,  nor will the Company or any of its affiliates or subsidiaries
      take any action or steps that would cause the  offering of the  Securities
      to  be  integrated  with  other  offerings  (other  than  such  concurrent
      offerings to the Purchaser).

            (d) The  Warrants,  the  Convertible  Note and the  shares of Common
      Stock which the  Purchaser  may acquire  pursuant to the  Warrants and the
      Convertible Note are all restricted securities under the Securities Act as
      of the  date of this  Agreement.  The  Company  will  not  issue  any stop
      transfer order or other order impeding the sale and delivery of any of the
      Registrable  Securities at such time as such  Registrable  Securities  are
      registered for public sale or an exemption from registration is available,
      except as required by federal or state securities laws.

            (e) The Company understands the nature of the Registrable Securities
      issuable upon the conversion of the  Convertible  Note and the exercise of
      the  Warrants  and  recognizes  that  the  issuance  of  such  Registrable
      Securities may have a potential dilutive effect. The Company  specifically
      acknowledges  that its obligation to issue the  Registrable  Securities is
      binding upon the Company and  enforceable  regardless of the dilution such
      issuance may have on the ownership  interests of other shareholders of the
      Company.

            (f) Except for agreements  made in the ordinary  course of business,
      there is no agreement  that has not been filed with the  Commission  as an
      exhibit to a  registration  statement or to a form required to be filed by
      the Company under the Exchange  Act, the breach of which could  reasonably
      be expected to have a material  and adverse  effect on the Company and its
      subsidiaries, or would prohibit or otherwise interfere with the ability of
      the Company to enter into and perform  any of its  obligations  under this
      Agreement in any material respect.


                                       8


            (g) The Company  will at all times have  authorized  and  reserved a
      sufficient number of shares of Common Stock for the full conversion of the
      Convertible Note and exercise of the Warrants.

      7. MISCELLANEOUS.

            (a) REMEDIES. In the event of a breach by the Company or by a Holder
      of any of their respective  obligations under this Agreement,  each Holder
      or the  Company,  as the case may be, in  addition  to being  entitled  to
      exercise  all rights  granted by law and under this  Agreement,  including
      recovery of damages,  will be  entitled  to  specific  performance  of its
      rights under this Agreement.

            (b) NO  PIGGYBACK  ON  REGISTRATIONS.  Except  as and to the  extent
      specified in Schedule  4.15 to the  Securities  Purchase  Agreement and on
      SCHEDULE 7(B) hereto,  neither the Company nor any of its security holders
      (other  than the  Holders in such  capacity  pursuant  hereto) may include
      securities  of the Company in any  Registration  Statement  other than the
      Registrable  Securities,  and the Company  shall not after the date hereof
      enter into any agreement  providing any such right for inclusion of shares
      in the Registration  Statement to any of its security  holders.  Except as
      and to the extent  specified in Schedule 4.15 to the  Securities  Purchase
      Agreement  and on SCHEDULE  7(B)  hereto,  the Company has not  previously
      entered into any agreement  granting any registration  rights with respect
      to any of its securities to any Person that have not been fully satisfied.

            (c) COMPLIANCE. Each Holder covenants and agrees that it will comply
      with  the  prospectus  delivery  requirements  of  the  Securities  Act as
      applicable  to it in  connection  with  sales  of  Registrable  Securities
      pursuant to any Registration Statement.

            (d) DISCONTINUED DISPOSITION.  Each Holder agrees by its acquisition
      of such  Registrable  Securities  that,  upon receipt of a notice from the
      Company of the occurrence of a  Discontinuation  Event (as defined below),
      such Holder will forthwith  discontinue  disposition  of such  Registrable
      Securities under the applicable Registration Statement until such Holder's
      receipt  of the  copies  of the  supplemented  Prospectus  and/or  amended
      Registration Statement or until it is advised in writing (the "Advice") by
      the Company that the use of the applicable Prospectus may be resumed, and,
      in either case,  has received  copies of any  additional  or  supplemental
      filings that are incorporated or deemed to be incorporated by reference in
      such  Prospectus  or  Registration  Statement.  The  Company  may  provide
      appropriate  stop orders to enforce the provisions of this paragraph.  For
      purposes of this Agreement, a "Discontinuation  Event" shall mean (i) when
      the  Commission  notifies the Company  whether there will be a "review" of
      such  Registration  Statement  and  whenever  the  Commission  comments in
      writing on such Registration Statement (the Company shall provide true and
      complete copies thereof and all written  responses  thereto to each of the
      Holders); (ii) any request by the Commission or any other Federal or state
      governmental  authority for amendments or supplements to such Registration
      Statement or Prospectus or for additional information;  (iii) the issuance
      by the Commission of any stop order  suspending the  effectiveness of such
      Registration  Statement covering any or all of the Registrable  Securities
      or the initiation of any


                                       9


      Proceedings  for that  purpose;  (iv) the  receipt  by the  Company of any
      notification  with  respect  to the  suspension  of the  qualification  or
      exemption from qualification of any of the Registrable Securities for sale
      in any  jurisdiction,  or the  initiation or threatening of any Proceeding
      for such  purpose;  and/or (v) the  occurrence  of any event or passage of
      time that makes the  financial  statements  included in such  Registration
      Statement  ineligible for inclusion  therein or any statement made in such
      Registration  Statement  or  Prospectus  or any document  incorporated  or
      deemed to be  incorporated  therein by  reference  untrue in any  material
      respect or that  requires any  revisions to such  Registration  Statement,
      Prospectus or other  documents so that,  in the case of such  Registration
      Statement  or  Prospectus,  as the case may be,  it will not  contain  any
      untrue  statement of a material  fact or omit to state any  material  fact
      required to be stated therein or necessary to make the statements therein,
      in light of the circumstances under which they were made, not misleading.

            (e)   PIGGY-BACK   REGISTRATIONS.   If  at  any  time   during   any
      Effectiveness  Period  there is not an  effective  Registration  Statement
      covering all of the Registrable  Securities  required to be covered during
      such  Effectiveness  Period and the Company shall determine to prepare and
      file with the Commission a registration  statement relating to an offering
      for its own account or the account of others under the  Securities  Act of
      any of its equity securities,  other than on Form S-4 or Form S-8 (each as
      promulgated  under the Securities Act) or their then equivalents  relating
      to  equity   securities  to  be  issued  solely  in  connection  with  any
      acquisition  of any entity or  business or equity  securities  issuable in
      connection  with stock option or other employee  benefit  plans,  then the
      Company  shall send to each Holder  written  notice of such  determination
      and, if within fifteen days after receipt of such notice,  any such Holder
      shall  so  request  in  writing,   the  Company   shall  include  in  such
      registration statement all or any part of such Registrable Securities such
      Holder  requests  to be  registered  to the extent the  Company  may do so
      without violating registration rights of others which exist as of the date
      of this Agreement, subject to customary underwriter cutbacks applicable to
      all holders of  registration  rights and subject to obtaining any required
      consent  of any  selling  stockholder(s)  to  such  inclusion  under  such
      registration statement.

            (f)  AMENDMENTS  AND  WAIVERS.  The  provisions  of this  Agreement,
      including the provisions of this sentence, may not be amended, modified or
      supplemented,  and waivers or consents to departures  from the  provisions
      hereof may not be given, unless the same shall be in writing and signed by
      the  Company  and  the  Holders  of  the  then   outstanding   Registrable
      Securities.  Notwithstanding the foregoing,  a waiver or consent to depart
      from  the  provisions  hereof  with  respect  to  a  matter  that  relates
      exclusively to the rights of certain Holders and that does not directly or
      indirectly  affect the rights of other  Holders may be given by Holders of
      at least a majority of the Registrable  Securities to which such waiver or
      consent relates;  provided,  however, that the provisions of this sentence
      may not be amended,  modified,  or supplemented  except in accordance with
      the provisions of the immediately preceding sentence.

            (g)  NOTICES.  Any notice or request  hereunder  may be given to the
      Company or the Purchaser at the respective addresses set forth below or as
      may hereafter be


                                       10


      specified in a notice designated as a change of address under this Section
      7(g).  Any notice or request  hereunder  shall be given by  registered  or
      certified mail, return receipt requested,  hand delivery,  overnight mail,
      Federal   Express   or  other   national   overnight   next  day   carrier
      (collectively,  "Courier") or telecopy  (confirmed  by mail).  Notices and
      requests shall be, in the case of those by hand  delivery,  deemed to have
      been given when  delivered  to any party to whom it is  addressed,  in the
      case of those by mail or overnight  mail,  deemed to have been given three
      (3)  business  days after the date when  deposited in the mail or with the
      overnight  mail carrier,  in the case of a Courier,  the next business day
      following  timely  delivery of the package with the  Courier,  and, in the
      case of a telecopy,  when  confirmed.  The  address  for such  notices and
      communications shall be as follows:

            IF TO THE COMPANY:                Incentra Solutions, Inc.
                                              1140 Pearl Street
                                              Boulder, Colorado  80302
                                              Attention: Chief Financial Officer
                                              Facsimile: (303) 449-9584

            WITH A COPY TO:
                                              Law Offices of Karl Reed Guest
                                              94 Underhill Road
                                              Orinda, CA 94563
                                              Attention: Reed Guest, Esq.
                                              Facsimile: (925) 254-9226

            IF TO A PURCHASER:                To the address set forth under
                                              such Purchaser name on the
                                              signature pages hereto.

            IF TO ANY OTHER PERSON WHO IS
            THEN THE REGISTERED HOLDER:       To the address of such Holder as
                                              it appears in the stock transfer
                                              books of the Company

      or such  other  address  as may be  designated  in  writing  hereafter  in
      accordance with this Section 7(g) by such Person.

            (h)  SUCCESSORS  AND  ASSIGNS.  This  Agreement  shall  inure to the
      benefit of and be binding upon the  successors  and  permitted  assigns of
      each of the parties and shall  inure to the  benefit of each  Holder.  The
      Company  may not assign its rights or  obligations  hereunder  without the
      prior  written  consent  of  each  Holder.  Each  Holder  may  assign  its
      respective  rights hereunder in the manner and to the Persons as permitted
      under  the  Notes,  the  Securities  Purchase  Agreement  and the  Related
      Agreements (as defined in the Securities Purchase Agreement).

            (i) EXECUTION AND  COUNTERPARTS.  This  Agreement may be executed in
      any number of counterparts, each of which when so executed shall be deemed
      to be an original and, all of which taken  together  shall  constitute one
      and the same  agreement.  In the event that any  signature is delivered by
      facsimile transmission, such signature shall


                                       11


      create a valid  binding  obligation  of the party  executing  (or on whose
      behalf such signature is executed) the same with the same force and effect
      as if such facsimile signature were the original thereof.

            (j)  GOVERNING  LAW,  JURISDICTION  AND WAIVER OF JURY  TRIAL.  THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH
STATE,  WITHOUT  REGARD TO  PRINCIPLES  OF CONFLICTS OF LAW. The Company  hereby
consents  and agrees that the state or federal  courts  located in the County of
New  York,  State of New York  shall  have  exclusive  jurisdiction  to hear and
determine  any  Proceeding  between  the  Company,  on the  one  hand,  and  the
Purchaser,  on the other hand,  pertaining  to this  Agreement  or to any matter
arising out of or related to this  Agreement;  PROVIDED,  that the Purchaser and
the Company  acknowledge that any appeals from those courts may have to be heard
by a court  located  outside of the County of New York,  State of New York,  and
FURTHER  PROVIDED,  that nothing in this Agreement shall be deemed or operate to
preclude the Purchaser from bringing a Proceeding in any other  jurisdiction  to
collect the obligations,  to realize on the Collateral or any other security for
the  obligations,  or to enforce a judgment or other court order in favor of the
Purchaser.  The  Company  expressly  submits  and  consents  in  advance to such
jurisdiction  in any  Proceeding  commenced  in any such court,  and the Company
hereby  waives  any  objection  which it may have  based  upon lack of  personal
jurisdiction,  improper venue or FORUM NON CONVENIENS. The Company hereby waives
personal service of the summons,  complaint and other process issued in any such
Proceeding and agrees that service of such summons,  complaint and other process
may be made by  registered  or  certified  mail  addressed to the Company at the
address  set forth in  Section  7(g) and that  service  so made  shall be deemed
completed upon the earlier of the Company's  actual receipt thereof or three (3)
days after deposit in the U.S. mails, proper postage prepaid. The parties hereto
desire that their disputes be resolved by a judge applying such applicable laws.
Therefore,  to achieve the best  combination  of the  benefits  of the  judicial
system and of arbitration,  the parties hereto waive all rights to trial by jury
in any Proceeding  brought to resolve any dispute,  whether arising in contract,
tort,  or otherwise  between the  Purchaser  and/or the Company  arising out of,
connected with,  related or incidental to the relationship  established  between
then in connection with this Agreement.  If either party hereto shall commence a
Proceeding to enforce any provisions of this Agreement,  the Securities Purchase
Agreement or any other  Related  Agreement,  then the  prevailing  party in such
Proceeding shall be reimbursed by the other party for its reasonable  attorneys'
fees and other costs and expenses incurred with the  investigation,  preparation
and prosecution of such Proceeding.

            (k) CUMULATIVE REMEDIES. The remedies provided herein are cumulative
      and not exclusive of any remedies provided by law.

            (l) SEVERABILITY. If any term, provision, covenant or restriction of
      this Agreement is held by a court of competent jurisdiction to be invalid,
      illegal,  void or unenforceable,  the remainder of the terms,  provisions,
      covenants and restrictions set forth herein shall remain in full force and
      effect and shall in no way be affected,  impaired or invalidated,  and the
      parties hereto shall use their reasonable efforts to find and employ an


                                       12


      alternative  means to achieve the same or substantially the same result as
      that contemplated by such term, provision,  covenant or restriction. It is
      hereby  stipulated  and  declared to be the  intention of the parties that
      they would have executed the remaining  terms,  provisions,  covenants and
      restrictions  without including any of such that may be hereafter declared
      invalid, illegal, void or unenforceable.

            (m) HEADINGS.  The headings in this Agreement are for convenience of
      reference only and shall not limit or otherwise affect the meaning hereof.

                   [BALANCE OF PAGE INTENTIONALLY LEFT BLANK;
                             SIGNATURE PAGE FOLLOWS]


                                       13


            IN WITNESS  WHEREOF,  the parties  have  executed  this  Amended and
Restated Registration Rights Agreement as of the date first written above.

INCENTRA SOLUTIONS, INC.                 LAURUS MASTER FUND, LTD.


By:    /s/ Thomas P. Sweeney III         By:    /s/ David Grin
       ------------------------------           --------------------------------
Name:  Thomas P. Sweeney III             Name:  David Grin
       ------------------------------           --------------------------------
Title: Chief Executive Officer           Title: Managing Partner
       ------------------------------           --------------------------------

                                         ADDRESS FOR NOTICES:

                                         825 Third Avenue - 14th Floor
                                         New York, NY 10022
                                         Attention: David Grin
                                         Facsimile: 212-541-4434


                                       14

EX-10.75

                                JOINDER AGREEMENT

            THIS JOINDER IN MASTER SECURITY AGREEMENT AND STOCK PLEDGE AGREEMENT
(this "JOINDER") is executed as of March 31, 2006 by PWI  Technologies,  Inc., a
Washington  corporation  ("PWI"),  Incentra  Solutions  of  California,  Inc., a
Delaware corporation ("CALIFORNIA") and Incentra Solutions International,  Inc.,
a Delaware  corporation  ("International"  and together with PWI and California,
the  "JOINING  PARTIES" and each, a "JOINING  PARTY"),  and  delivered to Laurus
Master  Fund,  Ltd.,  a Cayman  Islands  company  (the  "Purchaser").  Except as
otherwise  defined  herein,  terms used herein and defined in the 2006  Purchase
Agreement (as defined below).

                              W I T N E S S E T H:

            WHEREAS,  Incentra  Solutions,   Inc.,  a  Nevada  corporation  (the
"Company"),  certain  Subsidiaries  of the Company (in the case of the  Security
Agreement)  and the  Purchaser,  have  entered  into (x) a  Securities  Purchase
Agreement,  dated as of May 13, 2004 (as amended,  modified or supplemented from
time to time, the "2004 PURCHASE AGREEMENT"), (y) a Security Agreement, dated as
of February 6, 2006 (as amended, modified or supplemented from time to time, the
"2006 SECURITY AGREEMENT") and (z) a Securities Purchase Agreement,  dated as of
the date hereof (as amended,  modified or  supplemented  from time to time,  the
"2006 PURCHASE AGREEMENT"); and

            WHEREAS, the Joining Party is a direct or indirect Subsidiary of the
Company and desires,  or is required  pursuant to the  provisions of each of the
2004  Purchase  Agreement,  the 2006  Security  Agreement  and the 2006 Purchase
Agreement,  to become an "Assignor" under the 2004 Master Security Agreement and
a "Pledgor" under the 2006 Stock Pledge Agreement;

            NOW, THEREFORE, in consideration of the foregoing and other benefits
accruing to the Joining Party,  the receipt and  sufficiency of which are hereby
acknowledged,  the Joining Party hereby makes the following  representations and
warranties to the  Purchaser and hereby  covenants and agrees with the Purchaser
as follows:

            NOW, THEREFORE, the Joining Party agrees as follows:

            1. By this Joinder, each Joining Party becomes (i) an "Assignor" for
all purposes under the 2004 Master  Security  Agreement and (ii) a "Pledgor" for
all purposes under the 2006 Stock Pledge Agreement.

            2. Each Joining  Party agrees that,  upon its execution  hereof,  it
will become a Pledgor under, and as defined in, the 2006 Stock Pledge Agreement,
and will be bound by all terms,  conditions  and duties  applicable to a Pledgor
under the 2006 Stock Pledge Agreement.  Without  limitation of the foregoing and
in furtherance thereof, as security for the due and


                                                                          Page 2


punctual  payment of the  Indebtedness  (as  defined  in the 2006  Stock  Pledge
Agreement), each Joining Party hereby pledges, hypothecates, assigns, transfers,
sets over and  delivers  to the  Purchaser  grants to the  Purchaser  a security
interest in all Collateral (as defined in the 2006 Stock Pledge  Agreement),  if
any, now owned or, to the extent  provided in the 2006 Stock  Pledge  Agreement,
hereafter acquired by it.

            4. Each Joining  Party agrees that,  upon its execution  hereof,  it
will become an  Assignor  under,  and as defined  in, the 2004  Master  Security
Agreement,  and will be bound by all terms,  conditions and duties applicable to
an Assignor under the 2004 Master Security Agreement.  Without limitation of the
foregoing  and in  furtherance  thereof,  as security  for the due and  punctual
payment of the Obligations  (as defined in the 2004 Master Security  Agreement),
each Joining Party hereby pledges,  hypothecates,  assigns, transfers, sets over
and delivers to the Purchaser and grants to the Purchaser a security interest in
all Collateral (as defined in the 2004 Master Security  Agreement),  if any, now
owned  or,  to the  extent  provided  in the  2004  Master  Security  Agreement,
hereafter acquired by it.

            5. In connection  with the grant by each Joining Party,  pursuant to
paragraphs 3 and 4 above, of a security interest in all of its right,  title and
interest  in the  Collateral  (as  defined in each of the 2004  Master  Security
Agreement and the 2006 Stock Pledge  Agreement) in favor of the  Purchaser,  the
Joining Party (i) agrees to deliver to the Purchaser, together with the delivery
of this  Joinder,  each of the items  specified  in  Section 3 of the 2006 Stock
Pledge  Agreement,  (ii)  agrees to execute  (if  necessary)  and deliver to the
Purchaser such financing statements, in form acceptable to the Purchaser, as the
Purchaser  may request or as are  necessary  or  desirable in the opinion of the
Purchaser  to  establish  and  maintain  a valid,  enforceable,  first  priority
perfected  security  interest in the  Collateral (as defined in each of the 2004
Master  Security  Agreement and the 2006 Stock Pledge  Agreement)  owned by each
Joining  Party,  (iii)  authorizes  the  Purchaser  to file any  such  financing
statements without the signature of the respective Joining Party where permitted
by law (such  authorization  includes a  description  of the  Collateral as "all
assets and all personal property,  whether now owned and/or hereafter  acquired"
of the respective  Joining Party all assets and all personal  property,  whether
now owned and/or hereafter  acquired" (or any  substantially  similar  variation
thereof)) and (iv) agrees to execute and deliver to the Purchaser assignments of
United  States   trademarks,   patents  and   copyrights   (and  the  respective
applications therefor) to the extent requested by the Purchaser.

            6. Without  limiting the foregoing,  each Joining Party hereby makes
and undertakes,  as the case may be, each covenant,  representation and warranty
made by, and as (i) each Assignor pursuant to the 2004 Master Security Agreement
and (ii) each Pledgor pursuant to the 2006 Stock Pledge Agreement,  in each case
as of the date hereof (except to the extent any such  representation or warranty
relates solely to an earlier date in which case such representation and warranty
shall be true and correct as of such  earlier  date),  and agrees to be bound by
all covenants, agreements and obligations of an Assignor and Pledgor 2004 Master
Security  Agreement and the 2006 Stock Pledge Agreement,  respectively,  and all
other Related  Agreements (as defined in each of the 2004 Purchase Agreement and
the 2006 Purchase Agreement) and/or Ancillary Agreements (as defined in the 2006
Security Agreement) to which it is or becomes a party.


                                                                          Page 3


            8. Schedule A to the 2006 Stock Pledge  Agreement is hereby  amended
by  supplementing  such  Schedule  with the  information  for each Joining Party
contained on Schedule A attached  hereto as Annex I. In addition,  Schedule A to
the 2004 Master  Security  Agreement  is hereby  amended by  supplementing  such
Schedule  with the  information  for the Joining  Party  contained on Schedule A
attached hereto as Annex II.

            9. This Joinder  shall be binding upon the parties  hereto and their
respective  successors  and permitted  assigns and shall inure to the benefit of
and be  enforceable  by each  of the  parties  hereto  and  its  successors  and
permitted assigns, PROVIDED, HOWEVER, no Joining Party may not assign any of its
rights,  obligations or interest hereunder or under the 2004 Purchase Agreement,
the 2006 Security  Agreement,  the 2006 Purchase Agreement or, in each case, any
agreement related thereto, without the prior written consent of the Purchaser by
such agreement.  THIS JOINDER SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH
AND  GOVERNED BY THE LAW OF THE STATE OF NEW YORK.  This Joinder may be executed
in any number of  counterparts,  each of which shall be an original,  but all of
which shall  constitute one instrument.  In the event that any provision of this
Joinder  shall prove to be invalid or  unenforceable,  such  provision  shall be
deemed to be severable  from the other  provisions  of this Joinder  which shall
remain binding on all parties hereto.

            10. From and after the execution and delivery  hereof by the parties
hereto, this Joinder shall constitute (I) a "Related Agreement" for all purposes
of (x) the 2004 Purchase Agreement and the Related Agreements referred to in the
2004 Purchase Agreement, as each are amended, modified or supplemented from time
to time and (y) the 2006 Purchase Agreement and the Related Agreements  referred
to in the 2006 Purchase Agreement, as each are amended, modified or supplemented
from time to time and (II) an "Ancillary Agreement" for all purposes of the 2006
Security Agreement and the Ancillary Agreements referred to in the 2006 Security
Agreement, , as each are amended, modified or supplemented from time to time.

            11. The effective date of this Joinder is March 31, 2006.

                                      * * *


                                                                          Page 4


            IN WITNESS WHEREOF,  the Joining Party has caused this Joinder to be
duly executed as of the date first above written.

                                        PWI TECHNOLOGIES, INC.

                                        By: /s/ Thomas P. Sweeney III
                                            ------------------------------------
                                            Name:  Thomas P. Sweeney III
                                            Title: Chief Executive Officer


                                        INCENTRA SOLUTIONS OF CALIFORNIA, INC.

                                        By: /s/ Thomas P. Sweeney III
                                            ------------------------------------
                                            Name:  Thomas P. Sweeney III
                                            Title: Chief Executive Officer


                                        INCENTRA SOLUTIONS INTERNATIONAL, INC.

                                        By: /s/ Thomas P. Sweeney III
                                            ------------------------------------
                                            Name:  Thomas P. Sweeney III
                                            Title: Chief Executive Officer


                                                                          Page 5


Accepted and Acknowledged by:

LAURUS MASTER FUND, LTD.


By: /s/ David Grin
    ---------------------------
    Name:  David Grin
    Title: Managing Partner


                                                                          Page 6


                                                                         ANNEX I

                                      NONE


                                                                          Page 7


                                                                        ANNEX II

                                   SCHEDULE A

- --------------------------------------------------------------------------------
                                 Jurisdiction of     Organization Identification
         Entity                    Formation                    Number
- --------------------------------------------------------------------------------
ManagedStorage                      Delaware                   3188876
International, Inc.
- --------------------------------------------------------------------------------
PWI Technologies, Inc               Washington                 601840570
- --------------------------------------------------------------------------------
Incentra Solutions of               Delaware                   3925903
California, Inc.
- --------------------------------------------------------------------------------
Incentra Solutions, Inc.            Nevada                     C7006-1995
- --------------------------------------------------------------------------------
Incentra Solutions                  Delaware                   3766180
International, Inc.
- --------------------------------------------------------------------------------

EX-23.1

                                                                    EXHIBIT 23.1


            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We have issued our report  dated March 24,  2006,  except for Note 17(B),  as to
which the date is March 31, 2006 (which  expresses  an  unqualified  opinion and
includes an explanatory  paragraph relating to the Company's ability to continue
as a going concern and an explanatory  paragraph  relating to the Company's 2005
fourth quarter  correction of its accounting for goodwill recorded in connection
with  business  acquisitions  that  occurred  in  the  first  quarter  of  2005)
accompanying the consolidated financial statements included in the Annual Report
of Incentra  Solutions,  Inc., (the "Company") on Form 10-KSB for the year ended
December 31, 2005. We consent to the  incorporation  by reference of said report
in the registration  statements for Incentra  Solutions,  Inc. on Form S-8 (File
No.'s 333-114634 and 333-114605).


/s/ GHP HORWATH, P.C.

Denver, Colorado
April 3, 2006

EX-31.1

                                                                    EXHIBIT 31.1


                                  CERTIFICATION

                           Pursuant to 18 U.S.C. 1350
                 (Section 302 of the Sarbanes-Oxley Act of 2002)



I, Thomas P. Sweeney III, Chief Executive Officer of Incentra Solutions, Inc.,
certify that:

1.       I have reviewed this Annual Report on Form 10-KSB of Incentra
         Solutions, Inc.;

2.       Based on my knowledge, this report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this report;

3.       Based on my knowledge, the financial statements, and other financial
         information included in this report, fairly present in all material
         respects the financial condition, results of operations and cash flows
         of the registrant as of, and for, the periods presented in this report;

4.       The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
         registrant and have:

         a)       Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, to ensure that material information relating
                  to the registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during the period in which this report is being prepared;

         b)       Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

         c)       Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's fourth quarter of 2005 that has materially
                  affected, or is reasonably likely to materially affect, the
                  registrant's internal control over financial reporting; and

5.       The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of the
         registrant's board of directors (or persons performing the equivalent
         functions):


         a)       All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and


         b)       Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


Date:    April 4, 2006                      By:   /s/ Thomas P. Sweeney III
                                                  ----------------------------
                                                  Thomas P. Sweeney
                                                  Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2


                                  CERTIFICATION

                           Pursuant to 18 U.S.C. 1350
                 (Section 302 of the Sarbanes-Oxley Act of 2002)



I, Paul McKnight, Chief Financial Officer of Incentra Solutions, Inc., certify
that:

1.       I have reviewed this Annual Report on Form 10-KSB of Incentra
         Solutions, Inc.;

2.       Based on my knowledge, this report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this report;

3.       Based on my knowledge, the financial statements, and other financial
         information included in this report, fairly present in all material
         respects the financial condition, results of operations and cash flows
         of the registrant as of, and for, the periods presented in this report;

4.       The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
         registrant and have:

         a)       Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, to ensure that material information relating
                  to the registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during the period in which this report is being prepared;

         b)       Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

         c)       Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's fourth quarter of 2005 that has materially
                  affected, or is reasonably likely to materially affect, the
                  registrant's internal control over financial reporting; and

5.       The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of the
         registrant's board of directors (or persons performing the equivalent
         functions):


         a)       All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

         b)       Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


Date:    April 4, 2006                      By:      /s/ Paul McKnight
                                                     --------------------
                                                     Paul McKnight
                                                     Chief Financial Officer

EX-32.1

                                                                    EXHIBIT 32.1


                                  CERTIFICATION

                           Pursuant to 18 U.S.C. 1350
                 (Section 302 of the Sarbanes-Oxley Act of 2002)

         In connection with the Annual Report on Form 10-KSB of Incentra
Solutions, Inc. (the "Company") for the year ended December 31, 2005, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
Thomas P. Sweeney III, Chief Executive Officer of the Company, hereby certifies,
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, that:

         (1) The Report fully complies with the requirements of Section 13(a) or
         15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
         material respects, the financial condition and results of operations of
         the Company.


Date:    April 4, 2006                         By:    /s/ Thomas P. Sweeney
                                                      ---------------------
                                                      Thomas P. Sweeney
                                                      Chief Executive Officer



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


         This certification accompanies each Report pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18
of the Securities Exchange Act of 1934, as amended.

         A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.

EX-32.2

                                                                    EXHIBIT 32.2


                                  CERTIFICATION

                           Pursuant to 18 U.S.C. 1350
                 (Section 302 of the Sarbanes-Oxley Act of 2002)

         In connection with the Annual Report on Form 10-KSB of Incentra
Solutions, Inc. (the "Company") for the year ended December 31, 2005, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
Paul McKnight, Chief Financial Officer of the Company, hereby certifies,
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, that:

         (1) The Report fully complies with the requirements of Section 13(a) or
         15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
         material respects, the financial condition and results of operations of
         the Company.


Date:    April 4, 2006                         By:   /s/ Paul McKnight
                                                      -----------------
                                                      Paul McKnight
                                                      Chief Financial Officer



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


         This certification accompanies each Report pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18
of the Securities Exchange Act of 1934, as amended.

         A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.