**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**Form
      10-Q**





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


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**For
      the quarterly period ended June 30, 2008**





**OR**





**o** **TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      the transition period from _______ to _______.**





**Commission
      File Number 333-16031**





**INCENTRA
      SOLUTIONS, INC.**





(Exact
      name of 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 x No 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 o Accelerated
      Filer o Non-accelerated
      Filer o Smaller
      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 o No x





As
      of
      August 4, 2008, 22,108,451 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**





**June 30, 2008**
            
            **December 31, 2007****(UNAUDITED)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            857,019
            
            $
            3,274,600Accounts
                receivable, net of allowance for doubtful accounts of $221,849 and
                $380,913 at June 30, 2008 and December 31, 2007,
                respectively
            
            
            40,965,298
            
            
            37,137,811Current
                portion of deferred costs
            
            
            3,785,682
            
            
            2,435,075Other
                current assets
            
            
            2,894,083
            
            
            2,062,916Total
                current assets
            
            
            48,502,082
            
            
            44,910,402Property
                and equipment, net
            
            
            6,916,370
            
            
            7,201,027Capitalized
                software development costs, net
            
            
            1,166,795
            
            
            1,143,831Intangible
                assets, net
            
            
            2,669,140
            
            
            2,952,523Goodwill
            
            
            30,442,418
            
            
            30,452,152Deferred
                costs, net of current portion
            
            
            1,128,388
            
            
            752,978Other
                assets
            
            
            703,620
            
            
            762,732**TOTAL
                ASSETS**
            
            **$**
            **91,528,813**
            
            **$**
            **88,175,645****LIABILITIES
                AND SHAREHOLDERS' DEFICIT**Current
                liabilities:Current
                portion of notes payable and other long-term obligations
            
            $
            19,719,906
            
            $
            16,879,609Current
                portion of capital lease obligations
            
            
            630,830
            
            
            765,625Accounts
                payable
            
            
            34,183,200
            
            
            28,962,489Accrued
                expenses and other
            
            
            6,626,186
            
            
            7,865,142Current
                portion of deferred revenue
            
            
            5,101,975
            
            
            3,886,370Total
                current liabilities
            
            
            66,262,097
            
            
            58,359,235Notes
                payable and other long-term obligations, net of current
                portion
            
            
            8,404,771
            
            
            9,332,412Capital
                lease obligations, net of current portion
            
            
            3,526,592
            
            
            3,701,252Deferred
                revenue, net of current portion
            
            
            804,498
            
            
            847,103**TOTAL
                LIABILITIES**
            
            
            **78,997,958**
            
            
            **72,240,002**Commitments
                and contingenciesSeries
                A convertible redeemable preferred stock, $.001 par value, $31,500,000
                liquidation preference, 2,500,000 shares authorized, 2,466,971 shares
                issued and outstanding
            
            
            30,833,704
            
            
            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, 22,108,451
                and
                21,317,863 shares issued and outstanding at June 30, 2008 and December
                31,
                2007, respectively
            
            
            22,108
            
            
            21,318Additional
                paid-in capital
            
            
            130,158,121
            
            
            130,830,866Accumulated
                deficit
            
            
            (148,483,078
            )
            
            (144,770,007
            )**TOTAL
                SHAREHOLDERS' DEFICIT**
            
            
            **(18,302,849**
            **)**
            
            **(13,917,823**
            **)****TOTAL
                LIABILITIES AND SHAREHOLDERS' DEFICIT**
            
            **$**
            **91,528,813**
            
            **$**
            **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 June 30,**
            
            **Six Months Ended June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**REVENUES:Products
            
            $
            51,608,072
            
            $
            25,434,609
            
            $
            92,751,681
            
            $
            45,916,929Services
            
            
            7,639,211
            
            
            5,374,324
            
            
            14,720,274
            
            
            9,864,702**TOTAL
                REVENUE**
            
            
            **59,247,283**
            
            
            **30,808,933**
            
            
            **107,471,955**
            
            
            **55,781,631**Cost
                of revenue:Products
            
            
            42,602,674
            
            
            21,525,158
            
            
            76,567,788
            
            
            37,591,315Services
            
            
            5,314,629
            
            
            3,393,339
            
            
            10,546,912
            
            
            6,464,245Total
                cost of revenue
            
            
            47,917,303
            
            
            24,918,497
            
            
            87,114,700
            
            
            44,055,560**GROSS
                MARGIN**
            
            
            **11,329,980**
            
            
            **5,890,436**
            
            
            **20,357,255**
            
            
            **11,726,071**Selling,
                general and administrative expense
            
            
            10,602,449
            
            
            7,088,749
            
            
            19,737,349
            
            
            13,821,307Stock-based
                compensation expense
            
            
            172,722
            
            
            383,560
            
            
            308,284
            
            
            822,994Depreciation
                and amortization
            
            
            617,224
            
            
            273,145
            
            
            1,062,362
            
            
            604,57011,392,395
            
            
            7,745,454
            
            
            21,107,995
            
            
            15,248,871**LOSS
                FROM OPERATIONS**
            
            
            **(62,415**
            **)**
            
            **(1,855,018**
            **)**
            
            **(750,740**
            **)**
            
            **(3,522,800**
            **)**Interest
                expense, net
            
            
            (1,535,678
            )
            
            (822,206
            )
            
            (2,962,331
            )
            
            (1,445,392
            )**NET
                LOSS**
            
            
            **(1,598,093**
            **)**
            
            **(2,677,224**
            **)**
            
            **(3,713,071**
            **)**
            
            **(4,968,192**
            **)**Accretion
                of convertible redeemable preferred stock to redemption
                amount
            
            
            (654,392
            )
            
            (654,392
            )
            
            (1,308,784
            )
            
            (1,308,784
            )**NET
                LOSS APPLICABLE TO COMMON SHAREHOLDERS**
            
            **$**
            **(2,252,485**
            **)**
            **$**
            **(3,331,616**
            **)**
            **$**
            **(5,021,855**
            **)**
            **$**
            **(6,276,976**
            **)**Weighted
                average number of common shares outstanding - basic and
                diluted
            
            
            26,401,973
            
            
            13,075,203
            
            
            26,403,550
            
            
            13,162,751Basic
                and diluted net loss per share applicable to common
                shareholders:Net
                loss per share—basic and diluted
            
            $
            (0.09
            )
            $
            (0.25
            )
            $
            (0.19
            )
            $
            (0.48
            )





See
      accompanying notes to unaudited condensed consolidated financial
      statements.


2





**INCENTRA
      SOLUTIONS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT**


**SIX
      MONTHS ENDED JUNE 30, 2008**


**(UNAUDITED)**





**Common stock**
            
            **Additional**
              **paid-in capital**
            
            **Accumulated**
              **deficit**
            
            **Total****Shares**
            
            **Amount****Balances
                at January 1, 2008**
            
            
            **21,317,863**
            
            **$**
            **21,318**
            
            **$**
            **130,830,866**
            
            **$**
            **(144,770,007**
            **)**
            **$**
            **(13,917,823**
            **)**Stock-based
                compensation expense
            
            
            **-**
            
            
            **-**
            
            
            308,284
            
            
            -
            
            
            308,284Accretion
                of convertible redeemable preferred stock to redemption
                amount
            
            
            -
            
            
            -
            
            
            (1,308,784
            )
            
            -
            
            
            (1,308,784
            )Cash-less
                exercise of warrants
            
            
            790,588
            
            
            790
            
            
            (790
            )
            
            -
            
            
            -Reclassification
                of redemption value of expired preferred stock warrants
            
            
            -
            
            
            -
            
            
            328,545
            
            
            -
            
            
            328,545Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,713,071
            )
            
            (3,713,071
            )**Balances
                at June 30, 2008**
            
            
            **22,108,451**
            
            **$**
            **22,108**
            
            **$**
            **130,158,121**
            
            **$**
            **(148,483,078**
            **)**
            **$**
            **(18,302,849**
            **)**




See
      accompanying notes to unaudited condensed consolidated financial
      statements.


3





**INCENTRA
      SOLUTIONS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**





**SIX MONTHS ENDED JUNE 30,****2008**
            
            **2007**Cash
                flows from operating activities:Net
                loss
            
            $
            (3,713,071
            )
            $
            (4,968,192
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            1,082,463
            
            
            860,740Amortization
                of intangible assets and software development costs
            
            
            907,648
            
            
            620,682Stock-based
                compensation expense
            
            
            308,284
            
            
            822,994Amortization
                of debt issue costs
            
            
            1,123,825
            
            
            825,868Bad
                debt expense
            
            
            55,500
            
            
            4,272Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (4,316,285
            )
            
            (6,367,127
            )Other
                current assets
            
            
            (2,303,039
            )
            
            (872,724
            )Other
                assets
            
            
            (469,964
            )
            
            (1,376
            )Accounts
                payable
            
            
            5,201,711
            
            
            4,007,908Accrued
                expenses and other
            
            
            (737,848
            )
            
            (1,001,640
            )Deferred
                revenue
            
            
            1,172,999
            
            
            1,731,694Net
                cash used in continuing operations
            
            
            (1,687,777
            )
            
            (4,336,901
            )Net
                cash provided by (used in) discontinued operations
            
            
            370,008
            
            
            (12,086
            )Net
                cash used in operating activities
            
            
            (1,317,769
            )
            
            (4,348,987
            )Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (847,488
            )
            
            (672,929
            )Capitalized
                software development costs
            
            
            (447,545
            )
            
            (343,073
            )Other
            
            
            -
            
            
            65,724Net
                cash used in continuing operations
            
            
            (1,295,033
            )
            
            (950,278
            )Net
                cash provided by discontinued operations
            
            
            -
            
            
            1,500,000Net
                cash (used in) provided by investing activities
            
            
            (1,295,033
            )
            
            549,722Cash
                flows from financing activities:Proceeds
                on line of credit, net
            
            
            1,869,697
            
            
            4,391,103Proceeds
                from capital leases, notes payable and other long-term
                liabilities
            
            
            327,080
            
            
            -Payments
                on capital leases, notes payable and other long-term
                liabilities
            
            
            (2,001,556
            )
            
            (715,230
            )Proceeds
                from exercise of employee stock options
            
            
            -
            
            
            13,301Payment
                of debt issuance costs
            
            
            -
            
            
            (270,000
            )Net
                cash provided by continuing operations
            
            
            195,221
            
            
            3,419,174Net
                cash provided by discontinued operations
            
            
            -
            
            
            -Net
                cash provided by financing activities
            
            
            195,221
            
            
            3,419,174Net
                decrease in cash and cash equivalents from continuing
                operations
            
            
            (2,787,589
            )
            
            (1,868,005
            )Net
                increase in cash and cash equivalents from discontinued
                operations
            
            
            370,008
            
            
            1,487,914Net
                decrease in cash and cash equivalents
            
            
            (2,417,581
            )
            
            (380,091
            )Cash
                and cash equivalents at beginning of period
            
            
            3,274,600
            
            
            976,673Cash
                and cash equivalents at end of period
            
            $
            857,019
            
            $
            596,582Supplemental
                disclosures of cash flow information:Cash
                paid during the period for interest
            
            $
            1,838,508
            
            $
            619,524Supplemental
                disclosures of non-cash investing and financing
                activities:Purchases
                of property and equipment included in accounts payable
            
            $
            156,167
            
            $
            163,432Reclassification
                of redemption value of expired preferred stock warrants
            
            $
            328,545
            
            $
            -





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." On July 31, 2006, we sold substantially all of the assets of
      our
      broadcast and media operations, Front Porch Digital, Inc. (“Front Porch”). In
      2007 we completed two acquisitions: 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 two acquisitions in our consolidated financial statements
      from their acquisition dates through June 30, 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. Certain prior year amounts have
      been reclassified to conform with current year presentations. The results for
      the three-month and six-month periods ended June 30, 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 $17.8 million and a shareholders' deficit of $18.3 million
      at
      June 30, 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. The 2006 Facility matures
      on
      February 26, 2009, and is subject to having sufficient trade receivable balances
      to support the associated borrowing base. As of June 30, 2008, we had $2.4
      million of available borrowing capacity under our revolving credit facility.
      We
      believe we can renew and/or extend our current line upon maturity. However,
      no
      assurance can be given that we will be successful in increasing cash flow from
      operations or that additional funding can be obtained when needed, or that
      such
      funding, if available, will be obtainable on terms acceptable to us. 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 $3.7 million for the six-month period ended June 30,
      2008, although the net loss included certain non-cash expenses of approximately
      $3.6 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, assuming the renewal or
      extension of our revolving credit facility, 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 the next twelve
      months.




On
        August
        13, 2008, we agreed with the holders of the Series A Convertible Redeemable
        Preferred stockholders to extend the earliest possible redemption date from
        August 18, 2008 to January 1, 2010. We also agreed to amend the terms of
        our
        Series A Convertible Redeemable Stock to provide for the accrual of a cash
        dividend equal to 6% per annum of the original issue price ($31.2 million
        in the
        aggregate) of our Series A Preferred Redeemable stock, accruing daily, starting
        August 19, 2008 through February 18, 2009 and 12% thereafter until the
        redemption date. However, for any preferred shares converted to common stock
        prior to February 19, 2009, dividends accrued through such date are to be
        automatically waived by the respective holder upon such conversion. All other
        terms associated with the Series A Convertible Redeemable Preferred Stock
        remain
        unchanged.





**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
      use
      the Black-Scholes option pricing model to calculate the grant date fair value
      of
      each award. The fair value of options granted during the six-month periods
      ended
      June 30, 2008 and 2007 were calculated using the following estimated weighted
      average assumptions:


6





**Six
                Months Ended June 30,****2008**
            
            **2007**Stock
                options granted
            
            
            886,500
            
            
            665,700Weighted-average
                exercise price
            
            $
            0.85
            
            $
            1.02Weighted-average
                grant date fair value
            
            $
            0.65
            
            $
            0.83Assumptions:Expected
                volatility
            
            
            94
            %
            
            102
            %Expected
                term (in years)
            
            
            6
                Years
            
            
            6
                YearsRisk-free
                interest rate
            
            
            2.82
            %
            
            5.01
            %Dividend
                yield
            
            
            -
            
            
            -





Presented
      below is a summary of stock option activity for the six months ended June 30,
      2008:





**Weighted**
            
            **Weighted****Average**
            
            **Average****Number of**
            
            **Exercise**
            
            **Contractual****Options**
            
            **Price**
            
            **Life**Balance
                at January 1, 2008
            
            
            3,948,174
            
            $
            1.59
            
            
            8.00Granted
            
            
            886,500
            
            
            0.85
            
            
            10.00Exercised
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            172,912
            
            
            1.11
            
            
            8.57Balance
                at June 30, 2008
            
            
            4,661,762
            
            $
            1.46
            
            
            7.90Vested
                balance at June 30, 2008
            
            
            2,331,753
            
            $
            2.00
            
            
            6.70




As
      of
      June 30, 2008, there was $1.3 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
      2.16 years. The intrinsic value of outstanding options was not material at
      June
      30, 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 non-controlling 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.





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.


7





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.
      PROPERTY AND EQUIPMENT**





Property
      and equipment consist of the following:





**June 30,**
            
            **December 31,****2008**
            
            **2007**Computer
                equipment
            
            $
            4,534,599
            
            $
            5,469,465Software
            
            
            2,197,383
            
            
            2,195,460Assets
                held under capital lease
            
            
            6,110,992
            
            
            6,063,289Leasehold
                improvements
            
            
            803,434
            
            
            147,576Vehicles
            
            
            69,114
            
            
            69,114Office
                furniture and equipment
            
            
            128,703
            
            
            230,08413,844,225
            
            
            14,174,988Less
                accumulated depreciation
            
            
            6,927,855
            
            
            6,973,961Total
            
            $
            6,916,370
            
            $
            7,201,027




**4.
      ACCRUED EXPENSES AND OTHER**




Accrued
      expenses and other consists of the following:




**June 30,**
            
            **December 31,****2008**
            
            **2007**Wages,
                benefits and payroll taxes
            
            $
            3,752,840
            
            $
            4,393,219Taxes,
                other than income taxes
            
            
            930,172
            
            
            1,434,077Deferred
                rent
            
            
            269,311
            
            
            219,657Interest
                payable
            
            
            257,665
            
            
            374,380Due
                to shareholders of acquired companies
            
            
            208,063
            
            
            302,584Professional
                fees
            
            
            158,190
            
            
            163,564Other
                accrued payables
            
            
            1,049,945
            
            
            977,661Total
            
            $
            6,626,186
            
            $
            7,865,142





8





**5.
      NOTES PAYABLE AND OTHER LONG-TERM OBLIGATIONS**





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




**June 30,**
            
            **December 31,****2008**
            
            **2007**Laurus
                revolving line of credit (A)
            
            $
            16,958,402
            
            $
            14,639,7002007
                term note (A)
            
            
            9,687,009
            
            
            9,466,667NST
                note (B)
            
            
            -
            
            
            175,926Convertible
                notes (C)
            
            
            -
            
            
            850,000Helio
                note (D)
            
            
            594,027
            
            
            712,500SSI
                note (E)
            
            
            191,118
            
            
            230,628Other
                obligations
            
            
            694,121
            
            
            136,60028,124,677
            
            
            26,212,021Less
                current portion
            
            
            19,719,906
            
            
            16,879,609Non-current
                portion
            
            $
            8,404,771
            
            $
            9,332,412




**(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%. 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). Pursuant to a Registration Rights
      Agreement dated as of December 28, 2007, between us and Laurus, we were
      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 and was declared effective on
      June
      9, 2008. At June 30, 2008, outstanding borrowings under the 2006 Facility were
      $17.6 million ($17.0 million net of debt discounts). We had $2.4 million of
      available borrowings under the 2006 Facility at June 30, 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 $12.0 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 June
      30,
      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 began
      June 1, 2008, thereby deferring $1.1 million from 2008 until the maturity date
      of July 31, 2010. At June 30, 2008, $3.4 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. During May 2008, Laurus exercised 790,588
      options. 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.


9


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 13, 2011 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 862,088 options. During May 2008, Laurus exercised a warrant for
      800,000 shares of common stock. 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 $2.6
      million and $3.6 million at June 30, 2008 and December 31, 2007, respectively.
      Borrowings outstanding at June 30, 2008 and December 31, 2007 are reported
      net
      of the deferred financing costs associated with these borrowings.





**(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
      June
      30, 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 June 30, 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
      $72,900, 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 June 30, 2008, the Helio Note had an outstanding balance of $0.6
      million, of which $0.2 million is due within one year.


10





**(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 June 30, 2008, the SSI Note had
      an
      outstanding balance of $0.2 million, of which $0.1 million is due within one
      year.





**6.
      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 obligation is payable
      in
      monthly installments at an implicit interest rate of 13% and expires during
      December 2017. The total lease liability outstanding at June 30, 2008 was $3.5
      million, of which $0.1 million of principal is due within one year.





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
      June 2009. The total lease liability outstanding at June 30, 2008 was $0.5
      million, of which, $0.4 million of principal is due within one year.




During
      November 2003, we entered into a capital lease line of credit agreement (the
      "Lease Line") for $1.5 million 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 June 30, 2008 was $0.1 million, of which all is due
      within one year.





**7.
      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 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
      August
      13, 2008, the holders and the Company agreed to extend the Series A Preferred
      shares optional redemption date from August 18, 2008 to January 1, 2010. On
      or
      after that date, 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 ($31.2 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. In
      conjunction with the amendment, a dividend will now accrue at a rate of 6%
      through February 18, 2009 and 12% thereafter through the optional redemption
      date.  However,
      for any Series A Preferred stock converted to common stock prior to February
      19,
      2009, dividends accrued through such date are to be automatically waived by
      the
      respective holder upon such conversion. All other terms associated with the
      Series A Preferred shares remain unchanged. 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.


11





**8.
      EQUITY COMPENSATION PLANS**





During
      the first quarter of 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 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. As of June 30, 2008, 636,000 options
      and 213,000 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 have a term of 10 years and vest in three
      equal annual installments on the anniversary date of the grant.




Restricted
      stock granted under the 2008 Plan is earned based on the achievement of certain
      performance objectives, a services growth rate and a cash flow
      measure. A
      range
      has been established for the target services growth rate such that there is
      the
      potential to earn between 0% and 150% of the target award. If this performance
      element is achieved at any level above 0%, then the cash flow measure is
      evaluated as follows:





1.
            The
                2008 Adjusted EBITDA target, as approved by the Board of Directors,
                is the
                level at which 100% of the respective restricted stock grants will
                be
                earned;2.
            Upon
                reaching 72% of the 2008 Adjusted EBITDA target, 25% of the respective
                restricted stock granted will be earned; and,3.
            At
                Adjusted EBITDA levels between 72% and 100% of the target, the respective
                stock granted will be earned on a prorated basis range
                between 25% and 100% of targeted
                levels.




The
      combination of the two percentages will determine the ultimate amount of the
      restricted stock awarded.





All
      shares earned vest annually over two years starting on the first day of the
      year
      that follows the performance period.





**The
      2008 Employee Stock Purchase Plan**





The
      2008
      Employee Stock Purchase Plan (“ESPP”) provides eligible employees (as defined in
      the ESPP) the opportunity to purchase stock of our Company through payroll
      deductions. 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. Under the ESPP, 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 June 30, 2008, no shares had been
      purchased under the ESPP.


12





**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.





We
      continue to invest in hardware, data storage, the development of software and
      other infrastructure equipment. During the six-month period ended June 30,
      2008,
      we invested $0.4 million in software development and $0.8 million in data
      storage infrastructure. During the six-month period ended June 30, 2007, we
      invested $0.3 million in software development and $0.7 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.





**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.


13





***Results
      of Operations***





**Three-Month
      Period Ended June 30, 2008 Compared to the Three-Month Period Ended June 30,
      2007 and the Six-Month Period Ended June 30, 2008 Compared to the Six-Month
      Period Ended June 30, 2008**





**Three Months Ended June 30,**
            
            **Six Months Ended June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Product
                sales
            
            $
            51,608
            
            $
            25,435
            
            $
            92,752
            
            $
            45,917Service
                sales
            
            
            7,639
            
            
            5,374
            
            
            14,720
            
            
            9,865Gross
                margin-products
            
            $
            9,005
            
            $
            3,910
            
            $
            16,184
            
            $
            8,326Gross
                margin-services
            
            
            2,324
            
            
            1,981
            
            
            4,173
            
            
            3,401Product
                gross profit as a percentage of product sales
            
            
            17.5
            %
            
            15.4
            %
            
            17.4
            %
            
            18.1
            %Service
                gross profit as a percentage of service sales
            
            
            30.4
            %
            
            36.9
            %
            
            28.3
            %
            
            34.5
            %





**Revenue.** For the
      three-month period ended June 30, 2008, total revenue from operations increased
      92.3% to $59.2 million from the comparable prior-year period. Revenue from
      the
      sale of products increased 102.9% to $51.6 million and revenue from the delivery
      of services increased 42.1% to $7.6 million. For the six-month period ended
      June
      30, 2008, total revenue from operations increased 92.7% to $107.5 million from
      the comparable prior-year period. Revenue from the sale of products increased
      102.0% to $92.8 million and revenue from the delivery of services increased
      49.2% to $14.7 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.





**Gross
      Margin.** For the
      three-month period ended June 30, 2008, total gross margin from operations
      increased 92.3% to $11.3 million from the comparable prior-year period. Product
      gross margin increased 130.3% to $9.0 million and service gross margin increased
      17.3% to $2.3 million. For the six-month period ended June 30, 2008, total
      gross
      margin from operations increased 73.6% to $20.4 million from the comparable
      prior-year period. Product gross margin increased 94.4% to $16.2 million and
      service gross margin increased 22.7% to $4.2 million. Gross margin, as a
      percentage of revenue, remained constant at 19.1% for the three-month period
      ended June 30, 2008, as compared to the comparable prior-year period. For the
      six-month periods ended June 30, 2008 and 2007, gross margin, as a percentage
      of
      revenue was 19.0% and 21.0%, respectively. Product gross margin, as a percentage
      of revenue, for the three-month periods ended June 30, 2008 and 2007 were 17.5%
      and 15.4%, respectively. This increase is primarily a result of our ability
      to
      deliver a broader technology portfolio. Product gross margin, as a percentage
      of
      revenue, was 17.4% and 18.1% for the six-month periods ended June 30, 2008
      and
      2007, respectively. This decrease is due to lower margins for product sales
      from
      the acquired companies during the first quarter of 2008. Service gross margin,
      as a percentage of revenue for the three-month periods ended June 30, 2008
      and
      2007 were 30.4% and 36.9%, respectively, and 28.3% and 34.5% for the six-month
      periods ended June 30, 2008 and 2007, respectively. The year-over-year decline
      in the services gross margin percentage is reflective of a higher volume of
      First Call support contracts, which carry a lower margin than other managed
      services, and an increase in the volume of outside contractors used to deliver
      professional services engagements.





**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 June 30, 2008, total SG&A expenses increased 50% to
      $10.6 million from the comparable prior-year period. For the six-month period
      ended June 30, 2008, SG&A expenses increased 43% to $19.7 million from the
      comparable prior-year period. These increases are a direct result of larger
      commission costs associated with the higher margins earned in 2008 and increased
      personnel costs associated with the acquisitions completed in the third quarter
      of 2007. SG&A costs, as a percentage of total revenues, have decreased
      approximately 5% between the three-month period ended June 30, 2008 and the
      comparable prior year period and approximately 6% between the six-month period
      ended June 30, 2008 and the comparable prior year period. These decreases are
      the result of our continuing efforts to modify our operations to match our
      business model.


14





**Stock-based
      Compensation Expense.** For the
      three-month period ended June 30, 2008, stock-based compensation expense
      decreased 55% to $0.2 million from the comparable prior-year period. For the
      six-month period ended June 30, 2008, stock-based compensation expense decreased
      63% to $0.3 million from the comparable prior-year period. These decreases
      were
      primarily a result of having fully expensed option grants issued prior to June
      30, 2005.





**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 leasehold improvements. Depreciation and amortization expense
      was
      approximately $1.1 million and $0.7 million for the three-month periods ended
      June 30, 2008 and 2007, respectively, of which, $0.5 million and $0.4 million,
      respectively, was included in cost of revenue. Depreciation and amortization
      expense was approximately $2.0 million and $1.5 million for the six-month
      periods ended June 30, 2008 and 2007, respectively, of which, $0.9 million
      and
      $0.9 million, respectively, was included in cost of revenue.





**Loss
      from Operations.** For the
      three-month periods ended June 30, 2008 and 2007, our loss from operations
      decreased 97% to $0.1 million. For the six-month periods ended June 30, 2008
      and
      2007, our loss from operations decreased 79% to $0.8 million. The decrease
      in
      the loss from operations from the three-month and six-month periods ended June
      30, 2008 to the comparable prior year periods, was due to an increase in gross
      margin attributable to the acquisitions of Helio and SSI, as well as organic
      growth in services revenue and the continuing decline in SG&A expenses as a
      percentage of revenue.





**Interest
      Expense.** Interest
      expense consisted of cash interest owed on various debt instruments, including
      our revolving credit facility, notes payable and capital leases, as well as,
      non-cash interest expense related to amortization of debt discounts and deferred
      financing charges. For the three-month periods ended June 30, 2008 and 2007,
      interest expense was $1.5 million and $0.8 million, respectively. Interest
      expense incurred during the three-month periods ended June 30, 2008 and 2007
      included cash interest payments of $0.9 million and $0.3 million, respectively,
      and non-cash interest amortization totaling $0.6 million and $0.5 million,
      respectively. For the six-month periods ended June 30, 2008 and 2007, interest
      expense was $3.0 million and $1.5 million, respectively. Interest expense
      incurred during the six-month periods ended June 30, 2008 and 2007 included
      cash
      interest payments of $1.8 million and $0.6 million, respectively, and non-cash
      interest amortization totaling $1.1 million and $0.8 million, respectively.
      The
      increases in interest expense from the three-month and six-month periods ended
      June 30, 2008 and 2007, were 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.





**Net
      Loss Applicable to Common Shareholders.** During
      the three-month periods ended June 30, 2008 and 2007, we incurred net losses
      applicable to common shareholders of $2.3 million and $3.3 million,
      respectively. During the six-month periods ended June 30, 2008 and 2007, we
      incurred net losses applicable to common shareholders of $5.0 million and $6.3
      million, respectively.





**Liquidity
      and Capital Resources**





Operating
      profit or loss is defined as earnings before interest, taxes, depreciation
      and
      amortization and stock compensation. 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):


15





**For the Three Months Ended June 30,**
            
            **For the Six Months Ended June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                loss before accretion of preferred stock
            
            $
            (1,598
            )
            $
            (2,677
            )
            $
            (3,713
            )
            $
            (4,968
            )Depreciation
                and amortization
            
            
            1,330
            
            
            687
            
            
            2,184
            
            
            1,507Interest
                expense, net (cash portion)
            
            
            942
            
            
            319
            
            
            1,838
            
            
            619Interest
                expense (non-cash portion)
            
            
            594
            
            
            503
            
            
            1,124
            
            
            826Non-cash
                stock-based compensation
            
            
            172
            
            
            384
            
            
            308
            
            
            823Operating
                profit (loss)
            
            $
            1,440
            
            $
            (784
            )
            $
            1,741
            
            $
            (1,193
            )





For
      the
      six-month periods ended June 30, 2008 and 2007, net cash used in investing
      activities from continuing operations was $1.3 million and $1.0 million,
      respectively, consisting primarily of purchases of equipment and capitalized
      software development costs. For the six-month period ended June 30, 2007, net
      cash provided by investing activities from discontinued operations included
      $1.5
      million of escrowed proceeds from the sale of Front Porch. 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.





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
      5
      to Notes to Unaudited Condensed Consolidated Financial Statements for a
      description of our Notes Payable and Other Long-Term Obligations). We have
      a
      working capital deficit of $17.8 million at June 30, 2008. A significant
      component of the deficit is the $17.6 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. As of June 30, 2008, we had $2.4 million of available borrowing capacity
      under our revolving credit facility. We believe we can renew and/or extend
      our
      current line upon maturity, however, 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.





On
      August
      13, 2008, we agreed with the holders of the Series A Convertible Redeemable
      Preferred stockholders to extend the earliest possible redemption date from
      August 18, 2008 to January 1, 2010. We also agreed to amend the terms of our
      Series A Convertible Redeemable Stock to provide for the accrual of a cash
      dividend equal to 6% per annum of the original issue price ($31.2 million in
      the
      aggregate) of our Series A Preferred Redeemable stock, accruing daily, starting
      August 19, 2008 through February 18, 2009 and 12% thereafter until the
      redemption date. However, for any preferred shares converted to common stock
      prior to February 19, 2009, dividends accrued through such date are to be
      automatically waived by the respective holder upon such conversion. All other
      terms associated with the Series A Convertible Redeemable Preferred Stock remain
      unchanged.





We
      believe assuming the renewal or extension of our revolving credit facility,
      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
      the next twelve months.




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





Our
      most
      significant off-balance sheet financing arrangements as of June 30, 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.


16


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.


17





**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 six-month period ended June 30, 2008 that have materially affected,
      or are reasonably likely to materially affect, our internal control over
      financial reporting.


18





**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**





In
      addition to the disclosure in Item 1A-Risk Factors in our annual report on
      Form
      10K for the year ended December 31, 2007, you should carefully consider the
      risk
      factors set below:


**Failure
        to extend, renew or replace our 2006 Facility could adversely affect our
        results
        of operations.** The
        2006
        Facility matures on February 26, 2009. Presently, it is our primary source
        of
        working capital. Should we not be able to extend, renew or replace the 2006
        Facility with a facility having similar terms, our ability to conduct business
        would be impaired due to less availability of working capital. The 2006 Facility
        is subject to having sufficient trade receivable balances to support the
        associated borrowing base. As of June 30, 2008, we had $2.4 million of available
        borrowing capacity under our revolving credit facility. We believe we can
        renew
        and/or extend our current line upon maturity, however, 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.
  **Redemption
        obligations under our Series A Preferred Stock may have an adverse impact
        on our
        business.** The
        Series A preferred shareholders have a right of redemption that matures on
        January 1, 2010. From that date forward, the shareholders have the right
        but not
        the obligation to demand redemption at a price equal to the greater of (i)
        $12.60 (subject to certain adjustments) per each share of Series A preferred
        stock (currently $31.2 million in the aggregate) plus an amount equal to
        all
        accumulated but unpaid dividends on each such share of Series A preferred
        stock
        or (ii) the fair market value of the common stock in to which the shares
        of
        Series A preferred stock is then convertible. We do not presently have
        sufficient cash to meet a redemption demand and our 2009 business plan does
        not
        provide for sufficient cash flow to meet a redemption demand, should one
        occur.
        The Series A preferred shareholders are not required to take any action and
        any
        request for redemption must be approved by 80% of the Series A preferred
        shareholders. However, if such a demand were to be made, an event of default
        may
        be deemed to have occurred under our debt agreements with Laurus due to a
        subjective acceleration clause. Laurus would have the right to demand repayment
        of all outstanding obligations due to Laurus and these obligations are senior
        to
        the rights of these Series A preferred shareholders.




**The
        termination or reduction in vendor incentive programs could reduce our
        profitability.** Several
        of our key vendors regularly provide us with economic incentives tied to
        demand
        generation initiatives and for achieving various sales performance targets
        on
        their products. The vendors may terminate or modify these programs at any
        time.
        To the extent that we do not qualify for vendor incentives, or they are cut
        back, our profitability may be affected.
  **A
        reduction in IT spending by our customers due to lack of available credit
        could
        adversely affect our results of operations.** In
        response to credit risks in the subprime mortgage marketplace, lenders recently
        have generally made credit less available, and more expensive, for corporate
        borrowers, including our customers. A reduction in the availability or an
        increase in the price of borrowed funds could adversely affect our customers’
decisions or timing to purchase our products and services, which could adversely
        affect our sales, cash flows and results of operations. ****


19





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





Our
      stockholders approved the following proposals at our Annual Meeting of
      Stockholders held on Friday, June 27, 2008:




1)
            The
                election of the following four (4) directors, each to hold office for
                a term of one (1) year or until their respective successors have been
                duly elected or appointed:




**Nominee**
            
            **Votes
                FOR**
            
            **Votes WITHHELD**Thomas
                P. Sweeney III
            
            23,942,906
            
            148,731James
                Wolfinger
            
            23,971,072
            
            120,565Robert
                S. Kocol
            
            23,971,072
            
            120,565Thomas
                G. Hudson
            
            23,971,072
            
            120,565







2)      The
                approval of our 2008 Equity Incentive
                Plan:




**Votes
                FOR**
            
            **Votes AGAINST**
            
            **Votes ABSTAINED**
            
            **Broker NON-VOTES**19,509,920
            
            193,196
            
            8,945
            
            4,379,576




3)      The
                approval of our 2008 Employee Stock Purchase
                Plan:





**Votes
                FOR**
            
            **Votes AGAINST**
            
            **Votes ABSTAINED**
            
            **Broker NON-VOTES**19,536,250
            
            159,866
            
            15,945
            
            4,379,576


4)      Ratification
                of the appointment of GHP Horwath, P.C. as our independent registered
                public accountants for the year ending December 31,
                2008:




**Votes
                FOR**
            
            **Votes AGAINST**
            
            **Votes ABSTAINED**
            
            **Broker NON-VOTES**23,808,638
            
            1,410
            
            281,040
            
            549  **ITEM
      5. OTHER INFORMATION**





On
      August
      13, 2008, we amended the Certificate of Designation of the Series A Preferred
      Stock to extend the optional redemption date associated with this instrument.
      This optional redemption date, originally August 18, 2008, was extended to
      January 1, 2010. In conjunction with the extension a dividend was established.
      The shares will accrue a dividend at a rate of 6% through February 18, 2008
      and
      12% thereafter through the amended optional redemption date. However, if any
      shares are converted to common stock prior to February 18, 2009, the dividend
      accrued through the date of such conversion shall be automatically waived by
      the
      holder of the converted Series A Preferred Stock. The amendment is attached
      hereto as Exhibit 3.1.




**ITEM
      6. EXHIBITS**





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


20





**SIGNATURES**





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





Dated:
                August 14, 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)


21





**EXHIBIT
      INDEX**




3.1
Certificate
      of Amendment
      to Certificate of Designation of the Series A Preferred Stockholders, as adopted
      on August 13, 2008.





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.


22