UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
quarterly period ended: September 30, 2010





 ̈ TRANSITION REPORT
PURSUANT TO 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)


(Zip
Code)





(585)
385-0610


(Registrant's
telephone number, including area code)





(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.  (Check one):





Large Accelerated filer  ̈
              Non-accelerated filer  (Do not check if a smaller reporting company)    ̈
            
            Accelerated filer   ̈
              Smaller reporting company x





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


Yes
 ̈ No x





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


There
were 26,461,883 shares of the issuer’s common stock, par value $.001 per share,
outstanding as of November 10, 2010.







INFINITE
GROUP, INC.




FORM
10-Q REPORT





TABLE OF
CONTENTS


PAGEPART
      I – FINANCIAL INFORMATIONItem
      1.
                                  Consolidated
      Financial Statements
                                  3Consolidated
      Balance Sheets – September 30, 2010 (Unaudited) and December 31, 2009
      (Audited)
                                  3Consolidated
      Statements of Operations (Unaudited) for the three and nine months ended
      September 30, 2010 and 2009
                                  4Consolidated
      Statements of Cash Flows (Unaudited) for the nine months ended September
      30, 2010 and 2009
                                  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
                                  16Item
      4.
                                  Controls
      and Procedures
                                  16PART
      II – OTHER INFORMATION
                                  16Item
      2.
                                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                                  16Item
      6.
                                  Exhibits
                                  16SIGNATURES
                                  17





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.


2


PART
I


FINANCIAL
INFORMATION





Item
1.  Consolidated Financial Statements





INFINITE
      GROUP, INC.Consolidated
      Balance SheetsSeptember
      30,
                              
                              
                              December
      31,2010
                              
                              
                              2009(Unaudited)ASSETSCurrent
      assets:Cash
                              
                              $
                              104,462
                              
                              
                              $
                              196,711Accounts
      receivable, net of allowance of $70,000
                              
                              
                              665,780
                              
                              
                              
                              1,118,580Prepaid
      expenses and other current assets
                              
                              
                              65,732
                              
                              
                              
                              56,622Total
      current assets
                              
                              
                              835,974
                              
                              
                              
                              1,371,913Property
      and equipment, net
                              
                              
                              76,265
                              
                              
                              
                              58,777Deposits
      and other assets
                              
                              
                              18,424
                              
                              
                              
                              21,544Total
      assets
                              
                              $
                              930,663
                              
                              
                              $
                              1,452,234LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      liabilities:Accounts
      payable
                              
                              $
                              587,845
                              
                              
                              
                              686,457Accrued
      payroll
                              
                              
                              368,056
                              
                              
                              
                              388,131Accrued
      interest payable
                              
                              
                              291,496
                              
                              
                              
                              275,563Accrued
      retirement and pension
                              
                              
                              3,443,450
                              
                              
                              
                              3,078,361Accrued
      expenses - other
                              
                              
                              39,197
                              
                              
                              
                              61,632Current
      maturities of long-term obligations-bank
                              
                              
                              41,869
                              
                              
                              
                              32,243Notes
      payable
                              
                              
                              470,000
                              
                              
                              
                              295,000Notes
      payable - related parties
                              
                              
                              174,000
                              
                              
                              
                              154,000Total
      current liabilities
                              
                              
                              5,415,913
                              
                              
                              
                              4,971,387Long-term
      obligations:Notes
      payable:Banks
      and other
                              
                              
                              172,939
                              
                              
                              
                              334,029Related
      parties
                              
                              
                              501,324
                              
                              
                              
                              501,324Accrued
      pension expense
                              
                              
                              735,012
                              
                              
                              
                              735,012Total
      liabilities
                              
                              
                              6,825,188
                              
                              
                              
                              6,541,752Commitments
      and contingencies (Note 5)Stockholders’
      deficiency:Common
      stock, $.001 par value, 60,000,000 shares authorized; 26,461,883
      (25,661,883 – 2009) shares issued and outstanding
                              
                              
                              26,461
                              
                              
                              
                              25,661Additional
      paid-in capital
                              
                              
                              29,988,220
                              
                              
                              
                              29,870,506Accumulated
      deficit
                              
                              
                              (33,104,166
                              )
                              
                              
                              (32,180,645
                              )Accumulated
      other comprehensive loss
                              
                              
                              (2,805,040
                              )
                              
                              
                              (2,805,040
                              )Total
      stockholders’ deficiency
                              
                              
                              (5,894,525
                              )
                              
                              
                              (5,089,518
                              )Total
      liabilities and stockholders’ deficiency
                              
                              $
                              930,663
                              
                              
                              $
                              1,452,234





See notes
to unaudited consolidated financial statements.


3





INFINITE
      GROUP, INC.Consolidated
      Statements of Operations (Unaudited)Three
      Months Ended
                            
                            
                            Nine
      Months EndedSeptember 30,
                            
                            
                            September 30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Sales
                            
                            $
                            2,212,716
                            
                            
                            $
                            2,756,463
                            
                            
                            $
                            7,206,004
                            
                            
                            $
                            8,320,492Cost
      of services
                            
                            
                            1,589,069
                            
                            
                            
                            2,065,766
                            
                            
                            
                            5,354,738
                            
                            
                            
                            6,344,445Gross
      profit
                            
                            
                            623,647
                            
                            
                            
                            690,697
                            
                            
                            
                            1,851,266
                            
                            
                            
                            1,976,047Costs
      and expenses:General
      and administrative
                            
                            
                            311,997
                            
                            
                            
                            306,425
                            
                            
                            
                            928,125
                            
                            
                            
                            918,633Defined
      benefit pension plan
                            
                            
                            126,675
                            
                            
                            
                            133,468
                            
                            
                            
                            372,624
                            
                            
                            
                            430,214Selling
                            
                            
                            383,633
                            
                            
                            
                            416,656
                            
                            
                            
                            1,264,680
                            
                            
                            
                            1,309,795Total
      costs and expenses
                            
                            
                            822,305
                            
                            
                            
                            856,549
                            
                            
                            
                            2,565,429
                            
                            
                            
                            2,658,642Operating
      loss
                            
                            
                            (198,658
                            )
                            
                            
                            (165,852
                            )
                            
                            
                            (714,163
                            )
                            
                            
                            (682,595
                            )Interest
      expense:Related
      parties
                            
                            
                            (13,838
                            )
                            
                            
                            (21,060
                            )
                            
                            
                            (38,515
                            )
                            
                            
                            (62,423
                            )Other
                            
                            
                            (58,332
                            )
                            
                            
                            (50,130
                            )
                            
                            
                            (169,613
                            )
                            
                            
                            (155,533
                            )Total
      interest expense
                            
                            
                            (72,170
                            )
                            
                            
                            (71,190
                            )
                            
                            
                            (208,128
                            )
                            
                            
                            (217,956
                            )Loss
      before income tax expense
                            
                            
                            (270,828
                            )
                            
                            
                            (237,042
                            )
                            
                            
                            (922,291
                            )
                            
                            
                            (900,551
                            )Income
      tax expense
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (1,230
                            )
                            
                            
                            (4,000
                            )Net
      loss
                            
                            $
                            (270,828
                            )
                            
                            $
                            (237,042
                            )
                            
                            $
                            (923,521
                            )
                            
                            $
                            (904,551
                            )Net
      loss per share – basic and diluted
                            
                            $
                            (.01
                            )
                            
                            $
                            (.01
                            )
                            
                            $
                            (.04
                            )
                            
                            $
                            (.04
                            )Weighted
      average number of sharesoutstanding – basic and
      diluted
                            
                            
                            26,148,840
                            
                            
                            
                            25,498,253
                            
                            
                            
                            25,825,986
                            
                            
                            
                            25,400,155





See notes
to unaudited consolidated financial statements.


4


INFINITE
      GROUP, INC.Consolidated
      Statements of Cash Flows (Unaudited)Nine
      Months EndedSeptember 30,2010
                
                
                2009Operating
      activities:Net
      loss
                
                $
                (923,521
                )
                
                $
                (904,551
                )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Stock
      based compensation
                
                
                78,514
                
                
                
                118,580Depreciation
                
                
                26,265
                
                
                
                23,568Decrease
      (increase) in assets:Accounts
      receivable
                
                
                452,800
                
                
                
                (99,659
                )Other
      assets
                
                
                (5,990
                )
                
                
                (19,535
                )(Decrease)
      increase in liabilities:Accounts
      payable
                
                
                (98,612
                )
                
                
                174,780Accrued
      expenses
                
                
                13,423
                
                
                
                268,550Accrued
      pension and retirement
                
                
                365,089
                
                
                
                376,316Net
      cash used by operating activities
                
                
                (92,032
                )
                
                
                (61,951
                )Investing
      activities:Purchase
      of property and equipment
                
                
                (5,078
                )
                
                
                (6,651
                )Net
      cash used by investing activities
                
                
                (5,078
                )
                
                
                (6,651
                )Financing
      activities:Repayments
      of notes payable
                
                
                (15,139
                )
                
                
                (31,197
                )Proceeds
      from note payable - related parties
                
                
                90,000
                
                
                
                76,151Repayments
      of note payable - related parties
                
                
                (70,000
                )
                
                
                (76,151
                )Proceeds
      from exercise of stock options
                
                
                -
                
                
                
                1,750Net
      cash provided by (used by) financing activities
                
                
                4,861
                
                
                
                (29,447
                )Net
      decrease in cash and cash equivalents
                
                
                (92,249
                )
                
                
                (98,049
                )Cash
      - beginning of period
                
                
                196,711
                
                
                
                153,336Cash
      - end of period
                
                $
                104,462
                
                
                $
                55,287Supplemental
      disclosure:Cash
      paid for:Interest
                
                $
                154,082
                
                
                $
                173,790Income
      taxes
                
                $
                1,230
                
                
                $
                4,000





See
accompanying notes to unaudited consolidated financial
statements.


5





INFINITE
GROUP, INC.





Notes to
Consolidated Financial Statements–(Unaudited)





Note
1. Basis of Presentation





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





Note
2. Summary of Significant Accounting Policies





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




Reclassification




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





Recent
Accounting Pronouncements




In July
2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses”. The new disclosure
guidance will expand the existing requirements and will lead to greater
transparency into a company’s exposure to credit losses from lending
arrangements. The extensive new disclosures of information as of the end of a
reporting period will become effective for both interim and annual reporting
periods ending on or after December 15, 2010. Specific disclosures regarding
activity that occurred before the issuance of the ASU, such as the allowance
roll-forward and modification disclosures, will be required for periods
beginning on or after December 15, 2010. The Company is currently assessing the
impact that ASU 2010-20 will have on its consolidated financial
statements.




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





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


6





Note
3. Stock Option Plans





The
Company has approved stock options plans covering up to an aggregate of
9,172,933 shares of common stock. Such options may be designated at the time of
grant as either incentive stock options or nonqualified stock options. Stock
based compensation includes expense charges related to all stock-based awards to
employees, directors and consultants. Such awards include options, warrants and
stock grants.





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





2010
                          
                          
                          2009Risk-free
      interest rate
                          
                          1.73% - 2.93%
                          
                          
                          2.09% - 2.80%Expected
      dividend yield
                          
                          0%
                          
                          
                          0%Expected
      stock price volatility
                          
                          75%
                          
                          
                          75%Expected
      life of options
                          
                          5.75 years
                          
                          
                          5.75 years





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





Three
      Months
                      ended
                      September 30,
                      2010
                    
                    
                    Three
      Months
                      ended
                      September 30,
                      2009
                    
                    
                    Nine
      Months
                      ended
                      September 30,
                      2010
                    
                    
                    Nine
      Months
                      ended
                      September 30,
                      2009Employee
      stock options
                    
                    $
                    19,598
                    
                    
                    $
                    29,689
                    
                    
                    $
                    78,514
                    
                    
                    $
                    120,749Consultants
      – common stock warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,169
                    )Total
      expense
                    
                    $
                    19,598
                    
                    
                    $
                    29,689
                    
                    
                    $
                    78,514
                    
                    
                    $
                    118,580




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


Number of
                                    Options
                                  
                                  
                                  Weighted
                                    Average
                                    Exercise
                                    Price
                                  
                                  
                                  Weighted-
                                    Average
                                    Remaining
                                    Contractual
                                    Term
                                  
                                  
                                  Aggregate
                                    Intrinsic ValueOutstanding
      at December 31, 2009
                                  
                                  
                                  5,491,500
                                  
                                  
                                  $
                                  .26Options
      granted
                                  
                                  
                                  1,766,000
                                  
                                  
                                  $
                                  .14Options
      expired
                                  
                                  
                                  (558,000
                                  )
                                  
                                  $
                                  .29Outstanding
      at September 30, 2010
                                  
                                  
                                  6,699,500
                                  
                                  
                                  $
                                  .24
                                  
                                  
                                  6.3 years
                                  
                                  
                                  $
                                  21,860Exercisable
      at September 30, 2010
                                  
                                  
                                  4,800,834
                                  
                                  
                                  $
                                  .26
                                  
                                  
                                  5.0 years
                                  
                                  
                                  $
                                  21,860





The
weighted average fair value of options granted during the nine months ended
September 30, 2010 was approximately $.09 ($.12 during the nine months ended
September 30, 2009). Options for 25,000 shares were exercised during the nine
months ended September 30, 2009 with aggregate proceeds to the Company of
$1,750. The options had an intrinsic value of $ 8,250. No options were exercised
during 2010.





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





Number of
                            Nonvested
                            Options
                          
                          
                          Weighted Average
                            Fair Value
                            at Grant DateNonvested
      outstanding at December 31, 2009
                          
                          
                          866,333
                          
                          
                          $
                          .15Options
      granted
                          
                          
                          1,766,000
                          
                          
                          $
                          .09Options
      vested
                          
                          
                          (542,000
                          )
                          
                          $
                          .26Options
      forfeited
                          
                          
                          (191,667
                          )
                          
                          $
                          .13Nonvested
      outstanding at September 30, 2010
                          
                          
                          1,898,666
                          
                          
                          $
                          .10


7


At
September 30, 2010, there was approximately $146,500 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 two years. The total fair value of shares that vested
during the nine months ended September 30, 2010 was approximately
$142,000.




Note
4. Earnings Per Share




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




As of September 30, 2010,
convertible debt, options and warrants to purchase 25,061,128 sharesof
common stock (23,206,079 as of September 30, 2009) that could potentially dilute
basic net income per share in the future were excluded from the calculation of
diluted net income (loss) per share because their inclusion would have been
anti-dilutive.





Note
5. Employee Pension Plan





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




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




If the
Company does not ultimately prevail, it will become obligated for Plan
contributions of approximately $2.2 million as of September 30, 2010 and 10%
excise taxes on accumulated unfunded Plan contributions for the Plan years ended
December 31, 2006 and 2007 of approximately $348,500, as stated above, and
potentially additional 10% excise taxes of approximately $220,000 for the year
ended December 31, 2008, which have not been accrued based upon the Company’s
determination that it has no legal obligation to act as the Plan sponsor and the
Company’s belief that the likelihood is not probable that it will be required to
pay these excise taxes. Further, if the Company does not ultimately prevail, it
may be required to pay interest on these excise taxes and potentially incur
penalties for late payment of excise taxes and additional excise taxes up to
100% of each year’s required funding deficiency. The Company has accrued amounts
related to excise taxes, including late fees and interest, on unfunded
contributions for 2003, 2004 and 2005 of approximately $463,000 as of September
30, 2010 ($445,000 at December 31, 2009). No excise taxes, late fees or interest
for 2006, 2007, 2008, and 2009 has been accrued at September 30, 2010 or
December 31, 2009. The Company does not have the funds available to make
required contributions which approximate $2.2 million and does not intend to
make any contributions to the Plan during 2010.





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





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




8




At
September 30, 2010, the Plan had an accrued pension obligation liability of
approximately $4,040,000 ($3,696,640 at December 31, 2009), which includes the
underfunded amount plus interest on past due payments and excise taxes including
penalties and interest of approximately $463,000.  Accumulated other
comprehensive loss of $2,805,040 at September 30, 2010 has been recorded as a
reduction of stockholders’ deficiency.




The
market value of the Plan assets decreased from $2,004,117 at December 31, 2009
to $1,654,563 at September 30, 2010. The decrease was comprised of investment
gains of $20,663, benefit payments of $335,556 and expenses of
$34,661.





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





Three Months
                    ended
                    September 30,
                    2010
                  
                  
                  Three Months
                    ended
                    September 30,
                    2009
                  
                  
                  Nine Months
                    ended
                    September 30,
                    2010
                  
                  
                  Nine Months
                    ended
                    September 30,
                    2009Interest
      cost
                  
                  $
                  72,531
                  
                  
                  $
                  71,996
                  
                  
                  $
                  217,594
                  
                  
                  $
                  215,989Expected
      return on plan assets
                  
                  
                  (39,148
                  )
                  
                  
                  (42,115
                  )
                  
                  
                  (117,443
                  )
                  
                  
                  (126,346
                  )Service
      cost
                  
                  
                  12,500
                  
                  
                  
                  17,750
                  
                  
                  
                  37,500
                  
                  
                  
                  53,250Actuarial
      loss
                  
                  
                  31,882
                  
                  
                  
                  37,343
                  
                  
                  
                  95,645
                  
                  
                  
                  112,030Net
      periodic pension cost
                  
                  $
                  77,765
                  
                  
                  $
                  84,974
                  
                  
                  $
                  233,296
                  
                  
                  $
                  254,923





Note
6. Supplemental Cash Flow Information





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





Nine Months Ended September
    30,2010
                  
                  
                  2009Conversion
      of accrued interest payable under note payable -related party into 800,000
      and 500,000 shares on common stock, respectively
                  
                  $
                  40,000
                  
                  
                  $
                  25,000Purchase
      of computer and communications equipment through long-term
      obligations
                  
                  $
                  38,675
                  
                  
                  $
                  9,465Conversion
      of convertible accrued interest payable into a convertible note
      payable
                  
                  $
                  -
                  
                  
                  $
                  25,000





During
the nine months ended September 30, 2009, warrants were exercised for 60,000
shares of common stock on a cashless basis resulting in the Company’s net
issuance of 23,265 shares of common stock.During 2010, no options
or warrants were exercised.





Note
7. Notes Payable





During
the nine months ended September 30, 2010, the Company entered into the following
note payable agreements and made principal payments as follows.





On August
13, 2010, the Company borrowed $40,000 under the terms of a demand note payable
to a member of the Company’s board of directors with interest at 12% annually.
At the option of the holder, the principal is convertible into shares of common
stock at the rate of $.11 per share.





On May
27, 2010, the Company borrowed $50,000 under the terms of a demand note payable
to the Company’s President with interest at 12% annually. Principal of $45,000
was repaid through September 30, 2010. In addition, through September 30, 2010,
$25,000 of principal was repaid on other notes payable to the Company’s
President.





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




9




Note
8. Related Party Transactions





On
September 1, 2010, Mr. Donald W. Upson, the Company’s chairman of the board of
directors, became an employee of the Company with the title of Federal Business
Strategist and receives a salary and employee benefits according to the
Company’s standard policies. As disclosed in note 12 to the Company’s audited
consolidated financial statements for the year ended December 31, 2009, Mr.
Upson previously was a consultant to the Company performing the same services on
a month to month basis and earning $9,600 per month.





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





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





IT
Consulting




We are a
provider of IT services to federal, state and local government and commercial
clients. Our expertise includes managing leading edge operations and
implementing complex programs in advanced server management, data center
consolidation, virtualization services (including server, desktop, application,
and storage), cloud computing, information security, wireless technology, human
capital services, business and technology integration, and enterprise
architecture. We focus on aligning business processes with technology for
delivery of solutions meeting our clients’ exact needs and providing expert
management services to the lifecycle of technology-based projects. We have
business development personnel headquartered from our corporate office in
Pittsford, NY, as well as business development offices in the Washington, D.C.
metropolitan area and Colorado Springs, CO. During 2010, we have expanded our
business operations and expect to have future sales prospects in the State of
Mississippi. We also increased our marketing focus to include providing IT
consulting services to middle market sized businesses in Upstate New York,
nearby our corporate headquarters, and in the Denver/Colorado Springs region,
where we have approximately 50 employees and have provided IT services for
several years.





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





Results
of Operations





Comparison
of Three and Nine Month Periods ended September 30, 2010 and 2009





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




Three Months Ended September
      30,2010 vs. 2009As
      a % of
                    
                    
                    
                    
                    
                    As
      a % of
                    
                    
                    Amount
      of
                    
                    
                    %
      Increase2010
                    
                    
                    Sales
                    
                    
                    2009
                    
                    
                    Sales
                    
                    
                    Change
                    
                    
                    (Decrease)Sales
                    
                    $
                    2,212,716
                    
                    
                    
                    100.0
                    %
                    
                    $
                    2,756,463
                    
                    
                    
                    100.0
                    %
                    
                    $
                    (543,747
                    )
                    
                    
                    (19.7
                    )%Cost
      of services
                    
                    
                    1,589,069
                    
                    
                    
                    71.8
                    
                    
                    
                    2,065,766
                    
                    
                    
                    74.9
                    
                    
                    
                    (476,697
                    )
                    
                    
                    (23.1
                    )Gross
      profit
                    
                    
                    623,647
                    
                    
                    
                    28.2
                    
                    
                    
                    690,697
                    
                    
                    
                    25.1
                    
                    
                    
                    (67,050
                    )
                    
                    
                    (9.7
                    )General
      and administrative
                    
                    
                    311,997
                    
                    
                    
                    14.1
                    
                    
                    
                    306,425
                    
                    
                    
                    11.1
                    
                    
                    
                    5,572
                    
                    
                    
                    1.8Defined
      benefit pension plan
                    
                    
                    126,675
                    
                    
                    
                    5.7
                    
                    
                    
                    133,468
                    
                    
                    
                    4.8
                    
                    
                    
                    (6,793
                    )
                    
                    
                    (5.1
                    )Selling
                    
                    
                    383,633
                    
                    
                    
                    17.3
                    
                    
                    
                    416,656
                    
                    
                    
                    15.1
                    
                    
                    
                    (33,023
                    )
                    
                    
                    (7.9
                    )Total
      costs and expenses
                    
                    
                    822,305
                    
                    
                    
                    37.2
                    
                    
                    
                    856,549
                    
                    
                    
                    31.0
                    
                    
                    
                    (34,244
                    )
                    
                    
                    (4.0
                    )Operating
      loss
                    
                    
                    (198,658
                    )
                    
                    
                    (9.0
                    )
                    
                    
                    (165,852
                    )
                    
                    
                    (5.9
                    )
                    
                    
                    32,806
                    
                    
                    
                    19.8Interest
      expense
                    
                    
                    (72,170
                    )
                    
                    
                    (3.3
                    )
                    
                    
                    (71,190
                    )
                    
                    
                    (2.6
                    )
                    
                    
                    980
                    
                    
                    
                    1.4Net
      loss
                    
                    $
                    (270,828
                    )
                    
                    
                    (12.2
                    )%
                    
                    $
                    (237,042
                    )
                    
                    
                    (8.6
                    )%
                    
                    $
                    33,786
                    
                    
                    
                    14.3
                    %Net
      loss per share - basic and diluted
                    
                    $
                    (.01
                    )
                    
                    
                    
                    
                    
                    $
                    (.01
                    )
                    
                    
                    
                    
                    
                    $
                    -


10





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





2010 vs. 2009As
      a % of
                      
                      
                      
                      
                      
                      As
      a % of
                      
                      
                      Amount
      of
                      
                      
                      %
      Increase2010
                      
                      
                      Sales
                      
                      
                      2009
                      
                      
                      Sales
                      
                      
                      Change
                      
                      
                      (Decrease)Sales
                      
                      $
                      7,206,004
                      
                      
                      
                      100.0
                      %
                      
                      $
                      8,320,492
                      
                      
                      
                      100.0
                      %
                      
                      $
                      (1,114,488
                      )
                      
                      
                      (13.4
                      )%Cost
      of services
                      
                      
                      5,354,738
                      
                      
                      
                      74.3
                      
                      
                      
                      6,344,445
                      
                      
                      
                      76.3
                      
                      
                      
                      (989,707
                      )
                      
                      
                      (15.6
                      )Gross
      profit
                      
                      
                      1,851,266
                      
                      
                      
                      25.7
                      
                      
                      
                      1,976,047
                      
                      
                      
                      23.7
                      
                      
                      
                      (124,781
                      )
                      
                      
                      (6.3
                      )General
      and administrative
                      
                      
                      928,125
                      
                      
                      
                      12.9
                      
                      
                      
                      918,633
                      
                      
                      
                      11.0
                      
                      
                      
                      9,492
                      
                      
                      
                      1.0Defined
      benefit pension plan
                      
                      
                      372,624
                      
                      
                      
                      5.2
                      
                      
                      
                      430,214
                      
                      
                      
                      5.2
                      
                      
                      
                      (57,590
                      )
                      
                      
                      (13.4
                      )Selling
                      
                      
                      1,264,680
                      
                      
                      
                      17.6
                      
                      
                      
                      1,309,795
                      
                      
                      
                      15.7
                      
                      
                      
                      (45,115
                      )
                      
                      
                      (3.4
                      )Total
      costs and expenses
                      
                      
                      2,565,429
                      
                      
                      
                      35.6
                      
                      
                      
                      2,658,642
                      
                      
                      
                      32.0
                      
                      
                      
                      (93,213
                      )
                      
                      
                      (3.5
                      )Operating
      loss
                      
                      
                      (714,163
                      )
                      
                      
                      (9.9
                      )
                      
                      
                      (682,595
                      )
                      
                      
                      (8.2
                      )
                      
                      
                      31,568
                      
                      
                      
                      4.6Interest
      expense
                      
                      
                      (208,128
                      )
                      
                      
                      (2.9
                      )
                      
                      
                      (217,956
                      )
                      
                      
                      (2.6
                      )
                      
                      
                      (9,828
                      )
                      
                      
                      (4.5
                      )Income
      tax expense
                      
                      
                      (1,230
                      )
                      
                      
                      
                      
                      
                      
                      (4,000
                      )
                      
                      
                      
                      
                      
                      
                      (2,770
                      )
                      
                      
                      (69.3
                      )Net
      loss
                      
                      $
                      (923,521
                      )
                      
                      
                      (12.8
                      )%
                      
                      $
                      (904,551
                      )
                      
                      
                      (10.9
                      )%
                      
                      $
                      18,970
                      
                      
                      
                      2.1
                      %Net
      loss per share - basic and diluted
                      
                      $
                      (.04
                      )
                      
                      
                      
                      
                      
                      $
                      (.04
                      )
                      
                      
                      
                      
                      
                      $
                      .00





Sales





Sales for
the three months ended September 30, 2010 were $2,212,716 a decrease of $543,747
or 19.7% as compared to sales for the three months ended September 30, 2009 of
$2,756,463. Sales for the nine months ended September 30, 2010 were $7,206,004,
a decrease of $1,114,488 or 13.4% as compared to sales for the nine months ended
September 30, 2009 of $8,320,492. The decrease primarily results from the
completion of certain U.S. government assignments and certain projects for other
clients that were not offset by the addition of new projects and assignments.
Our Microsoft Stimulus360 project for a state government client was also
completed during June 2010. Stimulus360 is a Microsoft solution used to help
public sector agencies track, measure, and share information about federal
stimulus programs through easy to use graphical dashboards and maps. Our work
for this state government continued when a new project with an approximate six
month duration started in July 2010.




Cost
of Services and Gross Profit





Cost of
services represents the cost of employee services related to our sales. Cost of
services for the three months ended September 30, 2010 was $1,589,069 or 71.8%
of sales as compared to $2,065,766 or 74.9% of sales for the three months ended
September 30, 2009. Gross profit was $623,647 or 28.2% of sales for the three
months ended September 30, 2010 compared to $690,697 or 25.1% of sales for the
three months ended September 30, 2009. Cost of services for the nine months
ended September 30, 2010 was $5,354,738 or 74.3% of sales as compared to
$6,344,445 or 76.3% of sales for the nine months ended September 30, 2009. Gross
profit was $1,851,266 or 25.7% of sales for the nine months ended September 30,
2010 compared to $1,976,047 or 23.7% of sales for the nine months ended
September 30, 2009.




The
increase in gross profit margin percent is due to a change in the mix of our
business resulting from new projects in 2010 which carried higher profit margins
than work completed in 2009. Our personnel utilization rates also improved
during the most recent quarter.





General
and Administrative Expenses





General
and administrative expenses include corporate overhead such as compensation and
benefits for administrative and finance personnel, rent, insurance, professional
fees, travel, and office expenses. General and administrative expenses for the
three months ended September 30, 2010 were $311,997 which was an increase of
$5,572 or 1.8% as compared to $306,425 for the three months ended September 30,
2009. As a percentage of sales, general and administrative expense was 14.1% for
the three months ended September 30, 2010 and 11.1% for the three months ended
September 30, 2009.




General
and administrative expenses for the nine months ended September 30, 2010
increased by $9,492 or 1.0% from $918,633 for the nine months ended September
30, 2009 to $928,125 for the nine months ended September 30, 2010. As a
percentage of sales, general and administrative expenses were 12.9% for the nine
months ended September 30, 2010 and 11.0% for the nine months ended September
30, 2009.




11




General
and administrative expenses in 2010 were not significantly different from 2009.
We anticipate that general and administrative expenses will increase as we work
to grow our business and incur travel and other expenses associated with
managing a larger business.




Defined
Benefit Pension Plan Expenses





Defined
benefit pension plan expenses include expenses (including pension expense,
professional services, and interest costs) associated with the Osley &
Whitney, Inc. Retirement Plan(the Plan) of $126,675 for the three months ended September 30, 2010 and
$133,468 for the three months ended September 30, 2009, a decrease of $6,793. We
incurred expenses of $372,625 and $430,214 for the nine months ended September
30, 2010 and 2009, a decrease of $57,590.





During
the nine months ended September 30, 2010, we incurred legal and professional
fees of approximately $29,600 in connection with compliance requirements and
advocating our legal position in response to a request for additional
information from the Pension Benefit Guarantee Corporation (“PBGC”) in August
2010 as compared to approximately $69,300 for the nine months ended September
30, 2009. Net periodic pension cost decreased by $21,600 to $233,300 for the
nine months ended September 30, 2010 due principally to changes in pension
regulations. We continue to accrue interest and fees on unpaid excise taxes for
plan years 2003, 2004 and 2005, as well as interest on unfunded contributions,
which amounted to additional expense of approximately $109,700 and $106,000 for
the nine months ended September 30, 2010 and 2009, respectively.





Selling Expenses





For the
three months ended September 30, 2010, we incurred selling expenses of $383,633
as compared to $416,656 for the three months ended September 30, 2009, a
decrease of $33,023 or 7.9%. For the nine months ended September 30, 2010 we
incurred selling expenses of $1,264,680 compared to $1,309,795 for the nine
months ended September 30, 2009, a decrease of $45,115 or 3.4%.




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





Operating
Loss




For the
three months ended September 30, 2010, our operating loss was $(198,658)
compared to an operating loss of $(165,852) for the three months ended September
30, 2009, an increase in the loss of $32,806. This is principally attributable
to a reduction in sales of $543,747, which was partially offset by decreases in
cost of services and operating expenses of $476,697 and $34,244,
respectively.





For the
nine months ended September 30, 2010 our operating loss increased to $(714,163)
compared to an operating loss of $(682,595) for the nine months ended September
30, 2009, an increase in the loss of $31,568. This is principally attributable
to a decrease in gross profit of $124,781 or 6.3% offset by a decrease in
operating expenses of $93,213 or 3.5%.





Interest
Expense





Interest
expense includes interest on indebtedness and fees for financing accounts
receivable invoices. Interest expense was $72,170 for the three months ended
September 30, 2010 compared to interest expense of $71,190 for the three months
ended September 30, 2009. Interest expense was $208,128 for the nine months
ended September 30, 2010 compared to interest expense of $217,956 for the nine
months ended September 30, 2009.




Related
party interest expense increased by $793 and decreased by $123 for the three and
nine month periods ended September 30, 2010 as compared to the three and nine
month periods ended September 30, 2009. We incurred additional short-term
borrowings from related parties beginning in August 2010.





Other
interest expense increased by $187 and decreased by $9,705 for the three and
nine month periods ended September 30, 2010, respectively, as compared to the
three and nine month periods ended September 30, 2009. Our fees for financing
accounts receivable were reduced beginning in June 2009, thereby reducing our
interest expense.




Income Taxes





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


12





Net
Loss




For the
three months ended September 30, 2010,we recorded a net loss
in the amount of $(270,828) or $(.01) per share compared to a net loss of
$(237,042) or $(.01) per share for the three months ended September 30,
2009. For the nine
months ended September 30, 2010,we recorded a net loss
in the amount of $(923,521) or $(.04) per share compared to a net loss of
$(904,551) or $(.04) per share for the nine months ended September 30, 2009.




Stock-Based
Compensation





For the
nine months ended September 30, 2010 and 2009, we recorded expense of $78,514
and $118,580, respectively, for stock options expense issued to employees and
board members and equity instruments issued to consultants.





Liquidity
and Capital Resources




At
September 30, 2010, we had cash of $104,462 available for our working capital
needs and planned capital asset expenditures. Our primary liquidity needs are
the financing of working capital and capital expenditures. Our primary source of
liquidity is cash provided by operations and our factoring line of credit. At
September 30, 2010, we had financing availability, based on eligible accounts
receivable, of $126,000 under this line.




At
September 30, 2010, we had a working capital deficit of approximately $4.6
million and a current ratio of .15. Our objective is to improve our working
capital position from profitable operations. The Plan’s current liabilities have
a significant impact on our working capital. Without the current liabilities of
the Plan of approximately $3.3 million, our working capital deficit would have
been approximately $1.3 million.




During
2010 and 2009, we financed our business activities through the issuance of notes
payable to third parties, sales with recourse of our accounts receivable, and
capital equipment leases. Also, during 2010 and 2009, a certain related party
note holder converted principal and accrued interest payable into shares of our
common stock. During May and August 2010, we received an aggregate of $90,000
through working capital loans from our president and from one of our directors
of which principal of $45,000 were repaid through September 30, 2010. In
addition, through September 30, 2010, $25,000 of principal was repaid on certain
other notes payable to our president. We have used our common stock and common
stock options and warrants to provide compensation to certain employees and
consultants and to fund liabilities.




In June
2008, we received $200,000 through a working capital loan from a third party,
which balance was reduced to $175,000 during 2009 and matures on January 1,
2011. We have notes payable of $265,000 which mature on December 31,
2010. We plan to renegotiate the terms of these notes payable, included in
current liabilities, or seek funds to replace these notes payable. We have
short-term notes payable to related parties which proceeds were used for working
capital. Our borrowings under our accounts receivable financing line change
based on cash required to fund accounts payable and accrued payrolls relative to
the timing of cash received from the payment of client invoices.





We
believe the capital available under our factoring line of credit, from related
party loans, and cash generated by improving the results of our operations
provide sources to fund our ongoing operations and to support the internal
growth we expect to achieve for at least the next 12 months. If we do not
improve the results of our operations in future periods, we expect that
additional working capital will be required to fund our business. Although we
have no assurances, we believe that related parties are one source that will
continue to provide working capital loans to us on similar terms, as in the
past, as may be necessary to fund our on-going operations for at least the next
12 months. If we experience significant growth in our sales, we believe that
this may require us to increase our financing line or obtain additional working
capital from other sources to support our sales growth. There is no assurance
that in the event we need additional funds that adequate additional
working capital will be available or, if available, will be offered on
acceptable terms.





We
anticipate financing our external growth from acquisitions and our longer-term
internal growth through one or more of the following sources: cash from
operations; additional borrowing; issuance of equity; use of our existing
revolving credit facility; or a refinancing of our credit
facilities.




We do not
have the funds available to make required contributions to the Plan which
approximate $2.2 million or intend to make any contributions to the Plan during
2010.


13




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




Nine
      Months Ended
                    September
      30,2010
                  
                  
                  2009Net
      cash used by operating activities
                  
                  $
                  (92,032
                  )
                  
                  $
                  (61,951
                  )Net
      cash used by investing activities
                  
                  
                  (5,078
                  )
                  
                  
                  (6,651
                  )Net
      cash provided/(used) by financing activities
                  
                  
                  4,861
                  
                  
                  
                  (29,447
                  )Net
      decrease in cash
                  
                  $
                  (92,249
                  )
                  
                  $
                  (98,049
                  )





Cash
Flows from Operating Activities




During
the nine months ended September 30, 2010, cash used in operations was $92,032
compared with cash used in operations of $61,951 for the nine months ended
September 30, 2009. Our operating cash flow is primarily affected by the overall
profitability of our contracts, our ability to invoice and collect from our
clients in a timely manner, and our ability to manage our vendor payments. We
have focused on improving our employee utilization rates during 2010 to improve
our gross profit margin. We bill our clients weekly or monthly after services
are performed, depending on the contract terms. Our accounts receivable
decreased principally due to the decline in sales in the 2010 period. The
increase in liabilities is primarily due to increased accrued pension and
retirement expenses offset by a decrease in accounts payable and accrued
expenses.




Cash
Flows from Investing Activities




Cash used
by investing activities for the nine months ended September 30, 2010 was $5,078
compared with $6,651 for the nine months ended September 30, 2009. Cash used in
investing activities was primarily for capital expenditures for computer
hardware and software. We do not have any plans for significant capital
expenditures in the near future.





Cash
Flows from Financing Activities




During
the nine months ended September 30, 2010, cash provided by financing activities
was $4,861 consisting of $90,000 of proceeds from related party borrowings
offset by payments to related parties of $70,000 and principal payments of
$15,139 on notes payable. In comparison, for the nine months ended September 30,
2009, cash used by financing activities was $31,197 for principal payments on
notes payable offset by proceeds from the exercise of common stock options of
$1,750.




Credit
Agreement




We have
secured an accounts receivable financing line of credit from an independent
financial institution that allows us to sell selected accounts receivable
invoices to the financial institution with full recourse against us in the
amount of $2 million, including a sublimit for one major client of $1.5 million.
This provides us with the cash needed to finance certain costs and expenses. At
September 30, 2010, we had financing availability, based on eligible accounts
receivable, of $126,000 under this line. We pay fees based on the length of time
that the invoice remains unpaid.




Future
Trends





As
discussed above, we believe that our operations, as currently structured,
together with our available financial resources, will result in improved
financial performance in future periods. However, we do not have the funds
available to make required contributions to the Plan which approximate $2.2
million or intend to make any contributions to the Plan during
2010.





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




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




14





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




Osley
& Whitney, Inc. Retirement Plan





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




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




If we do
not ultimately prevail, we will become obligated for Plan contributions of
approximately $2.2 million as of September 30, 2010 and 10% excise taxes on
accumulated unfunded Plan contributions for the Plan years ended December 31,
2006 and 2007 of approximately $348,500, as stated above, and potentially
additional 10% excise taxes of approximately $220,000 for the plan year ended
December 31, 2008, which have not been accrued based upon our determination that
we have no legal obligation to act as the Plan sponsor and our belief that the
likelihood is not probable that we will be required to pay these excise taxes.
Further, if we do not ultimately prevail, we may be required to pay interest on
these excise taxes and potentially incur penalties for late payment of excise
taxes and additional excise taxes up to 100% of each year’s required funding
deficiency. We have accrued amounts related to excise taxes, penalties and
interest on unfunded contributions for 2003, 2004 and 2005 of approximately
$463,000 as of September 30, 2010
($445,000 at December 31, 2009). No excise taxes, penalties or interest for
2006, 2007, 2008, and 2009 have been accrued at September 30, 2010 or December
31, 2009. We do not
have the funds available to make required contributions which approximate $2.2
million and do not intend to make any contributions to the Plan during
2010.





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





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




15




At
September 30, 2010, the Plan had an accrued pension obligation liability of
approximately $4,040,000 which includes the underfunded amount plus interest on
past due payments and excise taxes including penalties and interest of
approximately $463,000.  Accumulated other comprehensive loss of $2,805,040
at September 30, 2010 has been recorded as a reduction of stockholders’
deficiency.





The
market value of the Plan assets decreased from $2,004,117 at December 31, 2009
to $1,654,563 at September 30, 2010. The decrease was comprised of investment
gains of $20,663, benefit payments of $335,556 and expenses of
$34,661.





Item 3. Quantitative and Qualitative Disclosures About
Market Risk.





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




Item
4. Controls and Procedures.





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





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





PART
II


OTHER
INFORMATION





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





In August
and September 2010, we granted options to purchase an aggregate of 350,000
shares of our common stock at an exercise price of $0.11 per share. These grants
were exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.





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




Item 6.   Exhibits.


Exhibit No.
                        
                        Description10.31
                        
                        Promissory
      Note between Allan M. Robbins and the Company dated August 13,
      2010.*31.1
                        
                        Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.*31.2
                        
                        Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.*32.1
                        
                        Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.*32.2
                        
                        Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of
2002.*





* Filed
herewith


16




SIGNATURES




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





Infinite Group, Inc.(Registrant)Date:
      November 10, 2010
                /s/ Michael S. SmithMichael
      S. SmithChief
      Executive Officer(Principal
      Executive Officer)Date:
      November 10, 2010
                /s/ James WitzelJames
      WitzelChief
      Financial Officer(Principal
      Financial Officer)


17