UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





x QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly
period ended: March 31, 2009





 ̈ 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 25,469,078
shares of the issuer’s common stock, par value $.001 per share, outstanding as
of May 11, 2009.









Infinite
Group, Inc.


Quarterly
Report on Form 10-Q


For the
Period Ended March 31, 2009





Table of
Contents





PAGEPART
      I - FINANCIAL INFORMATIONItem
      1. Financial StatementsBalance
      Sheets as of March 31, 2009 (Unaudited) and December 31, 2008
      (Audited)
                  3Statements
      of Operations – for the three months ended March 31, 2009 and 2008
      (Unaudited)
                  4Statements
      of Cash Flows – for the three months ended March 31, 2009 and 2008
      (Unaudited)
                  5Notes
      to Interim 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
      4T. Controls and Procedures
                  15PART
      II  - OTHER INFORMATIONItem
      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.  Financial Statements.





INFINITE GROUP, INC.Consolidated Balance Sheets


March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008ASSETS
                      
                      (Unaudited)
                      
                      
                      (Audited)Current
      assets:Cash
                      
                      $
                      71,149
                      
                      
                      $
                      153,336Accounts
      receivable, net of allowance of $35,000
                      
                      
                      1,055,045
                      
                      
                      
                      1,004,114Prepaid
      expenses and other current assets
                      
                      
                      80,626
                      
                      
                      
                      47,379Total
      current assets
                      
                      
                      1,206,820
                      
                      
                      
                      1,204,829Property
      and equipment, net
                      
                      
                      64,432
                      
                      
                      
                      69,750Other assets -
      deposits
                      
                      
                      15,515
                      
                      
                      
                      15,515Total
      assets
                      
                      $
                      1,286,767
                      
                      
                      $
                      1,290,094LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      liabilities:Accounts
      payable
                      
                      
                      440,307
                      
                      
                      
                      328,654Accrued
      payroll
                      
                      
                      444,074
                      
                      
                      
                      304,819Accrued
      interest payable
                      
                      
                      259,316
                      
                      
                      
                      280,547Accrued
      retirement and pension
                      
                      
                      2,661,905
                      
                      
                      
                      2,367,312Accrued
      expenses-other
                      
                      
                      54,485
                      
                      
                      
                      62,516Current
      maturities of notes payable
                      
                      
                      7,655
                      
                      
                      
                      7,426Note
      payable
                      
                      
                      30,000
                      
                      
                      
                      30,000Notes
      payable-related parties
                      
                      
                      305,000
                      
                      
                      
                      40,000Total
      current liabilities
                      
                      
                      4,202,742
                      
                      
                      
                      3,421,274Long-term
      obligations:Notes
      payable
                      
                      
                      212,264
                      
                      
                      
                      239,266Notes
      payable-related parties
                      
                      
                      684,624
                      
                      
                      
                      999,624Accrued
      pension expense
                      
                      
                      1,147,231
                      
                      
                      
                      1,337,231Total
      liabilities
                      
                      
                      6,246,861
                      
                      
                      
                      5,997,395Commitments
      and contingencies (note 5)Stockholders’
      deficiency:Common
      stock, $.001 par value, 60,000,000 shares authorized;25,469,078
      (24,969,078 - 2008) shares issued and outstanding
                      
                      
                      25,469
                      
                      
                      
                      24,969Additional
      paid-in capital
                      
                      
                      29,773,181
                      
                      
                      
                      29,699,795Accumulated
      deficit
                      
                      
                      (31,541,485
                      )
                      
                      
                      (31,214,806
                      )Accumulated
      other comprehensive loss
                      
                      
                      (3,217,259
                      )
                      
                      
                      (3,217,259
                      )Total
      stockholders’ deficiency
                      
                      
                      (4,960,094
                      )
                      
                      
                      (4,707,301
                      )Total
      liabilities and stockholders’ deficiency
                      
                      $
                      1,286,767
                      
                      
                      $
                      1,290,094




See notes
to consolidated financial statements.




3




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


Three Months EndedMarch 31,2009
                      
                      
                      2008Sales
                      
                      $
                      2,655,930
                      
                      
                      $
                      2,466,810Cost
      of services
                      
                      
                      1,992,710
                      
                      
                      
                      1,716,271Gross
      profit
                      
                      
                      663,220
                      
                      
                      
                      750,539Costs
      and expenses:General
      and administrative
                      
                      
                      296,791
                      
                      
                      
                      262,312Defined
      benefit pension plan
                      
                      
                      164,869
                      
                      
                      
                      48,961Selling
                      
                      
                      455,369
                      
                      
                      
                      412,320Total
      costs and expenses
                      
                      
                      917,029
                      
                      
                      
                      723,593Operating
      income (loss)
                      
                      
                      (253,809
                      )
                      
                      
                      26,946Other
      expense - interest expense:Related
      parties
                      
                      
                      (20,663
                      )
                      
                      
                      (32,353
                      )Other
                      
                      
                      (48,207
                      )
                      
                      
                      (46,035
                      )Total
      other expense - interest expense
                      
                      
                      (68,870
                      )
                      
                      
                      (78,388
                      )Loss
      before income tax expense
                      
                      
                      (322,679
                      )
                      
                      
                      (51,442
                      )Income
      tax expense
                      
                      
                      (4,000
                      )
                      
                      
                      (615
                      )Net loss
                      
                      $
                      (326,679
                      )
                      
                      $
                      (52,057
                      )Net
      loss per share - basic and diluted
                      
                      $
                      (.01
                      )
                      
                      $
                      (.00
                      )Weighted
      average number of shares outstanding - basic and diluted
                      
                      
                      25,230,189
                      
                      
                      
                      23,774,672




See notes
to consolidated financial statements.




4




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





Three Months EndedMarch 31,2009
                    
                    
                    2008Operating
      activities:Net
      loss
                    
                    $
                    (326,679
                    )
                    
                    $
                    (52,057
                    )Adjustments
      to reconcile net loss to net cash (used) provided byoperating
      activities:Stock
      based compensation
                    
                    
                    48,886
                    
                    
                    
                    61,280Depreciation
                    
                    
                    8,180
                    
                    
                    
                    8,954Increase
      in assets:Accounts
      receivable
                    
                    
                    (50,931
                    )
                    
                    
                    (188,724
                    )Other
      current assets
                    
                    
                    (33,247
                    )
                    
                    
                    (6,715
                    )Increase
      in liabilities:Accounts
      payable
                    
                    
                    111,653
                    
                    
                    
                    43,712Accrued
      expenses
                    
                    
                    134,993
                    
                    
                    
                    119,640Accrued
      pension obligations
                    
                    
                    104,593
                    
                    
                    
                    39,777Net
      cash (used) provided by operating activities
                    
                    
                    (2,552
                    )
                    
                    
                    25,867Investing
      activities:Purchase
      of property and equipment
                    
                    
                    (2,862
                    )
                    
                    
                    (5,285
                    )Net
      cash used by investing activities
                    
                    
                    (2,862
                    )
                    
                    
                    (5,285
                    )Financing
      activities:Repayments
      of notes payable
                    
                    
                    (26,773
                    )
                    
                    
                    (990
                    )Repayments
      of note payable-related party
                    
                    
                    (50,000
                    )
                    
                    
                    (1,399
                    )Proceeds
      from exercise of stock options
                    
                    
                    -
                    
                    
                    
                    16,667Net
      cash (used) provided by financing activities
                    
                    
                    (76,773
                    )
                    
                    
                    14,278Net
      (decrease) increase in cash
                    
                    
                    (82,187
                    )
                    
                    
                    34,860Cash  -
      beginning of period
                    
                    
                    153,336
                    
                    
                    
                    28,281Cash  -
      end of period
                    
                    $
                    71,149
                    
                    
                    $
                    63,141Supplemental
      disclosure:Cash
      paid for:Interest
                    
                    $
                    54,469
                    
                    
                    $
                    59,491Income
      taxes
                    
                    $
                    4,000
                    
                    
                    $
                    615




See notes
to consolidated financial statements.




5




INFINITE
GROUP, INC.





NOTES TO
INTERIM FINANCIAL STATEMENTS


March 31,
2009


(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, 2008 filed with the U.S. Securities and
Exchange Commission (SEC).  Results of consolidated operations for the
three months ended March 31, 2009 are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 2009.
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 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, 2008 presents
a summary of significant accounting policies.


Reclassification




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




Recent
Accounting Pronouncements




Business Combinations (SFAS 141R) and
Accounting and Reporting of Non-controlling Interest in Consolidated Financial
Statements, an amendment of ARB 51 (SFAS 160) - In December 2007,
the FASB issued SFAS 141R and SFAS 160 which will significantly change the
accounting for and reporting of business combinations and non-controlling
(minority) interests in consolidated financial statements. SFAS 141R and
160 have been adopted simultaneously on January 1, 2009 and are not expected to
have a material impact on our financial position, results of operations or cash
flows.





In
April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly(FSP 157-4),which provides
additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased. FSP 157-4 also
provides additional guidance on circumstances that may indicate that a
transaction is not orderly.  This guidance is effective for interim
reporting periods ending after June 15, 2009 and will apply to the
Company’s disclosures beginning with its second fiscal quarter of 2009.
 The Company does not believe the adoption of this staff position will
materially impact its consolidated financial statements and
disclosures.





In
April 2009, the FASB issued FSP No. 107-1 and APB 28-1,Interim Disclosures
About Fair Value of Financial Instruments(FSP 107-1 and APB 28-1),
which require disclosures about fair value of financial instruments for interim
reporting periods.  This guidance is effective for interim reporting
periods ending after June 15, 2009 and will apply to the Company’s
disclosures beginning with its second fiscal quarter of 2009.  The Company
has not determined the effect that the adoption of this staff position will have
on its consolidated financial statements and disclosures.




6




In
December 2008, the FASB issued FSP No. 132(R)-1,Employers’ Disclosures about
Postretirement Benefit Plan Assets(FSP 132(R)-1).FSP 132(R)-1 amends the
disclosure requirements for employer’s disclosure of plan assets for defined
benefit pensions and other postretirement plans.  The objective of
this FSP is to provide users of financial statements with an understanding of
how investment allocation decisions are made, the major categories of plan
assets held by the plans, the inputs and valuation techniques used to measure
the fair value of plan assets, significant concentration of risk within the plan
assets, and for fair value measurements determined using significant
unobservable inputs a reconciliation of changes between the beginning and ending
balances.  FSP 132(R)-1 is effective for fiscal years ending after
December 15, 2009.  The Company is currently evaluating the impact of
FSP 132(R)-1 on its financial statements and intends to adopt the new disclosure
requirements in the year ending December 31, 2009.





Note
3. Stock Option Plans





The
Company has stock options plans covering up to an aggregate of 9,223,833 shares
of common stock.  Such options may be designated at the time of grant
as either incentive stock options or nonqualified stock options.





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model.  The following assumptions were
used for the three months ended March 31, 2009 and 2008.





2009
                            
                            2008Risk-free
      interest rate
                            
                            2.09%
                            
                            3.74%Expected
      dividend yield
                            
                            0%
                            
                            0%Expected
      stock price volatility
                            
                            75%
                            
                            50%Expected
      life of options
                            
                            5.75 years
                            
                            10 years





The
Company recorded expense for options, warrants and common stock issued to
employees and independent service providers of $48,886 and $61,280 for the three
months ended March 31, 2009 and 2008, respectively.  There was no
impact on net loss per share for the three months ended March 31, 2009 and
2008.





A summary
of all stock option activity for the three months ended March 31, 2009
follows:





Number of
                        Options
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      Weighted-Average
                        Remaining
                        Contractual
                        Term
                      
                      Aggregate
                        Intrinsic
                        ValueOutstanding
      at December 31, 2008
                      
                      
                      4,851,500
                      
                      
                      $
                      .28Options
      granted
                      
                      
                      882,500
                      
                      
                      $
                      .18Options
      expired
                      
                      
                      (150,000
                      )
                      
                      $
                      .54Outstanding
      at March 31, 2009
                      
                      
                      5,584,000
                      
                      
                      $
                      .26
                      
                      6.9 years
                      
                      $
                      245,940Exercisable
      at March 31, 2009
                      
                      
                      4,370,667
                      
                      
                      $
                      .24
                      
                      6.2 years
                      
                      $
                      231,807





The
weighted average fair value of options granted during the three months ended
March 31, 2009 was approximately $.12 ($.50 during the three months ended March
31, 2008).  No options were exercised during the three months ended
March 31, 2009.  Options for 66,667 shares at $.25 per share were
exercised during the three months ended March 31, 2008 with an intrinsic value
of $38,000.




7




A summary
of the status of nonvested stock option activity for the three months ended
March 31, 2009 follows:




Nonvested Shares
                    
                    Shares
                    
                    
                    Weighted Average
                      Fair Value
                      at Grant DateNonvested
      at December 31, 2008
                    
                    
                    623,333
                    
                    
                    $
                    .33Granted
                    
                    
                    882,500
                    
                    
                    $
                    .12Vested
                    
                    
                    (200,833
                    )
                    
                    $
                    .16Forfeited
      or expired
                    
                    
                    (91,667
                    )
                    
                    $
                    .52Nonvested
      at March 31, 2009
                    
                    
                    1,213,333
                    
                    
                    $
                    .19





At March
31, 2009, there was approximately $176,500 of total unrecognized compensation
cost related to non-vested options.  That cost is expected to be
recognized over a weighted average period of approximately 1.25
years.  The total fair value of shares vested during the three months
ended March 31, 2009 was approximately $32,900.





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 income (loss) 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 including convertible accrued interest payable.  Stock options
and warrants 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 income (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 options
assumed to be exercise.  In a loss period, the calculation for basic
and diluted net loss per share is considered to be the same, as the impact of
potential common shares is anti-dilutive.





For the
three months ended March 31, 2009 and 2008, the Company had 25,230,189 and
23,774,672 weighted average shares of its common stock outstanding,
respectively.  If the Company had generated earnings during the three
months ended March 31, 2009 and 2008, 18,097,864 and 20,305,455 common stock
equivalents, respectively, would have been added to the weighted average shares
outstanding.  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.  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.





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
(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 February 2009, the
Company received a draft of a proposed revenue agent report from the Treasury
that indicates that the Treasury staff disagrees with the Company’s
position.  The draft revenue agent response indicates that the Company
is responsible for excise taxes attributed to the funding deficiency of
$1,836,359 for the years 2002 through 2007 which funding deficiency can only be
corrected by contributing $1,836,359 to the Plan.  The draft response
also states that additional penalties could be imposed.  The Company
and its outside legal counsel disagree with significant aspects of both the
factual findings and legal conclusions set forth in the draft report and, in
accordance with Treasury procedures, are in the process of responding with a
detailed analysis of its opposition to their findings.





If the
Treasury staff does not reconsider and conclude in the Company’s favor, the
Company expects that the Treasury will issue a formal revenue agent report
reiterating its preliminary position.  In this event, the Company will
commence and 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.




8




If the
Company does not ultimately prevail, it may become obligated for additional
estimated excise taxes on accumulated unfunded Plan contributions for the Plan
years ended December 31, 2006 and 2007 of approximately $165,000 and $184,000,
respectively, 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
additional excise taxes up to 100% of all required Plan contributions, which
required contributions were $1,836,359 at December 31, 2008.  No
excise taxes for 2006 and 2007 or related interest have been assessed and no
portion of this amount has been accrued at December 31, 2008 and March 31,
2009.  The Company has accrued amounts related to excise taxes on
unfunded contributions for 2003, 2004 and 2005 of $427,240 as of March 31, 2009
($420,362 - December 31, 2008), which does not include any amounts disclosed
above.





On April
29, 2009, acting for the Plan, the Company sent the Plan participants a notice
of intent to terminate the Plan in a distress termination with a proposed
termination date of June 30, 2009.  Plan termination is subject to
approval by the Pension Benefit Guaranty Corporation and requires providing
additional documentation regarding the Company’s status and the status of the
Plan.





At March
31, 2009, the Company had accrued liabilities of $3,740,373, which includes
$427,240 recorded for excise taxes on unfunded contributions, related to the
Plan and accumulated other comprehensive loss of $3,217,259 which was recorded
as a reduction of stockholders’ deficiency.  The market value of the
Plan assets decreased from $2,150,094 at December 31, 2008 to $1,827,624 at
March 31, 2009.  The decrease was comprised of investment losses of
$207,669, benefit payments of $113,741 and expenses paid of $1,060.





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




Three Months Ended
                    March 31,2009
                  
                  
                  2008Interest
      cost
                  
                  $
                  71,996
                  
                  
                  $
                  74,248Expected
      return on plan assets
                  
                  
                  (42,115
                  )
                  
                  
                  (72,686
                  )Service
      cost
                  
                  
                  17,750
                  
                  
                  
                  16,250Actuarial
      loss
                  
                  
                  37,343
                  
                  
                  
                  27,455Net
      periodic pension cost
                  
                  $
                  84,974
                  
                  
                  $
                  45,267





Note
6.  Supplemental Cash Flow Information





Non-cash
investing and financing transactions, including non-monetary exchanges,
consisted of the conversion of accrued interest payable of $25,000 into 500,000
shares of common stock during the three months ended March 31, 2009 and the
conversion of $12,500 of accrued interest payable into 250,000 shares of common
stock during the three months ended March 31, 2008.





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





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enterprise architecture, and earned value management.  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 a business
development office in the Washington, D.C. metropolitan area.





We have
several contract vehicles that enable us to deliver a broad range of our
services and solutions to the U.S. Government.  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 the Three Months ended March 31, 2009 and 2008





The
following table compares our statement of operations data for the three months
ended March 31, 2009 and 2008.  The trends suggested by this table are
not indicative of future operating results.





Three Months Ended March 31,2009 vs. 2008As a % of
                                              
                                              
                                              
                                              
                                              
                                              As a % of
                                              
                                              
                                              Amount of
                                              
                                              
                                              % Increase2009
                                              
                                              
                                              Sales
                                              
                                              
                                              2008
                                              
                                              
                                              Sales
                                              
                                              
                                              Change
                                              
                                              
                                              (Decrease)Sales
                                              
                                              $
                                              2,655,930
                                              
                                              
                                              
                                              100.0
                                              %
                                              
                                              $
                                              2,466,810
                                              
                                              
                                              
                                              100.0
                                              %
                                              
                                              $
                                              189,120
                                              
                                              
                                              
                                              7.7
                                              %Cost
      of services
                                              
                                              
                                              1,992,710
                                              
                                              
                                              
                                              75.0
                                              
                                              
                                              
                                              1,716,271
                                              
                                              
                                              
                                              69.6
                                              
                                              
                                              
                                              276,439
                                              
                                              
                                              
                                              16.1Gross
      profit
                                              
                                              
                                              663,220
                                              
                                              
                                              
                                              25.0
                                              
                                              
                                              
                                              750,539
                                              
                                              
                                              
                                              30.4
                                              
                                              
                                              
                                              (87,319
                                              )
                                              
                                              
                                              (11.6
                                              )General
      and administrative
                                              
                                              
                                              296,791
                                              
                                              
                                              
                                              11.2
                                              
                                              
                                              
                                              262,312
                                              
                                              
                                              
                                              10.6
                                              
                                              
                                              
                                              34,479
                                              
                                              
                                              
                                              13.1Defined
      benefit pension plan
                                              
                                              
                                              164,869
                                              
                                              
                                              
                                              6.2
                                              
                                              
                                              
                                              48,961
                                              
                                              
                                              
                                              2.0
                                              
                                              
                                              
                                              115,908
                                              
                                              
                                              
                                              236.7Selling
                                              
                                              
                                              455,369
                                              
                                              
                                              
                                              17.1
                                              
                                              
                                              
                                              412,320
                                              
                                              
                                              
                                              16.7
                                              
                                              
                                              
                                              43,049
                                              
                                              
                                              
                                              10.4Total
      operating expenses
                                              
                                              
                                              917,029
                                              
                                              
                                              
                                              34.5
                                              
                                              
                                              
                                              723,593
                                              
                                              
                                              
                                              29.3
                                              
                                              
                                              
                                              193,436
                                              
                                              
                                              
                                              26.7Operating
      income (loss)
                                              
                                              
                                              (253,809
                                              )
                                              
                                              
                                              (9.6
                                              )
                                              
                                              
                                              26,946
                                              
                                              
                                              
                                              1.1
                                              
                                              
                                              
                                              (280,755
                                              )
                                              
                                              
                                              (1,041.9
                                              )Interest
      expense
                                              
                                              
                                              (68,870
                                              )
                                              
                                              
                                              (2.6
                                              )
                                              
                                              
                                              (78,388
                                              )
                                              
                                              
                                              (3.2
                                              )
                                              
                                              
                                              9,518
                                              
                                              
                                              
                                              (12.1
                                              )Income
      tax expense
                                              
                                              
                                              (4,000
                                              )
                                              
                                              
                                              (0.2
                                              )
                                              
                                              
                                              (615
                                              )
                                              
                                              
                                              (0.0
                                              )
                                              
                                              
                                              (3,385
                                              )
                                              
                                              
                                              550.4Net
      loss
                                              
                                              $
                                              (326,679
                                              )
                                              
                                              
                                              (12.3
                                              )%
                                              
                                              $
                                              (52,057
                                              )
                                              
                                              
                                              (2.1
                                              )%
                                              
                                              $
                                              (274,622
                                              )
                                              
                                              
                                              527.5
                                              %Net
      loss per share - basic and diluted
                                              
                                              $
                                              (.01
                                              )
                                              
                                              
                                              
                                              
                                              
                                              $
                                              (.00
                                              )




Sales





Sales for
the three months ended March 31, 2009 were $2,655,930 as compared to sales for
the three months ended March 31, 2008 of $2,466,810, an increase of $189,120 or
7.7%.  The increase was a result of sales generated from new projects
in 2009 including virtual server consolidation projects for several
clients.  Certain projects were completed during 2008 and those sales
were replaced by sales from new projects in 2009.   These new
projects are supported by virtualization software provided by third party
vendors such as VMware, to enable our clients to run multiple operating systems
on one physical machine and therefore a broader, richer set of business
applications.





Cost
of Services and Gross Profit





Cost of
services represents the cost of employee services related to our IT Services
Group.  Cost of services for the three months ended March 31, 2009 was
$1,992,710 or 75.0% of sales as compared to $1,716,271 or 69.6% for the three
months ended March 31, 2008.  Gross profit was $663,220 or 25.0% of
sales for the three months ended March 31, 2009 compared to $750,539 or 30.4% of
sales for the three months ended March 31, 2008.  The decrease in
gross profit margin is due to a change in the mix of our business resulting from
the completion of certain projects in 2008 which provided better profit margins
than our recurring network service contracts and our new projects in
2009.  Although our objective is to maintain an overall gross margin
of approximately 30%, which was accomplished for the three months ended March
31, 2008, in the future we may submit bids on new projects with lower gross
profit margins to generate opportunities for long-term, larger volume contracts
and more stable sales.  Included in cost of sales are expenses
associated with employee stock options of $30,439 and $22,508 for the three
months ended March 31, 2009 and 2008, respectively.





General
and Administrative Expenses





General
and administrative expenses include corporate overhead such as compensation and
benefits for executive, administrative and finance personnel, rent, insurance,
professional fees, travel, and office expenses.  General and
administrative expenses for the three months ended March 31, 2009 increased by
$34,479 or 13.1% to $296,791 as compared to $262,312 for the same period in
2008.  The increases in general and administrative expense are
primarily attributable to the audit fees incurred, variable incentive
compensation paid to our employee recruiter as we hired more employees and
consulting expenses.  As a percentage of sales, general and
administrative expenses were 11.2% for the three months ended March 31, 2009 and
10.6% for the same period in 2008.  Included in general and
administrative expenses are expenses associated with employee stock options of
$4,709 and $4,298 for the three months ended
March 31, 2009 and 2008, respectively.




10




Defined
Benefit Pension Plan Expenses





Defined
benefit pension plan expenses include expenses (including pension expense,
professional services, and interest costs) associated with the Osley &
Whitney, Inc. Retirement Plan(O&W Plan) of $164,869 for the three months ended March 31, 2009 and
$48,961 for the three months ended March 31, 2008, an increase of
$115,908.  During the three months ended March 31, 2009, we incurred
legal and professional fees of approximately $46,600 in connection with
compliance requirements and advocating our legal position in response to recent
communication with the appropriate regulatory authorities as compared to
approximately $5,700 for the three months ended March 31, 2008.  Net
periodic pension cost increased by approximately $39,700 to $84,974 for the
three months ended March 31, 2009 due principally to a decline in the market
value of O&W Plan assets as a result of adverse market conditions during
2008.  We continue to accrue interest and fees on unpaid excise taxes
and unfunded contributions, which amounts increased by approximately $35,300 for
the three months ended March 31, 2009 from 2008.





Selling
Expenses





For the
three months ended March 31, 2009 we incurred selling expenses of $455,369
associated with growing our IT Services Group business compared to $412,320 for
the three months ended March 31, 2008, an increase of $43,049.  The
increase is principally due to the addition of new sales and business
development personnel in the third and fourth quarters of 2008 to develop more
new sales opportunities and to prepare proposals for new
projects.  Included in selling expenses are expenses associated with
employee stock options of $16,930 and $15,879 for the three months ended March
31, 2009 and 2008, respectively.





Operating
Income (Loss)





For the
three months ended March 31, 2009, we had an operating loss of $253,809, a
change of $(280,755) compared to income of $26,946 for the three months ended
March 31, 2008.  This is principally attributable to two factors:first, while our sales
increased by $189,120 from $2,466,810 for the three months ended March 31, 2008
to $2,655,930 for the three months ended March 31, 2009, our gross profit
decreased by $87,319; and second, our operating expenses increased by $193,436,
which consisted of increases in defined benefit pension plan expenses of
$115,908, general and administrative expenses of $34,479, and selling expenses
of $43,049 for the three months ended March 31, 2009 as compared to the three
months ended March 31, 2008.





Interest
Expense





Net
interest expense was $68,870 for the three months ended March 31, 2009 compared
to $78,388 for the three months ended March 31, 2008, a decrease of $9,518. The
decrease is due to lower average principal balances on related party notes for
the three months ended March 31, 2009 and a reduction in the contractual
interest rate on these notes payable from 8.5% for 2008 to 6.0% for
2009.





Income
Taxes





Income
tax expense was $4,000 and $615 for the three months ended March 31, 2009 and
2008, respectively, consisting of state taxes.





Net
Loss





For the
three months ended March 31, 2009,we recorded a net loss
of ($326,679) or $(.01) per share compared to a net loss of ($52,057) or $(.00)
per share for the three months ended March 31, 2008.





11





Liquidity
and Capital Resources




At March
31, 2009, we had cash of $71,149 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 our $800,000 factoring line of
credit.  At March 31, 2009, we had approximately $92,000 of
availability under this line and had adequate accounts receivable to use the
remaining available line.




At March
31, 2009, we had a working capital deficit of approximately $3.0 million and a
current ratio of .29.  Our objective is to improve our working capital
position from profitable operations.  The O&W Plan current
liabilities have a significant impact on our working capital.  Without
the current liabilities of the O&W Plan of approximately $2.6 million,
working capital would have been a deficit of approximately
$403,000.




If we
continue to incur operating losses or continue to incur net losses, we may
continue to experience working capital shortages that impair our business
operations and growth strategy.  Based on current level of operations,
we have sufficient cash flow and short-term financing sources, through sales
with recourse of accounts receivable, to fund our payroll and accounts payable
on a timely basis.




During
2008 and 2009, we financed our business activities through the issuance of notes
payable to third parties, including related parties and financing through sales
with recourse of our accounts receivable.  We have used our common
stock and common stock options and warrants to provide compensation to certain
employees and consultants and to fund liabilities.




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




Three Months Ended
                    March 31,2009
                  
                  
                  2008Net
      cash provided (used) by operating activities
                  
                  $
                  (2,552
                  )
                  
                  $
                  25,867Net
      cash used by investing activities
                  
                  
                  (2,862
                  )
                  
                  
                  (5,285
                  )Net
      cash provided (used) by financing activities
                  
                  
                  (76,773
                  )
                  
                  
                  14,278Net
      increase (decrease) in cash
                  
                  $
                  (82,187
                  )
                  
                  $
                  34,860




Cash
Flows Provided (Used) by Operating Activities




During
the three months ended March 31, 2009, cash used by operations was $2,552
compared with cash provided by operations of $25,867 for the same period in
2008.  Our operating cash flow is primarily affected by the overall
profitability of our contracts, our ability to invoice and collect from our
clients in a timely manner, and our ability to manage our vendor
payments.  We bill our clients weekly or monthly after services are
performed, depending on the contract terms. The decrease in cash provided by
operations in 2009 was primarily due to net loss $326,679 in 2009 as compared to
a net loss of $52,057 in 2008.  Our accounts receivable increased
principally due to the growth of sales in 2009.  The increase in total
liabilities that affect operating activities is primarily due to increased
accrued O&W Plan pension obligations of $104,593 during the three months
ended March 31, 2009.




Cash
Flows Used by Investing Activities




Cash used
by investing activities during the three months ended March 31, 2009 was $2,862
compared with $5,285 for the same period in 2008.  Cash used by
investing activities was primarily for capital expenditures for computer
hardware and software.  We expect to continue to invest in computer
hardware and software to update our technology to support the growth of our
business.  We do not have plans for significant capital expenditures
in the near future.




Cash
Flows Provided (Used) by Financing Activities




Cash used
by financing activities was $76,773 for the three months ended March 31, 2009
for principal payments on notes payable.  In comparison, for the three
months ended March 31 2008, cash provided by financing activities was $14,278
due to $16,667 from the exercise of an option for common stock offset by
principal payments of $2,389 on notes payable.  We anticipate that we
will use approximately $7,700 through the next twelve months for funding
contractual requirements of current maturities of long-term debt obligations to
third parties.  In addition, notes payable to a related party of
$265,000 become contractually due in January 2010.  We may continue to
repay other notes payable as working capital is generated.





12




Credit
Agreement




We have a
line of credit 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 March 31, 2009, we had
approximately $92,000 of availability under this line and had adequate accounts
receivable to use the remaining available line.




We
believe the capital resources available to us under our line of credit and cash
that will be provided from our operations are adequate to fund our ongoing
operations and to support the internal growth we expect to achieve for at least
the next 12 months.  However, if we experience significant growth in
our sales, we believe that this may require us to increase our financing line or
obtain additional working capital from other sources to support our sales
growth.  We anticipate financing our external growth from acquisitions
and our longer-term internal growth through one or more of the following
sources: cash from operations; additional borrowing; issuance of equity; use of
our existing revolving credit facility; or a refinancing of our credit
facilities.




There is
no assurance, that our current resources or cash flow from operations will be
adequate to fund the liabilities under the O&W Plan if the Department of
Treasury (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.




We have
recently financed our business activities through the issuance of notes payable
to third parties, including related parties, exercises of stock options, and
financing through sales with recourse of our accounts receivable.





We have
used our common stock to provide compensation to certain employees and
consultants and to fund liabilities.





Future
Trends





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





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




The
current recessionary economy may impact certain portions of our business and our
growth opportunities as certain projects are deferred pending funding or
improved economic conditions.  However, one of our major sources of
revenue is from ongoing data center support which is critical to the operation
of clients and is not solely dependent upon current economic
factors.  Our focus areas include virtualization and data center
projects which are based on a client’s need to upgrade or centralize its 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) and are a member of the Hewlett Packard Developer
and Solutions Partner Program (DSPP) which we believe provide us with a
competitive advantage versus those companies that do not have such
qualifications and bid against us on certain projects.  Certain
clients have started to or are planning to reduce the scope of certain projects
given the current economic conditions and such reductions could curtail our
overall sales growth rate.




The U.S.
and worldwide capital and credit markets have recently experienced 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.




13




Osley
& Whitney, Inc. Retirement Plan





As of
December 31, 2004, we sold or closed all of our prior
businesses.  Currently, our sole business is the provision of IT
consulting services.  The following discussion of the O&W Plan
relates to the business that was closed and sold and its current effect on our
operations and financial position.





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





During
2007, we submitted information to the Treasury advocating that we had no legal
obligation to act as the sponsor of the O&W Plan to ascertain whether the
Treasury concurred or disagreed with this position.  We subsequently
provided responses to Treasury inquiries related to this
determination.  In February 2009, we received a draft of a proposed
revenue agent report from the Treasury that indicates that the Treasury staff
disagrees with our position.  The draft revenue agent response
indicates that we are responsible for excise taxes attributed to the funding
deficiency of $1,836,359 for the years 2002 through 2007 which funding
deficiency can only be corrected by contributing $1,836,359 to the O&W
Plan.  The draft response also states that additional penalties could
be imposed.  We and our outside legal counsel disagree with
significant aspects of both the factual findings and legal conclusions set forth
in the draft report and, in accordance with Treasury procedures are in the
process of responding with a detailed analysis of our opposition to their
findings.





If the
Treasury staff does not reconsider and conclude in our favor, we expect that the
Treasury will issue a formal revenue agent report reiterating its preliminary
position.  In this event, we will commence and 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 may become obligated for additional estimated excise
taxes on accumulated unfunded O&W Plan contributions for the O&W Plan
years ended December 31, 2006 and 2007 of approximately $165,000 and $184,000,
respectively, which have not been accrued based upon our determination that we
have no legal obligation to act as the O&W Plan sponsor and our belief that
the likelihood is not probable that we will be required to pay these excise
taxes.  Further, if we do not ultimately prevail, we may be required
to pay interest on these excise taxes and potentially incur additional excise
taxes up to 100% of all required O&W Plan contributions, which required
contributions were $1,836,359 at December 31, 2008.  No excise taxes
for 2006 and 2007 or related interest have been assessed and no portion of this
amount has been accrued at December 31, 2008 and March 31, 2009.  We
have accrued amounts related to excise taxes on unfunded contributions for 2003,
2004 and 2005 of $427,240 as of March 31, 2009 ($420,362 - December 31, 2008)
which does not include any amounts disclosed above.





On April
29, 2009, acting for the O&W Plan, we sent the O&W Plan participants a
notice of intent to terminate the O&W Plan in a distress termination with a
proposed termination date of June 30, 2009.  O&W Plan termination
is subject to approval by the Pension Benefit Guaranty Corporation and requires
providing additional documentation regarding our status and the status of the
O&W Plan.





At March
31, 2009, we had accrued liabilities of $3,740,373, which includes $427,240
recorded for excise taxes on unfunded contributions, related to the O&W Plan
and accumulated other comprehensive loss of $3,217,259 which was recorded as a
reduction of stockholders’ deficiency.  The market value of the
O&W Plan assets decreased from $2,150,094 at December 31, 2008 to $1,827,624
at March 31, 2009.  The decrease was comprised of investment losses of
$207,669, benefit payments of $113,741 and expenses paid of $1,060.




14




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
4T.  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.





On
February 13, 2009, we issued 500,000 restricted shares of our common stock to an
accredited investor upon conversion of $25,000 of accrued interest payable on
certain outstanding notes payable in accordance with the terms of such
notes.





The
issuance of these shares was exempt from registration, as they were nonpublic
offerings made pursuant to Sections 4(2) and 4(6) of the Securities Act of 1933,
as amended.  The stock certificates representing these shares were
imprinted with a legend restricting transfer unless pursuant to an effective
registration statement or an exemption from registration under the
Act.





In
addition, in February and March 2009, we granted options to purchase 882,500
shares of our common stock at exercise prices ranging from $.16 to $.20 per
share.  The grants were exempt from registration pursuant to Section
4(2) of the Act.





Item
6.  Exhibits.





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




_______________________


*
                Filed
      as an exhibit hereto.




15





SIGNATURES





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





Infinite
      Group, Inc.
                  (Registrant)Date          May
      15, 2009
                /s/ Michael S. SmithMichael
      S. SmithChief
      Executive Officer(Principal
      Executive Officer)Date         May
      15, 2009
                /s/ James WitzelJames
      WitzelChief
      Financial Officer(Principal
      Financial Officer)




16