UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





x QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly
period ended: June 30, 2010





 ̈ TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition
period from _________ to __________





Commission
file number: 0-21816





INFINITE
GROUP, INC.


(Exact
name of registrant as specified in its charter)





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





60 Office
Park Way


Pittsford,
New York 14534


(Address
of principal executive offices)





(585)
385-0610


(Registrant's
telephone number)





(Former
name, former address and former fiscal year,


if
changed since last report)





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





Yes x No  ̈





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





Yes  ̈No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      Accelerated filer  ̈
                Non-accelerated
      filer   ̈
              
              Accelerated
      filer   ̈
                Smaller
      reporting company x





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


Yes  ̈ No x





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.


There
were 26,461,883 shares of the issuer’s common stock, par value $.001 per share,
outstanding as of August 12, 2010.







INFINITE
GROUP, INC.




FORM
10-Q REPORT





TABLE OF
CONTENTS


PAGEPART
      I – FINANCIAL INFORMATIONItem
      1.
                    
                    Consolidated
      Financial StatementsConsolidated
      Balance Sheets – June 30, 2010 (Unaudited)  and December 31,
      2009 (Audited)
                    
                    3Consolidated
      Statements of Operations (Unaudited) for the three and six months ended
      June 30, 2010 and 2009
                    
                    4Consolidated
      Statements of Cash Flows (Unaudited) for the six months ended June 30,
      2010 and 2009
                    
                    5Notes
      to Consolidated Financial Statements – (Unaudited)
                    
                    6Item
      2.
                    
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    9Item
      3.
                    
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    15Item
      4.
                    
                    Controls
      and Procedures
                    
                    15PART
      II – OTHER INFORMATION
                    
                    15Item
      2.
                    
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    
                    15Item
      6.
                    
                    Exhibits
                    
                    15SIGNATURES
                    
                    
                    
                    16





FORWARD-LOOKING
STATEMENTS




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


2


PART
I


FINANCIAL
INFORMATION


Item
1.  Consolidated Financial Statements





INFINITE
GROUP, INC.





Consolidated
Balance Sheets





June 30,
                        2010
                      
                      
                      December 31,
                        2009(Unaudited)ASSETSCurrent
      assets:Cash
                      
                      $
                      27,354
                      
                      
                      $
                      196,711Accounts
      receivable, net of allowance of $70,000
                      
                      
                      761,036
                      
                      
                      
                      1,118,580Prepaid
      expenses and other current assets
                      
                      
                      70,099
                      
                      
                      
                      56,622Total
      current assets
                      
                      
                      858,489
                      
                      
                      
                      1,371,913Property
      and equipment, net
                      
                      
                      82,778
                      
                      
                      
                      58,777Deposits
      and other assets
                      
                      
                      18,424
                      
                      
                      
                      21,544Total
      assets
                      
                      $
                      959,691
                      
                      
                      $
                      1,452,234LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      liabilities:Accounts
      payable
                      
                      $
                      572,516
                      
                      
                      
                      686,457Accrued
      payroll
                      
                      
                      313,870
                      
                      
                      
                      388,131Accrued
      interest payable
                      
                      
                      308,185
                      
                      
                      
                      275,563Accrued
      retirement and pension
                      
                      
                      3,313,431
                      
                      
                      
                      3,078,361Accrued
      expenses - other
                      
                      
                      29,049
                      
                      
                      
                      61,632Current
      maturities of long-term obligations-bank
                      
                      
                      42,350
                      
                      
                      
                      32,243Notes
      payable
                      
                      
                      470,000
                      
                      
                      
                      295,000Notes
      payable-related parties
                      
                      
                      179,000
                      
                      
                      
                      154,000Total
      current liabilities
                      
                      
                      5,228,401
                      
                      
                      
                      4,971,387Long-term
      obligations:Notes
      payable:Banks
      and other
                      
                      
                      178,249
                      
                      
                      
                      334,029Related
      parties
                      
                      
                      501,324
                      
                      
                      
                      501,324Accrued
      pension expense
                      
                      
                      735,012
                      
                      
                      
                      735,012Total
      liabilities
                      
                      
                      6,642,986
                      
                      
                      
                      6,541,752Commitments
      and contingencies (Note 5)Stockholders’
      deficiency:Common
      stock, $.001 par value, 60,000,000 shares authorized;
                        25,661,883
      (25,661,883 – 2009) shares issued and outstanding
                      
                      
                      25,661
                      
                      
                      
                      25,661Additional
      paid-in capital
                      
                      
                      29,929,422
                      
                      
                      
                      29,870,506Accumulated
      deficit
                      
                      
                      (32,833,338
                      )
                      
                      
                      (32,180,645
                      )Accumulated
      other comprehensive loss
                      
                      
                      (2,805,040
                      )
                      
                      
                      (2,805,040
                      )Total
      stockholders’ deficiency
                      
                      
                      (5,683,295
                      )
                      
                      
                      (5,089,518
                      )Total
      liabilities and stockholders’ deficiency
                      
                      $
                      959,691
                      
                      
                      $
                      1,452,234




See notes
to unaudited consolidated financial statements.


3




INFINITE
GROUP, INC.




Consolidated
Statements of Operations (Unaudited)





Three Months Ended
                    
                    
                    Six Months EndedJune 30,
                    
                    
                    June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Sales
                    
                    $
                    2,223,493
                    
                    
                    $
                    2,908,099
                    
                    
                    $
                    4,993,288
                    
                    
                    $
                    5,564,029Cost
      of services
                    
                    
                    1,708,864
                    
                    
                    
                    2,285,969
                    
                    
                    
                    3,765,668
                    
                    
                    
                    4,278,679Gross
      profit
                    
                    
                    514,629
                    
                    
                    
                    622,130
                    
                    
                    
                    1,227,620
                    
                    
                    
                    1,285,350Costs
      and expenses:General
      and administrative
                    
                    
                    307,833
                    
                    
                    
                    315,417
                    
                    
                    
                    616,130
                    
                    
                    
                    612,208Defined
      benefit pension plan
                    
                    
                    119,795
                    
                    
                    
                    131,877
                    
                    
                    
                    245,948
                    
                    
                    
                    296,746Selling
                    
                    
                    397,090
                    
                    
                    
                    437,770
                    
                    
                    
                    881,047
                    
                    
                    
                    893,139Total
      costs and expenses
                    
                    
                    824,718
                    
                    
                    
                    885,064
                    
                    
                    
                    1,743,125
                    
                    
                    
                    1,802,093Operating
      loss
                    
                    
                    (310,089
                    )
                    
                    
                    (262,934
                    )
                    
                    
                    (515,505
                    )
                    
                    
                    (516,743
                    )Interest
      expense:Related
      parties
                    
                    
                    (12,667
                    )
                    
                    
                    (12,772
                    )
                    
                    
                    (24,677
                    )
                    
                    
                    (25,594
                    )Other
                    
                    
                    (57,145
                    )
                    
                    
                    (65,123
                    )
                    
                    
                    (111,281
                    )
                    
                    
                    (121,171
                    )Total
      interest expense
                    
                    
                    (69,812
                    )
                    
                    
                    (77,895
                    )
                    
                    
                    (135,958
                    )
                    
                    
                    (146,765
                    )Loss
      before income tax expense
                    
                    
                    (379,901
                    )
                    
                    
                    (340,829
                    )
                    
                    
                    (651,463
                    )
                    
                    
                    (663,508
                    )Income
      tax expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,230
                    )
                    
                    
                    (4,000
                    )Net
      loss
                    
                    $
                    (379,901
                    )
                    
                    $
                    (340,829
                    )
                    
                    $
                    (652,693
                    )
                    
                    $
                    (667,508
                    )Net
      loss per share – basic and diluted
                    
                    $
                    (.02
                    )
                    
                    $
                    (.02
                    )
                    
                    $
                    (.03
                    )
                    
                    $
                    (.03
                    )Weighted
      average number of shares outstanding – basic and diluted
                    
                    
                    25,661,883
                    
                    
                    
                    25,469,078
                    
                    
                    
                    25,661,883
                    
                    
                    
                    25,350,293




See notes
to unaudited consolidated financial statements.


4




INFINITE
GROUP, INC.




Consolidated
Statements of Cash Flows (Unaudited)





Six Months EndedJune 30,2010
                  
                  
                  2009Operating
      activities:Net
      loss
                  
                  $
                  (652,693
                  )
                  
                  $
                  (667,508
                  )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Stock
      based compensation
                  
                  
                  58,916
                  
                  
                  
                  88,891Depreciation
                  
                  
                  17,744
                  
                  
                  
                  15,620Decrease
      (increase) in assets:Accounts
      receivable
                  
                  
                  357,544
                  
                  
                  
                  (38,765
                  )Other
      assets
                  
                  
                  (10,357
                  )
                  
                  
                  (18,475
                  )(Decrease)
      increase in liabilities:Accounts
      payable
                  
                  
                  (113,941
                  )
                  
                  
                  315,104Accrued
      expenses
                  
                  
                  (74,222
                  )
                  
                  
                  41,001Accrued
      pension and retirement
                  
                  
                  235,070
                  
                  
                  
                  233,123Net
      cash used by operating activities
                  
                  
                  (181,939
                  )
                  
                  
                  (31,009
                  )Investing
      activities:Purchase
      of property and equipment
                  
                  
                  (3,070
                  )
                  
                  
                  (3,410
                  )Net
      cash used by investing activities
                  
                  
                  (3,070
                  )
                  
                  
                  (3,410
                  )Financing
      activities:Repayments
      of notes payable
                  
                  
                  (9,348
                  )
                  
                  
                  (28,600
                  )Repayments
      of note payable-related party
                  
                  
                  (25,000
                  )
                  
                  
                  (50,000
                  )Proceeds
      from note payable-related party
                  
                  
                  50,000
                  
                  
                  
                  -Net
      cash provided by (used by) financing activities
                  
                  
                  15,652
                  
                  
                  
                  (78,600
                  )Net
      decrease in cash
                  
                  
                  (169,357
                  )
                  
                  
                  (113,019
                  )Cash
      - beginning of period
                  
                  
                  196,711
                  
                  
                  
                  153,336Cash
      - end of period
                  
                  $
                  27,354
                  
                  
                  $
                  40,317Supplemental
      disclosure:Cash
      paid for:Interest
                  
                  $
                  106,024
                  
                  
                  $
                  120,771Income
      taxes
                  
                  $
                  1,230
                  
                  
                  $
                  4,000




See notes
to unaudited consolidated financial statements.


5





INFINITE
GROUP, INC.





Notes to
Consolidated Financial Statements–(Unaudited)





Note
1. Basis of Presentation





The
accompanying unaudited consolidated financial statements of Infinite Group, Inc.
(“Infinite Group, Inc.” or the “Company”) included herein have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States of America (U.S.) for interim financial information and with
instructions to Form 10-Q.   Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the U.S. for complete financial statements.   In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included.  All such adjustments are of a normal
recurring nature.  The accompanying unaudited consolidated financial
statements should be read in conjunction with the Company’s audited consolidated
financial statements and the notes thereto included in the Company’s Annual
report on Form 10-K for the year ended December 31, 2009 filed with the U.S.
Securities and Exchange Commission (SEC).  Results of consolidated
operations for the three and six months ended June 30, 2010 are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 2010.  The unaudited consolidated financial statements
herein include the accounts of the Company and its wholly owned
subsidiaries.  The subsidiaries are inactive.  All material
inter-company accounts and transactions have been eliminated.





Note
2. Summary of Significant Accounting Policies





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




Reclassification




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





Recent
Accounting Pronouncements




Effective
January 1, 2010, the Company partially adopted the provisions of FASB ASU
No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which
amends ASC 820-10-50 to require new disclosures concerning (1) transfers
into and out of Levels 1 and 2 of the fair value measurement hierarchy, and
(2) activity in Level 3 measurements.  In addition, ASU
No. 2010-06 clarifies certain existing disclosure requirements regarding
the level of disaggregation and inputs and valuation techniques and makes
conforming amendments to the guidance on employers’ disclosures about
postretirement benefit plans assets.  The requirements to disclose
separately purchases, sales, issuances, and settlements in the Level 3
reconciliation are effective for fiscal years beginning after December 15,
2010 (and for interim periods within such years).  Accordingly, the
Company will apply the disclosure requirements relative to the Level 3
reconciliation in the first quarter of 2011.  There was no impact on
the Company’s financial position, results of operations or cash flows as a
result of the partial adoption of ASU No. 2010-06 as of and for the six
months ended June 30, 2010.





Management
does not believe that any other recently issued, but not yet effective
accounting standard if currently adopted would have a material effect on the
accompanying consolidated financial statements.





Note
3. Stock Option Plans





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





The fair
value of each option granted is estimated using the Black-Scholes option-pricing
model.  The following assumptions were used for the six months ended
June 30, 2010 and 2009.


6





2010
                        
                        
                        2009Risk-free
      interest rate
                        
                        2.39% - 2.93%
                        
                        
                        2.09% - 2.47%Expected
      dividend yield
                        
                        0%
                        
                        
                        0%Expected
      stock price volatility
                        
                        75%
                        
                        
                        75%Expected
      life of options
                        
                        5.75 years
                        
                        
                        5.75 years





The
Company recorded expense for options and warrants issued to employees and
independent service providers for the three months and six months ended June 30,
2010 and 2009 as follows.  There was no impact on net loss per share
for the three or six months ended June 30, 2010 and 2009.





Three Months
                        ended
                        June 30, 2010
                      
                      
                      Three Months
                        ended
                        June 30, 2009
                      
                      
                      Six Months
                        ended
                        June 30, 2010
                      
                      
                      Six Months
                        ended
                        June 30, 2009Employee
      stock options
                      
                      $
                      17,905
                      
                      
                      $
                      38,981
                      
                      
                      $
                      58,916
                      
                      
                      $
                      91,060Consultants  –
      common stock warrants
                      
                      
                      -
                      
                      
                      
                      1,023
                      
                      
                      
                      -
                      
                      
                      
                      (2,169
                      )Total
      expense
                      
                      $
                      17,905
                      
                      
                      $
                      40,004
                      
                      
                      $
                      58,916
                      
                      
                      $
                      88,891





A summary
of all stock option activity for the six months ended June 30, 2010
follows:





Number of
                    Options
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  Weighted-
                    Average
                    Remaining
                    Contractual
                    Term
                  
                  Aggregate
                    Intrinsic ValueOutstanding
      at December 31, 2009
                  
                  
                  5,491,500
                  
                  
                  $
                  .26Options
      granted
                  
                  
                  1,416,000
                  
                  
                  $
                  .15Options
      expired
                  
                  
                  (468,000
                  )
                  
                  $
                  .28Outstanding
      at June 30, 2010
                  
                  
                  6,439,500
                  
                  
                  $
                  .24
                  
                  6.4 years
                  
                  $
                  124,430Exercisable
      at June 30, 2010
                  
                  
                  4,809,167
                  
                  
                  $
                  .25
                  
                  5.3 years
                  
                  $
                  124,430





The
weighted average fair value of options granted during the six months ended June
30, 2010 was approximately $.10 ($.12 during the six months ended June 30,
2009).  No options were exercised during the six months ended June 30,
2010 and 2009.





A summary
of nonvested stock option activity for the six months ended June 30, 2010
follows:





Number of
                      Nonvested
                      Options
                    
                    
                    Weighted Average
                      Fair Value
                      at Grant DateNonvested
      outstanding at December 31, 2009
                    
                    
                    866,333
                    
                    
                    $
                    .15Options
      granted
                    
                    
                    1,416,000
                    
                    
                    $
                    .10Options
      vested
                    
                    
                    (497,000
                    )
                    
                    $
                    .25Options
      forfeited
                    
                    
                    (155,000
                    )
                    
                    $
                    .14Nonvested
      outstanding at June 30, 2010
                    
                    
                    1,630,333
                    
                    
                    $
                    .12





At June
30, 2010, there was approximately $145,700 of total unrecognized compensation
cost related to non-vested options granted under the Company’s stock option
plans.  That cost is expected to be recognized over a weighted average
period of two years.  The total fair value of shares that vested
during the six months ended June 30, 2010 was approximately
$123,000.


7





Note 4.  Earnings Per
Share





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





As of June 30, 2010,
convertible debt, options and warrants to purchase 25,092,984 sharesof
common stock (23,138,534 as of June 30, 2009) that could potentially dilute
basic net income per share in the future were excluded from the calculation of
diluted net income (loss) per share because their inclusion would have been
anti-dilutive.





Note
5.  Employee Pension Plan





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





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





If the
Company does not ultimately prevail, it will become obligated for Plan
contributions of approximately $2.2 million as of June 30, 2010 and 10% excise
taxes on accumulated unfunded Plan contributions for the Plan years ended
December 31, 2006 and 2007 of approximately $348,500, as stated above, and
potentially additional 10% excise taxes of approximately $220,000 for the year
ended December 31, 2008, which have not been accrued based upon the Company’s
determination that it has no legal obligation to act as the Plan sponsor and the
Company’s belief that the likelihood is not probable that it will be required to
pay these excise taxes.  Further, if the Company does not ultimately
prevail, it may be required to pay interest on these excise taxes and
potentially incur penalties for late payment of excise taxes and additional
excise taxes up to 100% of each year’s required funding
deficiency.  The Company has accrued amounts related to excise taxes,
including late fees and interest, on unfunded contributions for 2003, 2004 and
2005 of approximately $457,000 as of June 30, 2010 ($445,000 at December 31,
2009).  No excise taxes, late fees or interest for 2006, 2007, 2008,
and 2009 has been accrued at June 30, 2010 or December 31, 2009.  The
Company does not have the funds available to make required contributions which
approximate $2.2 million and does not intend to make any contributions to the
Plan during 2010.





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





On April
29, 2009, acting for the Plan, the Company sent the Plan participants a notice
of intent to terminate the Plan in a distress termination.  The
Company also provided additional documentation regarding the Company’s status
and the status of the Plan.  The termination of the Plan is subject to
approval by the PBGC.  During 2009, the Company provided information
to the PBGC which Company management believes satisfies the requirements of the
PBGC.  During August 2010, the PBGC requested additional information
and the Company is preparing its response.





At June
30, 2010, the Plan had an accrued pension obligation liability of $3,923,640
($3,696,640 at December 31, 2009), which includes the underfunded amount plus
interest on past due payments and excise taxes including penalties and interest
of approximately $457,000 as discussed above.  Accumulated other
comprehensive loss of $2,805,040 at June 30, 2010 ($2,805,040 at December 31,
2009) has been recorded as a reduction of stockholders’ deficiency.





The
market value of the Plan assets decreased from $2,004,117 at December 31, 2009
to $1,667,730 at June 30, 2010.  The decrease was comprised of
investment losses of $78,815, benefit payments of $223,897 and expenses of
$33,675.


8





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





Three Months
                    ended
                    June 30, 2010
                  
                  
                  Three Months
                    ended
                    June 30, 2009
                  
                  
                  Six Months
                    ended
                    June 30, 2010
                  
                  
                  Six Months
                    ended
                    June 30, 2009Interest
      cost
                  
                  $
                  72,531
                  
                  
                  $
                  71,996
                  
                  
                  $
                  145,062
                  
                  
                  $
                  143,993Expected
      return on plan assets
                  
                  
                  (39,148
                  )
                  
                  
                  (42,115
                  )
                  
                  
                  (78,296
                  )
                  
                  
                  (84,231
                  )Service
      cost
                  
                  
                  12,500
                  
                  
                  
                  17,750
                  
                  
                  
                  25,000
                  
                  
                  
                  35,500Actuarial
      loss
                  
                  
                  31,882
                  
                  
                  
                  37,343
                  
                  
                  
                  63,764
                  
                  
                  
                  74,687Net
      periodic pension cost
                  
                  $
                  77,765
                  
                  
                  $
                  84,974
                  
                  
                  $
                  155,530
                  
                  
                  $
                  169,949





Note
6.  Supplemental Cash Flow Information





Non-cash
investing and financing transactions, including non-monetary exchanges,
consisted of the acquisition of computer and communications equipment of $38,675
under the terms of capital  leases during the six months ended June
30, 2010 and the conversion of accrued interest payable of $25,000 into 500,000
shares of common stock during the six months ended June 30, 2009.





Note
7.  Notes Payable





During
the six months ended June 30, 2010, the Company entered into the following note
payable agreements.





On May
27, 2010, the Company borrowed $50,000 under the terms of a demand note payable
to the Company’s President with interest at 12% annually.





During
the first quarter of 2010, the Company financed the acquisition of computer and
communications equipment of $38,675 under the terms of capital leases with
payments aggregating $1,365 per month due over 36 months.





Note
8.  Subsequent Event





On August
6, 2010, a related party note holder converted $40,000 of accrued interest
payable into shares of common stock at $.05 per share according to the terms of
the note resulting in the Company’s issuance of 800,000 shares of common
stock.





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





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





IT
Consulting





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





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


9





Results
of Operations





Comparison
of Three and Six Month Periods ended June 30, 2010 and 2009





The
trends suggested by the following tables are not indicative of future operating
results.  The following table compares our statements of operations
data for the three months ended June 30, 2010 and 2009.





Three Months Ended June 30,2010
      vs. 2009As a
      % of
                  
                  
                  
                  
                  
                  As a
      % of
                  
                  
                  Amount
      of
                  
                  
                  %
      Increase2010
                  
                  
                  Sales
                  
                  
                  2009
                  
                  
                  Sales
                  
                  
                  Change
                  
                  
                  (Decrease)Sales
                  
                  $
                  2,223,493
                  
                  
                  
                  100.0
                  %
                  
                  $
                  2,908,099
                  
                  
                  
                  100.0
                  %
                  
                  $
                  (684,606
                  )
                  
                  
                  (23.5
                  )%Cost
      of services
                  
                  
                  1,708,864
                  
                  
                  
                  76.9
                  
                  
                  
                  2,285,969
                  
                  
                  
                  78.6
                  
                  
                  
                  (577,105
                  )
                  
                  
                  (25.2
                  )Gross
      profit
                  
                  
                  514,629
                  
                  
                  
                  23.1
                  
                  
                  
                  622,130
                  
                  
                  
                  21.4
                  
                  
                  
                  (107,501
                  )
                  
                  
                  (17.3
                  )General
      and administrative
                  
                  
                  307,833
                  
                  
                  
                  13.8
                  
                  
                  
                  315,417
                  
                  
                  
                  10.8
                  
                  
                  
                  (7,584
                  )
                  
                  
                  (2.4
                  )Defined
      benefit pension plan
                  
                  
                  119,795
                  
                  
                  
                  5.4
                  
                  
                  
                  131,877
                  
                  
                  
                  4.5
                  
                  
                  
                  (12,082
                  )
                  
                  
                  (9.2
                  )Selling
                  
                  
                  397,090
                  
                  
                  
                  17.9
                  
                  
                  
                  437,770
                  
                  
                  
                  15.1
                  
                  
                  
                  (40,680
                  )
                  
                  
                  (9.3
                  )Total
      costs and expenses
                  
                  
                  824,718
                  
                  
                  
                  37.1
                  
                  
                  
                  885,064
                  
                  
                  
                  30.4
                  
                  
                  
                  (60,346
                  )
                  
                  
                  (6.8
                  )Operating
      loss
                  
                  
                  (310,089
                  )
                  
                  
                  (13.9
                  )
                  
                  
                  (262,934
                  )
                  
                  
                  (9.0
                  )
                  
                  
                  47,155
                  
                  
                  
                  17.9Interest
      expense
                  
                  
                  (69,812
                  )
                  
                  
                  (3.1
                  )
                  
                  
                  (77,895
                  )
                  
                  
                  (2.7
                  )
                  
                  
                  (8,083
                  )
                  
                  
                  (10.4
                  )Net
      loss
                  
                  $
                  (379,901
                  )
                  
                  
                  (17.1
                  )
      %
                  
                  $
                  (340,829
                  )
                  
                  
                  (11.7
                  )
      %
                  
                  $
                  39,072
                  
                  
                  
                  11.5
                  %Net
      loss per share – basic and diluted
                  
                  $
                  (.02
                  )
                  
                  
                  
                  
                  
                  $
                  (.02
                  )
                  
                  
                  
                  
                  
                  $
                  -





The
following table compares our statements of operations data for the six months
ended June 30, 2010 and 2009.





Six
      Months Ended June 30,2010
      vs. 2009As a
      % of
                      
                      
                      
                      
                      
                      As a
      % of
                      
                      
                      Amount
      of
                      
                      
                      %
      Increase2010
                      
                      
                      Sales
                      
                      
                      2009
                      
                      
                      Sales
                      
                      
                      Change
                      
                      
                      (Decrease)Sales
                      
                      $
                      4,993,288
                      
                      
                      
                      100.0
                      %
                      
                      $
                      5,564,029
                      
                      
                      
                      100.0
                      %
                      
                      $
                      (570,741
                      )
                      
                      
                      (10.3
                      )%Cost
      of services
                      
                      
                      3,765,668
                      
                      
                      
                      75.4
                      
                      
                      
                      4,278,679
                      
                      
                      
                      76.9
                      
                      
                      
                      (513,011
                      )
                      
                      
                      (12.0
                      )Gross
      profit
                      
                      
                      1,227,620
                      
                      
                      
                      24.6
                      
                      
                      
                      1,285,350
                      
                      
                      
                      23.1
                      
                      
                      
                      (57,730
                      )
                      
                      
                      (4.5
                      )General
      and administrative
                      
                      
                      616,130
                      
                      
                      
                      12.3
                      
                      
                      
                      612,208
                      
                      
                      
                      11.0
                      
                      
                      
                      3,922
                      
                      
                      
                      .6Defined
      benefit pension plan
                      
                      
                      245,948
                      
                      
                      
                      4.9
                      
                      
                      
                      296,746
                      
                      
                      
                      5.3
                      
                      
                      
                      (50,798
                      )
                      
                      
                      (17.1
                      )Selling
                      
                      
                      881,047
                      
                      
                      
                      17.6
                      
                      
                      
                      893,139
                      
                      
                      
                      16.1
                      
                      
                      
                      (12,092
                      )
                      
                      
                      (1.4
                      )Total
      costs and expenses
                      
                      
                      1,743,125
                      
                      
                      
                      34.9
                      
                      
                      
                      1,802,093
                      
                      
                      
                      32.4
                      
                      
                      
                      (58,968
                      )
                      
                      
                      (3.3
                      )Operating
      loss
                      
                      
                      (515,505
                      )
                      
                      
                      (10.3
                      )
                      
                      
                      (516,743
                      )
                      
                      
                      (9.3
                      )
                      
                      
                      (1,238
                      )
                      
                      
                      (.2
                      )Interest
      expense
                      
                      
                      (135,958
                      )
                      
                      
                      (2.7
                      )
                      
                      
                      (146,765
                      )
                      
                      
                      (2.6
                      )
                      
                      
                      (10,807
                      )
                      
                      
                      (7.4
                      )Income
      tax expense
                      
                      
                      (1,230
                      )
                      
                      
                      
                      
                      
                      
                      (4,000
                      )
                      
                      
                      (.1
                      )
                      
                      
                      (2,770
                      )
                      
                      
                      (69.3
                      )Net
      loss
                      
                      $
                      (652,693
                      )
                      
                      
                      (13.1
                      )
      %
                      
                      $
                      (667,508
                      )
                      
                      
                      (12.0
                      )
      %
                      
                      $
                      (14,815
                      )
                      
                      
                      (2.2
                      )%Net
      loss per share - basic and diluted
                      
                      $
                      (.03
                      )
                      
                      
                      
                      
                      
                      $
                      (.03
                      )
                      
                      
                      
                      
                      
                      $
                      -





Sales





Sales for
the three months ended June 30, 2010 were $2,223,493, a decrease of $684,606 or
23.5% as compared to sales for the three months ended June 30, 2009 of
$2,908,099.  Sales for the six months ended June 30, 2010 were
$4,993,288, a decrease of $570,741 or 10.3% as compared to sales for the six
months ended June 30, 2009 of $5,564,029.  The decrease primarily
results from the completion of certain U.S. government assignments and certain
projects for other clients that were not offset by the addition of new projects
and assignments.  Our Microsoft Stimulus360 project for a state
government client was also completed during June 2010.  Stimulus360 is
a Microsoft solution used to help public sector agencies track, measure, and
share information about federal stimulus programs through easy to use graphical
dashboards and maps.


10




Cost
of Services and Gross Profit





Cost of
services represents the cost of employee services related to our
sales.  Cost of services for the three months ended June 30, 2010 was
$1,708,864 or 76.9% of sales as compared to $2,285,969 or 78.6% of sales for the
three months ended June 30, 2009.  Gross profit was $514,629 or 23.1%
of sales for the three months ended June 30, 2010 compared to $622,130 or 21.4%
of sales for the three months ended June 30, 2009.  Cost of services
for the six months ended June 30, 2010 was $3,765,668 or 75.4% of sales as
compared to $4,278,679 or 76.9% of sales for the six months ended June 30,
2009.  Gross profit was $1,227,620 or 24.6% of sales for the six
months ended June 30, 2010 compared to $1,285,350 or 23.1% of sales for the six
months ended June 30, 2009.





The
increase in gross profit margin percent is due to a change in the mix of our
business resulting from new projects in 2010 which carried higher profit margins
than work completed in 2009.  Gross profit margins in 2010 were
adversely affected by a decrease in certain personnel utilization rates when
certain project commencement dates were delayed or deferred.





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 June 30, 2010 were $307,833 which was a
decrease of $(7,584) or (2.4)% as compared to $315,417 for the three months
ended June 30, 2009.   As a percentage of sales, general and
administrative expense was 13.8% for the three months ended June 30, 2010 and
10.8% for the three months ended June 30, 2009.





General
and administrative expenses for the six months ended June 30, 2010 increased by
$3,922 or 0.6% from $612,208 for the six months ended June 30, 2009 to $616,130
for the six months ended June 30, 2010.  As a percentage of sales,
general and administrative expenses were 12.3% for the six months ended June 30,
2010 and 11.0% for the six months ended June 30, 2009.





General
and administrative expenses in 2010 were not significantly different from
2009.





We
anticipate that general and administrative expenses will increase as we attempt
to grow our business and incur travel and other expenses associated with
managing a larger business.





Defined
Benefit Pension Plan Expenses





Defined
benefit pension plan expenses include expenses (including pension expense,
professional services, and interest costs) associated with the Osley &
Whitney, Inc. Retirement Plan(the Plan) of $119,765 for the three months ended June 30, 2010 and
$131,877 for the three months ended June 30, 2009, a decrease of
$12,082.  We incurred expenses of $245,948 and $296,746 for the six
months ended June 30, 2010 and 2009, a decrease of $50,798.





During
the six months ended June 30, 2010, we incurred legal and professional fees of
approximately $19,000 in connection with compliance requirements and advocating
our legal position in response to recent communication with the appropriate
regulatory authorities as compared to approximately $58,000 for the six months
ended June 30, 2009.  Net periodic pension cost decreased by $14,649
to $155,531 for the six months ended June 30, 2010 due principally to a decline
in the market value of the Plan assets as a result of adverse market conditions,
changes in the pension regulations and declining interest rates.  We
continue to accrue interest and fees on unpaid excise taxes for plan years 2003,
2004 and 2005, as well as interest on unfunded contributions, which amounted to
additional expense of approximately $71,500 and $68,500 for the six months ended
June 30, 2010 and 2009, respectively.





Selling
Expenses





For the
three months ended June 30, 2010, we incurred selling expenses of $397,090 as
compared to $437,770 for the three months ended June 30, 2009, a decrease of
$40,680 or 9.3%.  For the six months ended June 30, 2010 we incurred
selling expenses of $881,047 compared to $893,139 for the six months ended June
30, 2009, a decrease of $12,092 or 1.4%.





The
decrease for the three and six months ended June 30, 2010 is principally due to
the reduction of two positions in April 2010 in our sales and business
development personnel.





Operating
Loss





For the
three months ended June 30, 2010 our operating loss was $(310,089) compared to
an operating loss of $(262,934) for the three months ended June 30, 2009, an
increase in the loss of $47,155.  This is principally attributable to
a reduction in sales of $684,606, which was partially offset by decreases in
cost of services and operating expenses of $577,105 and $60,346,
respectively.


11




For the
six months ended June 30, 2010 our operating loss decreased to $(515,505)
compared to an operating loss of $(516,743) for the six months ended June 30,
2009, an improvement of $1,238.  This is principally attributable to a
slight increase in gross profit margin of approximately 1.5% coupled with a
decrease in operating expenses of $58,968.





Interest
Expense





Interest
expense includes interest on indebtedness and fees for financing accounts
receivable invoices.  Interest expense was $69,812 for the three
months ended June 30, 2010 compared to interest expense of $77,895 for the three
months ended June 30, 2009.  Interest expense was $135,958 for the six
months ended June 30, 2010 compared to interest expense of $146,765 for the six
months ended June 30, 2009.





Related
party interest expense decreased by $105 and $917 for the three and six month
periods ended June 30, 2010 as compared to the three and six month periods ended
June 30, 2009 due to slightly lower average principal balances on related party
notes in 2010.





Other
interest expense decreased by $7,978 and $9,890 for the three and six month
periods ended June 30, 2010 as compared to the three and six month periods ended
June 30, 2009.  Our fees for financing accounts receivable were
reduced beginning in June 2009, thus reducing our interest expense.





Income
Taxes





Income
tax expense was $0 for the three months ended June 30, 2010 and 2009,
respectively.  Income tax expense was $1,230 and $4,000 for the six
months ended June 30, 2010 and 2009, respectively, consisting of state
taxes.





Net
Loss




For the
three months ended June 30, 2010,we recorded a net loss
in the amount of $(379,901) or $(.02) per share compared to a net loss of
$(340,829) or $(.02) per share for the three months ended June 30, 2009.  For the six
months ended June 30, 2010,we recorded a net loss
in the amount of $(652,693) or $(.03) per share compared to a net loss of
$(667,508) or $(.03) per share for the six months ended June 30, 2009.




Stock-Based
Compensation





For the
six months ended June 30, 2010 and 2009, we recorded expense of $58,916 and
$88,891, respectively, for stock options expense issued to employees and board
members and equity instruments issued to consultants.





Liquidity
and Capital Resources





At June
30, 2010, we had cash of $27,354 available for our working capital needs and
planned capital asset expenditures.  Our primary liquidity needs are
the financing of working capital and capital expenditures.  Our
primary source of liquidity is cash provided by operations and our factoring
line of credit.  At June 30, 2010, we had financing availability,
based on eligible accounts receivable, of $156,000 under this line.





At June
30, 2010, we had a working capital deficit of approximately $4.4 million and a
current ratio of .16.  Our objective is to improve our working capital
position from profitable operations.  The Plan’s current liabilities
have a significant impact on our working capital.  Without the current
liabilities of the Plan of approximately $3.2 million, our working capital
deficit would have been approximately $1.2 million.





During
2010 and 2009, we financed our business activities through the issuance of notes
payable to third parties, related parties, financing through sales with recourse
of our accounts receivable, and capital equipment leases.  During 2010
and 2009, certain note holders converted principal and accrued interest payable
into shares of our common stock.  During May 2010, we received $50,000
through a working capital loan from an officer of our Company.  In
June 2008, we received $200,000 through a working capital loan from a third
party, which balance was reduced to $175,000 during 2009 and matures on January
1, 2011.  We have notes payable of $265,000 which mature on December
31, 2010.  We plan to renegotiate the terms of these notes payable,
included in current liabilities, or seek funds to replace these notes
payable.  We have used our common stock and common stock options and
warrants to provide compensation to certain employees and consultants and to
fund liabilities.




12


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




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




Six Months Ended
                      June 30,2010
                    
                    
                    2009Net
      cash used by operating activities
                    
                    $
                    (181,939
                    )
                    
                    $
                    (31,009
                    )Net
      cash used by investing activities
                    
                    
                    (3,070
                    )
                    
                    
                    (3,410
                    )Net
      cash provided/(used) by financing activities
                    
                    
                    15,652
                    
                    
                    
                    (78,600
                    )Net
      decrease in cash
                    
                    $
                    (169,357
                    )
                    
                    $
                    (113,019
                    )




Cash
Flows from Operating Activities




During
the six months ended June 30, 2010, cash used in operations was $181,939
compared with cash used in operations of $31,009 for the six months ended June
30, 2009.  Our operating cash flow is primarily affected by the
overall profitability of our contracts, our ability to invoice and collect from
our clients in a timely manner, and our ability to manage our vendor
payments.  We bill our clients weekly or monthly after services are
performed, depending on the contract terms.  Our accounts receivable
decreased principally due to the decline in sales in the 2010
period.  The increase in liabilities is primarily due to increased
accrued pension and retirement expenses offset by a decrease in accounts payable
and accrued expenses.





Cash
Flows from Investing Activities





Cash used
by investing activities for the six months ended June 30, 2010 was $3,070
compared with $3,410 for the six months ended June 30, 2009.  Cash
used in investing activities was primarily for capital expenditures for computer
hardware and software.  We do not have any plans for significant
capital expenditures in the near future.





Cash
Flows from Financing Activities





During
the six months ended June 30, 2010, cash provided by financing activities was
$15,652 consisting of $50,000 of proceeds from related party borrowing offset by
principal payments of principal payments of $34,548 on notes
payable.  In comparison, for the six months ended June 30, 2009, cash
used by financing activities was $78,600 for principal payments on notes
payable.




Credit
Agreement




We have
secured an accounts receivable financing line of credit from an independent
financial institution that allows us to sell selected accounts receivable
invoices to the financial institution with full recourse against us in the
amount of $2 million, including a sublimit for one major client of $1.5
million.  This provides us with the cash needed to finance certain
costs and expenses.  At June 30, 2010, we had financing availability,
based on eligible accounts receivable, of $156,000 under this
line.  We pay fees based on the length of time that the invoice
remains unpaid.




Future
Trends





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





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


13





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





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





Osley
& Whitney, Inc. Retirement Plan





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





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





If we do
not ultimately prevail, we will become obligated for Plan contributions of
approximately $2.2 million as of June 30, 2010 and 10% excise taxes on
accumulated unfunded Plan contributions for the Plan years ended December 31,
2006 and 2007 of approximately $348,500, as stated above, and potentially
additional 10% excise taxes of approximately $220,000 for the plan year ended
December 31, 2008,  which have not been accrued based upon our
determination that we have no legal obligation to act as the Plan sponsor and
our belief that the likelihood is not probable that we will be required to pay
these excise taxes.  Further, if we do not ultimately prevail, we may
be required to pay interest on these excise taxes and potentially incur
penalties for late payment of excise taxes and additional excise taxes up to
100% of each year’s required funding deficiency.  We have accrued
amounts related to excise taxes, penalties and interest on unfunded
contributions for 2003, 2004 and 2005 of approximately $457,000 as of June 30,
2010 ($445,000 at December 31, 2009).  No excise taxes, penalties or
interest for 2006, 2007, 2008, and 2009 have been accrued at June 30, 2010 or
December 31, 2009.  We do not have the funds
available to make required contributions which approximate $2.2 million and do
not intend to make any contributions to the Plan during
2010.


14


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





On April
29, 2009, acting for the Plan, we sent the Plan participants a notice of intent
to terminate the plan in a distress termination.  We also provided
additional documentation regarding our status and the status of the
Plan.  The termination of the Plan is subject to approval by the
PBGC.  During 2009, we provided information to the PBGC which
management believes satisfies the requirements of the PBGC.  During
August 2010, the PBGC requested additional information and we are preparing our
response.





At June
30, 2010, the Plan had an accrued pension obligation liability of $3,923,640,
which includes the underfunded amount plus interest on past due payments and
excise taxes including penalties and interest of approximately $457,000. 
Accumulated other comprehensive loss of $2,805,040 at June 30, 2010 has been
recorded as a reduction of stockholders’ deficiency.





The
market value of the Plan assets decreased from $2,004,117 at December 31, 2009
to $1,667,730 at June 30, 2010.  The decrease was comprised of
investment losses of $78,815, benefit payments of $223,897 and expenses of
$33,675.





Item 3.Quantitative and Qualitative Disclosures About
Market Risk.





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





Item
4.  Controls and Procedures.





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





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





PART
II


OTHER
INFORMATION





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





In April
and June 2010, we granted options to purchase an aggregate of 1,040,000 shares
of our common stock at exercise prices ranging from $0.145 to $0.16 per
share.  These grants were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended.





On August
6, 2010, a related party note holder converted $40,000 of accrued interest
payable into shares of common stock at $.05 per share according to the terms of
the note resulting in our issuance of 800,000 shares of common
stock.  This transaction was exempt from registration, as it was a
nonpublic offering or transaction made pursuant to Section 4(2) of the
Securities Act of 1933, as amended.  All restricted shares issued in
this transaction bore an appropriate restrictive legend.




Item 6.   Exhibits.





Exhibit
      No.
                              
                              Description10.30
                              
                              Promissory
      Note between Northwest Hampton Holdings, LLC and the Company dated May 27,
      2010.*31.1
                              
                              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 pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.*32.2
                              
                              Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of
2002.*








*  Filed
herewith




15




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:   August  12,
      2010
                /s/ Michael S.
      SmithMichael
      S. SmithChief
      Executive Officer(Principal
      Executive Officer)Date:   August  12,
      2010
                /s/ James
      WitzelJames
      WitzelChief
      Financial Officer(Principal
      Financial Officer)


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