UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





xQUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly
period ended: September 30, 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 25,661,883 shares of the issuer’s common stock, par value $.001 per share,
outstanding as of November 11, 2009.










INFINITE
GROUP, INC.




FORM
10-Q REPORT




TABLE OF
CONTENTS




PAGEPART
      I – FINANCIAL INFORMATIONItem
      1.
                    Consolidated
      Financial StatementsConsolidated
      Balance Sheets – September 30, 2009 (Unaudited) and December 31,
      2008
                    3Consolidated
      Statements of Operations (Unaudited) for the three and nine months ended
      September 30, 2009 and 2008
                    4Consolidated
      Statements of Cash Flows (Unaudited) for the nine months ended September
      30, 2009 and 2008
                    5Notes
      to Consolidated Financial Statements – (Unaudited)
                    6Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    11Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    17Item
      4T.
                    Controls
      and Procedures
                    17PART
      II – OTHER INFORMATIONItem
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    17Item
      6.
                    Exhibits
                    17SIGNATURES
                    18





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





September 30,
                            
                            
                            December 31,2009
                              (Unaudited)
                            
                            
                            2008ASSETSCurrent
      assets:Cash
                            
                            $
                            55,287
                            
                            
                            $
                            153,336Accounts
      receivable, net of allowance of $50,000 ($35,000 - 2008)
                            
                            
                            1,103,773
                            
                            
                            
                            1,004,114Prepaid
      expenses and other current assets
                            
                            
                            66,914
                            
                            
                            
                            47,379Total
      current assets
                            
                            
                            1,225,974
                            
                            
                            
                            1,204,829Property
      and equipment, net
                            
                            
                            62,298
                            
                            
                            
                            69,750Other assets–
      securitydeposits
                            
                            
                            15,515
                            
                            
                            
                            15,515Total
      assets
                            
                            $
                            1,303,787
                            
                            
                            $
                            1,290,094LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      liabilities:Accounts
      payable
                            
                            $
                            502,734
                            
                            
                            $
                            328,654Accrued
      payroll
                            
                            
                            547,347
                            
                            
                            
                            304,819Accrued
      interest payable
                            
                            
                            266,798
                            
                            
                            
                            280,547Accrued
      pension and retirement
                            
                            
                            2,933,628
                            
                            
                            
                            2,367,312Accrued
      expenses – other
                            
                            
                            52,287
                            
                            
                            
                            62,516Current
      maturities of notes payable
                            
                            
                            11,329
                            
                            
                            
                            7,426Notes
      payable
                            
                            
                            205,000
                            
                            
                            
                            30,000Notes
      payable-related parties
                            
                            
                            414,000
                            
                            
                            
                            40,000Total
      current liabilities
                            
                            
                            4,933,123
                            
                            
                            
                            3,421,274Long-term
      obligations:Notes
      payable
                            
                            
                            38,631
                            
                            
                            
                            239,266Notes
      payable-related parties
                            
                            
                            651,324
                            
                            
                            
                            999,624Accrued
      pension expense
                            
                            
                            1,147,231
                            
                            
                            
                            1,337,231Total
      liabilities
                            
                            
                            6,770,309
                            
                            
                            
                            5,997,395Commitments
      and contingencies (note 5)Stockholders’
      deficiency:Common
      stock, $.001 par value, 60,000,000 shares authorized;25,517,343
      (24,969,078 – 2008) shares issued and outstanding
                            
                            
                            25,517
                            
                            
                            
                            24,969Additional
      paid-in capital
                            
                            
                            29,844,577
                            
                            
                            
                            29,699,795Accumulated
      deficit
                            
                            
                            (32,119,357
                            )
                            
                            
                            (31,214,806
                            )Accumulated
      other comprehensive loss
                            
                            
                            (3,217,259
                            )
                            
                            
                            (3,217,259
                            )Total
      stockholders’ deficiency
                            
                            
                            (5,466,522
                            )
                            
                            
                            (4,707,301
                            )Total
      liabilities and stockholders’ deficiency
                            
                            $
                            1,303,787
                            
                            
                            $
                            1,290,094




See notes
to consolidated financial statements.





3




INFINITE
GROUP, INC.




Consolidated
Statements of Operations (Unaudited)





Three Months Ended
                        
                        
                        Nine Months EndedSeptember 30,
                        
                        
                        September 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Sales
                        
                        $
                        2,756,463
                        
                        
                        $
                        2,478,978
                        
                        
                        $
                        8,320,492
                        
                        
                        $
                        7,109,403Cost
      of services
                        
                        
                        2,065,766
                        
                        
                        
                        1,795,927
                        
                        
                        
                        6,344,445
                        
                        
                        
                        5,164,602Gross
      profit
                        
                        
                        690,697
                        
                        
                        
                        683,051
                        
                        
                        
                        1,976,047
                        
                        
                        
                        1,944,801Costs
      and expenses:General
      and administrative
                        
                        
                        306,425
                        
                        
                        
                        271,224
                        
                        
                        
                        918,633
                        
                        
                        
                        796,029Defined
      benefit pension plan
                        
                        
                        133,468
                        
                        
                        
                        67,082
                        
                        
                        
                        430,214
                        
                        
                        
                        166,074Selling
                        
                        
                        416,656
                        
                        
                        
                        300,268
                        
                        
                        
                        1,309,795
                        
                        
                        
                        1,057,090Total
      costs and expenses
                        
                        
                        856,549
                        
                        
                        
                        638,574
                        
                        
                        
                        2,658,642
                        
                        
                        
                        2,019,193Operating
      income (loss)
                        
                        
                        (165,852
                        )
                        
                        
                        44,477
                        
                        
                        
                        (682,595
                        )
                        
                        
                        (74,392
                        )Interest
      expense:Related
      parties
                        
                        
                        (21,060
                        )
                        
                        
                        (30,638
                        )
                        
                        
                        (62,423
                        )
                        
                        
                        (95,015
                        )Other
                        
                        
                        (50,130
                        )
                        
                        
                        (41,087
                        )
                        
                        
                        (155,533
                        )
                        
                        
                        (132,039
                        )Total
      interest expense
                        
                        
                        (71,190
                        )
                        
                        
                        (71,725
                        )
                        
                        
                        (217,956
                        )
                        
                        
                        (227,054
                        )Loss
      before income tax expense
                        
                        
                        (237,042
                        )
                        
                        
                        (27,248
                        )
                        
                        
                        (900,551
                        )
                        
                        
                        (301,446
                        )Income
      tax expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,000
                        )
                        
                        
                        (615
                        )Net
      loss
                        
                        $
                        (237,042
                        )
                        
                        $
                        (27,248
                        )
                        
                        $
                        (904,551
                        )
                        
                        $
                        (302,061
                        )Net
      loss per share – basic and diluted
                        
                        $
                        (.01
                        )
                        
                        $
                        (.00
                        )
                        
                        $
                        (.04
                        )
                        
                        $
                        (.01
                        )Weighted
      average number of shares outstanding – basic and diluted
                        
                        
                        25,498,253
                        
                        
                        
                        24,783,698
                        
                        
                        
                        25,400,155
                        
                        
                        
                        24,348,508




See notes
to consolidated financial statements.





4




INFINITE
GROUP, INC.




Consolidated
Statements of Cash Flows (Unaudited)





For the Nine Months EndedSeptember 30,2009
                
                
                2008Operating
      activities:Net
      loss
                
                $
                (904,551
                )
                
                $
                (302,061
                )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Stock
      based compensation
                
                
                118,580
                
                
                
                197,727Depreciation
                
                
                23,568
                
                
                
                27,523Increase
      in assets:Accounts
      receivable, net
                
                
                (99,659
                )
                
                
                (537,392
                )Other
      assets
                
                
                (19,535
                )
                
                
                (5,169
                )Increase
      in liabilities:Accounts
      payable
                
                
                174,780
                
                
                
                131,690Accrued
      expenses
                
                
                268,550
                
                
                
                204,163Accrued
      pension and retirement
                
                
                376,316
                
                
                
                164,659Net
      cash used by operating activities
                
                
                (61,951
                )
                
                
                (118,860
                )Investing
      activities:Purchase
      of property and equipment
                
                
                (6,651
                )
                
                
                (17,339
                )Net
      cash used by investing activities
                
                
                (6,651
                )
                
                
                (17,339
                )Financing
      activities:Proceeds
      from note payable
                
                
                -
                
                
                
                200,000Repayments
      of notes payable
                
                
                (31,197
                )
                
                
                (2,956
                )Proceeds
      from notes payable - related parties
                
                
                76,151
                
                
                
                -Repayments
      of notes payable - related parties
                
                
                (76,151
                )
                
                
                (66,486
                )Proceeds
      from exercise of stock options
                
                
                1,750
                
                
                
                16,667Net
      cash (used) provided by financing activities
                
                
                (29,447
                )
                
                
                147,225Net
      (decrease) increase in cash
                
                
                (98,049
                )
                
                
                11,026Cash
      - beginning of period
                
                
                153,336
                
                
                
                28,281Cash
      - end of period
                
                $
                55,287
                
                
                $
                39,307Supplemental
      disclosure:Cash
      paid for:Interest
                
                $
                173,790
                
                
                $
                182,909Income
      taxes
                
                $
                4,000
                
                
                $
                615




See notes
to consolidated financial statements.





5




INFINITE
GROUP, INC.





Notes to
Consolidated Financial Statements–(Unaudited)





Note
1. Basis of Presentation





The
accompanying unaudited consolidated financial statements of Infinite Group, Inc.
(“Infinite Group, Inc.” or the “Company”) included herein have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States of America (U.S.) for interim financial information and with
instructions to Form 10-Q.   Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the U.S. for complete financial statements.   In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments are of a normal recurring
nature.  The December 31, 2008
balance sheet has been derived from the audited financial statements at that
date, but does not include all disclosures required by
GAAP.The accompanying unaudited consolidated financial
statements should be read in conjunction with the Company’s audited consolidated
financial statements and the notes thereto included in the Company’s Annual
report on Form 10-K for the year ended December 31, 2008 filed with the U.S.
Securities and Exchange Commission (SEC).  Results of consolidated
operations for the nine months ended September 30, 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





The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(Codification) -The Codification is the source of authoritative U.S.
generally accepted accounting principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities.  Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants including the Company.  On the
effective date of this Statement, the Codification superseded all then-existing
non-SEC accounting and reporting standards.  All other
nongrandfathered non-SEC accounting literature not included in the Codification
is nonauthoritative.  Since the Codification was effective for
financial statements issued for interim and annual periods ending after
September 15, 2009, the Company revised its references to Statement of Financial
Accounting Standards to refer to the Codification as its source for
GAAP.





“Subsequent Events.” -
Codification Topic 855 establishes the principles and requirements for
evaluating and reporting subsequent events, including the period subject to
evaluation for subsequent events, the circumstances requiring recognition of
subsequent events in the financial statements, and the required
disclosures.  This section of the Codification was effective for
interim and annual periods ending after June 15, 2009, which was June 30, 2009
for the Company.  The Company has evaluated subsequent events for
recognition and disclosure in the unaudited consolidated financial statements
for the three and nine months ended September 30, 2009.  Events are
evaluated based on whether they represent information existing as of September
30, 2009, which require recognition in the unaudited consolidated financial
statements or new events occurring after September 30, 2009, which do not
require recognition, but require disclosure if the event is significant to the
unaudited consolidated financial statements.    These
financial statements have not been updated for events occurring after November
12, 2009, which is the date these financial statements were available to be
issued.





In
April 2009, the FASB issued an amendment to the Codification as Topic 825,
“InterimDisclosures About Fair Value of
Financial Instruments”, which requires 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 applies to the Company’s disclosures beginning with the
quarter ended June 30, 2009.  The Company has determined that the adoption
of this staff position will not materially impact its consolidated financial
statements and disclosures.





With
respect to fair value of financial instruments interim disclosures, the carrying
amounts of cash, accounts receivable, accounts payable, and accrued expenses
payable are reasonable estimates of their fair value due to their short
maturity.  Based on the borrowing rates currently available to the
Company for loans similar to the Company’s term notes and notes payable, the
fair value approximates the carrying amount.





6




In
December 2008, the FASB issued an amendment to the Codification as Topic
715,“Employers’ Disclosures about
Postretirement Benefit Plan Assets”.This amends the
disclosure requirements for employer’s disclosure of plan assets for defined
benefit pensions and other postretirement plans.  The objective of
this amendment 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.  It is effective for fiscal years ending after
December 15, 2009.  The Company is currently evaluating the impact of
this amendment on its financial statements and intends to adopt the new
disclosure requirements for the year ending December 31, 2009.





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
9,198,833 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 nine months ended
September 30, 2009 and 2008.





2009
                  
                  
                  2008Risk-free
      interest rate
                  
                  
                  2.09%
      - 2.80
                  %
                  
                  
                  3.74%
      - 4.10
                  %Expected
      dividend yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %Expected
      stock price volatility
                  
                  
                  75
                  %
                  
                  
                  50
                  %Expected
      life of options
                  
                  5.75
      years
                  
                  
                  10
      years




Recording
stock based compensation expense for the nine months ended September 30, 2009
impacted net loss per share by $.01, from $(.03) loss per share to $(.04) loss
per share.  There was no impact from stock based compensation expense
on net loss per share for the three months ended September 30, 2009 and for the
three and nine months ended September 30, 2008.  The Company recorded
expense for options, warrants and common stock issued to employees and
independent service providers for the three months and nine months ended
September 30, 2009 and 2008 as follows.





Three Months
                    ended
                    September 30,
                    2009
                  
                  
                  Three Months
                    ended
                    September 30,
                    2008
                  
                  
                  Nine Months
                    ended
                    September 30,
                    2009
                  
                  
                  Nine Months
                    ended
                    September 30,
                    2008Employee
      stock options
                  
                  $
                  29,689
                  
                  
                  $
                  61,027
                  
                  
                  $
                  120,749
                  
                  
                  $
                  159,244Consultants
      - common stock warrants
                  
                  
                  -
                  
                  
                  
                  19,886
                  
                  
                  
                  (2,169
                  )
                  
                  
                  25,983Consultant
      - shares of common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,500Total
      expense
                  
                  $
                  29,689
                  
                  
                  $
                  80,913
                  
                  
                  $
                  118,580
                  
                  
                  $
                  197,727





A summary
of all stock option activity for the nine months ended September 30, 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
                    
                    
                    902,500
                    
                    
                    $
                    .19Options
      expired
                    
                    
                    (217,500
                    )
                    
                    $
                    .54Options
      exercised
                    
                    
                    (25,000
                    )
                    
                    $
                    .07Outstanding
      at September 30, 2009
                    
                    
                    5,511,500
                    
                    
                    $
                    .26
                    
                    6.4 years
                    
                    $
                    1,535,000Exercisable
      at September 30, 2009
                    
                    
                    4,578,834
                    
                    
                    $
                    .26
                    
                    5.8 years
                    
                    $
                    1,280,000




7




The
weighted average fair value of options granted during the nine months ended
September 30, 2009 was approximately $.12 ($.36 during the nine months ended
September 30, 2008).  Options for 25,000 and 66,667 shares were
exercised during the nine months ended September 30, 2009 and 2008,
respectively.  The Company received aggregate proceeds of $1,750 and
$16,667 upon exercise of such options during the nine months ended September 30,
2009 and 2008, which had an intrinsic value of $8,250 and $38,000,
respectively.





A summary
of nonvested stock option activity for the nine months ended September 30, 2009
follows:





Number of
                      Nonvested
                      Options
                    
                    
                    Weighted Average
                      Fair Value
                      at Grant DateNonvested
      outstanding at December 31, 2008
                    
                    
                    623,333
                    
                    
                    $
                    .33Options
      granted
                    
                    
                    902,500
                    
                    
                    $
                    .12Options
      vested
                    
                    
                    (458,167
                    )
                    
                    $
                    .26Options
      forfeited
                    
                    
                    (135,000
                    )
                    
                    $
                    .34Nonvested
      outstanding at September 30, 2009
                    
                    
                    932,666
                    
                    
                    $
                    .16


At
September 30, 2009, there was approximately $117,600 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 one year.  The total fair value of shares
that vested during the nine months ended September 30, 2009 was approximately
$119,194.





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.  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
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.





If the
Company had generated earnings, common stock equivalents would have been added
to the weighted average shares outstanding during the three and nine months
ended September 30, 2009 and 2008 as set forth below.





Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Weighted
      average number of shares outstanding
                  
                  
                  25,498,253
                  
                  
                  
                  24,783,698
                  
                  
                  
                  25,400,155
                  
                  
                  
                  24,348,508Common
      stock equivalents
                  
                  
                  19,829,201
                  
                  
                  
                  19,605,103
                  
                  
                  
                  19,167,233
                  
                  
                  
                  19,573,817





Options
to purchase 1,193,500 and 1,905,500 shares of common stock for the three and
nine months ended September 30, 2009, (375,000 and 371,500 shares of common
stock for the three and nine months ended September 30, 2008) that could
potentially dilute basic earnings 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
(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.




8




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 2002 through 2007 which funding deficiency can only be corrected
by contributing $1,836,359 to the Plan.  The report also states that
proposed 10% excise taxes of $348,500, penalties for late payment of excise
taxes of approximately $1,200,000, and 100% excise taxes of approximately $3.5
million related to the years ended December 31, 2006 and 2007 may be
imposed.  Penalties for late payment may be removed if the Company
provides reasonable cause for not paying the excise taxes and the Treasury
concurs with the Company’s position.  The Company and its outside
legal counsel disagree with significant aspects of both the factual findings and
legal conclusions set forth in the report and, in accordance with Treasury
procedures, will respond with a detailed analysis of its opposition to their
findings.  The Company will 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 $2.0 million as of September 30, 2009 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 $200,000 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 of approximately
$1.2 million and additional excise taxes up to 100% of each year’s
required funding deficiency of approximately $3.5 million for the years
ended December 31, 2006 and 2007.  The Company has accrued amounts
related to excise taxes on unfunded contributions for 2003, 2004 and 2005 of
approximately $440,000 as of September 30, 2009 ($420,362 at December 31,
2008).  No excise taxes for 2006, 2007 and 2008 or related interest on
penalties for late payment have been accrued at December 31, 2008 and September
30, 2009.




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





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





At
September 30, 2009, the Company had accrued liabilities related to the Plan of
$3,983,094 ($3,622,122 at December 31, 2008), which includes approximately
$440,000 ($420,362 at December 31, 2008) recorded for excise taxes on unfunded
contributions and accumulated other comprehensive loss of $3,217,259 ($3,217,259
at December 31, 2008) which was recorded as a reduction of stockholders’
deficiency.  The market value of the Plan assets increased from
$2,150,094 at December 31, 2008 to $2,204,441 at September 30,
2009.  The increase was comprised of investment returns of $383,205
and net expense credits of $7,992 offset by benefit payments of
$336,850.





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
                      September 30,
                      2009
                    
                    
                    Three Months
                      ended
                      September 30,
                      2008
                    
                    
                    Nine Months
                      ended
                      September 30,
                      2009
                    
                    
                    Nine Months
                      ended
                      September 30,
                      2008Interest
      cost
                    
                    $
                    71,996
                    
                    
                    $
                    74,248
                    
                    
                    $
                    215,989
                    
                    
                    $
                    225,357Expected
      return on plan assets
                    
                    
                    (42,115
                    )
                    
                    
                    (72,686
                    )
                    
                    
                    (126,346
                    )
                    
                    
                    (218,057
                    )Service
      cost
                    
                    
                    17,750
                    
                    
                    
                    16,250
                    
                    
                    
                    53,250
                    
                    
                    
                    48,750Actuarial
      loss
                    
                    
                    37,343
                    
                    
                    
                    27,455
                    
                    
                    
                    112,030
                    
                    
                    
                    82,364Net
      periodic pension cost
                    
                    $
                    84,974
                    
                    
                    $
                    45,267
                    
                    
                    $
                    254,923
                    
                    
                    $
                    138,414




9




Note
6.  Supplemental Cash Flow Information





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





Nine Months Ended September 30,2009
                              
                              
                              2008Conversion
      of accrued interest payable under note payable-related party into 500,000
      shares on common stock
                              
                              $
                              25,000
                              
                              
                              $
                              -Conversion
      of convertible accrued interest payable into a convertible note
      payable
                              
                              $
                              25,000
                              
                              
                              $
                              -Purchase
      of equipment through long-term obligations
                              
                              $
                              9,465
                              
                              
                              $
                              -Conversion
      of notes payable - related party and related accrued interest payable into
      1,185,000 shares of common stock
                              
                              $
                              -
                              
                              
                              $
                              59,250





During
the nine months ended September 30, 2009 and 2008, warrants were exercised for
60,000 and 122,500 shares of common stock on a cashless basis resulting in the
Company’s net issuance of 23,265 and 68,696 shares of common stock,
respectively.





Note
7.  Notes Payable-Related Party





During
the nine months ended September 30, 2009, the Company entered into the following
note payable agreements with related parties:




On July
23, 2009, the Company borrowed $50,000 under the terms of a demand note payable
to a member of the Company’s board of directors with interest at 12%
annually.





On July
13, 2009, the Company borrowed $26,151 under the terms of a demand note payable
from an executive officer with interest at 12% annually.  The demand
note was subsequently repaid during the third quarter of 2009.





On
September 30, 2009, a note payable to a related party of approximately $150,000
was modified to revise the interest rate from a floating rate, which was 6% at
the date of modification, to a fixed rate of 6% annually.  The
principal balance continues to be convertible into shares of common stock at
$.05 per share.





On
September 30, 2009, accrued interest payable to related party of $25,000 was
converted to a note payable of $25,000 with interest at a fixed rate of 6%
annually with principal and interest due on January 1, 2016.  The
balance of $25,000 continues to be convertible into shares of common stock at
$.05 per share.





Both
convertible notes include provisions such that the conversion of the principal
amount of these notes to common stock shall be limited such that the Company
incurs no limitation of the use of its net operating loss carry forwards, which
may be triggered by a change of control involving one or more 5%
shareholders.





Note
8.  Subsequent Events





On
October 2, 2009, the board of directors of the Company appointed Donald W. Upson
to the board, filling an existing vacancy.  Since June 2009, Mr. Upson
has been providing consulting services to the Company and has been compensated
for such services at the rate of $9,600 per month.





On
October 2, 2009, the Company entered into an unsecured note payable agreement
with a related party.  The Company borrowed $50,000 from a member of
the Company’s board of directors under the terms of a demand note payable with
interest at 10% annually.





During
the period subsequent to September 30, 2009, the following equity transactions
were recorded by the Company:





On
October 1, 2009, warrants were exercised for 20,000 shares of common stock on a
cashless basis resulting in the Company’s net issuance of 10,000 shares of
common stock.





On
October 2, 2009, a note holder converted $6,000 of principal and $727 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 134,540 shares of
common stock.





10




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, virtualization
services including server, desktop, application, and storage virtualization,
cloud computing, 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 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 and the State of
Mississippi.  The quality and consistency of our services and IT
expertise allow us to maintain long-term relationships with our major
clients.   We have entered into various subcontract agreements
with prime contractors to the U.S. Government, state and local governments and
commercial customers.





Results
of Operations





Comparison
of the Three and Nine Month Periods ended September 30, 2009 and
2008





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 September 30, 2009 and 2008.





Three
      Months Ended September 30,2009 vs. 2008As
      a % of
                    
                    
                    
                    
                    
                    As
      a % of
                    
                    
                    Amount
      of
                    
                    
                    %
      Increase2009
                    
                    
                    Sales
                    
                    
                    2008
                    
                    
                    Sales
                    
                    
                    Change
                    
                    
                    (Decrease)Sales
                    
                    $
                    2,756,463
                    
                    
                    
                    100.0
                    %
                    
                    $
                    2,478,978
                    
                    
                    
                    100.0
                    %
                    
                    $
                    277,485
                    
                    
                    
                    11.2
                    %Cost
      of services
                    
                    
                    2,065,766
                    
                    
                    
                    74.9
                    
                    
                    
                    1,795,927
                    
                    
                    
                    72.4
                    
                    
                    
                    269,839
                    
                    
                    
                    15.0Gross
      profit
                    
                    
                    690,697
                    
                    
                    
                    25.1
                    
                    
                    
                    683,051
                    
                    
                    
                    27.6
                    
                    
                    
                    7,646
                    
                    
                    
                    1.1General
      and administrative
                    
                    
                    306,425
                    
                    
                    
                    11.1
                    
                    
                    
                    271,224
                    
                    
                    
                    10.9
                    
                    
                    
                    35,201
                    
                    
                    
                    13.0Defined
      benefit pension plan
                    
                    
                    133,468
                    
                    
                    
                    4.8
                    
                    
                    
                    67,082
                    
                    
                    
                    2.7
                    
                    
                    
                    66,386
                    
                    
                    
                    99.0Selling
                    
                    
                    416,656
                    
                    
                    
                    15.1
                    
                    
                    
                    300,268
                    
                    
                    
                    12.1
                    
                    
                    
                    116,388
                    
                    
                    
                    38.8Total
      costs and expenses
                    
                    
                    856,549
                    
                    
                    
                    31.0
                    
                    
                    
                    638,574
                    
                    
                    
                    25.7
                    
                    
                    
                    217,975
                    
                    
                    
                    34.1Operating
      income (loss)
                    
                    
                    (165,852
                    )
                    
                    
                    (6.0
                    )
                    
                    
                    44,477
                    
                    
                    
                    1.8
                    
                    
                    
                    (210,329
                    )
                    
                    
                    (472.9
                    )Interest
      expense
                    
                    
                    (71,190
                    )
                    
                    
                    (2.6
                    )
                    
                    
                    (71,725
                    )
                    
                    
                    (2.9
                    )
                    
                    
                    535
                    
                    
                    
                    (0.7
                    )Net
      loss
                    
                    $
                    (237,042
                    )
                    
                    
                    (8.6
                    )
      %
                    
                    $
                    (27,248
                    )
                    
                    
                    (1.1
                    )
      %
                    
                    $
                    (209,794
                    )
                    
                    
                    770.0
                    %Net
      loss per share - basic and diluted
                    
                    $
                    (.01
                    )
                    
                    
                    
                    
                    
                    $
                    (.00
                    )
                    
                    
                    
                    
                    
                    $
                    (.01
                    )




11




The
following table compares our statements of operations data for the nine months
ended September 30, 2009 and 2008.





Nine Months Ended September
    30,2009 vs. 2008As
      a % of
                    
                    
                    
                    
                    
                    As
      a % of
                    
                    
                    Amount
      of
                    
                    
                    %
      Increase2009
                    
                    
                    Sales
                    
                    
                    2008
                    
                    
                    Sales
                    
                    
                    Change
                    
                    
                    (Decrease)Sales
                    
                    $
                    8,320,492
                    
                    
                    
                    100.0
                    %
                    
                    $
                    7,109,403
                    
                    
                    
                    100.0
                    %
                    
                    $
                    1,211,089
                    
                    
                    
                    17.0
                    %Cost
      of services
                    
                    
                    6,344,445
                    
                    
                    
                    76.3
                    
                    
                    
                    5,164,602
                    
                    
                    
                    72.6
                    
                    
                    
                    1,179,843
                    
                    
                    
                    22.8Gross
      profit
                    
                    
                    1,976,047
                    
                    
                    
                    23.7
                    
                    
                    
                    1,944,801
                    
                    
                    
                    27.4
                    
                    
                    
                    31,246
                    
                    
                    
                    1.6General
      and administrative
                    
                    
                    918,633
                    
                    
                    
                    11.0
                    
                    
                    
                    796,029
                    
                    
                    
                    11.2
                    
                    
                    
                    122,604
                    
                    
                    
                    15.4Defined
      benefit pension plan
                    
                    
                    430,214
                    
                    
                    
                    5.2
                    
                    
                    
                    166,074
                    
                    
                    
                    2.3
                    
                    
                    
                    264,140
                    
                    
                    
                    159.0Selling
                    
                    
                    1,309,795
                    
                    
                    
                    15.7
                    
                    
                    
                    1,057,090
                    
                    
                    
                    14.9
                    
                    
                    
                    252,705
                    
                    
                    
                    23.9Total
      costs and expenses
                    
                    
                    2,658,642
                    
                    
                    
                    32.0
                    
                    
                    
                    2,019,193
                    
                    
                    
                    28.4
                    
                    
                    
                    639,449
                    
                    
                    
                    31.7Operating
      loss
                    
                    
                    (682,595
                    )
                    
                    
                    (8.2
                    )
                    
                    
                    (74,392
                    )
                    
                    
                    (1.0
                    )
                    
                    
                    (608,203
                    )
                    
                    
                    817.6Interest
      expense
                    
                    
                    (217,956
                    )
                    
                    
                    (2.6
                    )
                    
                    
                    (227,054
                    )
                    
                    
                    (3.2
                    )
                    
                    
                    9,098
                    
                    
                    
                    (4.0
                    )Income
      tax expense
                    
                    
                    (4,000
                    )
                    
                    
                    (.0
                    )
                    
                    
                    (615
                    )
                    
                    
                    (.0
                    )
                    
                    
                    (3,385
                    )
                    
                    
                    550.4Net
      loss
                    
                    $
                    (904,551
                    )
                    
                    
                    (10.9
                    )
      %
                    
                    $
                    (302,061
                    )
                    
                    
                    (4.2
                    )
      %
                    
                    $
                    (602,490
                    )
                    
                    
                    199.5
                    %Net
      loss per share - basic and diluted
                    
                    $
                    (.04
                    )
                    
                    
                    
                    
                    
                    $
                    (.01
                    )
                    
                    
                    
                    
                    
                    $
                    (.03
                    )




Sales





Sales for
the three months ended September 30, 2009 were $2,756,463, an increase of
$277,485 or 11.2% as compared to sales for the three months ended September 30,
2008 of $2,478,978.  Sales for the nine months ended September 30,
2009 were $8,320,492, an increase of $1,211,089 or 17.0% as compared to sales
for the nine months ended September 30, 2008 of $7,109,403.  The
increase was principally due to growth in the number of new virtualization
projects during 2009.  Certain projects were completed during 2008 and
those sales were replaced by sales from new projects in 2009.  We use
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.  We have
expanded the scope of our virtualization services to include server, desktop,
application, and storage virtualization which has provided growth in our
sales.




We are
actively pursuing opportunities to develop additional sales from new and
existing target markets.  In June 2009, we submitted a proposal for
state and local government business projects within the Gulf Coast region and,
in October 2009, we executed our first master contract with the State of
Mississippi to deliver virtualization services to state agencies over a three
year period as part of the State of Mississippi’s larger strategy to streamline
government operations and to address issues of IT modernization.  In
September 2009, we submitted a proposal to the State of Mississippi related to
Microsoft’s Stimulus360 consulting services, our proposal was accepted in
October 2009 and our contract was executed in November 2009.  We
expect sales in future periods from these successful proposal
efforts.





In September 2009, weannounced the launch of Cloud-CastSM, a new division
focused on the growing demand for cloud computing and virtualization services
and solutions in the government and commercial markets.  Cloud-Cast’s
initial offering is the Cloud-Cast Readiness AssessmentSM, which analyzes
the business case for proposed cloud computing
implementations.  Cloud-Cast’s complete service offerings include
solutions for applications, desktops and servers, as well as migration and
management services.  Additionally, we expect that Cloud-Cast will
develop proprietary software solutions, with an emphasis on dynamic allocation
of cloud computing resources.  Cloud-Cast’s partners include Amazon
Web Services, Citrix, InstallFree, Microsoft and VMware.  We expect
sales in future periods from our Cloud-Cast division.





We are
also channeling energies towards forming alliances with large systems
integrators, who are mandated by federal policy to direct defined percentages of
their work to companies like ours which are small business
subcontractors.  In addition, we are currently working on proposals
for contract awards that we believe will enhance our position as a government
contractor.





12




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 September 30, 2009
was $2,065,766 or 74.9% of sales as compared to $1,795,927 or 72.4% of sales for
the three months ended September 30, 2008.  Gross profit was $690,697
or 25.1% of sales for the three months ended September 30, 2009 compared to
$683,051 or 27.6% of sales for the three months ended September 30,
2008.  Cost of services for the nine months ended September 30, 2009
was $6,344,445 or 76.3% of sales as compared to $5,164,602 or 72.6% of sales for
the nine months ended September 30, 2008.  Gross profit was $1,976,047
or 23.7% of sales for the nine months ended September 30, 2009 compared to
$1,944,801 or 27.4% of sales for the nine months ended September 30,
2008.





The
decrease in the gross profit percent in 2009 is due to increased sales volume
which was offset by a change in the mix of our contracts as a result of
completing higher margin projects in 2008 and adding new lower margin projects
in 2009.  We also experienced a decrease in personnel utilization
rates when certain project commencement dates were deferred.





Our
overall objective is to maintain an overall gross margin of approximately 30%.
We have experienced lower margins on certain new projects and certain ongoing
projects.  We have experienced competitive pressures which have
resulted in lower margins to generate certain new sales.  One of our
business objectives is to generate new opportunities for long-term, larger
volume contracts and more stable sales.  Prior to preparing a
proposal, we evaluate our likelihood of success based on a number of criteria,
and we will prepare a proposal only when we believe that we have a sufficiently
high likelihood of success. We believe that the number of proposals that we have
issued has increased and that these proposals have a better chance for success
based on our evaluation criteria, which includes our experience from a variety
of successfully completed IT projects.  Recently, this is evidenced by
our successful proposals to the State of Mississippi.





General
and Administrative Expenses





General
and administrative expenses include corporate overhead such as compensation and
benefits for administrative and finance personnel, rent, insurance, professional
fees, travel, and office expenses.  General and administrative
expenses for the three months ended September 30, 2009 were $306,425 which was
an increase of $35,201 or 13.0% as compared to $271,224 for the three months
ended September 30, 2008.   As a percentage of sales, general and
administrative expense was 11.1% for the three months ended September 30, 2009
and 10.9% for the three months ended September 30, 2008.





General
and administrative expenses for the nine months ended September 30, 2009
increased by $122,604 or 15.4% from $796,029 for the nine months ended September
30, 2008 to $918,633 for the nine months ended September 30, 2009.  As
a percentage of sales, general and administrative expenses were 11.0% for the
nine months ended September 30, 2009 and 11.2% for the nine months ended
September 30, 2008.





The
increase in general and administrative expenses was due to an increase in
consulting fees, an increase in variable incentive compensation paid to our
recruiter as we hired more employees and the addition of an employee to support
various functions as a direct result of our increased sales volume and number of
projects.





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





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 $133,468 for the three months ended September 30, 2009
and $67,082 the three months ended September 30, 2008, an increase of
$66,386.  We incurred expenses of $430,214 and $166,074 for the nine
months ended September 30, 2009 and 2008, an increase of $264,140.





During
the nine months ended September 30, 2009 and 2008, we incurred legal and
professional fees of approximately $69,000 and $6,000, respectively, in
connection with compliance requirements and advocating our legal position in
response to recent communications with the appropriate regulatory
authorities.  Net periodic pension cost increased by approximately
$149,000 to approximately $255,000 for the nine months ended September 30, 2009
due principally to a decline in the market value of O&W 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 and unfunded contributions for plan years 2003, 2004 and
2005, which amounts increased by approximately $51,400 for the nine months ended
September 30, 2009 from 2008.





Selling Expenses





For the
three months ended September 30, 2009, we incurred selling expenses of $416,656
associated with growing our sales as compared to $300,268 for the three months
ended September 30, 2008, an increase of $116,388 or 38.8%.  For the
nine months ended September 30, 2009 we incurred selling expenses of $1,309,795
associated with growing our sales compared to $1,057,090 for the nine months
ended September 30, 2008, an increase of $252,705 or 23.9%.





The
increase for the nine months ended September 30, 2009 is principally due to the
addition of sales and business development personnel in the second half of 2008
to develop more new sales opportunities and to prepare proposals for new
projects.





13




Operating
Loss





For the
three months ended September 30, 2009 our operating loss was $(165,852) compared
to operating income of $44,477 for the three months ended September 30, 2008, a
decrease of $210,329.  This is attributable to an increase in
operating expenses of $217,975 offset by increased gross profit of
$7,646.





For the
nine months ended September 30, 2009 our operating loss was $(682,595) compared
to an operating loss of $(74,392) for the nine months ended September 30, 2008,
an increase of $608,203.  This is attributable to an increase in
operating expenses of $639,449 offset by increased gross profit of
$31,246.





Interest
Expense





Interest
expense includes interest on indebtedness and fees for financing accounts
receivable invoices.  Interest expense was $71,190 for the three
months ended September 30, 2009 compared to interest expense of $71,725 for the
three months ended September 30, 2008.  Interest expense was $217,956
for the nine months ended September 30, 2009 compared to interest expense of
$227,054 for the nine months ended September 30, 2008.





Related
party interest expense decreased by $9,578 and $32,592 for the three and nine
month periods ended September 30, 2009 as compared to the three and nine month
periods ended September 30, 2008 due to lower average principal balances on
related party notes in 2009 and a reduction in the contractual interest rate on
these notes payable from 8.5% for 2008 to 6.0% for 2009.





Other
interest expense increased by $9,043 and $23,494 for the three and nine month
periods ended September 30, 2009 as compared to the three and nine month periods
ended September 30, 2008.  Our fees for financing accounts receivable
were reduced beginning in June 2009, thus reducing our financing rates, however
our length of term and volume of accounts receivable financings increased during
2009.   We also incurred additional interest expense in 2009 as
compared to 2008 due to $200,000 of new indebtedness that we incurred in June
2008 which was used for working capital purposes; the balance of this
indebtedness was reduced to $175,000 during the first quarter of
2009.




Income
Taxes





Income
tax expense was $0 for the three months ended September 30, 2009 and 2008,
respectively.  Income tax expense was $4,000 and $615 for the nine
months ended September 30, 2009 and 2008, respectively, consisting of state
taxes.





Net
Loss




For the
three months ended September 30, 2009,we recorded a net loss
in the amount of $(237,042) or $(.01) per share compared to a net loss of
$(27,248) or $(.00) per share for the three months ended September 30, 2008.  For the nine
months ended September 30, 2009,we recorded a net loss
in the amount of $(904,551) or $(.04) per share compared to a net loss of
$(302,061) or $(.01) per share for the nine months ended September 30, 2008.




Cash Flows




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




Nine Months Ended September
    30,2009
                  
                  
                  2008Net
      cash used by operating activities
                  
                  $
                  (61,951
                  )
                  
                  $
                  (118,860
                  )Net
      cash used by investing activities
                  
                  
                  (6,651
                  )
                  
                  
                  (17,339
                  )Net
      cash (used) provided by financing activities
                  
                  
                  (29,447
                  )
                  
                  
                  147,225Net
      (decrease) increase in cash
                  
                  $
                  (98,049
                  )
                  
                  $
                  11,026




14




Cash
Flows from Operating Activities




During
the nine months ended September 30, 2009, net cash used by operating activities
was $61,951 compared with net cash used by operating activities of $118,860 for
the nine months ended September 30, 2008.  For the nine months ended
September 30, 2009 and 2008, we recorded expense of $118,580 and $197,727,
respectively, for stock options expense issued to employees and board members
and equity instruments issued to consultants.





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 increased principally due to
the growth of sales in the period.  The increase in liabilities is
primarily due to increased accounts payable and accrued pension and retirement
expenses as a result of timing of remitting payables and continued accrued
expenses for pension and retirement obligations.




Cash
Flows from Investing Activities





Net cash
used by investing activities for the nine months ended September 30, 2009 was
$6,651 compared with $17,339 for the nine months ended September 30,
2008.  Net cash used by 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 nine months ended September 30, 2009, net cash used by financing activities
was $31,197 for principal payments on notes payable offset by $1,750 from the
exercise of an option for common stock.  During February 2009, we made
principal payments on a note to a related party of $50,000.  During
July 2009, we borrowed $50,000 from a member of our board of directors for
working capital purposes.  In comparison, for the nine months ended
September 30, 2008, net cash provided by financing activities was $147,225 due
to $200,000 from a new working capital loan, and $16,667 from the exercise of an
option for common stock offset by principal payments of $69,442 on notes
payable.




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 Department of the Treasury (Treasury)
advocating that we had no legal obligation to act as the sponsor of the O&W
Plan to ascertain whether the Treasury concurred or disagreed with this
position.  We subsequently provided responses to Treasury inquiries
related to this determination.  In October 2009, we received a report
from the Treasury that stated that the Treasury staff disagreed with our
position and as a result, we are responsible for excise taxes attributed to the
funding deficiency of $1,836,359 for the years 2002 through 2007 which funding
deficiency can only be corrected by our contributing $1,836,359 to the O&W
Plan.  The report also states that proposed 10% excise taxes of
$348,500, penalties for late payment of excise taxes of approximately
$1,200,000, and 100% excise taxes of approximately $3.5 million 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 will respond
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 O&W Plan contributions
of approximately $2.0 million as of September 30, 2009 and 10% excise taxes on
accumulated unfunded O&W Plan contributions for the Plan years ended
December 31, 2006 and 2007 of approximately $348,500, as stated above, and
potentially additional 10% excise taxes of approximately $200,000 for the year
ended December 31, 2008,  which have not been accrued based upon our
determination that we have no legal obligation to act as the O&W Plan
sponsor and our belief that the likelihood is not probable that we will be
required to pay these excise taxes.  Further, if we do not ultimately
prevail, we may be required to pay interest on these excise taxes and
potentially incur penalties for late payment of excise taxes of approximately
$1.2 million and additional excise taxes up to 100% of each year’s required
funding deficiency of approximately $3.5 million for the years ended December
31, 2006 and 2007.  We have accrued amounts related to excise taxes on
unfunded contributions for 2003, 2004 and 2005 of approximately $440,000 as of
September 30, 2009 ($420,362 at December 31, 2008).  No excise taxes
for 2006, 2007 and 2008 or related interest or penalties for late payment have
been accrued at December 31, 2008 and September 30, 2009.





15




On April
29, 2009, acting for the O&W Plan, we 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.  We also provided additional
documentation regarding our status and the status of the O&W
Plan.  Termination of the O&W Plan is subject to approval by the
Pension Benefit Guarantee Corporation (PBGC).   We have provided
information to the PBGC which management believes satisfies the requirements of
the PBGC. As of November 12, 2009, the PBGC has neither acted on the information
that we have provided nor requested additional information.





At
September 30, 2009, we had accrued liabilities related to the O&W Plan of
$3,893,094 ($3,622,122 at December 31, 2008), which includes approximately
$440,000 ($420,362 at December 31, 2008) recorded for excise taxes on unfunded
contributions, and accumulated other comprehensive loss of $3,217,259
($3,217,259 at December 31, 2008) which was recorded as a reduction of
stockholders’ deficiency.  The market value of the O&W Plan assets
increased from $2,150,094 at December 31, 2008 to $2,204,441 September 30,
2009.  The increase was comprised of investment returns of $383,205
and net expense credits of $7,992 offset by benefit payments of
$336,850.





Liquidity
and Capital Resources





At
September 30, 2009, we had cash of $55,287 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 accounts receivable financing facility.  We have a
line of credit of up to $2 million with a financial institution that allows us
to sell selected accounts receivable invoices to the financial institution with
full recourse against us.  We pay fees based on the length of time
that the invoice remains unpaid.   At September 30, 2009, we had
available credit under this facility of approximately $380,000 based on eligible
accounts receivable.  We have financed our business 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.




At
September 30, 2009, we had a working capital deficit of approximately $3.7
million and a current ratio of .25.  Our objective is to improve our
working capital position from profitable operations.  The O&W Plan
current liabilities have a significant impact on our working
capital.  Without the current liabilities of the O&W Plan of
approximately $2.8 million, working capital would have been a deficit of
approximately $870,000.   Included in current liabilities are
notes payable to related parties of $414,000 and notes payable to third parties
of $205,000, which increases our working capital deficit.  Management
intends to seek to renegotiate the terms, including extending the maturity date,
of a current note payable to a related party of $265,000 prior to its scheduled
maturity in January 2010 and a note payable to a third party of $175,000 prior
to its scheduled maturity in June 2010.  During 2006, the PBGC placed
a lien on all of our assets to secure the contributions of approximately $2
million due to the O&W Plan as of September 30, 2009.  This lien
is subordinate to liens that secure accounts receivable financing and certain
notes payable.




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 our current level of
operations, we believe that we have sufficient cash flow and short-term
financing sources, principally through sales with recourse of accounts
receivable and short-term borrowings from related parties and third parties, to
fund our payroll and accounts payable on a timely basis.  During July
2009 and October 2009, we made borrowings under the terms of two notes of
$50,000 each from members of our board of directors for working capital
purposes.




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.  The capital resources available to us include our line of
credit, loans from related parties and third parties and cash from our
operations which we believe 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 of eligible accounts
receivable 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 the existing revolving credit facility; or a refinancing of our
credit facilities.





There is
no assurance that we will be successful in raising additional working capital
when necessary or 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.  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.





16




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.





In July
2009, we granted options to purchase 10,000 shares of our common stock at an
exercise price of $.28 per share.





In July
2009, we issued 25,000 restricted shares of our common stock upon the exercise
of outstanding options by a former employee at an exercise price of $.07 per
share for gross proceeds of $1,750, which were used as working
capital.





On August
24, 2009 and October 1, 2009, warrants were exercised for 60,000 and 20,000
shares of common stock, respectively, on a cashless basis resulting in our net
issuance of 23,265 and 10,000 shares of common stock, respectively.





On
October 2, 2009, a note holder converted $6,000 of principal and $727 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 134,540 shares of common
stock.





These
transactions were exempt from registration, as they were nonpublic offerings or
transactions made pursuant to Section 4(2) of the Securities Act of 1933, as
amended.  All restricted shares issued in the transactions described
hereinabove bore an appropriate restrictive legend.





Item 6.  Exhibits.





ExhibitNo.
                    
                    Description10.27
                    
                    Promissory
      note dated July 23, 2009 in favor of James Villa.*10.28
                    
                    Promissory
      note dated October 2, 2009 in favor of Allan Robbins.*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





17




SIGNATURES




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




Infinite Group, Inc.(Registrant)Date:   November  12,
      2009
            /s/ Michael S. SmithMichael
      S. SmithChief
      Executive Officer(Principal
      Executive Officer)Date:   November  12,
      2009
            /s/ James WitzelJames
      WitzelChief
      Financial Officer(Principal
      Financial Officer)





18