**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**




Washington,
      D.C. 20549





**FORM
      10-QSB**





**QUARTERLY
      REPORT UNDER SECTION 13 OR 15(D)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**


**FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007**





Commission
      File Number 0-21816





**INFINITE
      GROUP, INC.**


(Exact
      name of small business issuer as specified in its charter)





Delaware
            
            52-1490422(State
                or other jurisdiction
            
            (I.R.S.
                Employerof
                incorporation or organization)
            
            Identification
                No.)




60
                Office Park Way
              Pittsford,
                New York 14534(Address
                of principal executive office)




(585)
                385-0610(Issuer’s
                telephone number, including area
                code)





Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the issuer 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 issuer is a shell company (as defined in Rule 12b-2
      of
      the Exchange Act). Yes o No x





Number
      of
      shares outstanding of each of the issuer's classes of common equity, as of
      the
      latest practicable date: As of November 12, 2007, there were 23,524,965 shares
      of common stock outstanding.





Transitional
      Small Business Disclosure Format.       Yeso No x









INFINITE
      GROUP, INC.




**FORM
      10-QSB REPORT**





TABLE
      OF
      CONTENTS




PAGEPART
                    I –
                    FINANCIAL INFORMATIONItem
                    1.
                
                Consolidated
                    Financial StatementsBalance
                    Sheet – September 30, 2007 (Unaudited) and December 31, 2006
                    (Audited)
                
                3Statements
                          of Operations (Unaudited) for the three and nine months
                          ended September
                          30, 2007 and 2006
                
                4Statements
                          of Cash Flows (Unaudited) for the nine months ended September
                          30, 2007 and
                          2006
                
                5Notes
                    to Consolidated Financial Statements - (Unaudited)
                
                6Item
                    2.
                
                Management’s
                    Discussion and Analysis or Plan of Operations
                
                9Item
                    3.
                
                Controls
                    and Procedures
                
                18PART
                    II – OTHER INFORMATIONItem
                    1.
                
                Legal
                    Proceedings
                
                18Item
                    2.
                
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                
                18Item
                    3.
                
                Defaults
                    Upon Senior Securities
                
                18Item
                    4.
                
                Submission
                    of Matters to a Vote of Security Holders
                
                18Item
                    5.
                
                Other
                    Information
                
                18Item
                    6.
                
                Exhibits
                
                18SIGNATURES
                
                
                
                19




**FORWARD-LOOKING
      STATEMENTS**




Certain
      statements made in this Quarterly Report on Form 10-QSB 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**




**September 30,**
            
            **December 31,****2007**
              **(Unaudited)**
            
            **2006**
              **(Audited)****ASSETS****Current
                assets:**Cash
            
            **$**
            **8,643**
            
            $
            73,786Accounts
                receivable, net of allowance of $35,000 ($53,000 – 2006)
            
            
            **626,243**
            
            
            487,240Notes
                receivable, current portion
            
            
            **953**
            
            
            4,968Prepaid
                expenses and other current assets
            
            
            **74,241**
            
            
            38,600Total
                current assets
            
            
            **710,080**
            
            
            604,594**Property
                and equipment, net**
            
            
            **76,790**
            
            
            80,612**Other
                assets**–
                security deposits
            
            
            **19,523**
            
            
            19,523Total
                assets
            
            **$**
            **806,393**
            
            $
            704,729**LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCY****Current
                liabilities:**Accounts
                payable
            
            
            **253,503**
            
            
            224,051Accrued
                payroll
            
            
            **356,894**
            
            
            216,397Accrued
                interest payable
            
            
            **239,460**
            
            
            176,734Accrued
                pension and retirement
            
            
            **2,048,887**
            
            
            1,807,524Accrued
                expenses-other
            
            
            **81,232**
            
            
            62,042****Current
                maturities of long-term obligations-bank
            
            
            **3,997**
            
            
            50,354****Note
                payable
            
            
            **30,000**
            
            
            30,000****Notes
                payable-related parties
            
            
            **141,660**
            
            
            148,663**Total
                current liabilities**
            
            
            **3,155,633**
            
            
            2,715,765**Long-term
                obligations:**Bank
                notes payable
            
            
            **30,787**
            
            
            -Notes
                payable-related parties
            
            
            **1,096,124**
            
            
            1,146,124Accrued
                pension obligation
            
            
            **703,211**
            
            
            706,196Total
                liabilities
            
            
            **4,985,755**
            
            
            4,568,085Commitments
                and contingencies**Stockholders’
                deficiency:**Common
                stock, $.001 par value, 60,000,000 shares authorized;23,524,965
                (22,414,965 – 2006) shares issued and outstanding
            
            
            **23,525**
            
            
            22,415Additional
                paid-in capital
            
            
            **29,310,505**
            
            
            28,981,059Accumulated
                deficit
            
            
            **(30,934,753**
            **)**
            
            (30,288,191
            )Accumulated
                other comprehensive loss
            
            
            **(2,578,639**
            **)**
            
            (2,578,639
            )Total stockholders’ deficiency
            
            
            **(4,179,362**
            **)**
            
            (3,863,356
            )Total
                liabilities and stockholders’ deficiency
            
            **$**
            **806,393**
            
            $
            704,729


See
        notes
        to consolidated financial statements.


3





**INFINITE
                GROUP, INC.****Consolidated
                Statements of Operations (Unaudited)**




**Nine
                Months Ended**
            
            **Three
                Months Ended****September
                30,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Sales**
            
            **$**
            **6,008,314**
            
            $
            4,391,436
            
            **$**
            **2,063,644**
            
            $
            1,427,434Cost
                of services
            
            
            **4,322,505**
            
            
            3,440,561
            
            
            **1,570,556**
            
            
            1,085,785**Gross
                profit**
            
            
            **1,685,809**
            
            
            950,875
            
            
            **493,088**
            
            
            341,649Costs
                and expenses:General
                and administrative
            
            
            **631,370**
            
            
            706,981
            
            
            **238,890**
            
            
            184,559Defined
                benefit pension plan
            
            
            **273,035**
            
            
            342,370
            
            
            **84,017**
            
            
            250,587Selling
            
            
            **1,118,089**
            
            
            1,243,369
            
            
            **415,325**
            
            
            427,178Research
                and development
            
            
            **88,807**
            
            
            202,719
            
            
            **1,553**
            
            
            62,009Impairment
                loss
            
            
            **-**
            
            
            130,767
            
            
            **-**
            
            
            130,767Depreciation
                and amortization
            
            
            **26,009**
            
            
            73,988
            
            
            **7,892**
            
            
            30,361Total
                costs and expenses
            
            
            **2,137,310**
            
            
            2,700,194
            
            
            **747,677**
            
            
            1,085,461**Operating
                loss**
            
            
            **(451,501**
            **)**
            
            (1,749,319
            )
            
            **(254,589**
            **)**
            
            (743,812
            )Other
                income (expense):Interest
                income
            
            
            **255**
            
            
            700
            
            
            **43**
            
            
            199Interest
                expense:Related
                parties
            
            
            **(105,113**
            **)**
            
            (88,164
            )
            
            **(34,834**
            **)**
            
            (30,129
            )Other
            
            
            **(94,555**
            **)**
            
            (55,777
            )
            
            **(34,833**
            **)**
            
            (26,621
            )****Total
                interest expense
            
            
            **(199,668**
            **)**
            
            (143,941
            )
            
            **(69,667**
            **)**
            
            (56,750
            )Other
                income-settlement of litigation
            
            
            **-**
            
            
            498,088
            
            
            -
            
            
            -****Gain
                (loss) on sale of equipment
            
            
            **4,957**
            
            
            -
            
            
            **(1,634**
            **)**
            
            -****Total
                other income (expense)
            
            
            **(194,456**
            **)**
            
            354,847
            
            
            **(71,258**
            **)**
            
            (56,551
            )Loss before income tax expense
            
            
            **(645,957**
            **)**
            
            (1,394,472
            )
            
            **(325,847**
            **)**
            
            (800,363
            )Income
                tax expense
            
            
            **(605**
            **)**
            
            (7,300
            )
            
            **-**
            
            
            -**Net
                loss**
            
            **$**
            **(646,562**
            **)**
            $
            (1,401,772
            )
            **$**
            **(325,847**
            **)**
            $
            (800,363
            )Net
                loss per share – basic and diluted
            
            **$**
            **(.03**
            **)**
            $
            (.07
            )
            **$**
            **(.01**
            **)**
            $
            (.04
            )Weighted
                average number of shares outstanding -basic and diluted
            
            
            **23,040,972**
            
            
            20,949,611
            
            
            **23,514,965**
            
            
            22,034,965


See
        notes
        to consolidated financial statements.





4


**INFINITE
                GROUP, INC.****Consolidated
                Statements of Cash Flows (Unaudited)**




**For
                the Nine Months Ended****September
                30,****2007**
            
            **2006****Operating
                activities:**Net
                loss
            
            **$**
            **(646,562**
            **)**
            $
            (1,401,772
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Stock
                based compensation
            
            
            **255,056**
            
            
            191,471Depreciation
                and amortization
            
            
            **26,009**
            
            
            73,988Gain
                on sale of equipment
            
            
            **(4,957**
            **)**
            
            **-**Impairment
                loss
            
            
            **-**
            
            
            130,767(Increase)
                decrease in:Accounts
                receivable
            
            
            **(139,003**
            **)**
            
            516,607Inventories
            
            
            **-**
            
            
            (2,013
            )Other
                assets
            
            
            **(10,641**
            **)**
            
            (9,596
            )Increase
                (decrease) in:Accounts
                payable
            
            
            **29,452**
            
            
            (174,964
            )Accrued
                expenses
            
            
            **222,413**
            
            
            165,821Accrued
                pension and retirement
            
            
            **238,378**
            
            
            343,707**Net
                cash used in operating activities**
            
            
            **(29,855**
            **)**
            
            (165,984
            )**Investing
                activities:**Purchase
                of property and equipment
            
            
            **(22,686**
            **)**
            
            (14,656
            )Proceeds
                from notes receivable
            
            
            **4,015**
            
            
            3,282**Net
                cash used in investing activities**
            
            
            **(18,671**
            **)**
            
            (11,374
            )**Financing
                activities:**Repayment
                of bank notes payable
            
            
            **(10,114**
            **)**
            
            (9,717
            )Repayment
                of notes payable – related parties
            
            
            **(7,003**
            **)**
            
            (25,450
            )Borrowings
                of notes payable – related parties
            
            
            **-**
            
            
            120,000Proceeds
                from issuance of common stock, net of costs
            
            
            **500**
            
            
            420**Net
                cash provided by (used in) financing activities**
            
            
            **(16,617**
            **)**
            
            85,253Net
                decrease in cash
            
            
            **(65,143**
            **)**
            
            (92,105
            )Cash
                – beginning of period
            
            
            **73,786**
            
            
            109,090Cash–end of period
            
            **$**
            **8,643**
            
            $
            16,985Supplemental
                disclosure:Cash
                paid for:Interest
            
            **$**
            **140,890**
            
            $
            102,440Income
                taxes
            
            **$**
            **605**
            
            $
            7,300


See
        notes to 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-QSB. 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 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-KSB for the year ended
      December 31, 2006 filed with the U.S. Securities and Exchange Commission.
      Results of consolidated operations for the nine months ended September 30,
      2007
      are not necessarily indicative of the operating results that may be expected
      for
      the year ending December 31, 2007. The 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 we believe are significant to the presentation
      of our consolidated financial statements. These policies require management
      to
      make complex or subjective judgments about matters that are inherently
      uncertain. Note 3 to our audited consolidated financial statements for the
      year
      ended December 31, 2006 presents a summary of significant accounting
      policies.





**Note
      3. Stock Option Plans and Share Based Payments**





Stock
      based compensation includes expense charges for all stock-based awards to
      employees, directors and consultants. Such awards include options, warrants
      and
      stock grants.





As
      of
      September 30, 2007, the Company’s Stock Option Plans (the “Plan”) provided for
      the grant of incentive (ISO’s) or non-qualified stock options (Non-ISO’s) for
      the purchase of common stock for up to 5,212,500 shares to employees, directors
      and consultants. The Plan is administered by the compensation committee
      established by the Company’s board of directors, which determines the terms of
      the options including the exercise price, expiration date, number of shares,
      and
      vesting provisions.





The
      Company used volatility of 50% when computing the value of stock options and
      warrants for the three and nine months ended September 30, 2007, 71% for the
      six
      months ended September 30, 2006, and 100% for the three months ended March
      31,
      2006. This is based on historical volatility, with consideration given to
      activity subsequent to July 2005, when the Company brought current its public
      information in filings with the SEC, and the increase in the volume of trading
      in the Company’s common stock in 2006 and 2007. The Company believes the
      increase in the volume of trading has provided more liquidity and less
      volatility than was previously experienced. The expected dividend yield is
      zero
      percent and the expected life of the options is ten years. The risk-free rate
      for periods within the contractual life of the option is based on the U.S.
      Treasury yield curve in effect at the time of grant.





The
      Company recorded expense for options, common stock and warrants issued to
      employees and independent service providers for the three and nine months ended
      September 30, 2007 and 2006 as follows:





**Nine Monthsended**
              **September 30,****2007**
            
            Nine Monthsended
              September 30,2006
            
            **Three Monthsended**
              **September 30,****2007**
            
            Three Monthsended
              September 30,2006Employee
                stock options
            
            **$**
            **180,068**
            
            $
            174,380
            
            **$**
            **97,009**
            
            $
            77,853Consultants
                – stock warrants
            
            
            **49,988**
            
            
            12,578
            
            
            **13,095**
            
            
            4,193Consultant
                – shares of common stock
            
            
            **25,000**
            
            
            -
            
            
            **12,500**
            
            
            -Consultant
                – stock options
            
            
            **-**
            
            
            4,513
            
            
            **-**
            
            
            1,504Total
                expense
            
            **$**
            **255,056**
            
            $
            191,471
            
            **$**
            **122,604**
            
            $
            83,550





6





A
      summary
      of all stock option activity for nine months ended September 30, 2007
      follows:





**Number ofOptions**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted-**
              **AverageRemaining
                ContractualTerm**
            
            **AggregateIntrinsic Value**Outstanding
                at December 31, 2006
            
            
            4,380,000
            
            $
            .24Options
                granted
            
            
            536,000
            
            $
            .51Options
                expired
            
            
            (14,500
            )
            $
            .41Options
                exercised
            
            
            (10,000
            )
            $
            .05Outstanding
                at September 30, 2007
            
            
            4,891,500
            
            $
            .27
            
            
            7.6
                years
            
            $
            1,200,000Exercisable
                at September 30, 2007
            
            
            4,049,500
            
            $
            .23
            
            
            7.3
                years
            
            $
            1,147,000





The
      weighted average fair value of options granted during the nine months ended
      September 30, 2007 was approximately $.33 ($.33 during the nine months ended
      September 30, 2006).  The
      total
      intrinsic value of options exercised during the nine months ended September
      30,
      2007 and 2006 was $4,700 and $480, respectively.




A
      summary
      of the status of nonvested stock option activity for the nine months ended
      September 30, 2007 follows:




**Number ofNonvested****Options**
            
            **Weighted Average**
              **Fair Value**
              **at Grant Date**Nonvested
                outstanding at December 31, 2006
            
            
            784,000
            
            $
            .30Options
                granted
            
            
            536,000
            
            
            .33Options
                vested
            
            
            (470,000
            )
            
            .30Options
                forfeited
            
            
            (8,000
            )
            
            .37Nonvested
                outstanding at September 30, 2007
            
            
            842,000
            
            $
            .32




At
      September 30, 2007, there was approximately $179,000 of total unrecognized
      compensation cost related to non-vested options granted under the plan. That
      cost is expected to be recognized over a weighted average period of one year.
      The total fair value of shares vested during the nine months ended September
      30,
      2006 was approximately $142,000.




On
      March
      10, 2006 the Company engaged the services of a consultant and issued the
      consultant a warrant to acquire 500,000 shares of our common stock exercisable
      at $.30 per share. The warrant is only exercisable in increments of 100,000
      shares as specified performance measures are met. For the nine months ended
      September 30, 2007 the consultant became vested in 100,000 shares of common
      stock and we recorded expense of $37,800 related to this warrant as the
      consultant satisfied a portion of the performance criteria by assisting us
      with
      increasing our sales in 2007. At September 30, 2007, 400,000 common shares
      issuable pursuant to this warrant are not vested. The Company will record
      expense when it is probable the consultant will meet the performance measures
      and therefore vest in these common shares.




On
      April
      5, 2007, the Company engaged the services of a consultant, an accredited
      investor, to assist with business development for a term of one year through
      April 4, 2008 and issued it (i) 100,000 restricted shares of common stock and
      (ii) a warrant to acquire 100,000 shares of common stock, which was fully vested
      upon issuance, exercisable at $.50 per share, and which expires on April 4,
      2012. Total expense recognized for these equity instruments for the nine months
      ended September 30, 2007 was $37,188.





The
      Company’s accounting policy for equity instruments issued to consultants and
      vendors in exchange for goods and services follows the provisions of EITF 96-18,
      “Accounting for Equity Instruments That are Issued to Other Than Employees for
      Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18,
“Accounting Recognition for Certain Transactions Involving Equity Instruments
      Granted to Other Than Employees.” The measurement date for the fair value of the
      equity instruments issued is determined at the earlier of (i) the date at
      which a commitment for performance by the consultant or vendor is reached or
      (ii) the date at which the consultant or vendor’s performance is complete.
      In the case of equity instruments issued to consultants, the fair value of
      the
      equity instrument is recognized over the term of the consulting
      agreement.




7




**Note
      6. Supplemental Cash Flow Information**





Non-cash
      investing and financing transactions, including non-monetary exchanges, consist
      of the following:





**Nine
                Months Ended****September
                30,****2007**
            
            **2006**Conversion
                of notes payable to common stock
            
            **$**
            **50,000**
            
            $
            100,000Issuance
                of 100,000 shares of common stock in exchange for consulting services
                to
                be provided over one year
            
            **$**
            **50,000**
            
            $
            -




**Note
      7. Earnings Per Share**





Basic
      net
      loss per share is computed by dividing net loss by the weighted average number
      of common shares outstanding during the period. Diluted loss per share is
      computed by dividing net loss by the weighted average number of common shares
      outstanding including dilutive potential common shares which, in the Company’s
      case, comprise shares issuable under stock options, stock warrants and
      convertible notes payable. Stock options, warrants and convertible notes payable
      with exercise prices that exceeded the average fair market value of common
      stock
      had an antidilutive effect and therefore, were excluded from the computation
      of
      net loss per share. 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 equity instruments assumed to be
      exercised.





If
      the
      Company had generated earnings, common stock equivalents would have been added
      to the weighted average shares outstanding during the three and nine months
      ended September 30, 2007 and 2006 as follows. These additional shares represent
      the assumed exercise of common stock options, warrants and convertible notes
      payable whose exercise price is less than the average of common stock during
      the
      period and convertible notes payable. The proceeds of the exercise are assumed
      to be used to purchase common stock for treasury and the incremental shares
      are
      added to the weighted average shares outstanding. 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.




**Nine
                Months Ended**
            
            **Three
                Months
                Ended****September
                30,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Weighted
                average number of shares outstanding
            
            
            **2****3,046,833**
            
            
            20,949,611
            
            
            **23,524,965**
            
            
            22,034,965Common
                stock equivalents
            
            
            **19,381,198**
            
            
            7,963,802
            
            
            **19,399,238**
            
            
            11,118,008





**Note
      8. – Employee
      Pension Plan**





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





**Nine Monthsended**
              **September 30,****2007**
            
            Nine Monthsended
              September 30,2006
            
            **Three** **Monthsended**
              **September** **30,****2007**
            
            Three Monthsended
              September 30,
              2006Interest
                cost
            
            **$**
            **249,182**
            
            **$**
            **227,617**
            
            **$**
            **88,488**
            
            **$**
            **75
                ,872**Expected
                return on plan assets
            
            
            **(205,582**
            **)**
            
            **(205,582**
            **)**
            
            **(68,527**
            **)**
            
            **(68,527**
            **)**Service
                cost
            
            
            **97,688**
            
            
            **97,688**
            
            
            **32,563**
            
            
            **32,560**Expected
                expenses
            
            
            **48,750**
            
            
            **48,750**
            
            
            **16,250**
            
            
            **16,250**Net
                periodic pension cost
            
            **$**
            **190,038**
            
            **$**
            **168,473**
            
            **$**
            **68,774**
            
            **$**
            **56,155**





8




**Note
      9. – New
      Accounting Pronouncements**





Effective
      January 1, 2007, the Company adopted the provisions of FASB Interpretation
      No.
      48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — An Interpretation
      of FASB Statement No. 109.” FIN 48 provides detailed guidance for the financial
      statement recognition, measurement and disclosure of uncertain tax positions
      recognized in the financial statements in accordance with SFAS No. 109. Tax
      positions must meet a “more-likely-than-not” recognition threshold at the
      effective date to be recognized upon the adoption of FIN 48 and in subsequent
      periods. Upon the adoption of FIN 48, the Company had no unrecognized tax
      benefits. During the three and nine months ended September 30, 2007, the Company
      recognized no adjustments for uncertain tax benefits.





Income
      taxes are computed using the asset and liability method of accounting. Under
      the
      asset and liability method, a deferred tax asset or liability is recognized
      for
      estimated future tax effects attributable to temporary differences and
      carryforwards. The measurement of deferred income tax assets is adjusted by
      a
      valuation allowance, if necessary, to recognize future tax benefits only to
      the
      extent, based on available evidence, it is more likely than not such benefits
      will be realized. The Company’s deferred tax assets were fully reserved at
      September 30, 2007 and December 31, 2006.





The
      Company recognizes interest and penalties, if any, related to uncertain tax
      positions in selling, general and administrative expenses or to defined benefit
      pension plan expense if they are associated with the Osley & Whitney, Inc.
      Retirement Plan (O&W Plan). The Company has accrued $380,000 of excise taxes
      and interest associated with the unfunded contributions to the O&W Plan
      through the Plan year ended December 31, 2005. Although the Company continued
      to
      act as the sponsor of the O&W Plan after the sale of all of the common stock
      of Osley & Whitney, Inc. (O&W) on December 30, 2002, during 2007 it was
      determined that, as a matter of law, the Company had no legal obligations to
      continue as the O&W Plan Sponsor. During the nine months ended September 30,
      2007, the Company submitted information advocating this position to the
      Department of Treasury (“DOT”) to ascertain whether they concur or disagree with
      this determination. The DOT is presently reviewing this information. If the
      DOT
      does not concur, the additional estimated excise taxes on accumulated unfunded
      O&W Plan contributions for the Plan year ended December 31, 2006 would
      approximate $135,000, which amount has not been accrued at September 30, 2007.
      Further, if the DOT does not concur, the Company could potentially incur
      additional excise taxes up to 100% of all required plan contributions. Such
      100%
      excise taxes have not been assessed and no portion of this amount has been
      accrued at September 30, 2007.





No
      interest and penalties related to other uncertain tax positions were accrued
      at
      September 30, 2007.





The
      tax
      years 2002 through 2006 remain open to examination by the taxing jurisdictions
      in which the Company operates. The Company expects no material changes to
      unrecognized tax positions within the next twelve months.





**Item
      2.**  **Management’s
      Discussion and Analysis or Plan of Operations**





**Our
      Business**





With
      offices in Pittsford, New York, Vienna, Virginia and Jackson, Mississippi,
      we
      provide business, program management and information technology (IT) services
      and systems support to federal, state and local government and commercial
      clients through our IT Services Group. Our work includes leading edge operations
      supporting complex programs in advanced computing environments (network
      services), server and desktop virtualization technology, wireless technology,
      human capital services, financial services, enterprise architecture, and earned
      value management. We focus on aligning business processes with technology for
      delivery of solutions meeting our clients’ exact needs.





In
      December 2003, we were awarded a Federal Supply Schedule Contract by the U.S.
      General Services Administration (GSA) for IT consulting services. As a GSA
      contractor we can compete for and secure prime contracts with all executive
      agencies of the U.S. Government, as well as state and local governments and
      other national and international organizations. As of September 30, 2007, we
      have one prime contract under our GSA schedule with the U.S. Department of
      Homeland Security.





During
      2007, we were approved as a VMware Authorized Consultant (VAC) by VMware, Inc.
      (NYSE:VMW) a subsidiary of EMC Corporation (NYSE:EMC). VMware is recognized
      as
      the industry leader in virtualization technology. As a VAC, we are trained
      and
      certified to deliver consulting services and solutions leveraging VMware
      technology. We are also certified as aVMware Enterprise VIP Reseller authorized
      to resell VMware’s full product line. We are actively working with a number of
      potential customers in that regard. These certifications are examples of our
      concerted effort to grow and expand our server virtualization practice. Server
      virtualization involves the creation, allocation, and management of “virtual
      machines,” which entails the virtual representation of hardware by a software
      system. What this means is that traditional “physical servers,” which typically
      run at only 5% to 15% of their capacity, can now be consolidated with the use
      of
      specialized software such as VMware to increase server utilization by a factor
      of ten to one or even greater. Reducing the number of physical machines required
      in a typical environment provides numerous and obvious benefits, including
      equipment cost savings, reduced operational maintenance costs, easier backup,
      improved availability, and better security.  Due to the substantial energy
      savings resulting from reduced infrastructure, virtualization is also a “green”
technology.





9




In
      July
      2007, we were accepted into the Hewlett Packard (NYSE:HPQ) Developer and
      Solutions Partner Program (DSPP). DSPP
      provides us with a mechanism to work with HP and our joint customers and
      prospects to provide solutions and services that complement HP's broad portfolio
      of products and services. HP has many tools and resources to help us generate
      new sales streams, and improve our mutual profitability, while at the same
      time
      adding unique value for our joint customers. The program comprises practical
      tools and services that we hope will help us in the key areas of marketing
      and
      selling our solutions, optimizing the technology, and collaborating with other
      organizations within our industry.




In
      August
      2007, we were notified that we were part of a team led by a large systems
      integrator that was awarded a Government Wide Acquisition Contract (GWAC) under
      GSA’s $50 billion Alliant program.




We
      are a
      member of a team led by CACI International Inc ( NYSE:CAI )
      that
      was awarded a $36 million task order by the U.S. Navy in October 2007 to support
      its Navy Enterprise Maintenance Automated Information System (NEMAIS) data
      center operations. The task order, awarded under the Seaport II Enhanced
      contract vehicle (Seaport-e), provides for one base year and three one-year
      options. The CACI team will perform the work at the Naval Sea Systems Command
      (NAVSEA) site in Norfolk, Virginia and the Puget Sound Naval Shipyard in
      Washington State. As a result of the award CACI was able to maintain the same
      level of support it has been providing to the Navy for the NEMAIS data center
      which in turn enhances CACI’s and our core lines of business in engineering
      services, network services and business systems integration.




The
      acquisition of these contract vehicles allows us additional opportunities to
      bid
      on new projects.





**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 all of the O&W common stock to
      a third party, but mistakenly continued to act as the sponsor of the O&W
      Retirement Plan (O&W Plan), a defined benefit pension plan. In 2007 it was
      determined that we had no legal obligations to continue as the O&W Plan
      Sponsor. During the nine months ended September 30, 2007, we submitted
      information advocating this position to the Department of Treasury to ascertain
      whether they concur or disagree with this determination. The Department of
      Treasury is presently reviewing this information. If they do not concur with
      our
      position, we intend to pursue all appropriate further avenues to prevail on
      our
      position. Depending upon the ultimate outcome regarding our obligations as
      sponsor of the O&W Plan, adjustments to our financial statements may be
      necessary. At September 30, 2007 we have accrued liabilities of $2,677,979
      related to the O&W Plan and an accumulated other comprehensive loss of
      $2,578,639 which we have recorded as a reduction of stockholders’ equity.





The
      market value of plan assets decreased by $79,353 from $3,497,115 at December
      31,
      2006 to $3,417,763 at September 30, 2007. The decrease was comprised of
      investment returns of $258,634 which were offset by benefit payments of $320,552
      and expenses paid of $17,434.




Whether
      or not we ultimately will be responsible to fund any O&W Plan deficiencies
      is largely dependent upon the ultimate outcome regarding our obligations as
      sponsor of the O&W Plan, as described above. If it is determined that we are
      responsible for such deficiencies, then we will be required to make
      contributions for deficiencies in 2004, 2005, 2006, 2007, and in future years
      to
      fund any O&W Plan deficiencies. We did not make any contributions in 2004,
      2006 or 2007. During 2005, we made contributions of $6,439 and 500,000 shares
      of
      our common stock, which were valued on the contribution date at $175,000 using
      that day’s closing market price. We currently do not have the funds available to
      make the required contributions which currently approximate $1.6 million, which
      includes the minimum required plan contributions. We recorded defined benefit
      pension expense (including professional services, excise taxes and interest
      costs) of $273,035 and $342,370 for the nine months ended September 30, 2007
      and
      2006, respectively. In 2006, we recorded excise taxes of $200,000. We may be
      required to pay interest on these excise taxes and potentially could incur
      additional excise taxes up to 100% of required plan contributions that were
      not
      made.




During
      2006, the Pension Benefit Guarantee Corporation 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.




**Future
      Trends**




We
      believe that our operations, as currently structured, together with our current
      financial resources, will result in improved financial performance in future
      years. Although our future prospects appear promising, the lengthy government
      financing and procurement processes may result in operating losses until sales
      increase to support our infrastructure and provide consistent cash flow to
      support profitability.




10





In
      the
      future, we may issue additional debt or equity securities to satisfy our cash
      needs. Any debt incurred or issued may be secured or unsecured, at fixed or
      variable interest rates and may contain other terms and conditions that our
      board of directors deems prudent. Any sales of equity securities may be at
      or
      below current market prices. We cannot assure you that we will be successful
      in
      generating sufficient capital to adequately fund our working capital
      needs.





**Results
      of Operations**





**Comparison
      of Three and Nine Month Periods ended September 30, 2007 and
      2006**





The
      trends suggested by the following tables are not indicative of future operating
      results due to the relatively short track record that we have in focusing on
      providing IT consulting services.





The
      following table compares our statements of operations data for the three months
      ended September 30, 2007 and 2006.


Three
                  Months Ended September 30,2007
                  vs. 2006As
                  a % of
              
              
              
              As
                  a % of
              
              Amount
                  of
              
              %
                  Increase2007
              
              Sales
              
              2006
              
              Sales
              
              Change
              
              (Decrease)Sales
              
              $
              2,063,644
              
              
              100.0
              %
              $
              1,427,434
              
              
              100.0
              %
              $
              6
                  36,210
              
              
              44.6
              %Cost
                  of services
              
              
              1,570,556
              
              
              76.1
              
              
              1,085,785
              
              
              76.1
              
              
              484,771
              
              
              44.6Gross
                  profit
              
              
              493,088
              
              
              23.9
              
              
              341,649
              
              
              23.9
              
              
              151,439
              
              
              44.3General
                  and administrative
              
              
              238,890
              
              
              11.6
              
              
              184,559
              
              
              12.9
              
              
              54,331
              
              
              29.4Defined
                  benefit pension plan
              
              
              84,017
              
              
              4.1
              
              
              250,587
              
              
              17.6
              
              
              (166,570
              )
              
              (66.5
              )Selling
              
              
              415,325
              
              
              20.1
              
              
              427,178
              
              
              29.9
              
              
              (11,853
              )
              
              (2.8
              )Research
                  and development
              
              
              1,553
              
              
              .1
              
              
              62,009
              
              
              4.3
              
              
              (60,456
              )
              
              (97.5
              )Impairment
                  loss
              
              
              -
              
              
              .0
              
              
              130,767
              
              
              9.2
              
              
              (130,767
              )Depreciation
                  and amortization
              
              
              7,892
              
              
              .4
              
              
              30,361
              
              
              2.1
              
              
              (22,469
              )
              
              (74.0
              )Total
                  costs and expenses
              
              
              747,677
              
              
              36.2
              
              
              1,085,461
              
              
              76.0
              
              
              (337,784
              )
              
              (31.1
              )Operating
                  loss
              
              
              (254,589
              )
              
              (12.3
              )
              
              (743,812
              )
              
              (52.1
              )
              
              489,223Interest
                  expense, net
              
              
              (69,624
              )
              
              (3.4
              )
              
              (56,551
              )
              
              (4.0
              )
              
              (13,073
              )
              
              23.1
              %Other
                  (loss)
              
              
              (1,634
              )
              
              (.1
              )
              
              -
              
              
              .0
              
              
              (1,634
              )Net
                  loss
              
              $
              (325,847
              )
              
              (15.8)
              %
              $
              (800,363
              )
              
              (56.1)
              %
              $
              474,516Net
                  loss per share - basic and diluted
              
              $
              (.01
              )
              
              
              
              $
              (.04
              )
              
              
              
              $
              .03





11




The
      following table compares our statements of operations data for the nine months
      ended September 30, 2007 and 2006.


Nine
                  Months Ended September 30,2007
                  vs. 2006As
                  a % of
              
              
              
              As
                  a % of
              
              Amount
                  of
              
              %
                  Increase2007
              
              Sales
              
              2006
              
              Sales
              
              Change
              
              (Decrease)Sales
              
              $
              6,008,314
              
              
              100.0
              %
              $
              4,391,436
              
              
              100.0
              %
              $
              1
                  ,616,878
              
              
              36.8
              %Cost
                  of services
              
              
              4,322,505
              
              
              71.9
              
              
              3,440,561
              
              
              78.3
              
              
              881,944
              
              
              25.6Gross
                  profit
              
              
              1,685,809
              
              
              28.1
              
              
              950,875
              
              
              21.7
              
              
              734,934
              
              
              77.3General
                  and administrative
              
              
              631,370
              
              
              10.5
              
              
              706,981
              
              
              16.1
              
              
              (75,611
              )
              
              (10.7
              )Defined
                  benefit pension plan
              
              
              273,035
              
              
              4.5
              
              
              342,370
              
              
              7.8
              
              
              (69,335
              )
              
              (20.3
              )Selling
              
              
              1,118,089
              
              
              18.6
              
              
              1,243,369
              
              
              28.3
              
              
              (125,280
              )
              
              (10.1
              )Research
                  and development
              
              
              88,807
              
              
              1.5
              
              
              202,719
              
              
              4.6
              
              
              (113,912
              )
              
              (56.2
              )Impairment
                  loss
              
              
              -
              
              
              .0
              
              
              130,767
              
              
              3.0
              
              
              (130,767
              )Depreciation
                  and amortization
              
              
              26,009
              
              
              .4
              
              
              73,988
              
              
              1.7
              
              
              (47,979
              )
              
              (64.8
              )Total
                  costs and expenses
              
              
              2,137,310
              
              
              35.6
              
              
              2,700,194
              
              
              61.5
              
              
              (562,884
              )
              
              (20.8
              )Operating
                  loss
              
              
              (451,501
              )
              
              (7.5
              )
              
              (1,749,319
              )
              
              (39.8
              )
              
              1,297,818Interest
                  expense, net
              
              
              (199,413
              )
              
              (3.3
              )
              
              (143,241
              )
              
              (3.3
              )
              
              (56,172
              )
              
              39.2Other
                  income
              
              
              4,957
              
              
              .1
              
              
              498,088
              
              
              11.3
              
              
              (493,131
              )
              
              (99.0
              )Income
                  tax expense
              
              
              (605
              )
              
              (.0
              )
              
              (7,300
              )
              
              (.2
              )
              
              6,695
              
              
              (91.7
              )%Net
                  loss
              
              $
              (646,562
              )
              
              (10.8
              )
              $
              (1,401,772
              )
              
              (31.9
              )
              $
              755,210Net
                  loss per share - basic and diluted
              
              $
              (.03
              )
              
              
              
              $
              (.07
              )
              
              
              
              $
              .04




**Sales**





Sales
      for
      the three months ended September 30, 2007 were $2,063,644, an increase of
      $636,210 or 44.6% as compared to sales for the three months ended September
      30,
      2006 of $1,427,434. Sales for the nine months ended September 30, 2007 were
      $6,008,314, an increase of $1,616,878 or 36.8% as compared to sales for the
      nine
      months ended September 30, 2006 of $4,391,436. A significant portion of this
      increase was a result of sales from new projects including significant server
      virtualization projects for a major establishment of the U.S. Government.





Server
      virtualization involves the creation, allocation, and management of “virtual
      machines,” which entails the virtual representation of hardware by a software
      system. Traditional “physical servers,” which typically run at only 5% to 15% of
      their capacity, can now be consolidated with the use of specialized software
      such as VMware to increase server utilization by a factor of ten to one or
      even
      greater. Reducing the number of physical machines required in a typical
      environment provides numerous and obvious benefits, including equipment cost
      savings, reduced operational maintenance costs, easier backup, improved
      availability, and better security. Due to the substantial energy savings
      resulting from reduced infrastructure, virtualization is also a “green”
technology. We continue to devote substantial resources to support our expanding
      server and desktop virtualization practice.





In
      March
      2006, one of our subcontracts for services to the U.S. Department of Homeland
      Security ended when the project ended. Most of our government contracts have
      a
      lifecycle; there is a beginning, middle and an end. Contracts end naturally
      when
      projects are completed or when appropriations of funds have been fully depleted
      and new appropriations have not been approved. Our ongoing business development
      efforts entail the submission of numerous contract proposals and the
      identification of opportunities for other new contracts to replace sales that
      do
      not continue in the ordinary course of business and to increase our sales.





We
      are
      actively pursuing opportunities to develop additional sales from new and
      existing target markets. In March 2006, we opened a regional office in Jackson,
      Mississippi, and hired a new business development employee and retained a
      lobbying firm to pursue state and local government business opportunities within
      the Gulf Coast region. We have made inroads within the state and local
      government market in Mississippi, although the sales cycle has been longer
      than
      we anticipated. Nevertheless, we remain committed to developing the state and
      local government market and are optimistic about our prospects in Mississippi
      and several other states. Moreover, we are also channeling energies towards
      forming alliances with large systems integrators, who are mandated by federal
      policy to direct defined percentages of their work to small business
      subcontractors. In addition, we are currently working on proposals for contract
      awards that we believe will enhance our position as a government contractor.





Early
      successes in our recent initiatives are evident in the preferred relationships
      we have earned with several large systems integrators and one major product
      house. In August 2007, we were notified that we were part of a team led by
      a
      large systems integrator that was awarded a Government Wide Acquisition Contract
      (GWAC) under GSA’s $50 billion Alliant program. In addition, we are a member of
      a team that won the U.S. State Department’s recent Hybrid Information Technology
      Support Services (HITSS) contract and a member of a team that won a $36 million
      contract to
      support the Navy’s Enterprise Maintenance Automated Information System (NEMAIS)
      data center operations in
      Norfolk, Virginia and Puget Sound, Washington State. The acquisition of these
      contract vehicles allows us additional opportunities to bid on new projects.
      Although we believe our future prospects are robust, the lengthy government
      financing and procurement processes may result in continuing operating losses
      until sales increase to support our infrastructure.





12




**Cost
      of Services and Gross Profit**





Cost
      of
      services represents the cost of employee services related to the IT Services
      Group. Cost of services for the three months ended September 30, 2007 was
      $1,570,556 or 76.1% of sales as compared to $1,085,785 or 76.1% of sales for
      the
      three months ended September 30, 2006. Gross profit was $493,088 or 23.9% of
      sales for the three months ended September 30, 2007 compared to $341,649 or
      23.9% of sales for the three months ended September 30, 2006. Cost of services
      for the nine months ended September 30, 2007 was $4,322,505 or 71.9% of sales
      as
      compared to $3,440,561 or 78.3% of sales for the nine months ended September
      30,
      2006. Gross profit was $1,685,809 or 28.1% of sales for the nine months ended
      September 30, 2007 compared to $950,875 or 21.7% of sales for the nine months
      ended September 30, 2006.




The
      increase in gross profit in 2007 is due to a change in the mix of our business
      resulting from new projects at improved profit margins and a reduction in the
      costs of employees who did not generate billable sales after contract
      reductions.





Although
      our objective is to maintain an overall gross margin of approximately 30%,
      in
      the future we may submit bids on new work with lower gross profit margins to
      generate opportunities for long-term, larger volume contracts and more stable
      sales.





**General
      and Administrative Expenses**





General
      and administrative expenses include corporate overhead such as compensation
      and
      benefits for administrative and finance personnel, rent, insurance, professional
      fees, travel, and office expenses. General and administrative expenses for
      the
      three months ended September 30, 2007 were $238,890 which was an increase of
      $54,331 or 29.4% as compared to $184,559 for the three months ended September
      30, 2006 due to slight increases in a variety of general and administrative
      expense categories and the reassignment of an independent consultant from
      research and development when the TouchThruTM development activities ended. As a
      percentage of sales, general and administrative expenses were 11.6% for the
      three months ended September 30, 2007 as compared to 12.9% for the three months
      ended September 30, 2006.





General
      and administrative expenses for the nine months ended September 30, 2007
      decreased by $75,611 or 10.7%. As a percentage of sales, general and
      administrative expenses were 10.5% for the nine months ended September 30,
      2007
      and 16.1% for the nine months ended September 30, 2006. This change was due
      in
      part to an increase in sales for the nine months ended September 30, 2007
      compared to 2006. In 2007, we experienced a decrease in compensation expense
      of
      $41,200 from consolidating certain administrative functions, which were offset
      by the expenses associated with the reassignment of an independent consultant
      from research and development when the TouchThruTM development activities ended.
      In addition, we incurred certain non-recurring expenses in 2006 including legal
      fees of $25,000 due to administering our contracts and annual stockholder
      meeting proxy expenses of approximately $18,400.





We
      anticipate that general and administrative expenses will increase as we continue
      to grow our business and incur travel and other expenses associated with
      managing a larger business, however, we anticipate that general and
      administrative expenses will decline as a percentage of sales as our sales
      increase.





**Defined
      Benefit Pension Plan Expenses**





Defined
      benefit pension plan expenses are expenses (including pension expense, excise
      taxes, professional services, and interest costs) associated with the O&W
      Plan. These expenses were $84,017 for the three months ended September 30,
      2007
      and $250,587 for the three months ended September 30, 2006, a decrease of
      $166,570, and $273,035 for the nine months ended September 30, 2007 and $342,370
      for the nine months ended September 30, 2006, a decrease of $69,335. The
      decrease in expense is due to recording excise taxes of $200,000 during the
      three months ended September 30, 2006 which are offset by accruing additional
      interest on unfunded contributions and increases in legal and professional
      fees
      during 2007.





During
      2006, the Pension Benefit Guarantee Corporation placed a lien on all of our
      assets to secure pension payments due under the O&W Plan. This lien is
      subordinate to liens that secure accounts receivable financing and certain
      notes
      payable.





Although
      we have acted as the sponsor of the O&W Plan since we acquired O&W,
      recently it was determined that we may not have had, or currently have, a legal
      obligation to do so since December 30, 2002 when we sold all of the common
      stock
      of O&W to a third party. During the nine months ended September 30, 2007, we
      incurred additional legal and professional fees in connection with advocating
      this position with the appropriate regulatory authorities to ascertain whether
      they concur or disagree with this determination. We are seeking the concurrence
      of the Department of Treasury and have recently provided to them the information
      related to our determination. They are presently reviewing this
      information.





13




If
      our
      current efforts do not result in a concurrence with our position, we intend
      to
      pursue all appropriate further avenues to prevail in our position. Depending
      upon the ultimate outcome regarding our obligations as sponsor of the O&W
      Plan, adjustments to our financial statements may be necessary.





**Selling
      Expenses**





For
      the
      three months ended September 30, 2007, we incurred selling expenses of $415,325
      associated with growing the business in our IT Services Group as compared to
      $427,178 for the three months ended September 30, 2006, a decrease of 11,853
      or
      2.8%. For the nine months ended September 30, 2007 we incurred selling expenses
      of $1,118,089 associated with growing business in our IT Services Group compared
      to $1,243,369 for the nine months ended September 30, 2006, a decrease of
      $125,280 or 10.1%.





Selling
      expenses consist of our business development staff including salaries, benefits,
      sales consultants, travel expenses, and occupancy expenses. As a result of
      the
      completion of one subcontract during the first quarter of 2006, we reduced
      certain salaried selling positions. During the second quarter of 2006, we hired
      new business development personnel, including a new business development
      director. In June 2007, we hired a new business development employee to focus
      efforts toward increasing sales of physical
      to virtual server consolidation projects .
      In
      August 2007, we hired two additional employees to focus more effort in
      generating business opportunity leads and writing proposals for new
      projects.





We
      experienced a decrease in consulting expense of $9,525 and $103,982 for the
      three and nine months ended September 30, 2007, respectively, as a result of
      our
      hiring of a consultant as an employee in the third quarter of 2006 and our
      reduction of the use and rate of compensation to other independent consultants.





We
      continued to incur expenses during the three and nine months ended September
      30,
      2007 associated with our business development efforts in the Gulf Coast
      region.





**Research
      and Development Expenses and Impairment Loss**





For
      the
      three months ended September 30, 2007, we recorded $1,553 of research and
      development expenses, a decrease of $60,456 compared to $62,009 for the three
      months ended September 30, 2006. For the nine months ended September 30, 2007,
      we recorded $88,807 of research and development expenses compared to $202,719
      for the nine months ended September 30, 2006, a decrease of $113,912. In 2007,
      these expenses were principally related to the development of an access control
      terminal and related software called TouchThruTM. During the three months ended
      September 30, 2007, we ended development activities and related expenses for
      TouchThruTM and reassigned an independent consultant from these development
      efforts to other business activities. TouchThruTM is a self-contained terminal
      enabling physical access control using biometric identification. It incorporates
      fingerprint matching technology licensed from Ultra-Scan Corporation, a private
      technology company headquartered in Buffalo, New York.





During
      the three months ended September 30, 2006, we recorded an impairment loss of
      $130,767 related to the carrying costs of TouchThruTM capitalized software
      development costs, tooling costs and inventory. Our TouchThruTM unit was designed
      around Ultra-Scan’s unique ultrasonic scanner. We anticipate that Ultra-Scan
      will improve the technology by designing a next generation scanner that will
      be
      smaller, lighter and less costly. We expect this will result in a substantial
      reduction in the costs of components to build our TouchThruTM unit and
      accordingly a substantial reduction in our sales price.  As a result of the
      evolution of our business strategy, during the three months ended September
      30,
      2006, we recorded an impairment loss for a portion of capitalized software
      development costs, all of the capitalized tooling costs and the related
      inventory.





We
      believe that significant resources will be required to market and sell a newly
      designed TouchThruTM product that is based on Ultra-Scan’s next generation
      scanner. For example, we will be required to re-design our TouchThruTM unit based
      on the next generation of this technology and offer for sale a newly designed
      unit when it is completed. Given our limited financial resources at this time
      and other business priorities, this will be deferred until the market is better
      established and we have the necessary working capital to support this product.
      We will continue to monitor the market and determine the appropriate time to
      enter this market.





**Depreciation
      and Amortization Expenses**





Depreciation
      and amortization expense decreased by $22,649 to $7,892 for the three months
      ended September 30, 2007 compared to $30,361 for the three months ended
      September 30, 2006. For the nine months ended September 30, 2007, depreciation
      and amortization expense decreased by $47,979 to $26,009 compared to $73,988
      for
      the nine months ended September 30, 2006. The decrease is due to less
      depreciation and amortization of assets related to the TouchThruTM product, which
      was considered impaired and written off during the last two quarters of
      2006.





14




**Operating
      Loss**





For
      the
      three months ended September 30, 2007 our operating loss was $(254,589) compared
      to an operating loss of $(743,812) for the three months ended September 30,
      2006; an improvement of $489,223. This is principally attributable to the
      following factors: **** first,
      our sales increased by $636,210 from $1,427,434 in 2006 to $2,063,644 in 2007;
      second, our gross profit increased by $151,439 from $341,649 in 2006 to $493,088
      in 2007; and third, we realized a decrease in total operating expenses of
      $337,784 from $1,085,461 in 2006 to $747,677 in 2007.





For
      the
      nine months ended September 30, 2007 our operating loss was $(451,501) compared
      to an operating loss of $(1,749,319) for the nine months ended September 30,
      2006; an improvement of $1,297,818. This is principally attributable to the
      following factors: **** first,
      our sales increased by $1,616,878 from $4,391,436 in 2006 to $6,008,314 in
      2007;
      second, our gross profit increased by $734,934 from $950,875 in 2006 to
      $1,685,809 in 2007; and third, we realized a decrease in total operating
      expenses of $562,884 from $2,700,194 in 2006 to $2,137,310 in 2007.





**Net
      Interest Expense**





Net
      interest expense consists of interest income offset by interest expense on
      indebtedness and fees for financing accounts receivable invoices. Net interest
      expense was $69,624 for the three months ended September 30, 2007 compared
      to
      net interest expense of $56,551 for the three months ended September 30, 2006.
      Net interest expense was $199,413 for the nine months ended September 30, 2007
      compared to net interest expense of $143,241 for the nine months ended September
      30, 2006. The increase in net interest expense of $13,073 and $56,172, for
      the
      three and nine months ended September 30, 2007, respectively, was principally
      due to an increase in the length of term and volume of accounts receivable
      invoices that were financed in 2007.





**Other
      Income (Loss)**





For
      the
      three months ended September 30, 2007, we had a loss of $1,634 compared to
      $0
      for the three months ended September 30, 2006. For the nine months ended
      September 30, 2007, we had other income of $4,957 compared to $498,088 for
      the
      nine months ended September 30, 2006.





We
      received and recorded other income of $498,088, net of legal fees and expenses
      of $164,412, in the first quarter of 2006. We were the plaintiff in a lawsuit
      filed in the Superior Court, State of Rhode Island on August 13, 1999
      captioned Infinite Group, Inc. vs. Spectra Science Corporation and Nabil
      Lawandy. In the action, we asserted that by fraud and in breach of fiduciary
      duties owed, Spectra and its president, Nabil Lawandy, caused us to sell to
      Spectra shares of Spectra’s Series A Preferred stock at a substantial discount
      to fair market value. We alleged that in entering into the transaction it relied
      on various representations made by Spectra and Mr. Lawandy, which were untrue
      at
      the time they were made. The trial was completed in February 2005, and the
      jury
      returned a verdict in our favor in the amount of approximately $600,000. We
      appealed the amount of the verdict and entered into a settlement with the
      defendants in January 2006 and recorded other income of $498,088.





**Income
      Taxes**





Income
      tax expense was $0
      for
      the three months ended September 30, 2007 and 2006, respectively. Income tax
      expense was $605 and $7,300 for the nine months ended September 30, 2007 and
      2006, respectively, consisting of state taxes.





**Net
      Loss**





For
      the
      three months ended September 30, 2007, ** we
      recorded a net loss in the amount of $(325,847) or $(.01) per share compared
      to
      a net loss of $(800,363) or $(.04) per share for the three months ended
      September 30, 2006 *.* The
      improvement in net loss of $474,516 is principally attributable to an increase
      in gross profit of $151,439 and a decrease in operating costs and expenses
      of
      $337,784. For the three months ended September 30, 2007 and 2006, we recorded
      expense of $97,009 and $77,853, respectively, for employee stock options expense
      under SFAS 123R and $25,595 and $5,697, respectively, for equity instruments
      issued to consultants.





For
      the
      nine months ended September 30, 2007, ** we
      recorded a net loss in the amount of $(646,562) or $(.03) per share compared
      to
      a net loss of $(1,401,772) or $(.07) per share for the nine months ended
      September 30, 2006 *.* The
      improvement in net loss of $755,210 is principally attributable to an increase
      in gross profit of $734,934 and a decrease in operating costs and expenses
      of
      $562,884, which were offset in part by an increase in net interest expense
      of
      $56,172, a decreases in other income of $493,131 and state income taxes of
      $6,695.





15




**Stock-Based
      Compensation**





In
      the
      following table, we present adjustments and pro forma amounts to reflect the
      impact that the adoption of SFAS 123R related to employee stock options had
      on
      our financial statements including net loss for the nine months ended September
      30, 2007 and 2006. Such expenses are allocated in the same manner as employee
      salary expense. We believe that these non-generally accepted accounting
      principles (GAAP) financial measures provide investors useful information to
      facilitate the comparison of current performance to prior performance. These
      non-GAAP measures should not be considered in isolation or as a substitute
      for
      performance measures in accordance with GAAP.


Nine
                  Months Ended September 30,2007
              
              2007
              
              2007
              
              2006
              
              2006
              
              2006As
                  Reported
              
              Adjustments
              
              Pro
                  Forma
              
              As
                  Reported
              
              Adjustments
              
              Pro
                  FormaSales
              
              $
              6,008,314
              
              $
              -
              
              $
              6,008,314
              
              $
              4,391,436
              
              $
              -
              
              $
              4,391,436Cost
                  of services
              
              
              4,322,505
              
              
              (67,702
              )
              
              4,254,803
              
              
              3,440,561
              
              
              (20,372
              )
              
              3,420,189Gross
                  profit
              
              
              1,685,809
              
              
              67,702
              
              
              1,753,511
              
              
              950,875
              
              
              20,372
              
              
              971,247General
                  and administrative
              
              
              631,370
              
              
              (12,636
              )
              
              618,734
              
              
              706,981
              
              
              (8,485
              )
              
              698,496Defined
                  benefit pension plan
              
              
              273,035
              
              
              -
              
              
              273,035
              
              
              342,370
              
              
              -
              
              
              342,370Selling
              
              
              1,118,089
              
              
              (99,730
              )
              
              1,018,359
              
              
              1,243,369
              
              
              (145,523
              )
              
              1,097,846Research
                  and development
              
              
              88,807
              
              
              -
              
              
              88,807
              
              
              202,719
              
              
              -
              
              
              202,719Impairment
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              130,767
              
              
              -
              
              
              130,767Depreciation
                  and amortization
              
              
              26,009
              
              
              -
              
              
              26,009
              
              
              73,988
              
              
              -
              
              
              73,988Total
                  costs and expenses
              
              
              2,137,310
              
              
              (112,366
              )
              
              2,024,944
              
              
              2,700,194
              
              
              (154,008
              )
              
              2,546,186Operating
                  loss
              
              
              (451,501
              )
              
              180,068
              
              
              (271,433
              )
              
              (1,749,319
              )
              
              174,380
              
              
              (1,574,939
              )Interest
                  expense, net
              
              
              (199,413
              )
              
              -
              
              
              (199,413
              )
              
              (143,241
              )
              
              -
              
              
              (143,241
              )Other
                  income
              
              
              4,957
              
              
              -
              
              
              4,957
              
              
              498,088
              
              
              -
              
              
              498,088Income
                  tax expense
              
              
              (605
              )
              
              -
              
              
              (605
              )
              
              (7,300
              )
              
              -
              
              
              (7,300
              )Net
                  loss
              
              $
              (646,562
              )
              $
              180,068
              
              $
              (466,494
              )
              $
              (1,401,772
              )
              $
              174,380
              
              $
              (1,227,392
              )Net
                  loss per share - basic
              
              $
              (.03
              )
              $
              .01
              
              $
              (.02
              )
              $
              (.07
              )
              $
              .01
              
              $
              (.06
              )




We
      recorded expense of $74,488 and $17,091 for equity instruments issued to
      consultants for the nine months ended September 30, 2007 and 2006, respectively.





**Liquidity
      and Capital Resources**




At
      September 30, 2007, we had cash of $8,643 available for our working capital
      needs and planned capital asset expenditures, a working capital deficit of
      approximately $2,445,000 and a current ratio of .22. 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 $1,975,000, working
      capital would be a deficit of approximately $470,000. Our objective is to
      improve our working capital position from profitable operations. If we continue
      to incur operating losses or net losses, we may continue to experience working
      capital shortages that impair our business operations and growth strategy.
      Presently, we have sufficient cash flow and short-term financing sources,
      including sales with recourse of accounts receivable, to pay our payrolls and
      recurring invoices on a timely basis.





We
      have
      financed the activity of our IT Services Group through the issuance of notes
      payable to third parties, including related parties, private placements of
      common stock and financing through sales with recourse of our accounts
      receivable.





We
      have
      available a financing line of up to $800,000 with a financial institution that
      allows us to sell selected accounts receivable invoices to the financial
      institution with full recourse against us. We pay fees based on the length
      of
      time that the invoice remains unpaid. At September 30, 2007, we had
      approximately $200,000 of availability under this line and could finance up
      to
      another approximately $200,000 based on eligible accounts receivable at
      September 30, 2007.





We
      have
      used our common stock to provide compensation to certain employees and
      consultants and to fund liabilities. For the nine months ended September 30,
      2007 we recorded expense of $37,800 related to a warrant issued to a consultant
      who has met a portion of his performance criteria by assisting us with
      increasing our sales in 2007. During this period we also recorded expense of
      $37,188 related to a warrant for 100,000 shares of our common stock and 100,000
      shares of our common stock issued to another consultant for services to be
      performed over one year.




16




During
      the nine months ended September 30, 2006, we issued non-qualified stock options
      and warrants to other service providers and recorded $17,091 of expense related
      to these issuances.





Successes
      in our 2006 and 2007 initiatives are evident in the preferred relationships
      we
      have earned with several large systems integrators and one major product house.
      In addition, we are a member of a team that won the U.S. State Department’s
      recent Hybrid Information Technology Support Services (HITSS) contract and
      a
      member of a team that won a $36 million contract in
      October 2007 to support the U.S. Navy’s Enterprise Maintenance Automated
      Information System (NEMAIS) data center operations in
      Norfolk, Virginia and Puget Sound, Washington. In June 2006, we were awarded
      a
      prime contract under the Department of the Navy’s SeaPort-Enhanced (SeaPort-e)
      program. This contract allows us to compete for and perform service requirements
      solicited by various Navy commands, the Marine Corps, other organizations within
      the Department of Defense (DoD), non-DoD agencies, and certain joint agency
      organizations for work that is integrally related to the scope and mission
      of
      the contract. This work involves professional services in all
      phases of naval ship and weapon systems acquisition and life-cycle support, including
      research and development support, prototyping, technology analysis, acquisition
      logistics, project management support, modeling, test and evaluation trials,
      crisis and consequence management, and engineering support. (The NEMAIS Data
      Center contract referenced above was procured using the SeaPort-e contract
      vehicle.)





During
      2007, we were approved as a VMware Authorized Consultant (VAC) by VMware, Inc.
      (NYSE:VMW), a subsidiary of EMC Corporation (NYSE:EMC). VMware is recognized
      as
      the industry leader in virtualization technology. As a VAC, we are trained
      and
      certified to deliver consulting services and solutions leveraging VMware
      technology. We are also certified as aVMware Enterprise VIP Reseller authorized
      to resell VMware’s full product line. We are actively working with a number of
      potential customers in that regard. These certifications are examples of our
      concerted effort to grow and expand our server virtualization practice. Server
      virtualization involves the creation, allocation, and management of “virtual
      machines,” which entails the virtual representation of hardware by a software
      system. What this means is that traditional “physical servers,” which typically
      run at only 5% to 15% of their capacity, can now be consolidated with the use
      of
      specialized software such as VMware to increase server utilization by a factor
      of ten to one or even greater. Reducing the number of physical machines required
      in a typical environment provides numerous and obvious benefits, including
      equipment cost savings, reduced operational maintenance costs, easier backup,
      improved availability, and better security.  Due to the substantial energy
      savings resulting from reduced infrastructure, virtualization is also a “green”
technology.





In
      July
      2007, we were accepted into the Hewlett Packard (NYSE:HPQ) Developer and
      Solutions Partner Program (DSPP). DSPP
      provides us with a mechanism to work with HP and our joint customers and
      prospects to provide solutions and services that complement HP's broad portfolio
      of products and services. HP has many tools and resources to help us generate
      new revenue streams, and improve our mutual profitability, while at the same
      time adding unique value for our joint customers. The program comprises
      practical tools and services that we hope will help us in the key areas of
      marketing and selling our solutions, optimizing the technology, and
      collaborating with other organizations within our industry.





In
      August
      2007, we were notified that we were part of a team led by a large systems
      integrator that was awarded a Government Wide Acquisition Contract (GWAC) under
      GSA’s $50 billion Alliant program. The competitively awarded GSA Alliant
      contract is a multiple-award, indefinite-delivery, indefinite-quantity (IDIQ)
      contract with a ceiling value of $50 Billion. The GSA's Alliant Government-wide
      Acquisition Contract is for ten years and can be utilized by all federal and
      Department of Defense agencies. The lead systems integrator and its team was
      one
      of 29 companies to receive awards for the contract which will support national
      security in areas such as infrastructure protection, anti-terrorism and emerging
      technologies.





The
      acquisition of these contract vehicles allows us additional opportunities to
      bid
      on new projects.





Although
      our future prospects appear promising, the lengthy government financing and
      procurement processes may result in continuing operating losses until sales
      increase to support our infrastructure.





In
      the
      future, we may issue additional debt or equity securities to satisfy our cash
      needs. Any debt incurred or issued may be secured or unsecured, at a fixed
      or
      variable interest rates and may contain other terms and conditions that our
      board of directors deems prudent. Any sales of equity securities may be at
      or
      below current market prices. We cannot assure you that we will be successful
      in
      generating sufficient capital to adequately fund our working capital
      needs.





**** **Risk
      Factors**




You
      should consider the risk factors included in our Annual Report on Form 10-KSB
      for the year ended December 31, 2006 in evaluating our business and us.
      Additional risks and uncertainties not presently known to us, which we currently
      deem immaterial or that are similar to those faced by other companies in our
      industry or business in general, such as competitive conditions, may also impair
      our business operations. If any of the results of the risks occur, our business,
      financial condition, or results of operations could be materially adversely
      affected.




17




**Item
      3. Controls and Procedures**




Evaluation
      of Disclosure Controls and Procedures. Our
      management, with the participation of the 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, as amended (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
      U.S. Securities and Exchange Commission’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 controls over financial reporting that occurred
      during our fiscal third quarter that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.




**PART
      II**




**OTHER
      INFORMATION**




**Item
      1.**  **Legal
      Proceedings.**




We
      are
      not presently involved in any material legal proceedings.




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




None.





**Item
      3.**  **Defaults
      Upon Senior Securities.**





None.





**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders.**





None.





**Item
      5. Other Information.**





None.





**Item
      6.**  **Exhibits.**


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







*
      Filed
      herewith




18




**SIGNATURES**




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





Infinite
                Group, Inc.(Registrant)Date:
                November 12, 2007
            /s/
                Michael S. SmithChief
                Executive Officer(Principal
                Executive Officer)Date:
                November 12, 2007
            /s/
                Michael S. SmithChief
                Financial Officer(Principal
                Financial Officer)




19