I have twice now rec'd this message, first time I took it in and they showed me to clear cache, I uninstalled some apps. but now 2 weeks later I'm getting the message, I have 1.84 total space and 1.78 available on the SD card, 6.46 total and 5.64 available internal. 748mb total and 527 available total memeory. Went to my local verizon store again yesterday. They advised a factory reset...What?? Is there any other solution?

And second question, how do I do this and not lose my contacts, are they stored on the SD?

wipe the cache partition (his will not delete your data or apps):

Boot into recovery

Press and hold Power, Choose "Restart" option
When screen turns off, press and hold Volume Down and Power
When the white HBOOT screen appears, use the volume button to move down to “RECOVERY.”
Press the Power button to select “RECOVERY.”
When the Green Arrows and\or triangle and exclamation appears, hold the Volume Up and Power button at the same time.
Using the volume button, scroll down to “Wipe cache partition” and select it (power button).
Select "Reboot system now"

Now you have enough space to download and install the additional update. Verizon released 2 updates for the HTC Incredible, I'm guessing you only got one. Go to Settings> About Phone> Software> Build - 4.06 right? there is a 4.08 that (allegedly) resolves this Low on Space problem.
To get that update immediately (recommend connecting to WiFi for the download):

Go to Settings> Date\Time> Uncheck Automatic and manually set your clock ahead 1 month
Then go to Settings> About Phone> System Updates and it should be there waiting for you.
follow the prompts, it'll take about 10 minutes