UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





x QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
quarterly period ended: March 31, 2010





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: 0-21816





INFINITE
GROUP, INC.


(Exact
name of registrant as specified in its charter)





Delaware
              52-1490422(State
      or other jurisdiction of
              (IRS
      Employerincorporation
      or organization)
              Identification
      No.)





60 Office
Park Way


Pittsford,
New York 14534


(Address
of principal executive offices)





(585)
385-0610


(Registrant's
telephone number)





(Former
name, former address and former fiscal year,


if
changed since last report)





Indicate by check mark whether the
registrant (1) has 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 has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).


Yes o 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.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      Accelerated filer o
              Accelerated
      filer  oNon-accelerated
      filer  o
              Smaller
      reporting company x





Indicate
by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of
the Exchange Act).


Yes o No x





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.  There were 25,661,883
shares of the issuer’s common stock, par value $.001 per share, outstanding as
of May 12, 2010.





Infinite
Group, Inc.


Quarterly
Report on Form 10-Q


For the
Period Ended March 31, 2010





Table of
Contents





PAGEPART
      I - FINANCIAL INFORMATIONItem
      1.
                          Financial
      StatementsConsolidated Balance
      Sheets – March 31, 2010 (Unaudited) and December
      31, 2009
                          3Consolidated
      Statements of Operations (Unaudited) for the three months ended March 31,
      2010 and 2009
                          4Consolidated
      Statements of Cash Flows (Unaudited) for the three months ended March 31,
      2010 and 2009
                          5Notes
      to Consolidated Financial Statements – (Unaudited)
                          6Item
      2.
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          9Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk.
                          13Item
      4.
                          Controls
      and Procedures
                          13PART II – OTHER INFORMATIONItem
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          13Item 6.
                          Exhibits
                          14SIGNATURES
                          
                          
                          14




FORWARD-LOOKING
STATEMENTS




Certain
statements made in this Quarterly Report on Form 10-Q are “forward-looking
statements” regarding the plans and objectives of management for future
operations and market trends and expectations.  Such statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements.  The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties.  Our plans and objectives are based, in part, on
assumptions involving the continued expansion of our
business.  Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our
control.  Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate.  In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives and
plans will be achieved.  We undertake no obligation to revise or
update publicly any forward-looking statements for any reason.  The
terms “we”, “our”, “us”, or any derivative thereof, as used herein refer to
Infinite Group, Inc., a Delaware corporation, and its
predecessors.


2


PART
I - FINANCIAL INFORMATION


Item
1.  Financial Statements.





INFINITE
GROUP, INC.


Consolidated
Balance Sheets





March 31,
                          
                          
                          December 31,2010
                          
                          
                          2009(Unaudited)ASSETSCurrent
      assets:Cash
                          
                          $
                          151,558
                          
                          
                          $
                          196,711Accounts
      receivable, net of allowance of $70,000
                          
                          
                          1,105,743
                          
                          
                          
                          1,118,580Prepaid
      expenses and other current assets
                          
                          
                          76,286
                          
                          
                          
                          56,622Total
      current assets
                          
                          
                          1,333,587
                          
                          
                          
                          1,371,913Property
      and equipment, net
                          
                          
                          92,132
                          
                          
                          
                          58,777Deposits
      and other assets
                          
                          
                          18,424
                          
                          
                          
                          21,544Total
      assets
                          
                          $
                          1,444,143
                          
                          
                          $
                          1,452,234LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      liabilities:Accounts
      payable
                          
                          
                          651,111
                          
                          
                          
                          686,457Accrued
      payroll
                          
                          
                          507,656
                          
                          
                          
                          388,131Accrued
      interest payable
                          
                          
                          294,209
                          
                          
                          
                          275,563Accrued
      retirement and pension
                          
                          
                          3,184,051
                          
                          
                          
                          3,078,361Accrued
      expenses - other
                          
                          
                          66,879
                          
                          
                          
                          61,632Current
      maturities of long-term obligations-bank
                          
                          
                          42,813
                          
                          
                          
                          32,243Notes
      payable
                          
                          
                          470,000
                          
                          
                          
                          295,000Notes
      payable - related parties
                          
                          
                          129,000
                          
                          
                          
                          154,000Total
      current liabilities
                          
                          
                          5,345,719
                          
                          
                          
                          4,971,387Long-term
      obligations:Notes
      payable:Banks
      and other
                          
                          
                          183,388
                          
                          
                          
                          334,029Related
      parties
                          
                          
                          501,324
                          
                          
                          
                          501,324Accrued
      pension expense
                          
                          
                          735,012
                          
                          
                          
                          735,012Total
      liabilities
                          
                          
                          6,765,443
                          
                          
                          
                          6,541,752Commitments
      and contingencies (Note 5)Stockholders’
      deficiency:Common
      stock, $.001 par value, 60,000,000 shares authorized;25,661,883
      (25,661,883 - 2009) shares issued and outstanding
                          
                          
                          25,661
                          
                          
                          
                          25,661Additional
      paid-in capital
                          
                          
                          29,911,517
                          
                          
                          
                          29,870,506Accumulated
      deficit
                          
                          
                          (32,453,438
                          )
                          
                          
                          (32,180,645
                          )Accumulated
      other comprehensive loss
                          
                          
                          (2,805,040
                          )
                          
                          
                          (2,805,040
                          )Total
      stockholders’ deficiency
                          
                          
                          (5,321,300
                          )
                          
                          
                          (5,089,518
                          )Total
      liabilities and stockholders’ deficiency
                          
                          $
                          1,444,143
                          
                          
                          $
                          1,452,234




See notes
to unaudited consolidated financial statements.


3




INFINITE
GROUP, INC.


Consolidated
Statements of Operations (Unaudited)





Three
      Months EndedMarch 31,2010
                      
                      
                      2009Sales
                      
                      $
                      2,769,795
                      
                      
                      $
                      2,655,930Cost
      of services
                      
                      
                      2,056,804
                      
                      
                      
                      1,992,710Gross
      profit
                      
                      
                      712,991
                      
                      
                      
                      663,220Costs
      and expenses:General
      and administrative
                      
                      
                      308,299
                      
                      
                      
                      296,791Defined
      benefit pension plan
                      
                      
                      126,153
                      
                      
                      
                      164,869Selling
                      
                      
                      483,956
                      
                      
                      
                      455,369Total
      costs and expenses
                      
                      
                      918,408
                      
                      
                      
                      917,029Operating
      loss
                      
                      
                      (205,417
                      )
                      
                      
                      (253,809
                      )Interest
      expense:Related
      parties
                      
                      
                      (12,010
                      )
                      
                      
                      (12,822
                      )Other
                      
                      
                      (54,136
                      )
                      
                      
                      (56,048
                      )Total
      interest expense
                      
                      
                      (66,146
                      )
                      
                      
                      (68,870
                      )Loss
      before income tax expense
                      
                      
                      (271,563
                      )
                      
                      
                      (322,679
                      )Income
      tax expense
                      
                      
                      (1,230
                      )
                      
                      
                      (4,000
                      )Net
      loss
                      
                      $
                      (272,793
                      )
                      
                      $
                      (326,679
                      )Net
      loss per share - basic and diluted
                      
                      $
                      (.01
                      )
                      
                      $
                      (.01
                      )Weighted
      average number of shares outstanding - basic and diluted
                      
                      
                      25,661,883
                      
                      
                      
                      25,230,189





See notes
to unaudited consolidated financial statements.


4




INFINITE
GROUP, INC.


Consolidated
Statements of Cash Flows (Unaudited)





Three Months EndedMarch 31,2010
                      
                      
                      2009Operating
      activities:Net
      loss
                      
                      $
                      (272,793
                      )
                      
                      $
                      (326,679
                      )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Stock
      based compensation
                      
                      
                      41,011
                      
                      
                      
                      48,886Depreciation
                      
                      
                      8,388
                      
                      
                      
                      8,180Decrease
      (increase) in assets:Accounts
      receivable
                      
                      
                      12,837
                      
                      
                      
                      (50,931
                      )Other
      assets
                      
                      
                      (16,544
                      )
                      
                      
                      (33,247
                      )(Decrease)
      increase in liabilities:Accounts
      payable
                      
                      
                      (35,346
                      )
                      
                      
                      111,653Accrued
      expenses
                      
                      
                      143,418
                      
                      
                      
                      134,993Accrued
      pension obligations
                      
                      
                      105,690
                      
                      
                      
                      104,593Net
      cash used by operating activities
                      
                      
                      (13,339
                      )
                      
                      
                      (2,552
                      )Investing
      activities:Purchase
      of property and equipment
                      
                      
                      (3,068
                      )
                      
                      
                      (2,862
                      )Net
      cash used by investing activities
                      
                      
                      (3,068
                      )
                      
                      
                      (2,862
                      )Financing
      activities:Repayments
      of notes payable
                      
                      
                      (3,746
                      )
                      
                      
                      (26,773
                      )Repayments
      of note payable-related party
                      
                      
                      (25,000
                      )
                      
                      
                      (50,000
                      )Net
      cash used by financing activities
                      
                      
                      (28,746
                      )
                      
                      
                      (76,773
                      )Net
      decrease in cash
                      
                      
                      (45,153
                      )
                      
                      
                      (82,187
                      )Cash
      - beginning of period
                      
                      
                      196,711
                      
                      
                      
                      153,336Cash
      - end of period
                      
                      $
                      151,558
                      
                      
                      $
                      71,149Supplemental
      disclosure:Cash
      paid for:Interest
                      
                      $
                      50,387
                      
                      
                      $
                      54,469Income
      taxes
                      
                      $
                      1,230
                      
                      
                      $
                      4,000





See notes
to unaudited consolidated financial statements.


5


INFINITE
GROUP, INC.





Notes to
Consolidated Financial Statements–(Unaudited)





Note
1. Basis of Presentation





The
accompanying unaudited consolidated financial statements of Infinite Group, Inc.
(“Infinite Group, Inc.” or the “Company”) included herein have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States of America (U.S.) for interim financial information and with
instructions to Form 10-Q.   Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the U.S. for complete financial statements.   In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included.  All such adjustments are of a normal
recurring nature.  The December 31, 2009
balance sheet has been derived from the audited financial statements at that
date, but does not include all disclosures required by
GAAP.The accompanying unaudited consolidated financial
statements should be read in conjunction with the Company’s audited consolidated
financial statements and the notes thereto included in the Company’s Annual
report on Form 10-K for the year ended December 31, 2009 filed with the U.S.
Securities and Exchange Commission (SEC).  Results of consolidated
operations for the three months ended March 31, 2010 are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 2010.  The unaudited consolidated financial statements
herein include the accounts of the Company and its wholly owned
subsidiaries.  The subsidiaries are inactive.  All material
inter-company accounts and transactions have been eliminated.





Note
2. Summary of Significant Accounting Policies





There are
several accounting policies that the Company believes are significant to the
presentation of its consolidated financial statements.  These policies
require management to make complex or subjective judgments about matters that
are inherently uncertain.  Note 3 to the Company’s audited
consolidated financial statements for the year ended December 31, 2009 presents
a summary of significant accounting policies.





Reclassification





The
Company reclassified certain prior year amounts in its consolidated financial
statements to conform to the current year’s presentation.





Recent
Accounting Pronouncements




Effective
January 1, 2010, the Company partially adopted the provisions of FASB ASU
No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which
amends ASC 820-10-50 to require new disclosures concerning (1) transfers
into and out of Levels 1 and 2 of the fair value measurement hierarchy, and
(2) activity in Level 3 measurements.  In addition, ASU
No. 2010-06 clarifies certain existing disclosure requirements regarding
the level of disaggregation and inputs and valuation techniques and makes
conforming amendments to the guidance on employers’ disclosures about
postretirement benefit plans assets.  The requirements to disclose
separately purchases, sales, issuances, and settlements in the Level 3
reconciliation are effective for fiscal years beginning after December 15,
2010 (and for interim periods within such years).  Accordingly, the
Company will apply the disclosure requirements relative to the Level 3
reconciliation in the first quarter of 2011.  There was no impact on
the Company’s financial position, results of operations or cash flows as a
result of the partial adoption of ASU No. 2010-06 as of and for the three
months ended March 31, 2010.





Note
3. Stock Option Plans





The
Company has approved stock options plans covering up to an aggregate of
9,173,833 shares of common stock.  Such options may be designated at
the time of grant as either incentive stock options or nonqualified stock
options.  Stock based compensation includes expense charges related to
all stock-based awards to employees, directors and consultants.  Such
awards include options, warrants and stock grants.





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model.  The following assumptions were
used for the three months ended March 31, 2010 and 2009:





2010
                    
                    2009Risk-free
      interest rate
                    2.74%
      - 2.90%
                    
                    2.09%Expected
      dividend yield
                    0%
                    
                    0%Expected
      stock price volatility
                    75%
                    
                    75%Expected
      life of options
                    5.75
      years
                    
                    5.75
      years


6


The
Company recorded expense for options and warrants issued to employees and
independent service providers of $41,011and $48,886 for the three months ended
March 31, 2010 and 2009, respectively.  There was no impact on net
loss per share for the three months ended March 31, 2010 and 2009.





A summary
of all stock option activity for the three months ended March 31, 2010
follows:





Number of
                          Options
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price
                        
                        Weighted-
                          Average
                          Remaining
                          Contractual
                          Term
                        
                        Aggregate
                          Intrinsic ValueOutstanding
      at December 31, 2009
                        
                        
                        5,491,500
                        
                        
                        $
                        .26Options
      granted
                        
                        
                        376,000
                        
                        
                        $
                        .17Options
      expired
                        
                        
                        (15,000
                        )
                        
                        $
                        1.50Outstanding
      at March 31, 2010
                        
                        
                        5,852,500
                        
                        
                        $
                        .25
                        
                        6.1 years
                        
                        $
                        105,549Exercisable
      at March 31, 2010
                        
                        
                        5,032,167
                        
                        
                        $
                        .25
                        
                        5.7 years
                        
                        $
                        105,549





The
weighted average fair value of options granted during the three months ended
March 31, 2010 was approximately $.11 ($.12 during the three months ended March
31, 2009).  No options were exercised during the three months ended
March 31, 2010 and 2009.





A summary
of non-vested stock option activity during the three months ended March 31, 2010
follows:




Non-vested Shares
                    
                    Shares
                    
                    
                    Weighted
                      Average
                      Fair Value
                      at Grant DateNon-vested
      at December 31, 2009
                    
                    
                    866,333
                    
                    
                    $
                    .15Granted
                    
                    
                    376,000
                    
                    
                    $
                    .11Vested
                    
                    
                    (422,000
                    )
                    
                    $
                    .13Non-vested
      at March 31, 2010
                    
                    
                    820,333
                    
                    
                    $
                    .14





At March
31, 2010, there was approximately $93,000 of total unrecognized compensation
cost related to non-vested options.  That cost is expected to be
recognized over a weighted average period of approximately one
year.  The total fair value of shares that vested during the three
months ended March 31, 2010 was approximately $54,400.





Note 4.  Earnings Per
Share





Basic net
income (loss) per share is based on the weighted average number of common shares
outstanding during the periods presented.  Diluted net income per
share is based on the weighted average number of common shares outstanding, as
well as dilutive potential common shares which, in the Company’s case, comprise
shares issuable under stock options, stock warrants and convertible notes
payable.  The treasury stock method is used to calculate dilutive
shares, which reduces the gross number of dilutive shares by the number of
shares purchasable from the proceeds of the options and warrants assumed to be
exercised.  In a loss period, the calculation for basic and diluted
net loss per share is considered to be the same, as the impact of potential
common shares is anti-dilutive.





For the three months ended
March 31, 2010, convertible debt, options and warrants to purchase 24,367,562
sharesof common stock that could potentially dilute basic net income per
share in the future were excluded from the calculation of diluted net income
(loss) per share because their inclusion would have been anti-dilutive
(23,021,232 shares of common stock for the three months ended March 31,
2009).





Note 5. – Employee Pension
Plan





Prior to
December 30, 2002, the Company owned 100% of the common stock of Osley &
Whitney, Inc. (O&W).  On December 30, 2002, the Company sold 100%
of the O&W common stock to a third party, but continued to act as the
sponsor of the Osley & Whitney, Inc. Retirement Plan (O&W
Plan).  Although the Company continued to act as the sponsor of the
Plan after the sale, during 2007 management determined that it had no legal
obligation to do so.


7


During
2007, the Company submitted information to the Department of Treasury (Treasury)
advocating that it had no legal obligation to act as the sponsor of the Plan to
ascertain whether the Treasury concurred or disagreed with this
position.  The Company subsequently provided responses to Treasury
inquiries related to this determination.  In October 2009, the Company
received a report from the Treasury that stated that the Treasury staff
disagreed with the Company’s position and as a result, the Company is
responsible for excise taxes attributed to the funding deficiency of $1,836,359
for the years 2003 through 2007 which funding deficiency can only be corrected
by contributing $1,836,359 to the Plan.  The report also states that
proposed 10% excise taxes of $348,500, penalties for late payment of excise
taxes of approximately $1,200,000, and 100% excise taxes of approximately $3.5
million related to the years ended December 31, 2006 and 2007 may be
imposed.  Penalties for late payment may be removed if the Company
provides reasonable cause for not paying the excise taxes and the Treasury
concurs with the Company’s position.  The Company and its outside
legal counsel disagree with significant aspects of both the factual findings and
legal conclusions set forth in the report and, in accordance with Treasury
procedures, have responded with a detailed analysis of its opposition to their
findings.  The Company plans to diligently pursue all appropriate
steps to perfect its appeal rights and attempt to prevail on the merits of its
position, which will include filing a protest, requesting an appeals conference,
and, if needed, petitioning the tax court and advocating its position in that
forum.





If the
Company does not ultimately prevail, it will become obligated for Plan
contributions of approximately $2.2 million as of March 31, 2010 and 10% excise
taxes on accumulated unfunded Plan contributions for the Plan years ended
December 31, 2006 and 2007 of approximately $348,500, as stated above, and
potentially additional 10% excise taxes of approximately $220,000 for the year
ended December 31, 2008, which have not been accrued based upon the Company’s
determination that it has no legal obligation to act as the Plan sponsor and the
Company’s belief that the likelihood is not probable that it will be required to
pay these excise taxes.  Further, if the Company does not ultimately
prevail, it may be required to pay interest on these excise taxes and
potentially incur penalties for late payment of excise taxes and additional
excise taxes up to 100% of each year’s required funding
deficiency.  The Company has accrued amounts related to excise taxes,
including late fees and interest, on unfunded contributions for 2003, 2004 and
2005 of approximately $452,000 as of March 31, 2010 ($445,000 at December 31,
2009).  No excise taxes, late fees or interest for 2006, 2007, 2008,
and 2009 has been accrued at March 31, 2010 or December 31, 2009.  The
Company does not have the funds available to make required contributions which
approximate $2.2 million and does not intend to make any contributions to the
O&W Plan during 2010.





During
2006, the Pension Benefit Guarantee Corporation (PBGC) placed a lien on all of
the Company’s assets to secure the contributions due to the
Plan.  This lien is subordinate to liens that secure accounts
receivable financing and certain notes payable.





On April
29, 2009, acting for the Plan, the Company sent the Plan participants a notice
of intent to terminate the Plan in a distress termination with a proposed
termination date of June 30, 2009.  The Company also provided
additional documentation regarding the Company’s status and the status of the
Plan.  The termination of the Plan is subject to approval by the
PBGC.  The Company has provided information to the PBGC which Company
management believes satisfies the requirements of the PBGC.  As of May
12, 2010, the PBGC has neither acted on the information that the Company
provided nor requested additional information.





At March
31, 2010, the O&W Plan had an accrued pension obligation liability of
$3,809,678 ($3,696,640 at December 31, 2009), which includes the underfunded
amount plus interest on past due payments and excise taxes including penalties
and interest of approximately $452,000 as discussed
above.  Accumulated other comprehensive loss of $2,805,040 ($2,805,040
at December 31, 2009) has been recorded as a reduction of stockholders’
deficiency.





The
market value of the O&W Plan assets decreased from $2,004,117 at December
31, 2009 to $1,893,889 at March 31, 2010.  The decrease was comprised
of investment returns of $6,042, offset by benefit payments of $111,699 and
expenses of $4,571.





Net
periodic pension cost recorded in the accompanying statements of operations
includes the following components of expense (benefit) for the periods
presented:




Three Months Ended
                    March 31,2010
                  
                  
                  2009Interest
      cost
                  
                  $
                  72,531
                  
                  
                  $
                  71,996Expected
      return on plan assets
                  
                  
                  (39,148
                  )
                  
                  
                  (42,115
                  )Service
      cost
                  
                  
                  12,500
                  
                  
                  
                  17,750Actuarial
      loss
                  
                  
                  31,882
                  
                  
                  
                  37,343Net
      periodic pension cost
                  
                  $
                  77,765
                  
                  
                  $
                  84,974





Note
6.  Supplemental Cash Flow Information





Non-cash
investing and financing transactions, including non-monetary exchanges,
consisted of the acquisition of computer equipment of  $38,675 under
the terms of a capital  lease during the three months ended March 31,
2010 and the conversion of accrued interest payable of $25,000 into 500,000
shares of common stock during the three months ended March 31,
2009.





************


8


Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





IT
Consulting





We are a
provider of IT services to federal, state and local government and commercial
clients.  Our expertise includes managing leading edge operations and
implementing complex programs in advanced server management, data center
consolidation, virtualization services (including server, desktop, application,
and storage), cloud computing, information security, wireless technology, human
capital services, business and technology integration, and enterprise
architecture.  We focus on aligning business processes with technology
for delivery of solutions meeting our clients’ exact needs and providing expert
management services to the lifecycle of technology-based projects.  We
have business development personnel headquartered from our corporate office in
Pittsford, NY, as well as business development offices in the Washington, D.C.
metropolitan area and Colorado Springs, CO.  During the first quarter
2010, we increased our marketing focus to include providing IT consulting
services to small and midsize businesses in the Denver/Colorado Springs region,
where we have provided IT services for several years, and in Upstate New York,
nearby our corporate headquarters.





We have
several contract vehicles that enable us to deliver a broad range of our
services and solutions to the U.S. Government and the State of
Mississippi.  The quality and consistency of our services and IT
expertise allow us to maintain long-term relationships with our major
clients.  We have entered into various subcontract agreements with
prime contractors to the U.S. Government, state and local governments and
commercial customers.





Results
of Operations


Comparison
of the Three Months ended March 31, 2010 and 2009





The
following table compares our statement of operations data for the three months
ended March 31, 2010 and 2009.  The trends suggested by this table are
not indicative of future operating results.





Three Months Ended March 31,2010 vs. 2009As a % of
                                              
                                              
                                              
                                              
                                              
                                              As a % of
                                              
                                              
                                              Amount of
                                              
                                              
                                              % Increase2010
                                              
                                              
                                              Sales
                                              
                                              
                                              2009
                                              
                                              
                                              Sales
                                              
                                              
                                              Change
                                              
                                              
                                              (Decrease)Sales
                                              
                                              $
                                              2,769,795
                                              
                                              
                                              
                                              100.0
                                              %
                                              
                                              $
                                              2,655,930
                                              
                                              
                                              
                                              100.0
                                              %
                                              
                                              $
                                              113,865
                                              
                                              
                                              
                                              4.3
                                              %Cost
      of services
                                              
                                              
                                              2,056,804
                                              
                                              
                                              
                                              74.3
                                              
                                              
                                              
                                              1,992,710
                                              
                                              
                                              
                                              75.0
                                              
                                              
                                              
                                              64,094
                                              
                                              
                                              
                                              3.2Gross
      profit
                                              
                                              
                                              712,991
                                              
                                              
                                              
                                              25.7
                                              
                                              
                                              
                                              663,220
                                              
                                              
                                              
                                              25.0
                                              
                                              
                                              
                                              49,771
                                              
                                              
                                              
                                              7.5General
      and administrative
                                              
                                              
                                              308,299
                                              
                                              
                                              
                                              11.1
                                              
                                              
                                              
                                              296,791
                                              
                                              
                                              
                                              11.2
                                              
                                              
                                              
                                              11,508
                                              
                                              
                                              
                                              3.9Defined
      benefit pension plan
                                              
                                              
                                              126,153
                                              
                                              
                                              
                                              4.6
                                              
                                              
                                              
                                              164,869
                                              
                                              
                                              
                                              6.2
                                              
                                              
                                              
                                              (38,716
                                              )
                                              
                                              
                                              (23.5
                                              )Selling
                                              
                                              
                                              483,956
                                              
                                              
                                              
                                              17.5
                                              
                                              
                                              
                                              455,369
                                              
                                              
                                              
                                              17.1
                                              
                                              
                                              
                                              28,587
                                              
                                              
                                              
                                              6.3Total
      operating expenses
                                              
                                              
                                              918,408
                                              
                                              
                                              
                                              33.2
                                              
                                              
                                              
                                              917,029
                                              
                                              
                                              
                                              34.5
                                              
                                              
                                              
                                              1,379
                                              
                                              
                                              
                                              0.2Operating
      income (loss)
                                              
                                              
                                              (205,417
                                              )
                                              
                                              
                                              (7.4
                                              )
                                              
                                              
                                              (253,809
                                              )
                                              
                                              
                                              (9.6
                                              )
                                              
                                              
                                              48,392
                                              
                                              
                                              
                                              (19.1
                                              )Interest
      expense
                                              
                                              
                                              (66,146
                                              )
                                              
                                              
                                              (2.4
                                              )
                                              
                                              
                                              (68,870
                                              )
                                              
                                              
                                              (2.6
                                              )
                                              
                                              
                                              (2,724
                                              )
                                              
                                              
                                              (4.0
                                              )Income
      tax expense
                                              
                                              
                                              (1,230
                                              )
                                              
                                              
                                              (.0
                                              )
                                              
                                              
                                              (4,000
                                              )
                                              
                                              
                                              (.2
                                              )
                                              
                                              
                                              (2,770
                                              )
                                              
                                              
                                              (69.3
                                              )Net
      loss
                                              
                                              $
                                              (272,793
                                              )
                                              
                                              
                                              (9.8
                                              )%
                                              
                                              $
                                              (326,679
                                              )
                                              
                                              
                                              (12.3
                                              )%
                                              
                                              $
                                              53,886
                                              
                                              
                                              
                                              (16.5
                                              )%Net
      loss per share - basic and diluted
                                              
                                              $
                                              (.01
                                              )
                                              
                                              
                                              
                                              
                                              
                                              $
                                              (.01
                                              )




Sales





Sales for
the three months ended March 31, 2010 were $2,769,795 as compared to sales for
the three months ended March 31, 2009 of $2,655,930, an increase of $113,865 or
4.3%.  The increase was a result of sales generated from new projects
in 2010 including virtualization projects for several clients and a Microsoft
Stimulus360 project for a state government client.  These new projects
are supported by software provided by third party vendors such as VMware, which
provided the virtualization software to enable our clients to run multiple
operating systems on one physical machine and therefore a broader, richer set of
business applications, and Microsoft, which provided the Stimulus360solution used to help
public sector agencies track, measure, and share information about federal
stimulus programs through easy-to-use graphical dashboards and
maps.





Cost
of Services and Gross Profit





Cost of
services represents the cost of employee services related to our IT Services
Group.  Cost of services for the three months ended March 31, 2010 was
$2,056,804 or 74.3% of sales as compared to $1,992,710 or 75.0% for the three
months ended March 31, 2009.  Gross profit was $712,991 or 25.7% of
sales for the three months ended March 31, 2010 compared to $663,220 or 25.0% of
sales for the three months ended March 31, 2009.  The increase in
gross profit margin is due to a change in the mix of our business resulting from
new projects in 2010 which carried higher profit margins than work completed in
2009.  Gross profit margins in the first quarter of 2010 were
adversely affected by a decrease in certain personnel utilization rates when
certain project commencement dates were delayed or deferred.


9


General
and Administrative Expenses





General
and administrative expenses include corporate overhead such as compensation and
benefits for executive, administrative and finance personnel, rent, insurance,
professional fees, travel, and office expenses.  General and
administrative expenses for the three months ended March 31, 2010 increased by
$11,508 or 3.9% to $308,299 as compared to $296,791 for the same period in
2009.





The
increase in general and administrative expenses in 2010 is not significantly
different from 2009, as general and administrative expenses, as a percentage of
sales, were 11.1% for the three months ended March 31, 2010 and 11.2% for the
same period in 2009.





Defined
Benefit Pension Plan Expenses





Defined
benefit pension plan expenses include expenses (including pension expense,
professional services, and interest costs) associated with the Osley &
Whitney, Inc. Retirement Plan(O&W Plan) of $126,153 for the three months ended March 31, 2010 and
$164,869 for the three months ended March 31, 2009, a decrease of
$38,716.  During the three months ended March 31, 2010, we incurred
legal and professional fees of approximately $13,000 in connection with
compliance requirements and advocating our legal position in response to recent
communication with the appropriate regulatory authorities as compared to
approximately $46,600 for the three months ended March 31, 2009.  Net
periodic pension cost decreased by $7,209 to $77,765 for the three months ended
March 31, 2010.  We continue to accrue interest and fees on unpaid
excise taxes for plan years 2003, 2004 and 2005, as well as interest on unfunded
contributions, which amounted to additional expense of approximately $35,300 and
$32,700 for the three months ended March 31, 2010 and 2009,
respectively.





Selling
Expenses





For the
three months ended March 31, 2010 we incurred selling expenses of $483,956
associated with growing our IT Services Group business compared to $455,369 for
the three months ended March 31, 2009, an increase of $28,587.  The
increase is principally due to the addition of new sales and business
development personnel in the third and fourth quarters of 2009 to develop more
new sales opportunities and to prepare proposals for new projects. During April
2010, we reduced our business development group by two positions and, at this
time, we plan to operate with a lower level of selling expenses with the
objective of improving profitability.





Operating
Loss





For the
three months ended March 31, 2010, we had an operating loss of $(205,417)
compared to a loss of $(253,809) for the three months ended March 31,
2009.  The improvement of $48,392 is principally attributable to an
increase in gross profit of $49,771 offset by an increase in total operating
expenses of $1,379 for the three months ended March 31, 2010 as compared to
2009.





Interest
Expense





Net
interest expense was $66,146 for the three months ended March 31, 2010 compared
to $68,870 for the three months ended March 31, 2009, a decrease of $2,724. The
decrease is due to lower average principal balances on our accounts receivable
financing line.





Income
Taxes





Income
tax expense was $1,230 and $4,000 for the three months ended March 31, 2010 and
2009, respectively, consisting of state taxes.





Net
Loss





For the
three months ended March 31, 2010,we recorded a net loss
of ($272,793) or $(.01) per share compared to a net loss of ($326,679) or $(.01)
per share for the three months ended March 31, 2009 primarily attributable to an
increases in sales and gross profit during the three months ended March 31,
2010.





Liquidity
and Capital Resources





At March
31, 2010, we had cash of $151,558 available for our working capital needs and
planned capital asset expenditures.  Our primary liquidity needs are
the financing of working capital and capital expenditures.  Our
primary source of liquidity is cash provided by operations and our factoring
line of credit.  At March 31, 2010, we had approximately $247,000 of
availability under this line.


10


At March
31, 2010, we had a working capital deficit of approximately $4.0 million and a
current ratio of .25.  Our objective is to improve our working capital
position from profitable operations.  The O&W Plan current
liabilities have a significant impact on our working capital.  Without
the current liabilities of the O&W Plan of approximately $3.1 million, our
working capital deficit would have been approximately $937,000.





During
2010 and 2009, we financed our business activities through the issuance of notes
payable to third parties, related parties and financing through sales with
recourse of our accounts receivable.  In June 2008, we received
$200,000 through a working capital loan from a third party, which balance was
reduced to $175,000 during 2009 and matures on January 1, 2011.  We
have notes payable of $265,000 which mature on December 31, 2010.  We
plan to renegotiate the terms of these notes payable, included in current
liabilities, or seek funds to replace these notes payable.  We have
used our common stock and common stock options and warrants to provide
compensation to certain employees and consultants and to fund
liabilities.





We
believe the capital resources available to us under our factoring line of credit
and cash from our operations are adequate to fund our ongoing operations and to
support the internal growth we expect to achieve for at least the next 12
months.  However, if we experience significant growth in our sales or
incur operating losses over a longer period of time or larger net losses than we
have recently experienced, we believe that this may require us to increase our
financing line or obtain additional working capital from other sources to
support our sales growth.  We anticipate financing our external growth
from acquisitions and our longer-term internal growth through one or more of the
following sources: cash from operations; additional borrowing; issuance of
equity; use of our existing revolving credit facility; or a refinancing of our
credit facilities.  We do not have the funds available to make
required contributions to the O&W Plan which approximate $2.2 million and do
not intend to make any contributions to the O&W Plan during
2010.




The
following table sets forth our sources and uses of cash for the periods
presented:




Three Months Ended
                      March 31,2010
                    
                    
                    2009Net
      cash used by operating activities
                    
                    $
                    (13,339
                    )
                    
                    $
                    (2,552
                    )Net
      cash used by investing activities
                    
                    
                    (3,068
                    )
                    
                    
                    (2,862
                    )Net
      cash used by financing activities
                    
                    
                    (28,746
                    )
                    
                    
                    (76,773
                    )Net
      decrease in cash
                    
                    $
                    (45,153
                    )
                    
                    $
                    (82,187
                    )




Cash
Flows Used by Operating Activities




During
the three months ended March 31, 2010, cash used by operations was $13,339
compared with cash used by operations of $2,552 for the same period in
2009.  Our operating cash flow is primarily affected by the overall
profitability of our contracts, our ability to invoice and collect from our
clients in a timely manner, and our ability to manage our vendor
payments.  We bill our clients weekly or monthly after services are
performed, depending on the contract terms. The increase in cash used by
operations was primarily due to a smaller net increase in liabilities for three
months March 31, 2010 compared to the three months ended March 31,
2009.  The increase in cash used by operations was offset by a
decrease in net loss from $326,679 in 2009 as compared to a net loss of $272,793
in 2010.  Our accounts receivable increased by $12,837 principally due
to the 4.3% growth of sales in 2010 over the three months ended March 31,
2009.  The increase in total liabilities that affect operating
activities is primarily due to increased accrued O&W Plan pension
obligations of $105,690 and accrued expenses of $143,418 during the three months
ended March 31, 2010.




Cash
Flows Used by Investing Activities




Cash used
by investing activities during the three months ended March 31, 2010 was $3,068
compared with $2,862 for the same period in 2009.  Cash used by
investing activities was primarily for capital expenditures for computer
hardware and software.  We expect to continue to invest in computer
hardware and software to update our technology to support the growth of our
business.  We do not have plans for significant capital expenditures
in the near future.




Cash
Flows Used by Financing Activities




Cash used
by financing activities was $28,746 and $76,773 for the three months ended March
31, 2010 and 2009, respectively, for principal payments on notes
payable.  We anticipate that we will use $42,813 through the next
twelve months for funding contractual requirements of current maturities of
long-term debt obligations due to banks.  In addition, notes payable
to third parties of $265,000 and $175,000 will become contractually due on
December 31, 2010 and January 1, 2011, respectively.  We plan to
renegotiate the terms of these notes payable or seek funds to replace these
notes payable.   We may continue to repay other notes payable as
working capital is generated.


11




Credit
Agreement




We have
secured an accounts receivable financing line of credit from an independent
finance organization institution that allows us to sell selected accounts
receivable invoices to the financial institution with full recourse against us
in the amount of $2 million, including a sublimit for one major client of $1.5
million.  This provides us with the cash needed to finance certain
costs and expenses.  At March 31, 2010, we had financing availability,
based on eligible accounts receivable, of $247,000 under this
line.  We pay fees based on the length of time that the invoice
remains unpaid.




Future
Trends





We
believe that our operations, as currently structured, together with our current
financial resources, will result in improved financial performance in future
periods.





There is
no assurance, that our current resources or cash flow from operations will be
adequate to fund the liabilities under the O&W Plan if the Treasury does not
concur with our position or that we will be successful in raising additional
working capital when necessary.  Our failure to raise necessary
working capital could force us to curtail operations, which would have a
material adverse effect on our financial condition and results of
operations.





The
current recessionary economy may impact certain portions of our business and our
growth opportunities as certain projects are deferred pending funding or
improved economic conditions.  However, one of our major sources of
revenue is from ongoing data center support which is critical to the operation
of clients and is not solely dependent upon current economic
factors.  Our focus areas include virtualization and data center
projects which are based on our clients’ need to upgrade or centralize their
data centers and such projects provide a rate of return that justifies these
projects.  We have Microsoft Gold Partner status, are a VMware
Authorized Consultant (VAC) by VMware, Inc. a subsidiary of EMC Corporation, and
are a member of the Hewlett Packard Developer and Solutions Partner Program
(DSPP) which we believe provide us with a competitive advantage versus those
companies that do not have such qualifications and bid against us on certain
projects.  In November 2009, we entered into master services
relationship and authorized reseller agreements with Dell, Inc.  Under
the master services agreement with Dell’s professional services organization, we
can rapidly engage on consulting projects and deliver service in a streamlined
and efficient manner.  Our key areas of focus for our Dell partnership
include virtualization services, as well as operational support for major Dell
contracts in the federal and defense markets.  However, certain
clients have started to or are planning to reduce the scope of certain projects
given the current economic conditions and such reductions could curtail our
overall sales growth rate.





During
2010, the U.S. and worldwide capital and credit markets have continued to
experience significant price volatility, dislocations and liquidity disruptions,
which have caused market prices of many stocks to fluctuate substantially and
the spreads on prospective debt financings to widen
considerably.  These circumstances have materially impacted liquidity
in the financial markets, making terms for certain financings less attractive,
and in some cases have resulted in the unavailability of
financing.  Continued uncertainty in the capital and credit markets
may negatively impact our business, including our ability to access additional
financing at reasonable terms, which may negatively affect our ability to make
future acquisitions or expand our business.  If our clients are not
able to obtain sufficient financing, the clients could delay their payments to
us which would negatively impact our cash flow.  A prolonged downturn
in the financial markets may cause us to seek alternative sources of potentially
less attractive financing, and may require us to adjust our business plan
accordingly.  These events also may make it more difficult or costly
for us to raise capital through the issuance of our debt or equity securities.
The disruptions in the financial markets may have a material adverse effect on
the market value of our common stock and other adverse effects on our
business.





Osley
& Whitney, Inc. Retirement Plan





Prior to
December 30, 2002, we owned 100% of the common stock of Osley & Whitney,
Inc. (O&W).  On December 30, 2002, we sold 100% of the O&W
common stock to a third party, but continued to act as the sponsor of the
O&W Plan.  Although we continued to act as the sponsor of the
O&W Plan after the sale, during 2007 management determined that it had no
legal obligation to do so.





During
2007, we submitted information to theDepartment of Treasury
(Treasury)advocating that we had no legal obligation to act as the
sponsor of the O&W Plan to ascertain whether the Treasury concurred or
disagreed with this position.  We subsequently provided responses to
Treasury inquiries related to this determination.  In October 2009, we
received a report from the Treasury that stated that the Treasury staff
disagreed with our position and as a result, we are responsible for excise taxes
attributed to the funding deficiency of $1,836,359 for the years 2003 through
2007 which funding deficiency can only be corrected by our contributing
$1,836,359 to the O&W Plan.  The report also states that proposed
10% excise taxes of $348,500, penalties for late payment of excise taxes of
approximately $1,200,000, and 100% excise taxes of approximately $3,500,000
related to the years ended December 31, 2006 and 2007 may be
imposed.  Penalties for late payment may be removed if we provide
reasonable cause for not paying the excise taxes and the Treasury concurs with
our position.  We and our outside legal counsel disagree with
significant aspects of both the factual findings and legal conclusions set forth
in the report and, in accordance with Treasury procedures, we have responded
with a detailed analysis of our opposition to their findings.  We will
diligently pursue all appropriate steps to perfect our appeal rights and attempt
to prevail on the merits of our position, which will include filing a protest,
requesting an appeals conference, and, if needed, petitioning the tax court and
advocating our position in that forum.


12


If we do
not ultimately prevail, we will become obligated for O&W Plan contributions
of approximately $2.2 million as of March 31, 2010 and 10% excise taxes on
accumulated unfunded O&W Plan contributions for the Plan years ended
December 31, 2006 and 2007 of approximately $348,500, as stated above, and
potentially additional 10% excise taxes of approximately $220,000 for the plan
year ended December 31, 2008,  which have not been accrued based upon
our determination that we have no legal obligation to act as the O&W Plan
sponsor and our belief that the likelihood is not probable that we will be
required to pay these excise taxes.  Further, if we do not ultimately
prevail, we may be required to pay interest on these excise taxes and
potentially incur penalties for late payment of excise taxes and additional
excise taxes up to 100% of each year’s required funding
deficiency.  We have accrued amounts related to excise taxes,
penalties and interest on unfunded contributions for 2003, 2004 and 2005 of
approximately $452,000 as of March 31, 2009 ($445,000 at December 31,
2009).  No excise taxes, penalties or interest for 2006, 2007, 2008,
and 2009 have been accrued at March 31, 2010 and December 31,
2009.  The
Company does not have the funds available to make required contributions which
approximate $2.2 million and does not intend to make any contributions to the
O&W Plan during 2010.





During 2006, the PBGC placed a lien on
all of our assets to secure the contributions due to the O&W
Plan.  This lien is subordinate to liens that secure accounts
receivable financing and certain notes payable.





On April
29, 2009, acting for the O&W Plan, we sent the O&W Plan participants a
notice of intent to terminate the plan in a distress termination with a proposed
termination date of June 30, 2009.  We also provided additional
documentation regarding our status and the status of the O&W
Plan.  The termination of the O&W Plan is subject to approval by
the PBGC.  We provided information to the PBGC which management
believes satisfies the requirements of the PBGC.  As of May 12, 2010,
the PBGC has neither acted on the information provided to them nor requested
additional information.





At March
31, 2010, we had accrued liabilities of $3,809,678, which includes $452,000
recorded for excise taxes on unfunded contributions, related to the O&W Plan
and accumulated other comprehensive loss of $2,805,040 which was recorded as a
reduction of stockholders’ deficiency.





The
market value of the O&W Plan assets decreased from $2,004,117 at December
31, 2009 to $1,893,889 at March 31, 2010.  The decrease was comprised
of investment returns of $6,042, offset by benefit payments of $111,699 and
expenses of $4,571.





Item 3.Quantitative and Qualitative Disclosures About
Market Risk.





As a
smaller reporting company we are not required to provide the information
required by this Item.





Item
4.  Controls and Procedures.





Evaluation of Disclosure
Controls and Procedures.Our management, with the
participation of our chief executive officer and chief financial officer,
carried out an evaluation of the effectiveness of our “disclosure controls and
procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange
Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by
this report (the “Evaluation Date”).  Based upon that evaluation, the
chief executive officer and chief financial officer concluded that as of the
Evaluation Date, our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act (i) is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms and
(ii) is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.





Changes in Internal Control
over Financial Reporting.  There were no changes in our
internal control over financial reporting that occurred during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.





PART
II - OTHER INFORMATION





Item
      2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds.





In
January, February and March 2010, we granted options to purchase an aggregate of
376,000 shares of our common stock at exercise prices ranging from $0.15 to
$0.23 per share.  These grants were exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended.


13


Item
6.  Exhibits.


Exhibit No.
                            
                            Description31.1
                            
                            Chief
      Executive Officer Certification pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
                            
                            Chief
      Financial Officer Certification pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
                            
                            Chief
      Executive Officer Certification pursuant to section 906 of the
      Sarbanes-Oxley Act of 2002.*32.2
                            
                            Chief
      Financial Officer Certification pursuant to section 906 of the
      Sarbanes-Oxley Act of
2002.*








SIGNATURES





Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.





Infinite
      Group, Inc.(Registrant)Date          May
      12, 2010
              /s/ Michael S. SmithMichael
      S. SmithChief
      Executive Officer(Principal
      Executive Officer)Date         May
      12, 2010
              /s/ James WitzelJames
      WitzelChief
      Financial Officer(Principal
      Financial Officer)


14