**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**Form
      10-Q**





**xQUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(D) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**For
      the quarterly period ended March 31, 2008**





**OR**





**oTRANSITION
      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 registrant as specified in its charter)





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





**1140
      PEARL STREET**


**BOULDER,
      COLORADO 80302**


**(Address
      of principal executive offices)**





**(303)
      449-8279**


**(Registrant's
      telephone number)**





Indicate
      by check mark whether the issuer (1) filed all reports required to be filed
      by
      Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
      12 months (or for such shorter period that the registrant was required to file
      such reports), and (2) has been subject to such filing requirements for the
      past
      90 days. Yes xNo
o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company (as
      defined in Rule 12b-2 of the Act). See definition of “large filer” and “large
      accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer
oAccelerated Filer oNon-accelerated
      Filer oSmaller Reporting Company x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act. Yes oNo x





As
      of May
      8, 2008, 21,317,863 shares of the issuer's common stock, $.001 par value per
      share, and 2,466,971 shares of the issuer's Series A preferred stock, $.001
      par
      value per share, were outstanding.





**PART
      I. FINANCIAL INFORMATION**





**Item
      1. FINANCIAL STATEMENTS**





**INCENTRA
      SOLUTIONS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





**March 31, 2008**
            
            **December 31, 2007****(UNAUDITED)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            1,117,730
            
            $
            3,274,600Accounts
                receivable, net of allowance for doubtful accounts of $168,927 and
                $380,913 at March 31, 2008 and December 31, 2007,
                respectively
            
            
            36,226,311
            
            
            37,137,811Current
                portion of deferred costs
            
            
            2,623,693
            
            
            2,435,075Other
                current assets
            
            
            2,479,098
            
            
            2,062,916Total
                current assets
            
            
            42,446,832
            
            
            44,910,402Property
                and equipment, net
            
            
            7,207,450
            
            
            7,201,027Capitalized
                software development costs, net
            
            
            1,142,533
            
            
            1,143,831Intangible
                assets, net
            
            
            2,880,623
            
            
            2,952,523Goodwill
            
            
            30,302,152
            
            
            30,452,152Deferred
                costs, net of current portion
            
            
            735,898
            
            
            752,978Other
                assets
            
            
            793,647
            
            
            762,732**TOTAL
                ASSETS**
            
            **$**
            **85,509,135**
            
            **$**
            **88,175,645****LIABILITIES
                AND SHAREHOLDERS' DEFICIT**Current
                liabilities:Current
                portion of notes payable and other long-term obligations
            
            $
            18,998,105
            
            $
            16,879,609Current
                portion of capital lease obligations
            
            
            699,675
            
            
            765,625Accounts
                payable
            
            
            28,491,956
            
            
            28,962,489Accrued
                expenses and other
            
            
            6,451,838
            
            
            7,865,142Current
                portion of deferred revenue
            
            
            3,798,837
            
            
            3,886,370Total
                current liabilities
            
            
            58,440,411
            
            
            58,359,235Notes
                payable and other long-term obligations, net of current
                portion
            
            
            8,506,557
            
            
            9,237,024Capital
                lease obligations, net of current portion
            
            
            3,673,330
            
            
            3,701,252Deferred
                revenue, net of current portion
            
            
            808,921
            
            
            847,103Other
                liabilities
            
            
            123,690
            
            
            95,388**TOTAL
                LIABILITIES**
            
            
            **71,552,909**
            
            
            **72,240,002**Commitments
                and contingenciesSeries A convertible redeemable preferred stock, $.001 par value, $31,500,000 liquidationpreference,
                2,500,000 shares authorized, 2,466,971 shares issued and
                outstanding
            
            
            30,507,858
            
            
            29,853,466Shareholders'
                deficit:Preferred
                stock, nonvoting, $.001 par value, 2,500,000 shares authorized, none
                issued
            
            
            -
            
            
            -Common
                stock, $.001 par value, 200,000,000 shares authorized, 21,317,863
                shares
                issued and outstanding at March 31, 2008 and December 31,
                2007
            
            
            21,318
            
            
            21,318Additional
                paid-in capital
            
            
            130,312,036
            
            
            130,830,866Accumulated
                deficit
            
            
            (146,884,986
            )
            
            (144,770,007
            )**TOTAL
                SHAREHOLDERS' DEFICIT**
            
            
            **(16,551,632**
            **)**
            
            **(13,917,823**
            **)****TOTAL
                LIABILITIES AND SHAREHOLDERS' DEFICIT**
            
            **$**
            **85,509,135**
            
            **$**
            **88,175,645**





See
      accompanying notes to unaudited condensed consolidated financial
      statements.




1





**INCENTRA
      SOLUTIONS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**





**Three Months Ended March 31,****2008**
            
            **2007**REVENUES:Products
            
            $
            41,143,609
            
            $
            20,482,322Services
            
            
            7,081,064
            
            
            4,490,378**TOTAL
                REVENUE**
            
            
            **48,224,673**
            
            
            **24,972,700**Cost
                of revenue:Products
            
            
            33,965,114
            
            
            16,066,157Services
            
            
            5,232,283
            
            
            3,070,905Total
                cost of revenue
            
            
            39,197,397
            
            
            19,137,062**GROSS
                MARGIN**
            
            
            **9,027,276**
            
            
            **5,835,638**Selling,
                general and administrative expense
            
            
            9,173,770
            
            
            6,762,162Stock-based
                compensation expense
            
            
            135,562
            
            
            439,434Depreciation
                and amortization
            
            
            445,137
            
            
            331,4249,754,469
            
            
            7,533,020**OPERATING
                LOSS**
            
            
            **(727,193**
            **)**
            
            **(1,697,382**
            **)**Other
                income (expense):Interest
                income
            
            
            9,316
            
            
            5,825Interest
                expense
            
            
            (1,435,971
            )
            
            (629,013
            )Other
                income (expense)
            
            
            16,615
            
            
            (1,049
            )Foreign
                currency transaction gain
            
            
            22,254
            
            
            30,654(1,387,786
            )
            
            (593,583
            )**NET
                LOSS**
            
            
            **(2,114,979**
            **)**
            
            **(2,290,965**
            **)**Accretion
                of convertible redeemable preferred stock to redemption
                amount
            
            
            (654,392
            )
            
            (654,392
            )**NET
                LOSS APPLICABLE TO COMMON SHAREHOLDERS**
            
            **$**
            **(2,769,371**
            **)**
            **$**
            **(2,945,357**
            **)**Weighted
                average number of common shares outstanding - basic and
                diluted
            
            
            26,405,110
            
            
            13,250,298Basic
                and diluted net loss per share applicable to commonshareholders:
            
            $
            (0.10
            )
            $
            (0.22
            )





See
      accompanying notes to unaudited condensed consolidated financial
      statements.




2





**INCENTRA
      SOLUTIONS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT**


**THREE
      MONTHS ENDED MARCH 31, 2008**


**(UNAUDITED)**





**Common
                stock**
            
            **Additional**
              **paid-in capital**
            
            **Accumulated**
              **deficit**
            
            **Total****Shares**
            
            **Amount****Balances
                at December 31, 2007**
            
            
            **21,317,863**
            
            **$**
            **21,318**
            
            **$**
            **130,830,866**
            
            **$**
            **(144,770,007**
            **)**
            **$**
            **(13,917,823**
            **)**Amortization
                of stock-based compensation expense
            
            
            **-**
            
            
            **-**
            
            
            135,562
            
            
            -
            
            
            135,562Accretion
                of convertible redeemable preferred stock to redemption
                amount
            
            
            -
            
            
            -
            
            
            (654,392
            )
            
            -
            
            
            (654,392
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,114,979
            )
            
            (2,114,979
            )**Balances
                at March 31, 2008**
            
            
            **21,317,863**
            
            **$**
            **21,318**
            
            **$**
            **130,312,036**
            
            **$**
            **(146,884,986**
            **)**
            **$**
            **(16,551,632**
            **)**





See
      accompanying notes to unaudited condensed consolidated financial
      statements.




3





**INCENTRA
      SOLUTIONS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**





**THREE MONTHS ENDED MARCH 31,****2008**
            
            **2007**Cash
                flows from operating activities:Net
                loss
            
            $
            (2,114,979
            )
            $
            (2,290,965
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            383,006
            
            
            493,418Amortization
                of intangible assets and software development costs
            
            
            471,815
            
            
            300,842Stock-based
                compensation expense
            
            
            135,562
            
            
            439,434Amortization
                of debt issue costs
            
            
            529,663
            
            
            322,805Bad
                debt expense
            
            
            2,500
            
            
            2,897Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            475,702
            
            
            (2,581,973
            )Other
                current assets
            
            
            (78,403
            )
            
            464,691Other
                assets
            
            
            (617,065
            )
            
            21,173Accounts
                payable
            
            
            (470,533
            )
            
            113,005Accrued
                expenses and other
            
            
            (1,321,714
            )
            
            (851,010
            )Deferred
                revenue
            
            
            (125,706
            )
            
            426,200Net
                cash used in continuing operations
            
            
            (2,730,152
            )
            
            (3,139,483
            )Net
                cash provided by (used in) discontinued operations
            
            
            370,008
            
            
            (298,342
            )Net
                cash used in operating activities
            
            
            (2,360,144
            )
            
            (3,437,825
            )Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (460,787
            )
            
            (424,842
            )Capitalized
                software development costs
            
            
            (177,265
            )
            
            (143,995
            )Other
            
            
            -
            
            
            68,086Net
                cash used in continuing operations
            
            
            (638,052
            )
            
            (500,751
            )Net
                cash provided by discontinued operations
            
            
            -
            
            
            -Net
                cash used in investing activities
            
            
            (638,052
            )
            
            (500,751
            )Cash
                flows from financing activities:Proceeds
                on line of credit, net
            
            
            2,056,801
            
            
            3,626,473Proceeds
                on lease line of credit, net
            
            
            -
            
            
            4,565Payments
                on capital leases, notes payable and other long-term
                liabilities
            
            
            (1,215,475
            )
            
            (377,753
            )Net
                cash provided by continuing operations
            
            
            841,326
            
            
            3,253,285Net
                cash provided by discontinued operations
            
            
            -
            
            
            -Net
                cash provided by financing activities
            
            
            841,326
            
            
            3,253,285Net
                decrease in cash and cash equivalents from continuing
                operations
            
            
            (2,526,878
            )
            
            (386,949
            )Net increase
                (decrease) in cash and cash equivalents from discontinued
                operations
            
            
            370,008
            
            
            (298,342
            )Net
                decrease in cash and cash equivalents
            
            
            (2,156,870
            )
            
            (685,291
            )Cash
                and cash equivalents at beginning of period
            
            
            3,274,600
            
            
            976,673Cash
                and cash equivalents at end of period
            
            $
            1,117,730
            
            $
            291,382Supplemental
                disclosures of cash flow information:Cash
                paid during the period for interest
            
            $
            896,992
            
            $
            300,383Supplemental
                disclosures of non-cash investing and financing
                activities:Purchases
                of property and equipment included in accounts payable
            
            
            190,130
            
            
            259,216





See
      accompanying notes to unaudited condensed consolidated financial
      statements.


4


**INCENTRA
      SOLUTIONS, INC. AND SUBSIDIARIES**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**UNAUDITED**





**1.
      ORGANIZATION**





Incentra
      Solutions, Inc. (which is referred to herein together with its subsidiaries
      as
      "we," "us," or "our") was organized and incorporated in the state of Nevada.
      Our
      common stock trades on the Over-the-Counter Bulletin Board under the trading
      symbol "ICNS." In 2005, 2006 and 2007 we completed six acquisitions: on February
      18, 2005, we acquired STAR Solutions of Delaware, Inc., a privately-held
      Delaware corporation (“Star”); on March 30, 2005, we acquired PWI Technologies,
      Inc., a privately-held Washington corporation (“PWI”); on April 13, 2006, we
      acquired Network System Technologies, Inc., a privately-held Illinois
      corporation (“NST”); on September 5, 2006, we acquired Tactix, Inc., a
      privately-held Oregon corporation (“Tactix”); on August 17, 2007, we acquired
      Helio Solutions, Inc., a privately-held California corporation (“Helio”) and on
      September 5, 2007, we acquired Sales Strategies, Inc. (d/b/a SSI Hubcity),
      a
      privately held New Jersey corporation (“SSI”). We have included the results of
      operations for the six acquisitions in our consolidated financial statements
      from their acquisition dates through March 31, 2008.





We
      are a
      leading provider of complete Information Technology (“IT”) services and
      solutions to enterprises and managed service providers in North America and
      Europe. Our complete solutions include hardware and software products,
      maintenance contracts, professional services, recurring managed services and
      capital financing solutions. We market our products and services to service
      providers and enterprise clients under the trade name Incentra
      Solutions.





**Basis
      of Presentation**





The
      consolidated financial statements include Incentra Solutions, Inc. and its
      wholly-owned subsidiaries. All significant intercompany accounts and
      transactions have been eliminated in consolidation.





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared by us in accordance with accounting principles generally accepted
      in
      the United States of America for interim financial information and pursuant
      to
      the rules and regulations of the Securities and Exchange Commission ("SEC").
      Certain information and footnote disclosures normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States of America have been condensed or omitted pursuant to
      such
      regulations. The unaudited condensed consolidated financial statements reflect
      all adjustments and disclosures that are, in the opinion of management,
      necessary for a fair presentation. Except as described above, all such
      adjustments are of a normal recurring nature. The results for the three-month
      period ended March 31, 2008 are not necessarily indicative of the results
      expected for the year ending December 31, 2008. These interim financial
      statements should be read in conjunction with the consolidated financial
      statements and footnotes included in our Annual Report on Form 10-K for the
      year
      ended December 31, 2007, as filed with the SEC on March 31, 2008.




5


**Management’s
      Plans**





We
      are
      subject to various risks and uncertainties frequently encountered by companies,
      particularly companies in the rapidly evolving market for technology-based
      products and services. Such risks and uncertainties include, but are not limited
      to, our limited operating history, need for additional capital, a volatile
      business and technological environment, an evolving business model, and the
      management of expected growth. To address these risks, we must, among other
      things, gain access to capital in amounts and on terms acceptable to us,
      maintain and increase our customer base, implement and successfully execute
      our
      business strategy, continue to enhance our technology, provide superior customer
      service, and attract, retain and motivate qualified personnel. There can be
      no
      assurance that we will be successful in addressing such risks.





Since
      inception, we have incurred substantial operating losses and have a working
      capital deficit of $16.0 million and a shareholders' deficit of $16.6 million
      at
      March 31, 2008. We have funded these deficiencies by utilizing our existing
      working capital, lines of credit and long-term borrowings. We anticipate that
      we
      will continue to fund our business from existing lines of credit and from
      increasing cash flows from our business operations. However, no assurance can
      be
      given that we will be successful in increasing cash flow from operations.
      Realization of our investment in property and equipment and other long-lived
      assets is dependent upon achieving positive operating cash flows. If we do
      not
      achieve and maintain such positive operating cash flows, our long-lived assets
      could be considered impaired, resulting in a significant impairment charge
      to
      operations.





We
      incurred a net loss of $2.1 million for the three-month period ended March
      31, 2008, although the loss included certain non-cash expenses of approximately
      $1.5 million. Our 2008 operating plan, and the execution thereof, is focused
      on
      increasing revenue, controlling costs, and increasing cash flow. However, there
      can be no assurance that we will be able to meet the operational and financial
      requirements of our operating plan. We believe that our cash and cash
      equivalents, working capital and access to current and potential lenders will
      provide sufficient capital resources to fund our operations, debt service
      requirements and working capital needs at least through December 31, 2008,
      barring a redemption request from our Series A Preferred Stock shareholders.
      Refer to Note 8.





At
      any
      time after August 18, 2008, holders of at least 80% of the outstanding shares
      of
      Series A Preferred stock may elect to redeem all, but not less than all, of
      the
      outstanding shares in the amount of $31,500,000. The holders are not required
      to
      take any action, and redemption request requires approval by 80% of the holders.
      Presently there are four holders of the preferred shares, and in order to attain
      an 80% consensus, the three largest holders would need to agree.





Should
      there be a request for redemption, and should we not have the funds to meet
      the
      redemption, management believes the most immediate negative impact to our
      business arises from the terms of our debt agreements with Laurus (Refer to
      Note
      6). The debt agreements include certain events of default which would be
      triggered in the event we are unable to satisfy a redemption request. Should
      an
      event of default be triggered with Laurus, Laurus is entitled to default rate
      interest of an additional 1.5% per month. In addition, Laurus would have the
      right to cease funding under our revolving credit facility and to assert an
      accelerated request for repayment, which would equal 125% of the total principal
      outstanding on both the 2006 Facility and the 2007 Term Note (Refer to Note
      6(A)), plus any accrued and unpaid interest. We currently do not have adequate
      funds available to satisfy a request for redemption, should one
      occur.





Due
      to
      Laurus’ senior position, our current liquidity position and considering our
      current business state and prospects for the future, management believes it
      is
      in the best interest of the holders to resolve the maturing redemption in a
      manner that neither creates an event of default with Laurus nor disrupts our
      business and allows us to continue to operate consistently with our 2008
      business plan.





Management
      is actively discussing a variety of options with the holders in regards
      to their redemption rights. Management’s strategy includes, but is not
      limited to, redeeming all or a portion of the Series A preferred shares by
      inducing the holders to convert to common shares, raising additional cash
      through issuance of common shares and/or additional debt to third-parties,
      restructuring the redemption requirement, or permitting the holders to sell
      their Series A preferred shares to third-parties. There can be no assurance
      that
      management will be successful in resolving the redemption rights of the holders,
      nor can there be any assurance that there will be no disruption to our business,
      either during the period in which management is pursuing a strategy
      to resolve the redemption rights (due to, among other things,
      distraction of management from day-to-day execution of the 2008 business plan),
      or subsequently.


6





**2.** **SUMMARY
          OF SIGNIFICANT ACCOUNTING POLICIES**





A
      description of our significant accounting policies is included in our 2007
      Annual Report on Form 10-K.





**Stock-Based
      Compensation**





We
      account for all share-based payments in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 123 (revised 2004), *"Share-Based
      Payment"* (“SFAS
      123R”). SFAS 123R requires all share-based payments to employees, including
      grants of employee stock options, to be recognized in the income statement
      based
      on their fair values at the date of grant. Pro forma disclosure is no longer
      an
      acceptable alternative.




We
      use
      the Black-Scholes option pricing model to calculate the grant date fair value
      of
      an award. The fair value of options granted during the three-month periods
      ended
      March 31, 2008 and 2007 were calculated using the following estimated weighted
      average assumptions:





**Three Months Ended March 31,****2008**
            
            **2007**Stock
                options granted
            
            
            805,500
            
            
            291,700Weighted-average
                exercise price
            
            $
            0.85
            
            $
            1.04Weighted-average
                grant date fair value
            
            $
            0.65
            
            $
            0.86Assumptions:Expected
                volatility
            
            
            94
            %
            
            104
            %Expected
                term (in years)
            
            
            6
                Years
            
            
            6
                YearsRisk-free
                interest rate
            
            
            2.80
            %
            
            5.17
            %Dividend
                yield
            
            
            -
            
            
            -





Presented
      below is a summary of all stock option activity for the three-months ended
      March
      31, 2008:





**Weighted**
            
            **Weighted****Average**
            
            **Average****Number
                of**
            
            **Exercise**
            
            **Contractual****Options**
            
            **Price**
            
            **Life**Balance
                at January 1, 2008
            
            
            3,948,174
            
            $
            1.59
            
            
            8.00Granted
            
            
            805,500
            
            
            0.85
            
            
            10.00Exercised
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            24,464
            
            
            1.28
            
            
            8.22Balance
                at March 31, 2008
            
            
            4,729,210
            
            $
            1.46
            
            
            8.13Vested
                balance at March 31, 2008
            
            
            2,042,554
            
            $
            2.11
            
            
            6.73




As
      of
      March 31, 2008, there was $1.4 million of total unrecognized compensation
      expense related to the unvested, share-based compensation arrangements granted
      under the plans. That cost is expected to be recognized over a weighted-average
      period of 2.34 years. The intrinsic value of outstanding options was not
      material at March 31, 2008.




**Recently
      Issued Accounting Pronouncements**





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 141 (Revised 2007), *Business
      Combinations* (“SFAS
      141R”). SFAS 141R continues to require the purchase method of accounting to be
      applied to all business combinations, but it significantly changes the
      accounting for certain aspects of business combinations. Under SFAS 141R, an
      acquiring entity will be required to recognize all the assets acquired and
      liabilities assumed in a transaction at the acquisition-date fair value with
      limited exceptions. SFAS 141R will change the accounting treatment for certain
      specific acquisition related items including: (1) expensing acquisition
      related costs as incurred; (2) valuing noncontrolling interests at fair
      value at the acquisition date; and (3) expensing restructuring costs
      associated with an acquired business. SFAS 141R also includes a substantial
      number of new disclosure requirements. SFAS 141R is to be applied prospectively
      to business combinations for which the acquisition date is on or after
      January 1, 2009. We expect SFAS 141R will have an impact on our accounting
      for future business combinations once adopted but the effect is dependent upon
      the acquisitions that are made in the future.


7





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements* (“SFAS
      160”). SFAS 160 establishes new accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary. It clarifies that a noncontrolling interest in a subsidiary
      (minority interest) is an ownership interest in the consolidated entity that
      should be reported as equity in the consolidated financial statements and
      separate from the parent company’s equity. Among other requirements, this
      statement requires consolidated net income to be reported at amounts that
      include the amounts attributable to both the parent and the noncontrolling
      interest. It also requires disclosure, on the face of the consolidated statement
      of operations, of the amounts of consolidated net income attributable to the
      parent and to the noncontrolling interest. This statement is effective for
      us on
      January 1, 2009. We currently do not have any minority interest, as all of
      our subsidiaries are wholly-owned. We do not expect the adoption of this
      statement to have a material impact on our consolidated financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* (“SFAS
      159”). SFAS 159 allows entities to voluntarily choose to measure certain
      financial assets and liabilities at fair value (“fair value option”). The fair
      value option may be elected on an instrument-by-instrument basis and is
      irrevocable, unless a new election date occurs. If the fair value option is
      elected for an instrument, SFAS 159 specifies that unrealized gains and losses
      for that instrument be reported in earnings at each subsequent reporting date.
      SFAS 159 was effective for us on January 1, 2008. We did not apply the fair
      value option to any of our outstanding instruments and, therefore, SFAS 159
      did
      not have an impact on our consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      157”), which defines fair value, establishes a framework for measuring fair
      value in accordance with generally accepted accounting principles, and expands
      disclosures about fair value measurements. SFAS 157 was effective for us on
      January 1, 2008 for all financial assets and liabilities. For all
      nonfinancial assets and liabilities, SFAS 157 is effective for us on
      January 1, 2009. As it relates to our financial assets and liabilities, the
      adoption of SFAS 157 did not have a material impact on our consolidated
      financial statements. We are still in the process of evaluating the impact
      that
      SFAS 157 will have on our nonfinancial assets and liabilities.





**3.
      SALE OF FRONT PORCH DIGITAL, INC. AND DISCONTINUED
      OPERATIONS**





On
      July
      31, 2006, we sold substantially all of the assets of our broadcast and media
      operations, Front Porch Digital, Inc. (“Front Porch”). During the three-month
      period ended March 31, 2007, we earned approximately $14,000 associated with
      the
      earn-out provision of the sale, partially offset by additional expenses
      associated with post-closing settlement of liabilities in excess of amounts
      previously recorded. That amount is considered immaterial by us and
      has been reclassified to other income on our income statement for the
      three-months ended March 31, 2007.


8





**4.
      PROPERTY AND EQUIPMENT**





Property
      and equipment consist of the following:





**March 31,**
            
            **December 31,****2008**
            
            **2007**Computer
                equipment
            
            $
            5,036,732
            
            $
            5,469,465Software
            
            
            2,311,044
            
            
            2,195,460Assets
                held under capital lease
            
            
            6,110,990
            
            
            6,063,289Leasehold
                improvements
            
            
            765,626
            
            
            147,576Vehicles
            
            
            69,114
            
            
            69,114Office
                furniture and equipment
            
            
            123,919
            
            
            230,08414,417,425
            
            
            14,174,988Less
                accumulated depreciation
            
            
            7,209,975
            
            
            6,973,961Total
            
            $
            7,207,450
            
            $
            7,201,027




**5.
      ACCRUED EXPENSES AND OTHER**




Accrued
      expenses and other consist of the following:




**March 31,**
            
            **December 31,****2008**
            
            **2007**Wages,
                benefits and payroll taxes
            
            $
            3,311,261
            
            $
            4,393,219Professional
                fees
            
            
            41,186
            
            
            163,564Taxes,
                other than income taxes
            
            
            1,230,546
            
            
            1,434,077Deferred
                rent
            
            
            667,795
            
            
            219,657Due
                to shareholders of acquired companies
            
            
            202,608
            
            
            302,584Interest
                payable
            
            
            269,302
            
            
            374,380Other
                accrued payables
            
            
            729,140
            
            
            977,661Total
            
            $
            6,451,838
            
            $
            7,865,142




**6.
      NOTES PAYABLE AND OTHER LONG-TERM OBLIGATIONS**





The
      following is a summary of our long-term debt:





**March 31,**
            
            **December 31,****2008**
            
            **2007**Laurus
                revolving line of credit (A)
            
            $
            16,921,002
            
            $
            14,639,7002007
                term note (A)
            
            
            9,679,897
            
            
            9,466,667NST
                note (B)
            
            
            -
            
            
            175,926Convertible
                notes (C)
            
            
            -
            
            
            850,000Helio
                note (D)
            
            
            653,850
            
            
            712,500SSI
                note (E)
            
            
            211,002
            
            
            230,628Other
                obligations
            
            
            38,911
            
            
            41,21227,504,662
            
            
            26,116,633Less
                current portion
            
            
            18,998,105
            
            
            16,879,609Non-current
                portion
            
            $
            8,506,557
            
            $
            9,237,024




9





**(A)**
            **Laurus
                Convertible Note, Line of Credit and 2007 Term Note**





On February 6, 2006, we entered into a 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 years and borrowings under the 2006 Facility
      accrue interest on the unpaid principal and interest at a rate per annum equal
      to the prime rate plus 1%, subject to a floor of 7%. During June 2007, the
      available revolving credit line on the 2006 Facility was increased from $10
      million to $15 million. In consideration for the increase, we issued Laurus
      a
      common stock purchase warrant to purchase 360,000 shares of our common stock
      at
      an exercise price of $0.01 per share. The warrant was valued at $343,000 using
      the Black-Scholes model and is being amortized to earnings as additional
      interest expense over the term of the debt (through February 2009). On December
      28, 2007, the available revolving credit line on the 2006 Facility was
      increased from $15 million to $20 million. In consideration for the increase,
      we
      issued Laurus a common stock purchase warrant to purchase 350,000 shares of
      our
      common stock at an exercise price of $0.01 per share and the interest rate
      was
      changed to a fixed rate of 10%. Pursuant to a Registration Rights Agreement
      dated as of December 28, 2007, between us and Laurus, we are obligated to file
      a
      registration statement to register the resale of the shares of our common stock
      underlying the warrant and use our best efforts to have the registration
      statement declared effective not later than June 25, 2008. The registration
      statement was filed with the SEC, however it has not yet been declared
      effective. The warrant was valued at $329,000 using the Black-Scholes model
      and
      is being amortized to earnings as additional interest expense over the term
      of
      the debt (through February 2009). At March 31, 2008, outstanding borrowings
      under the 2006 Facility were $17.7 million ($16.9 million net of debt
      discounts). We had $2.3 million of available borrowings under the 2006 Facility
      at March 31, 2008.





The
      2006
      Facility requires a lockbox arrangement whereby all receipts are swept daily
      to
      reduce borrowings outstanding under the 2006 Facility. This arrangement,
      combined with a Subjective Acceleration Clause (“SAC”) in the 2006 Facility,
      cause the 2006 Facility to be classified as a current liability, per guidance
      in
      Emerging Issues Task Force (“EITF”) Issue No. 95-22, *“Balance
      Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
      that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement”
(“EITF 95-22”).*





On
      August
      17, 2007, we entered into a financing agreement with Calliope Capital
      Corporation, an affiliate of Laurus, under which we issued a $12 million
      promissory note (the “2007 Term Note”). Proceeds from the 2007 Term Note were
      used to fund the acquisitions of Helio and SSI. The 2007 Term Note bears
      interest at the prime rate plus 2.0%, subject to a floor of 10% (10% at March
      31, 2008), and initially required four months of interest only payments followed
      by twenty-six monthly principal payments of $285,714 commencing on February
      1, 2008 with any remaining unpaid principal and interest due on July 31, 2010.
      On December 28, 2007, we entered into a letter agreement that amended the terms
      of the 2007 Term Note to defer certain monthly principal payments of $285,714.
      Originally scheduled to begin February 1, 2008, these monthly payments will
      now
      begin June 1, 2008, thereby deferring $1,142,857 from 2008 until the maturity
      date of July 31, 2010. At March 31, 2008, $2.9 million was due within one year
      on the 2007 Term Note. In connection with the 2007 Term Note, we issued to
      Laurus, a warrant to purchase 3,750,000 shares of our common stock at a price
      of
      $0.01 per share, expiring July 31, 2027. The warrant was valued at $2,850,000
      using the Black-Scholes model and is being amortized to earnings as additional
      interest expense over the term of the debt. We also paid $415,000 in loan fees
      on the 2007 Term Note. These fees are also being amortized over the term of
      the
      note.





In
      connection with our financings with Laurus, we have issued to Laurus, warrants
      to purchase up to 6,133,857 shares of our common stock at prices ranging from
      $.001 to $5.00 per share. The warrants expire between May 1, 2008 and July
      31,
      2027. In addition, an option to purchase 1,071,478 shares of our common stock
      at
      $.001 per share was issued to Laurus in connection with the 2006 Facility.
      The
      option expires in February 2026. During August 2007, Laurus
      exercised 860,858 options. Using the Black-Scholes model, the value of all
      warrants and the option issued to Laurus approximated $5.2 million, which is
      being amortized to earnings as additional interest expense over the term of
      the
      related indebtedness. The unamortized balance of these deferred costs was $3.1
      million and $3.6 million at March 31, 2008 and December 31, 2007, respectively.
      Borrowings outstanding at March 31, 2008 and December 31, 2007 are reported
      net
      of the deferred financing costs associated with these
      borrowings.


10





Our
      indebtedness to Laurus is collateralized by substantially all of our assets
      and
      is accompanied by substantially similar agreements governing registration
      rights, standard events of default provisions, typical remedies available to
      Laurus in the event of default, restrictions on the payment of dividends and
      other provisions standard in these types of arrangements.





**(B)**
            **NST
                Note**





The
      NST
      Note accrued interest at an annual rate of 0.5% and was discounted by $109,300
      to reflect a fair value rate of interest of 8.75%. The note required eight
      equal
      quarterly payments of principal and interest in the amount of $190,190. At
      March
      31, 2008, the note has been repaid in full.





**(C)**
            **Convertible
                Notes**





During
      May and June 2006, we entered into a Note Purchase Agreement (the "Purchase
      Agreement") with twelve accredited individual investors and three institutional
      investors (collectively, the "Purchasers"), pursuant to which we issued and
      sold
      unsecured convertible term notes (the "Convertible Notes") in the aggregate
      principal amount of $2,410,000. At March 31, 2008, the Convertible Notes have
      been repaid in full.





In
      connection with the issuance of the Convertible Notes, we also issued to the
      Purchasers, warrants (the "Warrants") to purchase an aggregate of 570,688 shares
      of our common stock, at an exercise price of $1.40 per share (subject to
      adjustment for stock splits, stock dividends and the like) expiring during
      May
      and June 2011. Using the Black-Scholes model, we determined the value of the
      Warrants to be $651,474, which has been fully amortized to interest expense
      through the initial maturity date (June 2007).





**(D)**
            **Helio
                Note**





Pursuant
      to the acquisition of Helio during August 2007, we issued an unsecured
      convertible promissory note for $770,000 (the “Helio Note”) to a selling
      shareholder of Helio. The Helio Note bears interest at 8.0% per annum and is
      payable in twelve equal quarterly installments of principal and interest of
      $79,800, beginning November 2007, and maturing on August 14, 2010. The Helio
      Note allows the shareholder to convert, at any time, the remaining principal
      balance into shares of our common stock at a price of $1.00 per share (which
      exceeded the market price of our common stock on the date the note was issued).
      The Helio 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 Helio Note).
      Any
      outstanding balance on the Helio Note can be prepaid, without penalty, at any
      time. At March 31, 2008, the Helio Note had an outstanding balance of $0.7
      million, of which, $0.2 million is due within one year.





**(E)**
            **SSI
                Note**





Pursuant
      to the acquisition of SSI in September 2007, we issued an unsecured promissory
      note for $250,000 (the “SSI Note”) to the selling shareholder of SSI. The SSI
      Note bears interest at 5.25% per annum and is payable in twelve equal quarterly
      installments of principal and interest of $22,653, beginning December 2007,
      and
      maturing on September 1, 2010. The SSI 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 SSI Note). Any outstanding balance on the SSI Note can
      be prepaid, without penalty, at any time. At March 31, 2008, the SSI Note had
      an
      outstanding balance of $0.2 million, of which, $0.1 million is due within one
      year.





**7.
      CAPITAL LEASE OBLIGATIONS**





With
      our
      acquisition of Helio during August 2007, we assumed a liability for Helio’s
      office facilities in Santa Clara, California. The building was recorded under
      a
      capitalized lease arrangement with a remaining liability of $3.5 million
      outstanding as of the Helio acquisition date. The lease is payable in monthly
      installments at an implicit interest rate of 13% and expires during December
      2017. The total lease liability outstanding at March 31, 2008 was $3.5 million,
      of which, $0.5 million of principal and interest is due within one
      year.


11





During
      December 2007, we entered into an agreement to lease various pieces of equipment
      from an outside-party. The lease requires 20 monthly payments of principal
      and
      interest of $35,683, beginning in December 2007, with the final payment due
      in
      July 2009. The total lease liability outstanding at March 31, 2008 was $0.5
      million, of which, $0.4 million of principal and interest is due within one
      year.





During
      November 2003, we entered into a capital lease line of credit agreement (the
      "Lease Line") for $1,500,000 with a third-party lender. Subsequent to that
      date,
      we entered into four amendments to the Lease Line which enabled us to draw
      an
      additional $2.0 million in total on the line for purchases through December
      31, 2007. The amendments also grant to us a call option to purchase the
      equipment from the lessor. The terms of the Lease Line (as amended) are for
      lease terms of 12-15 months with interest rates of 15%. The total lease
      liability outstanding at March 31, 2008 was $0.2 million, of which, all is
      due
      within one year.





**8.
      SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK**





In
      connection with the acquisition of Incentra CO on August 18, 2004, 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.





The
      Series A Preferred shares are convertible at any time upon written notice to
      us
      into shares of common stock on an approximately three-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. On or after August 18, 2008, the holders
      of
      at least 80% of the Series A Preferred shares may elect to have us redeem the
      Series A Preferred shares 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. As the carrying value of the Series A Preferred
      shares is less than the redemption amount, we are accreting the difference
      so
      that the carrying value will equal the redemption amount of $31.5 million at
      the
      earliest date the holders can elect to redeem the shares. 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).





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. Our agreements with Laurus prohibit the declaration or
      payment of dividends on our common stock unless we obtain their written consent.
      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.





**9.
      EQUITY COMPENSATION PLANS**





During
      the three-months ended March 31, 2008, we adopted two new equity compensation
      plans, the 2008 Equity Incentive Plan and the 2008 Employee Stock Purchase
      Plan.
      Each of these plans is subject to shareholder approval. Each of these plans
      is
      described below.





**The
      2008 Equity Incentive Plan**





The
      2008
      Equity Incentive Plan (the “2008 Plan”) provides for the granting of options and
      restricted stock to key employees and officers of our company. A total of
      4,000,000 shares of our company’s common stock or their equivalents may be
      issued pursuant to the 2008 Plan. On March 27, 2008, 632,500 options were
      granted and 212,000 shares of restricted stock were granted under the 2008
      Plan.





The
      exercise price for options granted under the 2008 Plan is the fair market value
      on the date of the grant. Options will have a term of ten years and vest in
      three equal annual installments on the anniversary date of the grant. The
      restricted stock grants are based on a first year performance element as
      follows:





1.
            The
                2008 Adjusted EBITDA target at which 100% of the respective restricted
                stock grants that will be earned is $5.56
                million;


12





2.
            Upon
                reaching 2008 Adjusted EBITDA of $4 million, 25% of the respective
                restricted stock grants that will be earned;
                and,





3.
            At
                Adjusted EBITDA levels between $4 million and $5.56 million, the
                respective stock grants that will be earned on a prorated basis at
                25% to
                100% of targeted levels.





All
      shares earned vest annually over two years starting on the date that the
      performance element is achieved.





**The
      2008 Employee Stock Purchase Plan**





The
      2008
      Employee Stock Purchase Plan (“ESPP”) provides for eligible employees (as
      defined in the ESPP) the opportunity to purchase stock of our company through
      payroll deduction. Eligible employees may elect to have between 1% and 20%
      of
      compensation withheld each pay period for the purchase of our company’s common
      stock. Shares are purchased at the fair market value at the close of trading
      on
      the last day of each offering period. An offering period consists of each
      bi-weekly payroll period. Members of the Board of Directors may elect to
      withhold up to the full amount of cash compensation earned for services as
      a
      Director. A total of 1,000,000 shares of our company’s common stock are
      available for purchase under the ESPP. As of March 31, 2008, no shares had
      been
      purchased under the ESPP.


13




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





**General**





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





Our
      business and results of operations are affected by a wide variety of factors
      that could materially and adversely affect us and our operating 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 and continued
      enhancement of our products in a timely manner; (5) our ability to effectively
      market and sell our products and services to current and new customers; (6)
      our
      ability to negotiate and maintain suitable strategic partnerships, vendor
      relationships and corporate relationships; (7) the intensity of competition;
      and
      (8) general economic conditions. As a result of these and other factors, we
      may
      experience material fluctuations in future operating results on a quarterly
      or
      annual basis, which could materially and adversely affect our business,
      financial condition, operating results and stock price.





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





We
      supply
      a broad range of IT products and services to enterprises and service providers.
      We market our products and services to service providers and enterprise clients
      under the trade name Incentra Solutions. We deliver complete IT solutions and
      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. We provide data protection solutions and
      services that ensure that our customers' data is backed-up and recoverable
      and
      meets internal data retention compliance policies. Our remote monitoring and
      management services are delivered from our Storage Network Operations Center
      ("NOC") in Broomfield, Colorado, which monitors and manages a wide spectrum
      of
      diverse storage infrastructures on a 24x7 basis throughout North America and
      Europe. We deliver these services worldwide using our proprietary GridWorks
      Operations Support System, which enables automated remote monitoring and
      management of complete storage infrastructures and back-up applications. We
      provide 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.





Operating
      profit or loss is defined as earnings before interest, taxes, depreciation
      and
      amortization, stock compensation and cumulative effect of changes in
      accounting principles. Although operating profit and loss is not a measure
      of
      performance or liquidity calculated in accordance with accounting principles
      generally accepted in the United States (GAAP), we believe the use of the
      non-GAAP financial measure operating profit and loss 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 operating
      profit and loss provides useful information to the investor because the measure
      excludes significant non-cash interest and amortization charges related to
      our
      past financings that, when excluded, we believe produces more meaningful
      operating information. Operating profit and loss also excludes depreciation
      and
      amortization expenses, which are significant due to six acquisitions completed
      since 2004. 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 operating profit and loss to the most comparable
      GAAP financial measure, net loss before deemed dividends and accretion on
      preferred stock, is set forth below (all amounts in thousands):


14





**Three Months Ended March 31,****2008**
            
            **2007**Net
                loss before accretion of preferred stock
            
            $
            (2,115
            )
            $
            (2,291
            )Depreciation
                and amortization
            
            
            854
            
            
            794Interest
                expense, net (cash portion)
            
            
            896
            
            
            300Interest
                expense (non-cash portion)
            
            
            530
            
            
            323Taxes
            
            
            -
            
            
            26Non-cash
                stock-based compensation
            
            
            136
            
            
            439Operating
                profit (loss)
            
            $
            301
            
            $
            (409
            )




We
      continue to invest in hardware, data storage, the development of software other
      infrastructure equipment. During the three-month period ended March 31, 2008,
      we
      invested $0.2 million in software development and $0.4 million in data storage
      infrastructure. During the three-month period ended March 31, 2007, we invested
      $0.1 million in software development and $0.4 million in data storage
      infrastructure.





We
      continue to expand our product and service offerings in an effort to position
      our company as a provider of a wide range of services and products and to
      further solidify our leading market position. We also continue to increase
      the
      number of products we have available for resale to our customers, both directly
      and through existing channel partners. We introduced the sales of managed
      services along with our sales of storage products and professional services
      directly to enterprise customers. We also believe we can increase our sales
      of
      managed services by introducing these services to the customers of our acquired
      businesses. We believe our professional services business will be enhanced
      as we
      leverage our engineering resources across our entire customer base.





During
      the year ended December 31, 2007, we completed two additional strategic
      acquisitions that we believe allow us to become a more complete solutions
      provider of IT infrastructure products and services.





**Interim
      Financial Results**




Presented
      below are schedules showing condensed statement of operations categories and
      analyses of changes in those condensed categories. These schedules are derived
      from the unaudited condensed consolidated statements of operations and are
      prepared solely to facilitate the discussion of results of operations that
      follows. All dollar amounts are in thousands.





**Results
      of Operations—Three-Month Period Ended March 31, 2008 Compared to Three-Month
      Period Ended March 31, 2007**


**Three Months Ended March 31,****2008**
              
              **2007**Product
                  sales
              
              $
              41,144
              
              $
              20,482Service
                  sales
              
              
              7,081
              
              
              4,490Gross
                  margin-products
              
              
              7,179
              
              
              4,416Gross
                  margin-services
              
              
              1,848
              
              
              1,420Product
                  gross profit as a percentage of product sales
              
              
              17
              %
              
              22
              %Service
                  gross profit as a percentage of service sales
              
              
              26
              %
              
              32
              %





**Revenue.** For the
      three-month period ended March 31, 2008, total revenue from operations increased
      93% to $48.2 million from the comparable prior-year period. Revenue from the
      sale of products increased 101% to $41.1 million and revenue from the delivery
      of services increased 58% to $7.1 million. The significant growth in product
      and
      service revenue was a result of the added sales from the acquisitions of Helio
      in August 2007 and SSI in September 2007, as well as organic growth in services
      revenue.





15




**Gross
      Margin.** For the
      three-month period ended March 31, 2008, total gross margin from operations
      increased 55% to $9.0 million from the comparable prior-year period. Product
      gross margin increased 63% to $7.2 million and service gross margin increased
      30% to $1.8 million. Gross margin, as a percentage of revenue, declined from
      the
      three-month period ended March 31, 2007 to the three-month period ended March
      31, 2008, due to the large increases in product revenues in both years from
      acquisitions. Product revenues have lower gross margins than those for service
      revenues.





**Selling,
      General and Administrative Expenses** .
      Significant components of selling, general and administrative expenses
      ("SG&A") include salaries and related benefits for employees, general office
      expenses, professional fees, travel-related costs and facilities costs. For
      the
      three-month period ended March 31, 2008, SG&A expenses increased 36% to $9.2
      million from the comparable prior-year period. SG&A expenses for the
      three-month period ended March 31, 2008 included $7.2 million in salaries and
      related benefits for employees, $0.6 million in general office expenses, $0.3
      million in professional fees, $0.4 million for travel-related costs and $0.7
      million in facilities costs. SG&A expenses for the three-month period ended
      March 31, 2007 included $5.1 million in salaries and related benefits for
      employees, $0.7 million in general office expenses, $0.3 million in professional
      fees, $0.3 million for travel-related costs and $0.3 million in facilities
      costs. SG&A costs, as a percentage of total revenues, have decreased
      approximately 8% between the three-month periods ended March 31, 2008 and the
      comparable prior year period.





**Stock-based
      Compensation Expense.**For the
      three-month period ended March 31, 2008, stock-based compensation expense
      decreased 69% to $0.1 million from the comparable prior-year period. This
      decrease was primarily a result of having fully expensed option grants issued
      during 2004.





**Depreciation
      and Amortization.** Amortization expense consists of amortization of acquired customer
      relationships, capitalized software development costs and other intangible
      assets. Depreciation expense consists of depreciation of furniture, equipment,
      software and improvements. Depreciation and amortization expense was
      approximately $0.9 million and $0.8 million for the three-month periods ended
      March 31, 2008 and 2007, respectively, of which, $0.4 million and $0.5 million,
      respectively, was included in cost of revenue.





**Operating
      Loss.** For
      the
      three-month periods ended March 31, 2008 and 2007, we incurred losses from
      operations of $2.1 million and $2.3 million, respectively. The decrease in
      the
      loss from operations from the three-month period ended March 31, 2008 to the
      comparable prior year period, was due to an increase in gross margin
      attributable to the acquisitions of Helio and SSI during August and September
      2007, respectively.





**Interest
      Expense.** For
      the
      three-month periods ended March 31, 2008 and 2007, interest expense was $1.4
      million and $0.6 million, respectively. Interest expense during the three-month
      period ended March 31, 2008 included cash interest costs of $0.9 million on
      notes payable and capital leases, and non-cash interest charges of $0.5 million,
      consisting of $0.4 million related amortization of debt discounts and $0.1
      million related to warrants and amortization of financing costs. For the
      three-month period ended March 31, 2007, interest expense included cash interest
      costs of $0.3 million on notes payable and capital leases, and non-cash interest
      charges of $0.3 million, consisting of $0.2 million related to amortization
      of
      debt discounts and $0.1 million related to warrants and amortization of
      financing costs. The increase in interest expense from the three-month periods
      ended March 31, 2008 and 2007, was due primarily to the additional debt
      incurred related to our acquisitions of Helio and SSI, as well as having higher
      outstanding balances on our revolving credit facility.





**Other
      Income and Expense.** For the
      three-month periods ended March 31, 2008 and 2007, other income amounts
      consisted of miscellaneous fees collected from various outside
      sources.





**Foreign
      Currency Transaction Gain or Loss.** We
      conduct business in various countries outside the United States in which the
      functional currency of the country is not the U. S. dollar. The effects of
      exchange rate fluctuations in remeasuring foreign currency transactions for
      the
      three months ended March 31, 2008 and 2007 were minimal for each
      period.





**Net
      Loss Applicable to Common Shareholders.** During
      the three-month periods ended March 31, 2008 and 2007, we incurred net losses
      applicable to common shareholders of $2.8 million and $2.9 million,
      respectively.





16




**Liquidity
      and Capital Resources**





We
      finance our operations through cash on-hand, borrowings under our
      non-convertible revolving credit facility with Laurus, payment terms provided
      by
      our major suppliers and distributors, and equipment lease financing (see Note
      6
      to Notes to Unaudited Condensed Consolidated Financial Statements for a
      description of our Notes Payable and Other Long-Term Obligations). During June
      2007, the available revolving credit facility was increased from $10 million
      to
      $15 million, and increased again in December 2007 from $15 million to $20
      million. As of March 31, 2008, we had $2.3 million of available borrowing
      capacity under our revolving credit facility. Management believes that it has
      the ability to further increase the size of the existing revolving credit
      facility as there is sufficient collateral to support a higher level of
      borrowing availability. However, no assurance can be given that we will be
      successful in increasing the size of our revolving credit facility if and when
      we may need to.




For
      the
      three-month periods ended March 31, 2008 and 2007, net cash used in operating
      activities was $2.4 million and $3.4 million, respectively. Significant items
      which impacted our operating cash flows for the three-month period ended March
      31, 2008 included a net loss of $2.1 million and approximately $1.5 million
      of
      non-cash related items including $0.9 million of depreciation and amortization
      expense, $0.1 million of stock-based compensation expense and $0.5 million
      of
      non-cash interest expense relating to amortization of debt issuance costs.
      In
      addition, net cash used in operating activities was impacted by a $1.3 million
      reduction in accrued and other expenses which was primarily attributable to
      payments of commissions accrued for in the fourth quarter of 2007. Net cash
      provided by discontinued operations of $0.4 million consisted primarily of
      the
      collection of accrued royalty income.





For
      the
      three-month periods ended March 31, 2008 and 2007, net cash used in investing
      activities was $0.6 and $0.5 million, respectively, consisting primarily of
      purchases of equipment and capitalized software development costs. The net
      cash
      used in operating and investing activities was provided by cash on-hand and
      borrowings under the revolving credit facility and the 2007 Term
      Note.





As
      part
      of our business strategy, we completed six acquisitions from 2005 to 2007.
      Although we are experiencing success in the deployment of our marketing strategy
      for the sale and delivery of our complete IT 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, the maintenance of satisfactory agreements with our suppliers
      and distributors of products that we resell and general economic and business
      conditions, among other factors.





We
      believe cash and cash equivalents, available borrowings under the 2006 Facility,
      cash flow from operations and non-operating sources of cash will provide us
      with
      sufficient capital resources to fund our operations, debt service requirements,
      and working capital needs for the next twelve months barring a redemption
      request from our Series A preferred stock shareholders. There can be
      no assurances that we will be able to obtain additional funding when needed,
      or
      that such funding, if available, will be obtainable on terms acceptable to
      us.
      In the event that our operations do not generate sufficient cash flow, or we
      cannot obtain additional funds if and when needed, we may be forced to curtail
      or cease our activities, which would likely result in the loss to investors
      of
      all or a substantial portion of their investment.





We
      have a
      working capital deficit of $16.0 million at March 31, 2008. A significant
      component of the deficit is the $16.9 million balance outstanding on the 2006
      Facility. The 2006 Facility matures on February 26, 2009, and is subject to
      having sufficient trade receivable balances to support the associated borrowing
      base.




At
      any
      time after August 18, 2008, holders of at least 80% of the outstanding shares
      of
      Series A Preferred stock may elect to redeem all, but not less than all, of
      the
      outstanding shares currently amounting to $31,500,000. The holders are
      not required to take any action, and redemption request requires approval by
      80%
      of the holders. Presently there are four holders of the preferred shares, and
      in
      order to attain an 80% consensus, the three largest holders would need to
      agree.





Should
      there be a request for redemption, and should we not have the funds to meet
      the
      redemption, management believes the most immediate negative impact to our
      business arises from the terms of our debt agreements with Laurus. The debt
      agreements include certain events of default which would be triggered in the
      event we are unable to satisfy a redemption request. Should an event of default
      be triggered with Laurus, Laurus is entitled to a default rate interest of
      an
      additional 1.5% per month. In addition, Laurus would have the right to cease
      funding under our revolving credit facility and to assert an accelerated request
      for repayment, which would equal 125% of the total principal outstanding on
      both
      the revolving credit facility and $12 million term note, plus any accrued and
      unpaid interest. We currently do not have adequate funds available to satisfy
      a
      request for redemption, should one occur.





17




Due
      to
      Laurus’ senior position, our current liquidity position and considering our
      current business state and prospects for the future, management believes it
      is
      in the best interest of the holders to resolve the maturing redemption in a
      manner that neither creates an event of default with Laurus nor disrupts our
      business and allows it to continue to operate consistently with its 2008
      business plan.





Management
      is actively discussing a variety of options with the holders in regards to
      their
      redemption rights. Management’s strategy includes, but is not limited to,
      redeeming all or a portion of the Series A preferred shares by inducing the
      holders to convert to common shares, raising additional cash through issuance
      of
      common shares and/or additional debt to third-parties, restructuring the
      redemption requirement, or permitting the holders to sell their Series A
      preferred shares to third-parties. There can be no assurance that management
      will be successful in resolving the redemption rights of the holders, nor can
      there be any assurance that there will be no disruption to our business, either
      during the period in which management is pursuing a strategy to resolve the
      redemption rights (due to, among other things, distraction of management
      from day-to-day execution of the 2008 business plan), or
      subsequently.





**Management’s
      Plans**





We
      are
      subject to various risks and uncertainties frequently encountered by companies,
      particularly companies in the rapidly evolving market for technology-based
      products and services. Such risks and uncertainties include, but are not limited
      to, our limited operating history, need for additional capital, a volatile
      business and technological environment, an evolving business model, and the
      management of expected growth. To address these risks, we must, among other
      things, gain access to capital in amounts and on terms acceptable to us,
      maintain and increase our customer base, implement and successfully execute
      our
      business strategy, continue to enhance our technology, provide superior customer
      service, and attract, retain and motivate qualified personnel. There can be
      no
      assurance that we will be successful in addressing such risks.





Since
      inception, we have incurred substantial operating losses and have a working
      capital deficit of $16.0 million and a shareholders' deficit of $16.6 million
      at
      March 31, 2008. We have funded these deficiencies by utilizing our existing
      working capital, lines of credit and long-term borrowings. We anticipate that
      we
      will continue to fund our business from existing lines of credit and from
      increasing cash flows from our business operations. However, no assurance can
      be
      given that we will be successful in increasing cash flow from operations.
      Realization of our investment in property and equipment and other long-lived
      assets is dependent upon achieving positive operating cash flows. If we do
      not
      achieve and maintain such positive operating cash flows, our long-lived assets
      could be considered impaired, resulting in a significant impairment charge
      to
      operations.





We
      incurred a net loss of $2.1 million for the three-month period ended March
      31,
      2008, although the loss included certain non-cash expenses of approximately
      $1.5
      million. Our 2008 operating plan, and the execution thereof, is focused on
      increasing revenue, controlling costs, and increasing cash flow. However, there
      can be no assurance that we will be able to meet the operational and financial
      requirements of our operating plan. We believe that our cash and cash
      equivalents, working capital and access to current and potential lenders will
      provide sufficient capital resources to fund our operations, debt service
      requirements and working capital needs at least through December 31, 2008,
      barring a redemption request from our Series A Preferred Stock shareholders.
      Refer to Note 8.




At
      any
      time after August 18, 2008, holders of at least 80% of the outstanding shares
      of
      Series A Preferred stock may elect to redeem all, but not less than all, of
      the
      outstanding shares in the amount of $31,500,000. The holders are not required
      to
      take any action, and redemption request requires approval by 80% of the holders.
      Presently there are four holders of the preferred shares, and in order to attain
      an 80% consensus, the three largest holders would need to agree.





Should
      there be a request for redemption, and should we not have the funds to meet
      the
      redemption, management believes the most immediate negative impact to our
      business arises from the terms of our debt agreements with Laurus (Refer to
      Note
      6). The debt agreements include certain events of default which would be
      triggered in the event we are unable to satisfy a redemption request. Should
      an
      event of default be triggered with Laurus, Laurus is entitled to default rate
      interest of an additional 1.5% per month. In addition, Laurus would have the
      right to cease funding under our revolving credit facility and to assert an
      accelerated request for repayment, which would equal 125% of the total principal
      outstanding on both the 2006 Facility and the 2007 Term Note (Refer to Note
      6(A)), plus any accrued and unpaid interest. We currently do not have adequate
      funds available to satisfy a request for redemption, should one
      occur.





18




Due
      to
      Laurus’ senior position, our current liquidity position and considering our
      current business state and prospects for the future, management believes it
      is
      in the best interest of the holders to resolve the maturing redemption in a
      manner that neither creates an event of default with Laurus nor disrupts our
      business and allows us to continue to operate consistently with our 2008
      business plan.





Management
      is actively discussing a variety of options with the holders in regards
      to their redemption rights. Management’s strategy includes, but is not
      limited to, redeeming all or a portion of the Series A preferred shares by
      inducing the holders to convert to common shares, raising additional cash
      through issuance of common shares and/or additional debt to third-parties,
      restructuring the redemption requirement, or permitting the holders to sell
      their Series A preferred shares to third-parties. There can be no assurance
      that
      management will be successful in resolving the redemption rights of the holders,
      nor can there be any assurance that there will be no disruption to our business,
      either during the period in which management is pursuing a strategy
      to resolve the redemption rights (due to, among other things,
      distraction of management from day-to-day execution of the 2008 business plan),
      or subsequently.





**Off-Balance
      Sheet Financing and Other Matters**





Our
      most
      significant off-balance sheet financing arrangements as of March 31, 2008 were
      non-cancellable operating lease arrangements primarily for office space, which
      have not changed significantly since December 31, 2007. We do not participate
      in
      any off-balance sheet arrangements involving unconsolidated subsidiaries that
      provide financing or potentially expose us to unrecorded financial
      obligations.





**Critical
      Accounting Estimates**





We
      prepare our consolidated financial statements in accordance with accounting
      principles generally accepted in the United States (GAAP), which requires
      management to make estimates and assumptions that affect reported amounts and
      related disclosures. Management identifies critical accounting estimates
      as:





·
            Those
                that require the use of assumptions about matters that are inherently
                and
                highly uncertain at the time the estimates are made;
                and


·
            Those
                for which changes in the estimate or assumptions, or the use of different
                estimates and assumptions, could have a material impact on our
                consolidated results of operations or financial
                condition.





Management
      has discussed the development, selection and disclosure of our critical
      accounting estimates with the Audit Committee of our Board of Directors. For
      a
      description of our critical accounting estimates that require us to make the
      most difficult, subjective or complex judgements, please see our Annual Report
      on Form 10-K for the year ended December 31, 2007. We have not changed these
      policies from those previously disclosed.




19


**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





No
      significant change from disclosure as set forth in our annual report on Form
      10-K for the fiscal year ended December 31, 2007.





**ITEM
      4. CONTROLS AND PROCEDURES**





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





**Internal
      Control Over Financial Reporting.** There
      have not been any changes in our internal control over financial reporting
      (as
      such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
      during the three-month period ended March 31, 2008 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.


20




**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





We
      are
      involved in various claims and legal actions arising in the ordinary course
      of
      business. In the opinion of management, the ultimate disposition of these
      matters will not have a material adverse impact either individually or in the
      aggregate on our consolidated results of operations, financial position or
      cash
      flows. Accordingly, no provision has been made for any estimated losses with
      regard to such matters.





**ITEM
      1A. RISK FACTORS**





There
      has
      not been a material change to the risk factors as set forth in our annual report
      on Form 10-K for the fiscal year ended December 31, 2007.





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





None.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.





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





None.





**ITEM
      5. OTHER INFORMATION**





None.





**ITEM
      6. EXHIBITS**





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


21





**SIGNATURES**





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





Dated:
                May 15, 2008
            
            INCENTRA
                SOLUTIONS, INC.By:
                    /s/ Thomas P. Sweeney IIIThomas
                P. Sweeney IIIChief
                Executive Officer(principal
                executive officer)By:
                /s/ Anthony DiPaoloAnthony
                DiPaoloChief
                Financial Officer(principal
                financial andaccounting
                officer)




22


**EXHIBIT
      INDEX**




31.1 Certification
        of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
        to
        Section 302 of the Sarbanes-Oxley Act of 2002.
 
 31.2 Certification
        of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
        to
        Section 302 of the Sarbanes-Oxley Act of 2002.
 
 32.1 Certification
        of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
        to
        Section 906 of the Sarbanes-Oxley Act of 2002.
 
 32.2 Certification
        of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
        to
        Section 906 of the Sarbanes-Oxley Act of 2002.




23