UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-QSB

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

                         Commission File Number 0-21816

                               INFINITE GROUP INC.
        (Exact name of small business issuer as specified in its charter)

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

                            595 Blossom Rd. Suite 309
                            -------------------------
                            Rochester, New York 14610
                            -------------------------
                     (Address of principal executive office)

                                 (585) 654-5525
                (Issuer's telephone number, including area code)

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

                                               Yes |X| No | |

Number of shares  outstanding of each of the issuer's  classes of common equity,
as of the latest  practicable  date: As of July 31, 2005,  there were 19,206,965
shares of common stock outstanding.

Transitional Small Business Disclosure Format. Yes |_| No |X|


                                       1
<PAGE>

                               INFINITE GROUP INC.
                               FORM 10-QSB REPORT

                               Infinite Group Inc.

                                TABLE OF CONTENTS
                                                                            PAGE
PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

        Balance Sheet - June 30, 2005 (unaudited)
        and December 31, 2004 (audited)                                        3

        Statements of Operations-(unaudited) for
        the three and six month periods ended June
        30, 2005 and 2004                                                      4

        Statements of Cash Flows-(unaudited) for
        the six month periods ended June 30, 2005
        and 2004                                                               5

        Notes to Consolidated Financial Statements                             6

Item 2. Management's Discussion and Analysis of
        Financial Conditions and Results of Operations                        13

Item 3. Controls and Procedures                                               20


PART II - OTHER INFORMATION

Item 1. Legal Proceedings                                                     21

Item 2. Unregistered Sales of Equity Securities
        and Use of Proceeds                                                   22

Item 3. Defaults Upon Senior Securities                                       22

Item 4. Submission of Matters to a Vote of                                    22
        Security Holders

Item 5. Other Information                                                     22

Item 6. Exhibits                                                              22

SIGNATURES                                                                    23

                           FORWARD-LOOKING STATEMENTS

      Certain  statements  made in this  Quarterly  Report  on Form  10-QSB  are
"forward-looking statements" within the meaning of Section 21E of the Securities
and Exchange Act of 1934  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.  The terms
"we", "our", "us", or any derivative  thereof,  as used herein refer to Infinite
Group Inc., a Delaware corporation.



                                       2
<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

Item 1.  Financial Statements

INFINITE GROUP, INC.

Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                              June 30,        December 31,
                                                                               2005             2004
                                                                            (unaudited)       (audited)
----------------------------------------------------------------------------------------------------------
ASSETS
<S>                                                                       <C>               <C>
Current assets:
   Cash                                                                   $      338,205    $       97,297
   Restricted cash                                                                    --            30,327
   Accounts receivable, net of allowance of $56,202 ($25,000 - 2004)           1,285,175         1,054,623
   Current portion of notes receivable                                                --           270,347
   Inventories                                                                    23,239                --
   Other current assets                                                           53,207            41,207
   Assets of discontinued operations                                                  --           205,921
                                                                          --------------    --------------
       Total current assets                                                    1,699,826         1,699,722

Property and equipment, net                                                      275,442           239,907

Other assets:
  Note receivable                                                                 73,897         1,940,857
  Intangible assets, net
                                                                                      --            50,526
                                                                          --------------    --------------
         Total other assets                                                       73,897         1,991,383
                                                                          --------------    --------------
Total assets                                                              $    2,049,165    $    3,931,012
                                                                          ==============    ==============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
   Notes payable:
     Bank                                                                             --            50,207
     Other                                                                       175,427           176,184
     Related parties                                                               9,906             9,906
   Accounts payable                                                              537,272           504,327
   Accrued expenses                                                              823,653           542,066
   Current maturities of long-term obligations                                    11,725         2,128,572
   Current maturities of long-term obligations-related party                      44,000            44,000
   Liabilities of discontinued operations                                             --           217,300
                                                                          --------------    --------------
       Total current liabilities                                               1,601,983         3,672,562

Long-term obligations
   Bank notes payable                                                             57,425            64,133
   Notes payable-related parties                                               1,100,124         1,100,124
   Accrued pension expense                                                     2,236,687         2,177,287
                                                                          --------------    --------------
Total liabilities                                                              4,996,219         7,014,106
                                                                          --------------    --------------

Commitments and contingencies

Stockholders' deficiency:
   Common stock, $.001 par value, 20,000,000 shares authorized;
      19,206,965 (17,561,965 in 2004) shares issued and outstanding               19,207            17,562
   Additional paid-in capital                                                 28,455,803        28,375,198
   Accumulated deficit                                                       (28,666,173)      (28,719,963)
   Accumulated other comprehensive loss                                       (2,755,891)       (2,755,891)
                                                                          --------------    --------------
 Total stockholders' deficiency                                               (2,947,054)       (3,083,094)
                                                                          --------------    --------------
Total liabilities and stockholders' deficiency                            $    2,049,165    $    3,931,012
                                                                          ==============    ==============
</TABLE>

See notes to consolidated financial statements.

                                       3
<PAGE>

INFINITE GROUP, INC.

Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
                                                            Six Months Ended                  Three Months Ended
                                                               June 30,                          June 30,
                                                     ---------------------------------------------------------------
                                                         2005             2004             2005            2004
--------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>              <C>              <C>
Sales                                                $  4,134,550     $  1,829,823     $  2,009,823     $  1,269,388
Cost of goods and services                              2,886,028        1,193,950        1,371,147          833,965
                                                     ------------     ------------     ------------     ------------
Gross profit                                            1,248,522          635,873          638,676          435,423
Costs and expenses:
   General and administrative                             787,554          574,954          399,711          310,775
   Depreciation and amortization                           23,749           12,517           12,568            5,911
   Write-off of capitalized financing  costs               44,857               --           44,857               --
   Selling                                                140,072            4,364          139,178            4,195
   Research and development                               161,924          142,955           90,243           74,309
                                                     ------------     ------------     ------------     ------------
        Total costs and expenses                        1,158,156          734,790          686,557          395,190
                                                     ------------     ------------     ------------     ------------

Operating income (loss)                                    90,366          (98,917)         (47,881)          40,233

Other income (expense):
   Interest income                                         66,255               --           32,193               --
   Interest expense:
      Related parties                                     (44,333)         (36,653)         (22,476)         (19,565)
      Other                                               (69,431)              --          (33,889)
                                                     ------------     ------------     ------------     ------------
                                                         (113,764)         (36,653)         (56,365)         (19,565)
                                                     ------------     ------------     ------------     ------------
       Total other expense                                (47,509)         (36,653)         (24,172)         (19,565)
                                                     ------------     ------------     ------------     ------------
 Income (loss)  from continuing operations before
         income tax expense                                42,857         (135,570)         (72,053)          20,668
Income tax expense
                                                           (1,300)            (350)              --               --
                                                     ------------     ------------     ------------     ------------
Income (loss) from continuing operations                   41,557         (135,920)         (72,053)          20,668
Discontinued operations:
    Income (loss) from discontinued operations             12,233          (74,731)           4,979           13,938
                                                     ------------     ------------     ------------     ------------

Net income (loss)                                    $     53,790     $   (210,651)    $    (67,074)    $     34,606
                                                     ============     ============     ============     ============

Net income (loss) per share-basic:
    Income (loss) from continuing operations         $        .00     $       (.01)    $       (.00)    $        .00
    Income (loss) from discontinued operations                .00             (.01)             .00              .00
                                                     ------------     ------------     ------------     ------------
    Net income (loss)                                $        .00     $       (.02)    $       (.00)    $        .00
                                                     ============     ============     ============     ============


Net income (loss) per share-diluted:
    Income (loss) from  continuing operations        $        .00     $       (.01)    $       (.00)    $        .00
    Income (loss) from discontinued operations
                                                              .00             (.01)             .00              .00
                                                     ------------     ------------     ------------     ------------
    Net income (loss)                                $        .00     $       (.02)    $       (.00)    $        .00
                                                     ============     ============     ============     ============

 Weighted average number of shares outstanding:
     Basic                                             18,910,805       13,692,968       19,206,965       13,769,822
                                                     ============     ============     ============     ============
     Diluted                                           20,181,583       13,692,968       19,206,965       14,807,219
                                                     ============     ============     ============     ============
</TABLE>

See notes to consolidated financial statements.


                                       4
<PAGE>


INFINITE GROUP, INC.

Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
                                                                                For the Six Months Ended
                                                                                        June 30,
                                                                                  2005             2004
----------------------------------------------------------------------------------------------------------
<S>                                                                         <C>              <C>
Operating activities:
  Net income (loss)                                                         $     53,790     $   (210,651)
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
      (Income) loss from discontinued operations                                 (12,233)          74,731
      Depreciation and amortization                                               24,019           12,517
      Write-off of capitalized financing costs                                    44,587               --

  Increase in:
      Accounts receivable                                                       (230,552)        (481,156)
      Inventories                                                                (23,239)              --
      Other current assets                                                       (12,000)         (16,097)
  Increase (decrease) in:
      Accounts payable                                                            35,195          (59,974)
      Accrued expenses                                                           281,587          316,747
      Accrued pension obligations                                                 59,400           80,773
                                                                            ------------     ------------

Net cash provided by (used in) operating activities
    of continuing operations                                                     220,554         (283,110)
Net cash provided by (used in) operating activities
    of discontinued operations                                                       854          161,952
                                                                            ------------     ------------
Net cash provided by (used in)  operating activities                             221,408         (121,158)
                                                                            ------------     ------------

Investing activities:
    Decrease in restricted funds                                                  30,327           12,179
    Purchase of property and equipment                                           (53,615)          (3,768)
    Proceeds from notes receivable                                             2,137,307               --
                                                                            ------------     ------------
Net cash provided by (used in) investing activities                            2,114,019            8,411
                                                                            ------------     ------------

Financing activities:
   Net repayments of bank notes payable                                          (50,207)         (53,930)
   Net repayments of notes payable-other                                            (757)              --
   Proceeds from issuance of long-term obligations-related parties                    --          463,000
   Repayment of notes payable-related parties                                         --         (188,000)
   Repayments of long-term obligations                                        (2,123,555)        (158,585)
   Proceeds from issuance of common stock, net of costs                           80,000          163,126
                                                                            ------------     ------------
Net cash provided by (used in) financing activities                           (2,094,519)         225,611
                                                                            ------------     ------------
Net increase in cash                                                             240,908          112,864
Cash - beginning of period                                                        97,297           16,515
                                                                            ------------     ------------
Cash  - end of period                                                       $    338,205     $    129,379
                                                                            ============     ============

Supplemental disclosure:
   Cash paid for:
      Interest                                                              $    103,196     $      7,057
                                                                            ============     ============
      Income taxes                                                          $      1,300     $        350
                                                                            ============     ============
</TABLE>

See notes to consolidated financial statements.


                                       5
<PAGE>

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 for interim  financial  information and
with  instructions to Form 10-QSB.  Accordingly,  they do not include all of the
information and footnotes required by accounting  principles  generally accepted
in the United  States of  America  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  footnotes  for the year  ended  December  31,  2004 and the  notes  thereto
included in the  Company's  Annual  report on Form 10-KSB  filed with the United
States Securities and Exchange  Commission.  Results of consolidated  operations
for the six month period ended June 30, 2005 are not  necessarily  indicative of
the operating  results to be attained in the year ending  December 31, 2005. The
consolidated financial statements herein include the accounts of the Company and
its  wholly  owned  subsidiaries.   All  material   inter-company  accounts  and
transactions have been eliminated.

Note 2. Summary of Significant Accounting Policies

Critical Accounting Policies and Estimates

There are several  accounting  policies that we believe are  significant  to the
presentation of our consolidated  financial  statements.  These policies require
management  to make  complex or  subjective  judgments  about  matters  that are
inherently  uncertain.  Note 3 to our audited consolidated  financial statements
presents  a  summary  of  significant  accounting  policies.  The most  critical
accounting policies follow.

Inventories

Inventories are stated at the lower of cost (first-in,  first-out) or market and
consist of component parts for the TouchThru(TM) biometric product.

Revenue Recognition

Beginning in the second quarter of 2003, we commenced  providing services in the
field of information technology (IT) consulting services through our IT Services
Group.  Consulting  revenues  are  recognized  as the  consulting  services  are
provided.  Customer  deposits  received in advance are  recorded as  liabilities
until associated services are completed.

Stock-Based Compensation

We disclose the pro forma  compensation  cost relating to stock options  granted
under employee  stock option plans,  based on the fair value of those options at
the date of grant.  This  valuation is determined  utilizing  the  Black-Scholes
option-pricing  model, which takes into account certain  assumptions,  including
the expected life of the option and the expected  stock  volatility and dividend
yield over this life.  These  assumptions  are made based on past experience and
expected future  results.  In the event the actual  performance  varies from the
estimated amounts, the value of these options may be misstated.

                                       6
<PAGE>

Effect of New Accounting Pronouncements

In February  2003,  the FASB issued  SFAS No. 148,  "Accounting  for Stock Based
Compensation: A Comparison of FASB Statement No. 123, Accounting for Stock-Based
Compensation,   and  Its  Related  Interpretations,   and  IASB  Proposed  IFRS,
Share-based  Payments." SFAS 148 amends SFAS 123 to provide  alternative methods
of  transition  for an entity that  voluntarily  changes to the fair value based
method of accounting for stock-based employee  compensation.  It also amends the
disclosure  provisions of that Statement to require  prominent  disclosure about
the effects on reported net income of an entity's  accounting  policy  decisions
with respect to stock-based compensation.  The statement also amends APB Opinion
No. 28, "Interim Financial Reporting", to require disclosure about those effects
in interim financial  information.  We have chosen not to voluntarily  change to
the fair value based method of accounting for stock-based employee  compensation
but have adopted the disclosure rules under SFAS 148.

In December  2004,  the FASB issued SFAS No. 123R (revised  2004),  "Share-Based
Payment".  For public  companies,  the cost of  employee  services  received  in
exchange for equity  instruments  generally  should be measured at fair value at
the grant date. The cost of employee  services received in exchange for an award
of  liability  instruments  should  be  measured  initially  at fair  value  and
re-measured  subsequently  at each reporting  date through the settlement  date.
Publicly traded companies,  other than small business  issuers,  must apply this
Standard as of the  beginning of the first  interim or annual period that begins
after June 15, 2005.  Public  entities that file as small business  issuers must
comply as of the beginning of the first interim or annual  reporting period that
begins after December 15, 2005.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an  amendment  of APB  Opinion  No.  29".  This  amendment  to Opinion  No. 29
eliminates  the fair  value  exception  for  nonmonetary  exchanges  of  similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary  assets that do not have  commercial  substance.  The  Statement  is
effective for nonmonetary  asset exchanges  occurring in periods beginning after
June 15, 2005.

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections  - A  Replacement  of APB Opinion No. 20 and FASB  Statement No. 3".
This  Statement  replaces  APB Opinion No. 20,  "Accounting  Changes",  and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements",
and changes the requirements for the accounting for and reporting of a change in
accounting  principle.  This  Statement  applies  to all  voluntary  changes  in
accounting  principle.  It also  applies to changes  required  by an  accounting
pronouncement  in the unusual instance that the  pronouncement  does not include
specific  transition   provisions.   When  a  pronouncement   includes  specific
transition  provisions,  those provisions should be followed.  This statement is
effective for accounting  changes and corrections of errors made in fiscal years
beginning after December 15, 2005.

Note 3. Discontinued Operations and Reclassifications

The  statements of operations  and cash flows for the three and six months ended
June 30, 2005 and 2004 account for the discontinued  operations of the Photonics
Group, consisting of Infinite Photonics, Inc. (IP), which business was suspended
in 2002 as a result of the loss of the DARPA  contract,  and Laser  Group  (LF),
which was sold as discussed below.


                                       7
<PAGE>

On October 30, 2002, IP received a Notice of  Termination  of its DARPA contract
for  the  government's   convenience  under  the  contract  provisions  entitled
Termination,  Federal Acquisition  Regulation (FAR) 52.249.6. The DARPA contract
had provided  substantially  all of the revenue of the  Photonics  Group.  As of
December 31, 2004, the contract termination process was substantially  complete.
We have  been  reimbursed  for  substantially  all  costs  associated  with  the
termination.  The  termination  of the contract had a detrimental  effect on the
development of our technology. During 2002, all of our Photonics Group employees
were  released  and  the  operations  of the  Photonics  Group  ceased.  We also
determined  that our  Photonics  Group  intellectual  property  and property and
equipment were impaired,  and  consequently  recorded  impairment  losses in the
fourth  quarter of 2002 of  approximately  $468,000 and  $148,000  respectively,
which were  included  in loss on  disposal  of  discontinued  operations  in the
consolidated statement of operations for the year ended December 31, 2002.

On  December  31,  2003,  the  Company  and LF  entered  into an asset  purchase
agreement  with LFI,  Inc.  ("LFI")  relating to the  purchase by LFI of certain
assets and the  assumption  of certain  liabilities  of LF relating to the laser
engraving and medical products  manufacturing and assembly businesses of LF (the
"Purchase  Agreement").  The  principals  of LFI  are  former  employees  of LF,
including the former  chairman and chief executive  officer of the Company.  The
purchase price for the assets was assumed  liabilities of LF and the Company. On
December 31,  2004,  the Company  completed  the sale of the  remaining  assets,
including  the  assumption  of  certain  liabilities,  to an  affiliate  of LFI,
relating to all the remaining laser businesses of LF. The purchase price was the
assumed liabilities of LF plus the issuance of several notes by the buyer to LF.
LF recorded a loss on sale of approximately  $99,000 for the year ended December
31, 2003. LF  reclassified  the operating  assets and  liabilities to assets and
liabilities held for sale at December 31, 2003.

In accordance  with FASB 144, the disposal of the  Photonics and Laser  segments
have been accounted for as a disposal of business segments and accordingly,  the
assets  and  liabilities  for IP and LF have  been  segregated  from  continuing
operations in the  accompanying  consolidated  balance  sheets and classified as
assets and liabilities of  discontinued  operations.  The operating  results for
both  segments are  segregated  and reported as  discontinued  operations in the
accompanying consolidated statements of operations and cash flows.

The  following is a summary of financial  position at June 30, 2005 and December
31, 2004 and results of  operations  for the three and six months ended June 30,
2005 and 2004 for the disposed Photonics (IP) and Laser (LF) segments:

<TABLE>
<CAPTION>
                                                     June 30,          December 31,
Financial Position                                    2005                 2004
                                                 ----------------    ----------------
<S>                                              <C>                 <C>
Current assets and total assets of
 discontinued operations                         $             --    $        205,921
                                                 ================    ================
Liabilities of discontinued operations:
     Accounts payable and accrued
      expenses                                   $             --    $        212,300
     Unsecured note payable                                    --               5,000
                                                 ----------------    ----------------
     Total liabilities of discontinued
      operations                                 $             --    $        217,300
                                                 ================    ================

                                                         Three Months Ended
                                                             June 30,
                                                             --------
Results of Operations                                 2005                 2004
                                                 ----------------    ----------------
Revenue from discontinued operations             $             --    $        821,648
                                                 ================    ================
Income (loss) from discontinued operations       $          4,979    $         13,938
                                                 ================    ================

                                                           Six Months Ended
                                                             June 30,
                                                             --------

Results of Operations                                 2005          2004
                                                 ----------------    ----------------
Revenue from discontinued operations             $             --    $      1,492,158
                                                 ================    ================
Income (loss) from discontinued operations       $         12,233    $        (74,731)
                                                 ================    ================
</TABLE>

                                       8
<PAGE>


Certain other amounts in the 2004 financial statements have been reclassified to
conform with the 2005 financial statements.


Note 4. Stock Option Plan and Stock Warrants

As of June 30, 2005 the Company's  Stock Option Plans (the "Plan"),  as approved
by  shareholders,  provided for the grant of incentive  or  non-qualified  stock
options  for the  purchase  of common  stock for up to  approximately  1,840,000
shares to employees, directors and consultants. The Company's board of directors
has  approved the grant of  incentive  stock  options for the purchase of common
stock for up to 4,000,000 shares to employees,  directors and consultants, which
is  subject  to  approval  by  shareholders.  The  Plan is  administered  by the
compensation  committee  established by the Company's board of directors,  which
determines the terms of options  including the exercise price,  expiration date,
number of shares, and vesting provisions.

A summary of all stock option activity for the six months ended June 30, 2005 is
as follows:

<TABLE>
<CAPTION>
                                                                                  Weighted
                                               Number          Exercise           Average
                                             Of Options         Price         Exercise Price
                                             ---------      -------------     --------------

<S>                                          <C>            <C>                    <C>
Outstanding at December 31, 2004             1,895,482      $ .01 - $2.50          $ .13
                                                            =============          =====

Options issued                               2,428,000      $ .09 - $.25           $ .18
                                                            =============          =====

Options expired                              (676,982)      $ .09 - $2.50          $ .42
                                             ---------      =============          =====

Outstanding at June 30, 2005                 3,646,500      $ .01 -  $.25          $ .11
                                             =========      =============          =====

Exercisable at June 30, 2005                 3,646,500      $ .01 - $ .25          $ .11
                                             =========      =============          =====
</TABLE>


At December 31, 2004, the Company had 425,000 warrants outstanding at an average
exercise  price of $2.50 per share.  During the six months  ended June 30, 2005,
350,000  warrants  expired.  At June 30, 2005,  the Company had 75,000  warrants
outstanding at an average exercise price of $2.40.

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 -"Accounting for Stock-Based Compensation, "
and, accordingly,  does not recognize  compensation cost for stock option grants
under fixed awards. If the Company had elected to recognize  compensation  costs
based on the fair value of the options  granted at grant date as  prescribed  by
SFAS  No.123,  net income  (loss) and  income  (loss) per share from  continuing
operations would have changed as follows:


                                       9
<PAGE>


<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                              June 30,
                                                                              --------
Results of Operations                                                   2005           2004
                                                                     ----------     ----------
<S>                           <C>                                    <C>            <C>
Net income (loss)-as reported (000's)                                $      (67)    $       35
Total stock based employee compensation
      expense determined under the fair value
      method for all awards (000's)                                  $     (119)    $       (8)
                                                                     ----------     ----------


Net income (loss) - pro forma (000's)                                $     (186)    $       27
                                                                     ==========     ==========



Income (loss) per share as reported-basic and diluted                $     (.00)    $      .00
                                                                     ==========     ==========
Income (loss) per share pro forma-basic and diluted                  $     (.01)    $      .00
                                                                     ==========     ==========



                                                                          Six Months Ended
                                                                              June 30,
                                                                              --------
Results of Operations                                                      2005           2004
                                                                     ----------     ----------

Net income (loss)-as reported (000's)                                $       54     $     (211)

Total stock based employee compensation
      expense determined under the fair value
      method for all awards (000's)                                  $     (251)    $      (15)
                                                                     ----------     ----------

Net loss- pro forma (000's)                                          $     (197)    $     (226)
                                                                     ==========     ==========


Income (loss) per share as reported-basic and diluted                $      .00     $     (.02)
                                                                     ==========     ==========
Loss per share pro forma-basic and diluted                           $     (.01)    $     (.02)
                                                                     ==========     ==========
</TABLE>

Note 5. Business Segments

Prior to 2002,  our business was organized,  managed and internally  reported as
three segments.  The segments were determined  based on differences in products,
production processes and internal reporting.  During the fourth quarter of 2002,
our  contract  with  DARPA was  terminated  and as a result of the  termination,
management  decided to suspend the activities of the Photonics Group in 2002 and
liquidate  the  remaining  assets.  During the fourth  quarter of the year ended
December 31, 2003, we approved the sale of the assets and certain liabilities of
our Laser Fare, Inc. subsidiary, referred to as the Laser Group. As a result, in
accordance  with FASB 144, the disposal of the  Plastics,  Photonics,  and Laser
segments  have  been  accounted  for  as  disposals  of  business  segments  and
accordingly,  the respective  assets and  liabilities  have been segregated from
continuing  operations and classified as assets and  liabilities of discontinued
operations  and the operating  results for all three segments are segregated and
reported as discontinued operations.

Beginning in 2003,  we revised our business  strategy  and began  operating  our
newly formed IT Services Group.

                                       10
<PAGE>

All of our business segments operate entirely within the United States. Revenues
from customers in foreign countries are minimal. Transactions between reportable
segments  are  recorded  at  cost.  We rely  on  inter-segment  cooperation  and
management  does not represent that these segments,  if operated  independently,
would report the results shown. A summary of selected  consolidated  information
for our  industry  segments  during the  periods  ended June 30,  2005 and 2004,
respectively, is set forth as follows.

<TABLE>
<CAPTION>
------------------------------    -----------     -----------     -----------     -----------
                                                                  IT Services
                                 Photonics Group  Laser Group        Group       Consolidated
------------------------------    -----------     -----------     -----------     -----------
Three Months ended June 30, 2004
------------------------------    -----------     -----------     -----------     -----------
<S>                               <C>             <C>             <C>             <C>
Sales to unaffiliated             $        --     $        --     $ 1,269,388     $ 1,269,388
customers
------------------------------    -----------     -----------     -----------     -----------
Operating income                  $        --     $        --     $    40,233     $    40,233
------------------------------    -----------     -----------     -----------     -----------
Income (loss) from
discontinued operations           $   (19,752)    $    33,690     $        --     $    13,938
------------------------------    -----------     -----------     -----------     -----------

Three Months ended June 30, 2005
------------------------------    -----------     -----------     -----------     -----------
Sales to unaffiliated
customers                         $        --     $        --     $ 2,009,823     $ 2,009,823
------------------------------    -----------     -----------     -----------     -----------
Operating (loss)                  $        --     $   (46,486)    $    (1,395)    $   (47,881)
------------------------------    -----------     -----------     -----------     -----------
Income (loss) from
discontinued operations           $     4,979     $        --     $        --     $     4,979
------------------------------    -----------     -----------     -----------     -----------
<CAPTION>
------------------------------    -----------     -----------     -----------     -----------
                                                                  IT Services
                                 Photonics Group  Laser Group        Group       Consolidated
------------------------------    -----------     -----------     -----------     -----------
Six Months ended June 30, 2004
------------------------------    -----------     -----------     -----------     -----------
<S>                               <C>             <C>             <C>             <C>
Sales to unaffiliated
customers                         $        --     $        --     $ 1,829,823     $ 1,829,823
------------------------------    -----------     -----------     -----------     -----------
Operating loss                    $        --     $        --     $   (98,917)    $   (98,917)
------------------------------    -----------     -----------     -----------     -----------
Income (loss) from
discontinued operations           $   (59,930)    $   (14,801)    $        --     $   (74,731)
------------------------------    -----------     -----------     -----------     -----------

Six Months ended June 30, 2005
------------------------------    -----------     -----------     -----------     -----------
Sales to unaffiliated
customers                         $        --      $       --     $ 4,134,550     $ 4,134,550
------------------------------    -----------     -----------     -----------     -----------
Operating income
(loss)                            $        --     $   (48,087)    $   138,453     $    90,366
------------------------------    -----------     -----------     -----------     -----------
Income (loss) from
discontinued operations           $    12,233     $        --     $        --     $    12,233
------------------------------    -----------     -----------     -----------     -----------
</TABLE>


                                       11
<PAGE>




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,
                                                     --------
                                               2005            2004
                                            -----------    -----------

Conversion of accounts payable to common
 stock                                      $     2,250    $        --
                                            ===========    ===========

Common stock authorized not issued,
 transferred to issued                      $        --    $    75,000
                                            ===========    ===========

Purchase of equipment through long-term
 lease obligation                           $        --    $    45,120
                                            ===========    ===========


Note 7. Earnings Per Share

Basic income per share is based on the weighted  average number of common shares
outstanding during the periods  presented.  Diluted income per share is based on
the weighted  average number of common shares  outstanding,  as well as dilutive
potential  common shares which, in our case,  comprise shares issuable under the
stock options and stock warrants. 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 year,  the  calculation  for basic and diluted  earnings  per share is
considered  to be  the  same,  as the  impact  of  potential  common  shares  is
anti-dilutive.

The following table sets forth the computation of basic and diluted earnings per
share for those periods with net income from continuing operations as follows:

                                                  Six Months       Three Months
                                                     Ended            Ended
                                                 June 30, 2005    June 30, 2004
                                                 -------------    -------------
Numerator:
   Income available to common stockholders
    from continuing operations                   $      53,790    $      20,668
                                                 =============    =============

   Weighted average shares outstanding              18,910,805       13,769,822
                                                 =============    =============

Denominator for diluted income per share:
   Weighted average shares outstanding              18,910,805       13,769,822
   Common stock options and stock warrants           1,270,778        1,037,397
                                                 -------------    -------------
   Weighted average shares and conversions          20,181,583       14,807,219
                                                  =============    =============


For the three  months ended June 30, 2005 and six months ended June 30, 2004 all
outstanding  stock  options and warrants have not been  considered  common stock
equivalents because their assumed exercise would be anti-dilutive.


                                       12
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations

On January 3, 2003, our former president and chief executive  officer,  Clifford
G. Brockmyre II, resigned and was replaced by Michael S. Smith, one of our board
members. At the same time, we moved our corporate headquarters from Rhode Island
to Rochester,  New York. On May 6, 2003, Dr. Allan Robbins and Paul Delmore were
appointed to fill two existing vacancies on our board. Mr. Brockmyre remained on
our board of  directors  until  October 30, 2003 at which time he  resigned.  On
March 15, 2004, Brian Corridan resigned from our board.

In the fourth  quarter of 2003,  we decided to dispose of our Laser  Fare,  Inc.
subsidiary  (LF) and to  restructure  our  business.  We sold a  portion  of the
business of LF (primarily the medical and engraving business) as of December 31,
2003 and the remaining  business as of December 31, 2004,  although we continued
to operate the business during the disposal process.

The purchase  price for the assets  consisted of LFI's  assumption of certain of
our liabilities in the aggregate amount of approximately  $358,000.  On December
31, 2004, we sold the remaining assets of LF to Rolben  Acquisition  Corporation
(Rolben),  a company  affiliated  with LFI. The purchase price for the remaining
assets consisted of Rolben's  assumption of substantially all of the liabilities
of LF  and  the  delivery  of  promissory  notes  in  the  aggregate  amount  of
approximately  $2.1  million.  Because  certain  required  consents were not yet
obtained at December 31, 2004, we remained  obligated under several notes to UPS
Capital  Business  Credit  (UPS)  and the  Rhode  Island  Industrial  Facilities
Corporation  (RIIFC) in the same amounts as the notes from Rolben.  In May 2005,
the UPS and RIIFC notes were paid in full and we were  released  from all of our
obligations  thereunder.  At  the  same  time,  the  notes  from  Rolben  to  us
terminated.

During the second quarter of 2003, we commenced  providing services in the field
of  information  technology  (IT)  consulting  services  through our IT Services
Group.  We provide  business and technology  integration  and systems support to
government  clients. We focus on aligning business processes with technology for
delivery of solutions meeting the client's exact needs.

Results of Operations

Comparison of Three Months ended June 30, 2005 and 2004

We commenced the  operations of our IT services  Group in the second  quarter of
2003. The trends suggested by the following table are not necessarily indicative
of future operating results due to the startup nature of our IT Services Group.


                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                                         Three Months Ended June 30,
                                                                         ---------------------------

                                                                As a % of Net                  As a % of Net     Increase
                                                   2005           Revenues        2004           Revenues       (Decrease)
                                               -----------          -----      ----------         ------         -------
<S>                                            <C>                  <C>       <C>                  <C>             <C>
Sales                                          $ 2,009,823          100.0%    $ 1,269,388          100.0%           58.3%
Cost of sales                                    1,371,147           68.2         833,965           65.7            64.4
                                               -----------          -----      ----------         ------         -------
Gross profit                                       638,676           31.8         435,423           34.3            46.7
                                               -----------          -----      ----------         ------         -------
General and administrative                         399,711           19.9         310,775           24.5            28.6
Depreciation and amortization                       12,568            0.6           5,911            0.5           112.6
Write-off of capitalized financing costs            44,857            2.2              --            0.0
Selling                                            139,178            6.9           4,195            0.3         3,217.7
Research and development                            90,243            4.5          74,309            5.9            21.4
                                               -----------          -----      ----------         ------         -------
Total operating expenses                           686,557           34.2         395,190           31.1            73.7
                                               -----------          -----      ----------         ------         -------
Operating income( loss)                            (47,881)          (2.4)         40,233            3.2          (219.0)
Other income (expense) and income taxes, net       (24,172)          (1.2)        (19,565)          (1.5)          (23.5)
                                               -----------          -----      ----------         ------         -------
Income (loss) from continuing operations           (72,053)          (3.6)         20,668            1.6          (448.6)
Income  from discontinued operations                 4,979            0.2          13,938            1.1           (64.3)
                                               -----------          -----      ----------         ------         -------
Net income (loss)                              $   (67,074)          (3.3)%   $    34,606            2.7%         (293.8)%
                                               ===========          =====      ==========         ======         =======
</TABLE>

      Sales

Sales for the three  months  ended  June 30,  2005 were  $2,009,823  which was a
substantial  increase  of  $740,435  or 58.3% as compared to sales for the three
months ended June 30, 2004 of $1,269,388.  The increase was due to the continued
development  of our IT  Services  Group,  which began  operations  in the second
quarter of 2003.  We  realized  sales  increases  in 2005 from new and  expanded
contracts with prime contractors for the U.S. Government.

      Cost of Sales and Gross Profit

Cost of  sales  represents  the  cost of  employee  services  related  to the IT
Services  Group.  Cost of sales for the three  months  ended  June 30,  2005 was
$1,371,147  or 68.2% of sales as  compared to $833,965 or 65.7% of sales for the
three months  ended June 30,  2004.  Gross profit was $638,676 or 31.8% of sales
for the three months ended June 30, 2005  compared to $435,423 or 34.3% of sales
from the three months ended June 30, 2004.  We  experienced  a decrease in gross
profit  margin  as a  percent  of sales  due to the  competitive  nature  of our
business,  which  generally  provides for lower gross  profit  margins on larger
sales volume  contracts.  As the mix of different  projects  changes,  our gross
profit margin  changes.  In the future we may submit bids on new work with lower
gross profit  margins to generate  opportunities  for  long-term,  larger volume
contracts and more stable sales.

      General and Administrative Expenses

General  and   administrative   expenses  include  corporate  overhead  such  as
compensation  and  benefits  for  administrative  and finance  personnel,  rent,
insurance,   professional  fees,  travel,  and  office  expenses.   General  and
administrative  expenses for the three months ended June 30, 2005 were  $399,711
which was an increase of $88,938 or 28.6% as compared to $310,775  for the three
months ended June 30, 2004. As a percentage of sales, general and administrative
expenses  were 19.9 % for the three  months  ended June 30,  2005 as compared to
24.5% for the three months ended June 30, 2004. 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.  We
also  experienced  increases in accounting and legal expenses in 2005 due to our
focus on completing  audits of our financial  statements and related  regulatory
filings.


                                       14
<PAGE>

General and  administrative  expenses include expenses  (including  professional
services and interest costs) associated with the Osley & Whitney defined benefit
retirement plan of approximately  $48,000 and $54,000 for the three months ended
June 30, 2005 and 2004, respectively.

      Depreciation and Amortization

Depreciation  and  amortization  expense was $12,568 for the three  months ended
June 30, 2005 compared to $5,911 for the three months ended June 30, 2004.  This
increase is due to  depreciation  of equipment  and software  that were added in
2004 and 2005.

      Write-off of Capitalized Closing Costs

In the second  quarter of 2005,  the buyer of the  assets and  businesses  of LF
obtained new bank financing.  The buyer paid all of its notes receivables to us,
which proceeds were used to pay off all of LF's bank  promissory  notes and LF's
capital  lease  obligation.  As a  result  we  wrote  off  the  balance  of LF's
capitalized financing costs of $44,857.

      Selling Expenses

For the three  months  ended  June 30,  2005 we  incurred  selling  expenses  of
$139,178  associated with growing  business in our IT Services Group as compared
to $4,195 for the three months ended June 30, 2004.  We added new  employees and
changed the work  assignment  of one  employee in the second  quarter of 2005 to
focus on generating  new sales leads and new contract  opportunities.  We expect
that selling  expenses will  increase as we devote more  resources to increasing
our sales.

      Research and Development

For the three  months  ended June 30, 2005 we  continued  to incur  research and
development  expenses  associated with growing business in our IT Services Group
related to our biometrics  applications and recorded $90,243 of expense compared
to  $74,309  for the three  months  ended  June 30,  2004.  These  expenses  are
principally related to the development of an access control terminal and related
software  called  TouchThru(TM).  TouchThru(TM)  is  a  self-contained  terminal
enabling physical access control using biometric identification. It incorporates
fingerprint matching technology licensed from Ultra-Scan Corporation,  a private
technology company headquartered in Buffalo, New York. TouchThru(TM) will be the
first  biometric  product we  introduce,  and we intend to be in a  position  to
market  and sell that  product  beginning  in 2006.  We plan to market  and sell
TouchThru(TM)  in a variety of  industries  and markets,  including the federal,
state and local government, health care, travel and general security, and access
control.

      Operating Income (Loss)

The non-recurring  write off of capitalized  financing costs of $44,857 recorded
in the  three  months  ended  June 30,  2005  had a  significant  impact  in the
reduction of net  operating  income from $40,233 for the three months ended June
30, 2004 to a net operating  loss of $47,881 for the three months ended June 30,
2005.  For the three  months ended June 30, 2005,  we  experienced  increases in
operating  expenses  of  $291,367  as  discussed  above,  offset  in  part by an
improvement in gross margin of $203,253.


                                       15
<PAGE>

      Other Income (Expense)

Other income and expense  consists of interest  expense on indebtedness  for the
three  months  ended June 30,  2005.  Interest  expense was  $56,365  (including
$32,193 of interest  expense on notes  payable of LF) for the three months ended
June 30, 2005 compared to interest expense of $19,565 for the three months ended
June 30, 2004,  which was an increase of $36,800.  This increase is  principally
offset by $32,193 of  interest  income  from the notes  receivable  due from the
buyer of LF's businesses.

      Income (Loss) from Discontinued Operations

We recorded income from  discontinued  operations of $4,979 for the three months
ended June 30, 2005  compared to income of $13,938  for the three  months  ended
June 30,  2004.  The income is the result of the Laser  Group and the  Photonics
Group which were reclassified as discontinued operations.

      Net Income (Loss)

For the three  months ended June 30,  2005,  we recorded a loss from  continuing
operations  of $72,053  or  breakeven  per  share,  and a net loss of $67,074 or
breakeven per share.  This compares to net income from continuing  operations of
$20,668 or breakeven  per share and a net income of $34,606,  or  breakeven  per
share for the three months ended June 30, 2004. The decrease in profitability is
attributable  to the write off of  capitalized  financing  costs of $44,857  and
increases in other expenses, especially selling expenses during the three months
ended June 30, 2005.

      Comparison of Six Months ended June 30, 2005 and 2004

The following table compares our statements of operations data for the first six
months of 2005 and 2004. We commenced the operations of our IT Services Group in
the  second  quarter  of  2003.  The  trends  suggested  by this  table  are not
indicative  of future  operating  results  due to the  startup  nature of our IT
Services  Group,  our termination of the DARPA contract and our decision to sell
the business of our Laser Group and focus on our IT Services Group.

<TABLE>
<CAPTION>
                                                                           Six Months Ended June 30,
                                                                         ---------------------------

                                                                  As a % of Net                    As a % of Net        Increase
                                                       2005          Revenues         2004           Revenues          (Decrease)
                                                  -------------    ----------     -------------    -------------     -------------
<S>                                               <C>                   <C>       <C>                      <C>               <C>
Sales                                             $   4,134,550         100.0%    $   1,829,823            100.0%            126.0%
Cost of sales                                         2,886,028          69.8         1,193,950             65.2             141.7
                                                  -------------    ----------     -------------    -------------     -------------
Gross profit                                          1,248,522          30.2           635,873             34.8              96.3
                                                  -------------    ----------     -------------    -------------     -------------
General and administrative                              787,554          19.0           574,954             31.4              37.0
Depreciation and amortization                            23,749           0.6            12,517              0.7              89.7
Write-off of capitalized financing costs                 44,857           1.1                --              0.0
Selling                                                 140,072           3.4             4,364              0.2           3,109.7
Research and development                                161,924           3.9           142,955              7.8              13.3
                                                  -------------    ----------     -------------    -------------     -------------
Total operating expenses                              1,158,156          28.0           734,790             40.2              57.6
                                                  -------------    ----------     -------------    -------------     -------------
Operating income (loss)                                  90,366           2.2           (98,917)            (5.4)            191.4
Other income (expense) and income taxes, net            (48,809)         (1.2)          (37,003)            (2.0)            (31.9)
                                                  -------------    ----------     -------------    -------------     -------------
Income (loss) from continuing operations                 41,557           1.0          (135,920)            (7.4)            130.6
Income (loss) from discontinued operations               12,233           0.3           (74,731)            (4.1)            116.4
                                                  -------------    ----------     -------------    -------------     -------------
Net income (loss)                                 $      53,790           1.3%    $    (210,651)           (11.5)%           125.5%
                                                  -------------    ----------     -------------    -------------     -------------
</TABLE>


                                       16
<PAGE>

      Sales

Sales  for the six  months  ended  June  30,  2005  increased  substantially  by
$2,304,727  or 126% to  $4,134,550 as compared to sales for the six months ended
June 30, 2004 of $1,829,823.  The increase was due to the continued  development
of our IT Services Group,  which began operations in the second quarter of 2003.
We  realized  sales  increases  from  new  and  expanded  contracts  with  prime
contractors for the U.S. Government.

      Cost of Sales and Gross Profit

Cost of  sales  represents  the  cost of  employee  services  related  to the IT
Services  Group.  Cost of sales  for the six  months  ended  June  30,  2005 was
$2,886,028 or 69.8% of sales as compared to $1,193,950 or 65.2% of sales for the
six months ended June 30, 2004.  Gross profit was  $1,248,522  or 30.2% of sales
for the six months  ended June 30,  2005  compared to $635,873 or 34.8% of sales
for the six months  ended June 30,  2004.  We  experienced  a decrease  in gross
profit  margin  as a  percent  of sales  due to the  competitive  nature  of our
business,  which  generally  provides for lower gross  profit  margins on larger
sales volume  contracts.  As the mix of different  projects  changes,  our gross
profit margin  changes.  In the future we may submit bids on new work with lower
gross profit  margins to generate  opportunities  for  long-term,  larger volume
contracts and more stable sales.

      General and Administrative Expenses

General  and   administrative   expenses  include  corporate  overhead  such  as
compensation  and  benefits  for  administrative  and finance  personnel,  rent,
insurance,   professional  fees,  travel,  and  office  expenses.   General  and
administrative  expenses  for the six months  ended June 30, 2005  increased  by
$212,600  or 37.0% due to the  increases  in employee  compensation  and related
fringe benefits expenses as well as increased  operating expenses as we manage a
larger volume of business.  As a percentage of sales, general and administrative
expense  was 19.0% for the six months  ended June 30, 2005 and 31.4% for the six
months  ended June 30,  2004.  We  anticipate  that  general and  administrative
expenses  will  increase as we continue to implement  our business  strategy and
incur travel and other expenses  associated with managing a larger business.  We
experienced  increases in accounting and legal expenses in 2005 due to our focus
on completing audits of our financial statements and related regulatory filings.

General and  administrative  expenses include expenses  (including  professional
services and interest costs) associated with the Osley & Whitney defined benefit
retirement plan of approximately  $123,000 and $108,000 for the six months ended
June 30, 2005 and 2004, respectively.

      Depreciation and Amortization

Depreciation and amortization  expense was $23,949 for the six months ended June
30,  2005.  Beginning  in the second  quarter of 2003,  we  purchased  equipment
related to our Rochester headquarters office,  acquired a technology license and
capitalized software development costs related to our TouchThru TM products. The
increase is due to depreciations and amortization of these assets.

      Write-off of Capitalized Closing Costs

In the second  quarter of 2005,  the buyer of the  assets and  businesses  of LF
obtained new bank financing.  The buyer paid all of its notes  receivable to us,
which proceeds were used to pay off all of LF's bank  promissory  notes and LF's
capital  lease  obligation.  As a  result  we  wrote  off  the  balance  of LF's
capitalized financing costs of $44,857.


                                       17
<PAGE>

      Selling Expenses

For the six months ended June 30, 2005 we incurred  selling expenses of $140,072
associated with growing business in our IT Services Group compared to $4,364 for
the six  months  ended June 30,  2004.  We expect  that  selling  expenses  will
increase  in  the  future  as  we  hire  additional  personnel  and  expand  our
development  of new contract  opportunities.  We added new employees and changed
the work  assignment  of one employee in the second  quarter of 2005 to focus on
generating new sales leads and new contract opportunities.

      Research and Development

For the six months  ended  June 30,  2005 we  continued  to incur  research  and
development  expenses  associated with growing business in our IT Services Group
related to our biometrics applications and recorded $161,924 of expense compared
to  $142,955  for the six  months  ended  June  30,  2004.  These  expenses  are
principally related to the development of an access control terminal and related
software  called  TouchThru(TM).  TouchThru(TM)  is  a  self-contained  terminal
enabling physical access control using biometric identification. It incorporates
fingerprint matching technology licensed from Ultra-Scan Corporation,  a private
technology company headquartered in Buffalo, New York. TouchThru(TM) will be the
first  biometric  product we  introduce,  and we intend to be in a  position  to
market  and sell that  product  beginning  in 2006.  We plan to market  and sell
TouchThru(TM)  in a variety of  industries  and markets,  including the federal,
state and local government, health care, travel and general security, and access
control.

      Operating Income (Loss)

For the six months ended June 30, 2005 our operating income was $90,366 compared
to a $98,917 loss from  operations  in the  comparable  period of 2004.  This is
primarily  attributable to our focus on our new IT Services Group and the growth
of IT sales which provided  gross profit of $1,248,522,  an increase of $612,649
over the six months  ended June 30,  2004,  to fund  research  and  development,
general and administrative  expenses and interest  expenses.  Operating expenses
were $1,158,156, for the six months ended June 30, 2005, an increase of $423,366
over the six months ended June 30, 2004.

      Other Income (Expense)

Other income and expense  consists of interest  expense on indebtedness  for the
six months ended June 30, 2005. Interest expense was $113,764 (including $66,255
of interest  expense on notes  payable of LF) for the six months  ended June 30,
2005 compared to $36,653 for the six months ended June 30, 2004. The increase of
$77,111  is  principally  offset by $66,255 of  interest  income  from the notes
receivable  due from the  buyer of LF's  business.  Interest  expense  for notes
payable to related parties  increased by $7,680 to $44,333 due to an increase in
the average outstanding principal balance of notes payable to related parties.

      Income (Loss) from Discontinued Operations

We recorded  income from  discontinued  operations of $12,233 for the six months
ended June 30, 2005  compared to a loss of $74,731 for the six months ended June
30, 2004.  These results are from the Laser Group and the Photonics  Group which
were reclassified as discontinued operations.


                                       18
<PAGE>

      Net Income (Loss)

For the six months  ended June 30,  2005,  we recorded  income  from  continuing
operations  of  $41,557,  or  breakeven  per share and net  income of $53,790 or
breakeven per share.  This compares to a net loss from continuing  operations of
$135,920 or $(.01) per share and a net loss of $210,651 or $(.02) per share (the
difference  of $(.01)  per share is from  discontinued  operations)  for the six
months ended June 30, 2004. The improvement in  profitability is attributable to
growth of sales and gross profit from our expanding IT Services which allowed us
to fund our research and development,  general and administrative,  and interest
expenses.

      Liquidity and Capital Resources

As of June 30, 2005 we had unrestricted cash of $338,205, which is available for
working capital and property and equipment acquisitions.  Approximately $220,000
of this cash was used to fund June 2005 payroll accruals which were paid in July
2005.

At June 30, 2005 we had  working  capital of  $97,843.  In  previous  periods we
reported a working capital deficit. The improvement from a deficit of $1,972,840
at December 31, 2004 is a result of the buyer of the assets and businesses of LF
obtaining new bank financing and paying off all of LF's notes receivable,  which
proceeds  were used to pay off LF's bank  promissory  notes  and  capital  lease
obligation  (which were all classified as current  liabilities due to violations
of certain loan covenants).

We have financed the activity of our new IT Services  Group through the issuance
of notes  payable to related  parties,  private  placements  of common stock and
financing of our accounts  receivable.  In the future,  we may issue  additional
debt or equity securities to satisfy our cash needs. Any debt incurred or issued
may be secured  or  unsecured,  at a fixed or  variable  interest  rates and may
contain other terms and  conditions  that our board of directors  deems prudent.
Any sales of equity  securities  may be at or below current  market  prices.  We
cannot assure you that we will be successful in generating sufficient capital to
adequately fund our working capital needs.

Risk Factors

You should  consider  the risk  factors  included  in our annual  report on Form
10-KSB for the year ended  December 31, 2004 in evaluating  our business and us.
Additional risks and uncertainties not presently known to us, which we currently
deem  immaterial  or that are similar to those faced by other  companies  in our
industry or business in general, such as competitive conditions, may also impair
our business operations. If any of the results of the risks occur, our business,
financial  condition,  or results of operations  could be  materially  adversely
affected.


                                       19
<PAGE>

Item 3. 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, providing
them with  material  information  relating  to the  company  as  required  to be
disclosed  in the reports we file or submit  under the  Exchange Act on a timely
basis.

Changes in Internal Control over Financial  Reporting.  There were no changes in
our internal  controls over financial  reporting,  known to our chief  executive
officer and chief  financial  officer,  that  occurred  during our fiscal second
quarter that has  materially  affected,  or is  reasonably  likely to materially
affect, our internal control over financial reporting.


                                       20
<PAGE>

                                     PART II
                                OTHER INFORMATION

Item 1: Legal Proceedings.

We are the  plaintiff in a lawsuit filed in the Superior  Court,  State of Rhode
Island on August 13, 1999 captioned  Infinite  Group,  Inc. vs. Spectra  Science
Corporation  and Nabil  Lawandy.  In the action,  we assert that by fraud and in
breach of  fiduciary  duties owed,  Spectra and its  president,  Nabil  Lawandy,
caused us to sell to Spectra shares of Spectra's  Series A Preferred  stock at a
substantial  discount to fair market value.  We allege that in entering into the
transaction  we  relied  on  various  representations  made by  Spectra  and Mr.
Lawandy,  which were untrue at the time they were made.  In the action,  we seek
compensatory damages in the amount of $500,000 plus statutory interest, punitive
damages  as well as an award of  attorney's  fees and  costs.  One of  Spectra's
counterclaims  was  dismissed by the court in response to our motion for summary
judgment.  The trial was completed in February 2005. The jury returned a verdict
and judgment in our favor in the amount of approximately $600,000. We have filed
a notice of appeal with respect to the damages  portion of the verdict.  On June
1, 2005,  Spectra  voluntarily  dismissed with  prejudice its remaining  pending
counterclaim  against  us. We have  entered  into an escrow  agreement  with the
defendants pursuant to which approximately $600,000,  representing the amount of
the judgment has been deposited.  Withdrawal of the funds will be permitted only
upon the date that  judgment,  in the  matter,  becomes  a final  non-appealable
decision, or earlier upon the written agreement of all parties.

We are the  respondent in an arbitration  proceeding  filed on December 10, 2002
captioned J. Terrence Feeley v. Infinite Group, Inc. Claimant, a former employee
and former  member of our board of directors,  alleges that the parties  entered
into  a  consulting  agreement  dated  June  27,  2002  relative  to  the  early
termination of claimant's employment requiring certain cash payments to be made.
Claimant  alleges that we have failed or refused to make such cash  payments and
have  breached  the  agreement  and seeks all monies  owed to him,  said  amount
alleged to be approximately  $130,000. We answered the claim by admitting that a
letter  agreement was entered into but denied all of the remaining  allegations.
We also filed a counterclaim in the arbitration  proceeding.  We filed a related
claim  against  Mr.  Feeley  in the  Superior  Court,  State of Rhode  Island on
September  5,  2003.  We  claim  that  he  breached  certain  provisions  of his
employment  agreement,  breached  fiduciary  duties  he owed to us and  violated
several  provisions of the June 27, 2002 letter agreement.  We seek compensatory
damages  in  amounts  to be  shown  at  trial,  and  preliminary  and  permanent
injunctive relief and other relief as may be appropriate.

Mr.  Feeley's  arbitration  claims are pending  before the American  Arbitration
Association  and an arbitrator  selected by the parties.  Our claims against Mr.
Feeley are pending in the Rhode Island  Superior  Court. In January of 2004, the
parties agreed to stay  arbitration  proceedings and to mediate all the disputes
under procedures  available  through the Superior Court. To date,  neither party
has initiated mediation proceedings.

Other than the foregoing  proceeding,  we are not a party to any material  legal
proceeding.


                                       21
<PAGE>


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

      None.


Item 3. Defaults Upon Senior Securities.

      None.


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

      None.

Item 5. Other Information.

      None.

Item 6. Exhibits.

a. Exhibits:

Exhibit No.    Description
-----------    -----------

31.1        Certification of Chief Executive Officer and Chief Financial Officer
            pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1        Certification of Chief Executive Officer and Chief Financial Officer
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


                                       22
<PAGE>

                                   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  11, 2005                        /s/ Michael S. Smith
                                                --------------------
                                                Chief Executive Officer

Date:   August  11, 2005
                                                /s/ Michael S. Smith
                                                --------------------
                                                Chief Financial Officer

                                                (Principal Financial Officer)


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