UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





x QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly
period ended: June 30, 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 25,494,078 shares of the issuer’s common stock, par value $.001 per share,
outstanding as of August 11, 2009.







INFINITE
GROUP, INC.




FORM
10-Q REPORT





TABLE OF
CONTENTS


PAGEPART
      I – FINANCIAL INFORMATION
                                          3Item
      1.
                                          Consolidated
      Financial Statements
                                          3Consolidated
      Balance Sheets – June 30, 2009 (Unaudited) and December 31, 2008
      (Audited)
                                          3Consolidated
      Statements of Operations (Unaudited) for the three and six months ended
      June 30, 2009 and 2008
                                          4Consolidated
      Statements of Cash Flows (Unaudited) for the six months ended June 30,
      2009 and 2008
                                          5Notes
      to Consolidated Financial Statements – (Unaudited)
                                          6Item
      2.
                                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                          10Item
      3.
                                          Quantitative
      and Qualitative Disclosures About Market Risk
                                          15Item
      4T.
                                          Controls
      and Procedures
                                          15PART
      II – OTHER INFORMATION
                                          15Item
      2.
                                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                                          15Item
      6.
                                          Exhibits
                                          16SIGNATURES
                                          16




FORWARD-LOOKING
STATEMENTS




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


2


PART
I


FINANCIAL
INFORMATION


Item
1.  Financial Statements





INFINITE
      GROUP, INC.Consolidated
      Balance SheetsJune
      30,
                  
                  
                  December
      31,2009
                    (Unaudited)
                  
                  
                  2008
                    (Audited)ASSETSCurrent
      assets:Cash
                  
                  $
                  40,317
                  
                  
                  $
                  153,336Accounts
      receivable, net of allowance of $35,000
                  
                  
                  1,042,879
                  
                  
                  
                  1,004,114Prepaid
      expenses and other current assets
                  
                  
                  65,854
                  
                  
                  
                  47,379Total
      current assets
                  
                  
                  1,149,050
                  
                  
                  
                  1,204,829Property
      and equipment, net
                  
                  
                  57,540
                  
                  
                  
                  69,750Other assets–
      securitydeposits
                  
                  
                  15,515
                  
                  
                  
                  15,515Total
      assets
                  
                  $
                  1,222,105
                  
                  
                  $
                  1,290,094LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  643,758
                  
                  
                  $
                  328,654Accrued
      payroll
                  
                  
                  339,276
                  
                  
                  
                  304,819Accrued
      interest payable
                  
                  
                  272,948
                  
                  
                  
                  280,547Accrued
      pension and retirement
                  
                  
                  2,790,435
                  
                  
                  
                  2,367,312Accrued
      expenses – other
                  
                  
                  51,659
                  
                  
                  
                  62,516Current
      maturities of notes payable
                  
                  
                  7,893
                  
                  
                  
                  7,426Notes
      payable
                  
                  
                  205,000
                  
                  
                  
                  30,000Notes
      payable-related parties
                  
                  
                  305,000
                  
                  
                  
                  40,000Total
      current liabilities
                  
                  
                  4,615,969
                  
                  
                  
                  3,421,274Long-term
      obligations:Notes
      payable
                  
                  
                  35,199
                  
                  
                  
                  239,266Notes
      payable-related parties
                  
                  
                  684,624
                  
                  
                  
                  999,624Accrued
      pension expense
                  
                  
                  1,147,231
                  
                  
                  
                  1,337,231Total
      liabilities
                  
                  
                  6,483,023
                  
                  
                  
                  5,997,395Commitments
      and contingencies (note 5)Stockholders’
      deficiency:Common
      stock, $.001 par value, 60,000,000 shares authorized;
                    25,469,078
      (24,969,078 – 2008) shares issued and outstanding
                  
                  
                  25,469
                  
                  
                  
                  24,969Additional
      paid-in capital
                  
                  
                  29,813,186
                  
                  
                  
                  29,699,795Accumulated
      deficit
                  
                  
                  (31,882,314
                  )
                  
                  
                  (31,214,806
                  )Accumulated
      other comprehensive loss
                  
                  
                  (3,217,259
                  )
                  
                  
                  (3,217,259
                  )Total
      stockholders’ deficiency
                  
                  
                  (5,260,918
                  )
                  
                  
                  (4,707,301
                  )Total
      liabilities and stockholders’ deficiency
                  
                  $
                  1,222,105
                  
                  
                  $
                  1,290,094





See notes
to consolidated financial statements.


3


INFINITE
GROUP, INC.





Consolidated
Statements of Operations (Unaudited)


Three
      Months Ended
                          
                          
                          Six
      Months EndedJune
      30,
                          
                          
                          June
      30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Sales
                          
                          $
                          2,908,099
                          
                          
                          $
                          2,163,615
                          
                          
                          $
                          5,564,029
                          
                          
                          $
                          4,630,425Cost
      of services
                          
                          
                          2,285,969
                          
                          
                          
                          1,652,404
                          
                          
                          
                          4,278,679
                          
                          
                          
                          3,368,676Gross
      profit
                          
                          
                          622,130
                          
                          
                          
                          511,211
                          
                          
                          
                          1,285,350
                          
                          
                          
                          1,261,749Costs
      and expenses:General
      and administrative
                          
                          
                          315,417
                          
                          
                          
                          261,270
                          
                          
                          
                          612,208
                          
                          
                          
                          523,582Defined
      benefit pension plan
                          
                          
                          131,877
                          
                          
                          
                          50,031
                          
                          
                          
                          296,746
                          
                          
                          
                          98,992Selling
                          
                          
                          437,770
                          
                          
                          
                          345,724
                          
                          
                          
                          893,139
                          
                          
                          
                          758,044Total
      costs and expenses
                          
                          
                          885,064
                          
                          
                          
                          657,025
                          
                          
                          
                          1,802,093
                          
                          
                          
                          1,380,618Operating
      loss
                          
                          
                          (262,934
                          )
                          
                          
                          (145,814
                          )
                          
                          
                          (516,743
                          )
                          
                          
                          (118,869
                          )Interest
      expense:Related
      parties
                          
                          
                          (20,700
                          )
                          
                          
                          (32,025
                          )
                          
                          
                          (41,363
                          )
                          
                          
                          (64,377
                          )Other
                          
                          
                          (57,195
                          )
                          
                          
                          (44,917
                          )
                          
                          
                          (105,402
                          )
                          
                          
                          (90,952
                          )Total
      interest expense
                          
                          
                          (77,895
                          )
                          
                          
                          (76,942
                          )
                          
                          
                          (146,765
                          )
                          
                          
                          (155,329
                          )Loss
      before income tax expense
                          
                          
                          (340,829
                          )
                          
                          
                          (222,756
                          )
                          
                          
                          (663,508
                          )
                          
                          
                          (274,198
                          )Income
      tax expense
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (4,000
                          )
                          
                          
                          (615
                          )Net
      loss
                          
                          $
                          (340,829
                          )
                          
                          $
                          (222,756
                          )
                          
                          $
                          (667,508
                          )
                          
                          $
                          (274,813
                          )Net
      loss per share – basic and diluted
                          
                          $
                          (.02
                          )
                          
                          $
                          (.01
                          )
                          
                          $
                          (.03
                          )
                          
                          $
                          (.01
                          )Weighted
      average number of shares outstanding – basic and diluted
                          
                          
                          25,469,078
                          
                          
                          
                          24,482,371
                          
                          
                          
                          25,350,293
                          
                          
                          
                          24,128,522





See notes
to consolidated financial statements.


4


INFINITE
GROUP, INC.





Consolidated
Statements of Cash Flows (Unaudited)


For
      the Six Months EndedJune
      30,2009
                  
                  
                  2008Operating
      activities:Net
      loss
                  
                  $
                  (667,508
                  )
                  
                  $
                  (274,813
                  )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Stock
      based compensation
                  
                  
                  88,891
                  
                  
                  
                  116,812Depreciation
                  
                  
                  15,620
                  
                  
                  
                  18,323Increase
      in assets:Accounts
      receivable
                  
                  
                  (38,765
                  )
                  
                  
                  (81,553
                  )Other
      assets
                  
                  
                  (18,475
                  )
                  
                  
                  (7,155
                  )Increase
      in liabilities:Accounts
      payable
                  
                  
                  315,104
                  
                  
                  
                  100,276Accrued
      expenses
                  
                  
                  41,001
                  
                  
                  
                  38Accrued
      pension and retirement
                  
                  
                  233,123
                  
                  
                  
                  84,569Net
      cash used by operating activities
                  
                  
                  (31,009
                  )
                  
                  
                  (43,503
                  )Investing
      activities:Purchase
      of property and equipment
                  
                  
                  (3,410
                  )
                  
                  
                  (16,205
                  )Net
      cash used by investing activities
                  
                  
                  (3,410
                  )
                  
                  
                  (16,205
                  )Financing
      activities:Repayments
      of notes payable
                  
                  
                  (28,600
                  )
                  
                  
                  (1,999
                  )Repayments
      of note payable-related party
                  
                  
                  (50,000
                  )
                  
                  
                  (52,081
                  )Proceeds
      from note payable
                  
                  
                  -
                  
                  
                  
                  200,000Proceeds
      from exercise of stock options
                  
                  
                  -
                  
                  
                  
                  16,667Net
      cash provided by (used by) financing activities
                  
                  
                  (78,600
                  )
                  
                  
                  162,587Net
      increase (decrease) in cash
                  
                  
                  (113,019
                  )
                  
                  
                  102,879Cash
      – beginning of period
                  
                  
                  153,336
                  
                  
                  
                  28,281Cash
      – end of period
                  
                  $
                  40,317
                  
                  
                  $
                  131,160Supplemental
      disclosure:Cash
      paid for:Interest
                  
                  $
                  120,771
                  
                  
                  $
                  130,235Income
      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 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
six months ended June 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





Statement of Financial Accounting
Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles (Codification) -The
Codification will become 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 will supersede all then-existing non-SEC
accounting and reporting standards.  All other nongrandfathered
non-SEC accounting literature not included in the Codification will become
nonauthoritative.  This Statement is effective for financial
statements issued for interim and annual periods ending after September 15, 2009
at which time the Company will revise its references to Statement of Financial
Accounting Standards and refer to the Codification as its source for
GAAP.





SFAS No. 165, “Subsequent
Events.” - The Statement was issued in May 2009 and 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.  The Statement 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 six months ended June 30, 2009.  Events are
evaluated based on whether they represent information existing as of June 30,
2009, which require recognition in the unaudited consolidated financial
statements or new events occurring after June 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 August 12, 2009,
which is the date these financial statements were available to be
issued.





In
April 2009, the FASB issued FSP No. 107-1 and APB 28-1,Interim Disclosures
About Fair Value of Financial Instruments(FSP 107-1 and APB 28-1),
which require disclosures about fair value of financial instruments for interim
reporting periods.  This guidance is effective for interim reporting
periods ending after June 15, 2009 and 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 its carrying amount.


6


In
December 2008, the FASB issued FSP No. 132(R)-1,Employers’ Disclosures about
Postretirement Benefit Plan Assets(FSP 132(R)-1).FSP 132(R)-1 amends the
disclosure requirements for employer’s disclosure of plan assets for defined
benefit pensions and other postretirement plans.  The objective of
this FSP is to provide users of financial statements with an understanding of
how investment allocation decisions are made, the major categories of plan
assets held by the plans, the inputs and valuation techniques used to measure
the fair value of plan assets, significant concentration of risk within the plan
assets, and for fair value measurements determined using significant
unobservable inputs a reconciliation of changes between the beginning and ending
balances.  FSP 132(R)-1 is effective for fiscal years ending after
December 15, 2009.  The Company is currently evaluating the impact of
FSP 132(R)-1 on its financial statements and intends to adopt the new disclosure
requirements 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
9,223,833 shares of common stock.  Such options may be designated at
the time of grant as either incentive stock options or nonqualified stock
options.





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





The fair
value of each option granted is estimated using the Black-Scholes option-pricing
model.  The following assumptions were used for the six months ended
June 30, 2009 and 2008.





2009
                      
                      
                      2008Risk-free
      interest rate
                      
                      
                      2.09%
      - 2.47%
                      
                      
                      
                      3.74%
      - 4.10%Expected
      dividend yield
                      
                      
                      0%
                      
                      
                      
                      0%Expected
      stock price volatility
                      
                      
                      75%
                      
                      
                      
                      50%Expected
      life of options
                      
                      5.75 years
                      
                      
                      10 years





The
Company recorded expense for options, warrants and common stock issued to
employees and independent service providers for the three months and six months
ended June 30, 2009 and 2008 as follows.  There was no impact from
SFAS 123R on net loss per share for the three or six months ended June 30, 2009
and 2008.





Three Months
                    ended
                    June 30, 2009
                  
                  
                  Three Months
                    ended
                    June 30, 2008
                  
                  
                  Six Months
                    ended
                    June 30, 2009
                  
                  
                  Six Months
                    ended
                    June 30, 2008Employee
      stock options
                  
                  $
                  38,981
                  
                  
                  $
                  55,532
                  
                  
                  $
                  91,060
                  
                  
                  $
                  98,217Consultants  –
      common stock warrants
                  
                  
                  1,023
                  
                  
                  
                  -
                  
                  
                  
                  (2,169
                  )
                  
                  
                  6,095Consultant
      – shares of common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,500Total
      expense
                  
                  $
                  40,004
                  
                  
                  $
                  55,532
                  
                  
                  $
                  88,891
                  
                  
                  $
                  116,812





A summary
of all stock option activity for the six months ended June 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
                      
                      
                      892,500
                      
                      
                      $
                      .18Options
      expired
                      
                      
                      (155,000
                      )
                      
                      $
                      .54Outstanding
      at June 30, 2009
                      
                      
                      5,589,000
                      
                      
                      $
                      .26
                      
                      6.6 years
                      
                      $
                      537,330Exercisable
      at June 30, 2009
                      
                      
                      4,442,667
                      
                      
                      $
                      .25
                      
                      5.9 years
                      
                      $
                      459,380




7




The
weighted average fair value of options granted during the six months ended June
30, 2009 was approximately $.12 ($.3 4 during
the six months ended June 30, 2008).  Options for 66,667 shares were
exercised during the six months ended June 30, 2008. No options were exercised
during the six months ended June 30, 2009.  The Company received
aggregate proceeds of $16,667 upon exercise of such options which had an
intrinsic value of $38,000.





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





Number of
                              Nonvested
                              Options
                            
                            
                            Weighted Average
                              Fair Value
                              at Grant DateNonvested
      outstanding at December 31, 2008
                            
                            
                            623,333
                            
                            
                            $
                            .33Options
      granted
                            
                            
                            892,500
                            
                            
                            $
                            .12Options
      vested
                            
                            
                            (274,500
                            )
                            
                            $
                            .20Options
      forfeited
                            
                            
                            (95,000
                            )
                            
                            $
                            .34Nonvested
      outstanding at June 30, 2009
                            
                            
                            1,146,333
                            
                            
                            $
                            .20




At June
30, 2009, there was approximately $154,500 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 six months ended June 30, 2009 was approximately $55,663.





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 six months ended
June 30, 2009 and 2008 as set forth below.





Three Months Ended June 30,
                              
                              
                              Six Months Ended June 30,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Weighted
      average number of shares outstanding
                              
                              
                              25,469,078
                              
                              
                              
                              24,482,371
                              
                              
                              
                              25,350,393
                              
                              
                              
                              24,128,522Common
      stock equivalents
                              
                              
                              18,736,294
                              
                              
                              
                              19,717,604
                              
                              
                              
                              18,514,815
                              
                              
                              
                              19,680,827





Options
to purchase 2,360,500 shares of common stock for the three and six months ended
June 30, 2009, (zero and 145,500 shares of common stock for the three and
six months ended June 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.





During
2007, the Company submitted information to the Department of Treasury (Treasury)
advocating that it had no legal obligation to act as the sponsor of the Plan to
ascertain whether the Treasury concurred or disagreed with this
position.  The Company subsequently provided responses to Treasury
inquiries related to this determination.  In February 2009, the
Company received a proposed draft of the revenue agent report from the Treasury
that indicated 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 draft response also states that additional penalties could
be imposed.  The Company and its outside legal counsel disagree with
significant aspects of both the factual findings and legal conclusions set forth
in the draft report and, in accordance with Treasury procedures, have responded
with a detailed analysis of its opposition to their findings.


8


If the
Treasury staff does not reconsider and conclude in the Company’s favor, the
Company expects that the Treasury will issue a formal revenue agent report
reiterating its preliminary position.  In this event, the Company will
commence and diligently pursue all appropriate steps to perfect its appeal
rights and attempt to prevail on the merits of its position, which will include
filing a protest, requesting an appeals conference, and, if needed, petitioning
the tax court and advocating its position in that forum.





If the
Company does not ultimately prevail, it may become obligated for additional
estimated excise taxes on accumulated unfunded Plan contributions for the Plan
years ended December 31, 2006 and 2007 of approximately $165,000 and $184,000,
respectively, which have not been accrued based upon the Company’s determination
that it has no legal obligation to act as the Plan sponsor and the Company’s
belief that the likelihood is not probable that it will be required to pay these
excise taxes.  Further, if the Company does not ultimately prevail, it
may be required to pay interest on these excise taxes and potentially incur
additional excise taxes up to 100% of each year’s required Plan
contributions.  The required Plan contributions were approximately $2
million at June 30, 2009.  No excise taxes for 2006 and 2007 or
related interest has been assessed and no portion of those amounts have been
accrued at December 31, 2008 and June 30, 2009.  The Company has
accrued amounts related to excise taxes on unfunded contributions for 2003, 2004
and 2005 of approximately $440,000 as of June 30, 2009 ($420,362 - December 31,
2008), which does not include any amounts as stated above.




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.  Plan termination is subject to
approval by the PBGC and requires providing additional documentation regarding
the Company’s status and the status of the Plan.  On July 13, 2009,
the Company provided information to the PBGC which Company management believes
satisfies the requirements of the PBGC.  As of August 12, 2009, the
PBGC has neither acted on the information that the Company provided nor
requested additional information.





At June
30, 2009, the Company had accrued liabilities of $3,860,881 ($3,622,122 –
December 31, 2008), which includes approximately $440,000 ($420,362 – December
31, 2008) recorded for excise taxes on unfunded contributions, related to the
Plan and accumulated other comprehensive loss of $3,217,259 ($3,217,259 –
December 31, 2008) which was recorded as a reduction of stockholders’
deficiency.  The market value of the Plan assets decreased from
$2,150,094 at December 31, 2008 to $1,990,714 at June 30, 2009.  The
decrease was comprised of investment returns of $57,121 offset by benefit
payments of $226,176 and net expense credits of $9,675.





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





Three Months
                      ended
                      June 30, 2009
                    
                    
                    Three Months
                      ended
                      June 30, 2008
                    
                    
                    Six Months
                      ended
                      June 30, 2009
                    
                    
                    Six Months
                      ended
                      June 30, 2008Interest
      cost
                    
                    $
                    71,996
                    
                    
                    $
                    74,248
                    
                    
                    $
                    143,993
                    
                    
                    $
                    134,336Expected
      return on plan assets
                    
                    
                    (42,115
                    )
                    
                    
                    (72,686
                    )
                    
                    
                    (84,231
                    )
                    
                    
                    (145,372
                    )Service
      cost
                    
                    
                    17,750
                    
                    
                    
                    16,250
                    
                    
                    
                    35,500
                    
                    
                    
                    32,500Actuarial
      loss
                    
                    
                    37,343
                    
                    
                    
                    27,455
                    
                    
                    
                    74,687
                    
                    
                    
                    54,910Net
      periodic pension cost
                    
                    $
                    84,974
                    
                    
                    $
                    45,267
                    
                    
                    $
                    169,949
                    
                    
                    $
                    76,374




Note
6.  Supplemental Cash Flow Information





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





Six Months Ended June 30,2009
                  
                  
                  2008Conversion
      of accrued interest payable under note payable into 500,000 and 850,000
      shares of common stock, respectively
                  
                  $
                  25,000
                  
                  
                  $
                  42,500


9


During
the six months ended June 30, 2008, warrants were exercised for 122,500 shares
of common stock on a cashless basis resulting in the Company’s net issuance of
68,696 shares of common stock.





Note
7.  Accounts Receivable Financing Line





During
the three months ended June 30, 2009, the Company increased its accounts
receivable financing line from $800,000 to $2 million including a sublimit for
one major client of $1.5 million.  The fee schedule was also
revised.  The fee for the first 30 days is 1% (previously 1.5%) and
additional fees are charged against the average daily balance of net outstanding
funds at the prime rate, which was 3.25% per annum as of June 30, 2009
(previously fees were charged at one half of one percent for each ten day period
or portion thereof).  At June 30, 2009, the Company could finance up
to another approximately $150,000 based on eligible accounts
receivable.





********





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, server
virtualization, cloud computing, wireless technology, human capital services,
enterprise architecture, and earned value management.  We focus on
aligning business processes with technology for delivery of solutions meeting
our clients’ exact needs and providing expert management services to the
lifecycle of technology-based projects.  We have a business
development office in the Washington, D.C. metropolitan area.





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





Results
of Operations





Comparison
of Three and Six Month Periods ended June 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 June 30, 2009 and 2008.





Three
      Months Ended June 30,2009
      vs. 2008As
      a % of
                                                
                                                
                                                
                                                
                                                
                                                As
      a % of
                                                
                                                
                                                Amount
      of
                                                
                                                
                                                %
      Increase2009
                                                
                                                
                                                Sales
                                                
                                                
                                                2008
                                                
                                                
                                                Sales
                                                
                                                
                                                Change
                                                
                                                
                                                (Decrease)Sales
                                                
                                                $
                                                2,908,099
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                $
                                                2,163,615
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                $
                                                744,484
                                                
                                                
                                                
                                                34.4
                                                %Cost
      of services
                                                
                                                
                                                2,285,969
                                                
                                                
                                                
                                                78.6
                                                
                                                
                                                
                                                1,652,404
                                                
                                                
                                                
                                                76.4
                                                
                                                
                                                
                                                633,565
                                                
                                                
                                                
                                                38.3Gross
      profit
                                                
                                                
                                                622,130
                                                
                                                
                                                
                                                21.4
                                                
                                                
                                                
                                                511,211
                                                
                                                
                                                
                                                23.6
                                                
                                                
                                                
                                                110,919
                                                
                                                
                                                
                                                21.7General
      and administrative
                                                
                                                
                                                315,417
                                                
                                                
                                                
                                                10.8
                                                
                                                
                                                
                                                261,270
                                                
                                                
                                                
                                                12.1
                                                
                                                
                                                
                                                54,147
                                                
                                                
                                                
                                                20.7Defined
      benefit pension plan
                                                
                                                
                                                131,877
                                                
                                                
                                                
                                                4.5
                                                
                                                
                                                
                                                50,031
                                                
                                                
                                                
                                                2.3
                                                
                                                
                                                
                                                81,846
                                                
                                                
                                                
                                                163.6Selling
                                                
                                                
                                                437,770
                                                
                                                
                                                
                                                15.1
                                                
                                                
                                                
                                                345,724
                                                
                                                
                                                
                                                16.0
                                                
                                                
                                                
                                                92,046
                                                
                                                
                                                
                                                26.6Total
      costs and expenses
                                                
                                                
                                                885,064
                                                
                                                
                                                
                                                30.4
                                                
                                                
                                                
                                                657,025
                                                
                                                
                                                
                                                30.4
                                                
                                                
                                                
                                                228,039
                                                
                                                
                                                
                                                34.7Operating
      loss
                                                
                                                
                                                (262,934
                                                )
                                                
                                                
                                                (9.0
                                                )
                                                
                                                
                                                (145,814
                                                )
                                                
                                                
                                                (6.7
                                                )
                                                
                                                
                                                (117,120
                                                )
                                                
                                                
                                                80.3Interest
      expense
                                                
                                                
                                                (77,895
                                                )
                                                
                                                
                                                (2.7
                                                )
                                                
                                                
                                                (76,942
                                                )
                                                
                                                
                                                (3.6
                                                )
                                                
                                                
                                                (953
                                                )
                                                
                                                
                                                1.2Net
      loss
                                                
                                                $
                                                (340,829
                                                )
                                                
                                                
                                                (11.7
                                                )%
                                                
                                                $
                                                (222,756
                                                )
                                                
                                                
                                                (10.3
                                                )%
                                                
                                                $
                                                (118,073
                                                )
                                                
                                                
                                                53.0
                                                %Net
      loss per share - basic and diluted
                                                
                                                $
                                                (.02
                                                )
                                                
                                                
                                                
                                                
                                                
                                                $
                                                (.01
                                                )
                                                
                                                
                                                
                                                
                                                
                                                $
                                                (.01
                                                )




10





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





Six
      Months Ended June 30,2009
      vs. 2008As
      a % of
                                                
                                                
                                                
                                                
                                                
                                                As
      a % of
                                                
                                                
                                                Amount
      of
                                                
                                                
                                                %
      Increase2009
                                                
                                                
                                                Sales
                                                
                                                
                                                2008
                                                
                                                
                                                Sales
                                                
                                                
                                                Change
                                                
                                                
                                                (Decrease)Sales
                                                
                                                $
                                                5,564,029
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                $
                                                4,630,425
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                $
                                                933,604
                                                
                                                
                                                
                                                20.2
                                                %Cost
      of services
                                                
                                                
                                                4,278,679
                                                
                                                
                                                
                                                76.9
                                                
                                                
                                                
                                                3,368,676
                                                
                                                
                                                
                                                72.8
                                                
                                                
                                                
                                                910,003
                                                
                                                
                                                
                                                27.0Gross
      profit
                                                
                                                
                                                1,285,350
                                                
                                                
                                                
                                                23.1
                                                
                                                
                                                
                                                1,261,749
                                                
                                                
                                                
                                                27.2
                                                
                                                
                                                
                                                23,601
                                                
                                                
                                                
                                                1.9General
      and administrative
                                                
                                                
                                                612,208
                                                
                                                
                                                
                                                11.0
                                                
                                                
                                                
                                                523,582
                                                
                                                
                                                
                                                11.3
                                                
                                                
                                                
                                                88,626
                                                
                                                
                                                
                                                16.9Defined
      benefit pension plan
                                                
                                                
                                                296,746
                                                
                                                
                                                
                                                5.3
                                                
                                                
                                                
                                                98,992
                                                
                                                
                                                
                                                2.1
                                                
                                                
                                                
                                                197,754
                                                
                                                
                                                
                                                199.8Selling
                                                
                                                
                                                893,139
                                                
                                                
                                                
                                                16.1
                                                
                                                
                                                
                                                758,044
                                                
                                                
                                                
                                                16.4
                                                
                                                
                                                
                                                135,095
                                                
                                                
                                                
                                                17.8Total
      costs and expenses
                                                
                                                
                                                1,802,093
                                                
                                                
                                                
                                                32.4
                                                
                                                
                                                
                                                1,380,618
                                                
                                                
                                                
                                                29.8
                                                
                                                
                                                
                                                421,475
                                                
                                                
                                                
                                                30.5Operating
      loss
                                                
                                                
                                                (516,743
                                                )
                                                
                                                
                                                (9.3
                                                )
                                                
                                                
                                                (118,869
                                                )
                                                
                                                
                                                (2.6
                                                )
                                                
                                                
                                                (397,874
                                                )
                                                
                                                
                                                334.7Interest
      expense
                                                
                                                
                                                (146,765
                                                )
                                                
                                                
                                                (2.6
                                                )
                                                
                                                
                                                (155,329
                                                )
                                                
                                                
                                                (3.3
                                                )
                                                
                                                
                                                8,564
                                                
                                                
                                                
                                                (5.5
                                                )Income
      tax expense
                                                
                                                
                                                (4,000
                                                )
                                                
                                                
                                                (.1
                                                )
                                                
                                                
                                                (615
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                (3,385
                                                )
                                                
                                                
                                                550.4Net
      loss
                                                
                                                $
                                                (667,508
                                                )
                                                
                                                
                                                (12.0
                                                )%
                                                
                                                $
                                                (274,813
                                                )
                                                
                                                
                                                (5.9
                                                )
      %
                                                
                                                $
                                                (392,695
                                                )
                                                
                                                
                                                142.9
                                                %Net
      loss per share - basic and diluted
                                                
                                                $
                                                (.03
                                                )
                                                
                                                
                                                
                                                
                                                
                                                $
                                                (.01
                                                )
                                                
                                                
                                                
                                                
                                                
                                                $
                                                (.02
                                                )





Sales





Sales for
the three months ended June 30, 2009 were $2,908,099, an increase of $744,484 or
34.4% as compared to sales for the three months ended June 30, 2008 of
$2,163,615.  Sales for the six months ended June 30, 2009 were
$5,564,029, an increase of $933,604 or 20.2% as compared to sales for the six
months ended June 30, 2008 of $4,630,425.  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 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.  We are also channeling energies towards forming alliances
with large systems integrators, who are mandated by federal policy to direct
defined percentages of their work to small business
subcontractors.  In addition, we are currently working on proposals
for contract awards that we believe will enhance our position as a government
contractor.





Cost
of Services and Gross Profit





Cost of
services represents the cost of employee services related to our
sales.  Cost of services for the three months ended June 30, 2009 was
$2,285,969 or 78.6% of sales as compared to $1,652,404 or 76.4% of sales for the
three months ended June 30, 2008.  Gross profit was $622,130 or 21.4%
of sales for the three months ended June 30, 2009 compared to $511,211 or 23.6%
of sales for the three months ended June 30, 2008.  Cost of services
for the six months ended June 30, 2009 was $4,278,679 or 76.9% of sales as
compared to $3,368,676 or 72.8% of sales for the six months ended June 30,
2008.  Gross profit was $1,285,350 or 23.1% of sales for the six
months ended June 30, 2009 compared to $1,261,749 or 27.2% of sales for the six
months ended June 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.





Although
our objective is to maintain an overall gross margin of approximately 30%, we
have experienced lower margins on certain new projects.  One of our
business objectives is to generate new opportunities for long-term, larger
volume contracts and more stable sales.





General
and Administrative Expenses





General
and administrative expenses include corporate overhead such as compensation and
benefits for administrative and finance personnel, rent, insurance, professional
fees, travel, and office expenses.  General and administrative
expenses for the three months ended June 30, 2009 were $315,417 which was an
increase of $54,147 or 20.7% as compared to $261,270 for the three months ended
June 30, 2008.   As a percentage of sales, general and
administrative expense was 10.8% for the three months ended June 30, 2009 and
12.1% for the three months ended June 30, 2008.


11


General
and administrative expenses for the six months ended June 30, 2009 increased by
$88,626 or 16.9% from $523,582 for the six months ended June 30, 2008 to
$612,208 for the six months ended June 30, 2009.  As a percentage of
sales, general and administrative expenses were 11.0% for the six months ended
June 30, 2009 and 11.3% for the six months ended June 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 $131,877 for the three months ended June 30, 2009 and
$50,031 for the three months ended June 30, 2008, an increase of
$81,846.  We incurred expenses of $296,746 and $98,992 for the six
months ended June 30, 2009 and 2008, an increase of $197,754.





During
the six months ended June 30, 2009 and 2008, we incurred legal and professional
fees of approximately $58,000 and $5,800, 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 $108,300 to $170,000 for the
six months ended June 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,
which amounts increased by approximately $37,300 for the six months ended June
30, 2009 from 2008.





Selling Expenses





For the
three months ended June 30, 2009, we incurred selling expenses of $437,770
associated with growing our sales as compared to $345,724 for the three months
ended June 30, 2008, an increase of $92,046 or 26.6%.  For the six
months ended June 30, 2009 we incurred selling expenses of $893,139 associated
with growing our sales compared to $758,044 for the six months ended June 30,
2008, an increase of $135,095 or 17.8%.





The
increase for the six months ended June 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.





Operating
Loss





For the
three months ended June 30, 2009 our operating loss was $(262,934) compared to
an operating loss of $(145,814) for the three months ended June 30, 2008, an
increase of $117,120.  This is attributable to an increase in
operating expenses of $228,039 offset by an increase in sales of $744,484 which
contributed an additional $110,919 of gross profit.





For the
six months ended June 30, 2009 our operating loss was $(516,743) compared to an
operating loss of $(118,869) for the six months ended June 30, 2008, an increase
of $397,874.  This is attributable to an increase in operating
expenses of $421,475 offset by an increase in sales of $933,604 which
contributed an additional $23,601 of gross profit.





Interest
Expense





Interest
expense includes interest on indebtedness and fees for financing accounts
receivable invoices.  Interest expense was $77,895 for the three
months ended June 30, 2009 compared to interest expense of $76,942 for the three
months ended June 30, 2008.  Interest expense was $146,765 for the six
months ended June 30, 2009 compared to interest expense of $155,329 for the six
months ended June 30, 2008.





Related
party interest expense decreased by $11,325 and $23,014 for the three and six
month periods ended June 30, 2009 as compared to the three and six month periods
ended June 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.


12


Other
interest expense increased by $12,278 and $14,450 for the three and six month
periods ended June 30, 2009 as compared to the three and six month periods ended
June 30, 2008 in part due to changes in the length of term and volume of
accounts receivable invoices that were financed during the respective
periods.  Our fees for financing accounts receivable were reduced
beginning in June 2009, thus reducing our interest expense.  We
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 June 30, 2009 and 2008,
respectively.  Income tax expense was $4,000 and $615 for the six
months ended June 30, 2009 and 2008, respectively, consisting of state
taxes.





Net
Loss




For the
three months ended June 30, 2009,we recorded a net loss
in the amount of $(340,829) or $(.02) per share compared to a net loss of
$(222,756) or $(.01) per share for the three months ended June 30, 2008.  For the six
months ended June 30, 2009,we recorded a net loss
in the amount of $(667,508) or $(.03) per share compared to a net loss of
$(274,813) or $(.01) per share for the six months ended June 30, 2008.





Stock-Based
Compensation





For the
six months ended June 30, 2009 and 2008, we recorded expense of $88,891 and
$116,812, respectively, for stock options expense issued to employees and board
members and equity instruments issued to consultants.




Cash Flows




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




Six Months Ended June 30,2009
                                  
                                  
                                  2008Net
      cash used by operating activities
                                  
                                  $
                                  (31,009
                                  )
                                  
                                  $
                                  (43,503
                                  )Net
      cash used by investing activities
                                  
                                  
                                  (3,410
                                  )
                                  
                                  
                                  (16,205
                                  )Net
      cash provided (used) by financing activities
                                  
                                  
                                  (78,600
                                  )
                                  
                                  
                                  162,587Net
      increase (decrease) in cash
                                  
                                  $
                                  (113,019
                                  )
                                  
                                  $
                                  102,879




Cash
Flows from Operating Activities




During
the six months ended June 30, 2009, cash used in operations was $31,009 compared
with cash used in operations of $43,503 for the six months ended June 30,
2008.  Our operating cash flow is primarily affected by the overall
profitability of our contracts, our ability to invoice and collect from our
clients in a timely manner, and our ability to manage our vendor
payments.  We bill our clients weekly or monthly after services are
performed, depending on the contract terms.  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.




Cash
Flows from Investing Activities





Cash used
by investing activities for the six months ended June 30, 2009 was $3,410
compared with $16,205 for the six months ended June 30, 2008.  Cash
used in investing activities was primarily for capital expenditures for computer
hardware and software.


We do not
have any plans for significant capital expenditures in the near
future.





Cash
Flows from Financing Activities





During
the six months ended June 30, 2009, cash used by financing activities was
$78,600 for principal payments on notes payable.  In comparison, for
the six months ended June 30, 2008, cash provided by financing activities was
$162,587 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 $54,080
on notes payable.


13


Osley & Whitney, Inc. Retirement
Plan





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





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





During
2007, we submitted information to the 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 February 2009, we received a
proposed draft of the revenue agent report from the Treasury that indicated 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 contributing $1,836,359 to the O&W Plan.  The draft response
also states that additional penalties could be imposed.  We and our
outside legal counsel disagree with significant aspects of both the factual
findings and legal conclusions set forth in the draft report and, in accordance
with Treasury procedures, have responded with a detailed analysis of our
opposition to their findings.





If the
Treasury staff does not reconsider and conclude in our favor, we expect that the
Treasury will issue a formal revenue agent report reiterating its preliminary
position.  In this event, we will commence and diligently pursue all
appropriate steps to perfect our appeal rights and attempt to prevail on the
merits of our position, which will include filing a protest, requesting an
appeals conference, and, if needed, petitioning the tax court and advocating our
position in that forum.





If we do
not ultimately prevail, we may become obligated for additional estimated excise
taxes on accumulated unfunded O&W Plan contributions for the O&W Plan
years ended December 31, 2006 and 2007 of approximately $165,000 and $184,000,
respectively, which have not been accrued based upon our determination that we
have no legal obligation to act as the O&W Plan sponsor and our belief that
the likelihood is not probable that we will be required to pay these excise
taxes.  Further, if we do not ultimately prevail, we may be required
to pay interest on these excise taxes and potentially incur additional excise
taxes up to 100% of each year’s required O&W Plan
contributions.  Required Plan contributions were $2 million at June
30, 2009.  No excise taxes for 2006 and 2007 or related interest have
been assessed and no portion of this amount has been accrued at December 31,
2008 and June 30, 2009.  We have accrued amounts related to excise
taxes on unfunded contributions for 2003, 2004 and 2005 of approximately
$440,000 as of June 30, 2009 ($420,362 - December 31, 2008) which does not
include any amounts as stated above.





On April
29, 2009, acting for the O&W Plan, we sent the O&W Plan participants a
notice of intent to terminate the O&W Plan in a distress termination with a
proposed termination date of June 30, 2009.  O&W Plan termination
is subject to approval by the Pension Benefit Guaranty Corporation (PBGC) and
requires providing additional documentation regarding our status and the status
of the O&W Plan.  On July 13, 2009, we provided information to the
PBGC which we believe satisfies the requirements of the PBGC.  As of
August 12, 2009, the PBGC has neither acted on the information that we provided
nor requested additional information.





At June
30, 2009, we had accrued liabilities of $3,860,881 ($3,622,122 – December 31,
2008), which includes approximately $440,000 ($420,362 – December 31, 2008)
recorded for excise taxes on unfunded contributions, related to the O&W Plan
and accumulated other comprehensive loss of $3,217,259 ($3,217,259 – December
31, 2008) which was recorded as a reduction of stockholders’
deficiency.  The market value of the O&W Plan assets decreased
from $2,150,094 at December 31, 2008 to $1,990,714 at June 30,
2009.  The decrease was comprised of investment returns of $57,121
offset by benefit payments of $226,176 and net expense credits of
$9,675.





Liquidity
and Capital Resources





At June
30, 2009, we had cash of $40,317 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 June 30, 2009, we could finance up to another
approximately $150,000 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.


14




At June
30, 2009, we had a working capital deficit of approximately $3.47 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 $2.7 million,
working capital would have been a deficit of approximately
$750,000.   Included in current liabilities are notes payable to
related parties of $305,000 and notes payable to third parties of $205,000,
which increases the working capital deficit.  Management intends 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 June 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.





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 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.





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 issued 25,000 restricted shares of our common stock upon the exercise
of outstanding common stock options by a former employee at an exercise price of
$.07 per share.


15





In April
and May 2009, we granted options to purchase 10,000 shares of our common stock
at exercise prices of $.20 and $.27 per share.





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





Item 6.  Exhibits.





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




SIGNATURES




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


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


16