**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





Washington,
      D.C. 20549





**FORM
      10-QSB**





**QUARTERLY
      REPORT UNDER SECTION 13 OR 15(D)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**


**FOR
      THE QUARTERLY PERIOD ENDED JUNE 30, 2007**





Commission
      File Number 0-21816





**INFINITE
      GROUP, INC.**


(Exact
      name of small business issuer as specified in its charter)




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




60
      Office
      Park Way


Pittsford,
      New York 14534


(Address
      of principal executive office)





(585)
      385-0610


(Issuer’s
      telephone number, including area code)





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





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


Yes
oNo
x




Number
      of
      shares outstanding of each of the issuer's classes of common equity, as of
      the
      latest practicable date: as of August 10, 2007, there were 23,524,965 shares
      of
      common stock outstanding.





Transitional
      Small Business Disclosure Format. Yes oNo x









INFINITE
      GROUP, INC.


**FORM
      10-QSB REPORT**





TABLE
      OF
      CONTENTS


PAGEPART
                  I - FINANCIAL INFORMATIONItem
                  1.
              Consolidated
                  Financial Statements
              3Balance
                  Sheet - June 30, 2007 (Unaudited) and December 31, 2006 (Audited)
              4Statements
                  of Operations (Unaudited) for the three and six months ended June
                  30, 2007
                  and 2006
              4Statements
                  of Cash Flows (Unaudited) for the six months ended June 30, 2007
                  and
                  2006
              5Notes
                  to Consolidated Financial Statements - (Unaudited)
              6Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operations
              9Item
                  3.
              Controls
                  and Procedures
              17PART
                  II - OTHER INFORMATION.
              Item
                  1.
              Legal
                  Proceedings
              17Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              17Item
                  3.
              Defaults
                  Upon Senior Securities
              17Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              17Item
                  5.
              Other
                  Information
              17Item
                  6.
              Exhibits
              17SIGNATURES
              18





**FORWARD-LOOKING
      STATEMENTS**




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




2




**PART
      I**


**FINANCIAL
      INFORMATION**




**Item
      1. Financial Statements**





**INFINITE
                GROUP, INC.****Consolidated
                Balance Sheets****June
                30,**
            
            **December
                31,****2007**
            
            **2006****(Unaudited)**
            
            
            **(Unaudited)****ASSETS****Current
                assets:**Cash
            
            **$**
            **5,908**
            
            $
            73,786Accounts
                receivable, net of allowance of $53,000 ($53,000 - 2006)
            
            
            **520,320**
            
            
            487,240Notes
                receivable, current portion
            
            
            **2,336**
            
            
            4,968Prepaid
                expenses and other current assets
            
            
            **91,080**
            
            
            38,600******Total
                current assets**
            
            
            **619,644**
            
            
            604,594**Property
                and equipment, net**
            
            
            **49,812**
            
            
            80,612**Other
                assets**-
                security****deposits
            
            
            **19,523**
            
            
            19,523Total
                assets
            
            **$**
            **688,979**
            
            $
            704,729**LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCY****Current
                liabilities:**Accounts
                payable
            
            
            **195,000**
            
            
            224,051Accrued
                payroll
            
            
            **204,946**
            
            
            216,397Accrued
                interest payable
            
            
            **211,810**
            
            
            176,734Accrued
                pension and retirement
            
            
            **1,868,948**
            
            
            1,807,524Accrued
                expenses - other
            
            
            **90,844**
            
            
            62,042****Notes
                payable**-**bank
            
            
            **19,660**
            
            
            50,354Note
                payable
            
            
            **30,000**
            
            
            30,000Notes
                payable-related parties
            
            
            **143,209**
            
            
            148,663**Total
                current liabilities**
            
            
            **2,764,417**
            
            
            2,715,765**Long-term
                obligations:**Notes
                payable-related parties
            
            
            **1,096,124**
            
            
            1,146,124Accrued
                pension expense
            
            
            **792,054**
            
            
            706,196Total
                liabilities
            
            
            **4,652,595**
            
            
            4,568,085Commitments
                and contingencies**Stockholders’
                deficiency:**Common
                stock, $.001 par value, 60,000,000 shares authorized;23,524,965
                (22,414,965 - 2006) shares issued and outstanding
            
            
            **23,525**
            
            
            22,415Additional
                paid-in capital
            
            
            **29,200,402**
            
            
            28,981,059Accumulated
                deficit
            
            
            **(30,608,904**
            **)**
            
            (30,288,191
            )Accumulated
                other comprehensive loss
            
            
            **(2,578,639**
            **)**
            
            (2,578,639
            )Total
                stockholders’ deficiency
            
            
            **(3,963,616**
            **)**
            
            (3,863,356
            )Total
                liabilities and stockholders’ deficiency
            
            **$**
            **688,979**
            
            $
            704,729




See
                notes to consolidated financial
                statements.





3




**INFINITE
                  GROUP, INC.****Consolidated
                  Statements of Operations (Unaudited)****Six
                  Months Ended**
              
              **Three
                  Months Ended****June
                  30,**
              
              **June
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****Sales**
              
              **$**
              **3,944,669**
              
              $
              2,964,002
              
              **$**
              **1,812,262**
              
              $
              1,340,566Cost
                  of services
              
              
              **2,751,949**
              
              
              2,354,776
              
              
              **1,343,342**
              
              
              1,048,917**Gross
                  profit**
              
              
              **1,192,720**
              
              
              609,226
              
              
              **468,920**
              
              
              291,649Costs
                  and expenses:General
                  and administrative
              
              
              **392,479**
              
              
              522,422
              
              
              **176,267**
              
              
              195,627Defined
                  benefit pension plan
              
              
              **189,018**
              
              
              91,783
              
              
              **73,493**
              
              
              45,340Selling
              
              
              **702,764**
              
              
              816,191
              
              
              **366,166**
              
              
              403,657Research
                  and development
              
              
              **87,253**
              
              
              140,710
              
              
              **41,990**
              
              
              72,588Depreciation
                  and amortization
              
              
              **18,117**
              
              
              43,627
              
              
              **8,810**
              
              
              30,588Total
                  costs and expenses
              
              
              **1,389,631**
              
              
              1,614,733
              
              
              **666,726**
              
              
              747,800**Operating
                  loss**
              
              
              **(196,911**
              **)**
              
              (1,005,507
              )
              
              **(197,806**
              **)**
              
              (456,151
              )Other
                  income (expense):Interest
                  income
              
              
              **212**
              
              
              501
              
              
              **84**
              
              
              233Interest
                  expense:Related
                  parties
              
              
              **(70,279**
              **)**
              
              (58,035
              )
              
              **(34,654**
              **)**
              
              (28,739
              )Other
              
              
              **(59,721**
              **)**
              
              (29,156
              )
              
              **(30,746**
              **)**
              
              (15,522
              )****Total
                  interest expense
              
              
              **(130,000**
              **)**
              
              (87,191
              )
              
              **(65,400**
              **)**
              
              (44,261
              )Other
                  income
              
              
              **6,591**
              
              
              498,088
              
              
              **6,591**
              
              
              -****Total
                  other income (expense)
              
              
              **(123,197**
              **)**
              
              411,398
              
              
              **(58,725**
              **)**
              
              (44,028
              )Loss
                  before income tax expense
              
              
              **(320,108**
              **)**
              
              (594,109
              )
              
              **(256,531**
              **)**
              
              (500,179
              )Income
                  tax expense
              
              
              **(605**
              **)**
              
              (7,300
              )
              
              ******-**
              
              
              -Net
                  loss
              
              **$**
              **(320,713**
              **)**
              $
              (601,409
              )
              **$**
              **(256,531**
              **)**
              $
              (500,179
              )Net
                  loss per share - basic and diluted
              
              **$**
              **(.01**
              **)**
              $
              (.03
              )
              **$**
              **(.01**
              **)**
              $
              (.02
              )Weighted
                  average number of sharesoutstanding
                  - basic and diluted
              
              
              **22,803,805**
              
              
              20,397,940
              
              
              **23,188,372**
              
              
              20,933,053




See
                notes to consolidated financial
                statements.





4


**INFINITE
                  GROUP, INC.****Consolidated
                  Statements of Cash Flows (Unaudited)****For
                  the Six Months Ended****June
                  30,****2007**
              
              
              **2006****Operating
                  activities:**Net
                  loss
              
              **$**
              **(320,713**
              **)**
              $
              (601,409
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Stock
                  based compensation
              
              
              **132,453**
              
              
              107,921Depreciation
                  and amortization
              
              
              **18,117**
              
              
              43,627Gain
                  on disposal of equipment
              
              
              **(6,591**
              **)**
              
              -(Increase)
                  decrease in assets:Accounts
                  receivable
              
              
              **(33,080**
              **)**
              
              560,182Inventories
              
              
              **-**
              
              
              (2,013
              )Other
                  assets
              
              
              **(14,980**
              **)**
              
              (12,524
              )Increase
                  (decrease) in liabilities:Accounts
                  payable
              
              
              **(29,051**
              **)**
              
              (245,751
              )Accrued
                  expenses
              
              
              **52,427**
              
              
              18,322Accrued
                  pension and retirement
              
              
              **147,282**
              
              
              116,594**Net
                  cash used in operating activities**
              
              
              **(54,136**
              **)**
              
              (15,051
              )**Investing
                  activities:**Purchase
                  of property and equipment
              
              
              **(5,365**
              **)**
              
              (14,315
              )Proceeds
                  from notes receivable
              
              
              **2,632**
              
              
              2,559**Net
                  cash used in investing activities**
              
              
              **(2,733**
              **)**
              
              (11,756
              )**Financing
                  activities:**Net
                  repayments of bank notes payable
              
              
              **(6,055**
              **)**
              
              (6,445
              )Net
                  repayments of note payable-related party
              
              
              **(5,454**
              **)**
              
              **-**Proceeds
                  from exercise of stock options
              
              
              **500**
              
              
              420**Net
                  cash used in financing activities**
              
              
              **(11,009**
              **)**
              
              (6,025
              )Net
                  decrease in cash
              
              
              **(67,878**
              **)**
              
              (32,832
              )Cash
                  - beginning of period
              
              
              **73,786**
              
              
              109,090Cash
                  - end of period
              
              **$**
              **5,908**
              
              $
              76,258Supplemental
                  disclosure:Cash
                  paid for:Interest
              
              **$**
              **100,856**
              
              $
              71,894Income
                  taxes
              
              **$**
              **605**
              
              $
              7,300
  See
                  notes to consolidated financial
                  statements.





5





**INFINITE
      GROUP, INC.**





**Notes
      to Consolidated Financial Statements** - **(Unaudited)**





**Note
      1. Basis of Presentation**





The
      accompanying unaudited consolidated financial statements of Infinite Group,
      Inc.
      (“Infinite Group, Inc.” or the “Company”), included herein have been prepared by
      the Company in accordance with accounting principles generally accepted in
      the
      United States of America (U.S.) for interim financial information and with
      instructions to Form 10-QSB. 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-KSB for the year ended
      December 31, 2006 filed with the U.S. Securities and Exchange Commission.
      Results of consolidated operations for the six months ended June 30, 2007 are
      not necessarily indicative of the operating results that may be expected for
      the
      year ending December 31, 2007. The consolidated financial statements herein
      include the accounts of the Company and its wholly owned subsidiaries. The
      subsidiaries are inactive. All material inter-company accounts and transactions
      have been eliminated.





**Note
      2. Summary of Significant Accounting Policies**




There
      are
      several accounting policies that we believe are significant to the presentation
      of our consolidated financial statements. These policies require management
      to
      make complex or subjective judgments about matters that are inherently
      uncertain. Note 3 to our audited consolidated financial statements for the
      year
      ended December 31, 2006 presents a summary of significant accounting
      policies.




The
      Company reclassified certain prior year amounts to conform to the current year’s
      presentation.





**Note
      3. Stock Option Plans and Equity Instruments**





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





As
      of
      June 30, 2007 the Company’s Stock Option Plans (the “Plan”) provided for the
      grant of incentive (ISO’s) or non-qualified stock options (Non-ISO’s) for the
      purchase of common stock for up to 5,213,000 shares to employees, directors
      and
      consultants. The Plan is administered by the compensation committee established
      by the Company’s board of directors, which determines the terms of the options
      including the exercise price, expiration date, number of shares, and vesting
      provisions.





The
      Company used volatility of 50% when computing the value of stock options and
      warrants for the three and six months ended June 30, 2007, 71% for the three
      months ended June 30, 2006, and 100% for the three months ended March 31, 2006.
      This is based on historical volatility, with consideration given to trading
      activity subsequent to July 2005, when the Company brought current its public
      information in filings with the SEC, and the increase in the volume of trading
      in the Company’s common stock in 2006 and 2007. The Company believes the
      increase in the volume of trading has provided more liquidity and less
      volatility than was previously experienced. The expected dividend yield is
      zero
      percent and the expected life of the options is ten years. The risk-free rate
      for periods within the contractual life of the option is based on the U.S.
      Treasury yield curve in effect at the time of grant.





The
      Company recorded expense for options, common stock and warrants issued to
      employees and independent service providers for the three and six months ended
      June 30, 2007 and 2006 as follows:





**Six
                Months ended**
              **June
                30, 2007**
            
            Six
                Months ended
              June
                30, 2006
            
            **Three
                Months ended**
              **June
                30, 2007**
            
            Three
                Months ended
              June
                30, 2006Employee
                stock options
            
            **$**
            **83,059**
            
            $
            96,527
            
            **$**
            **44,815**
            
            $
            72,942Consultants
                - stock warrants
            
            
            **36,894**
            
            
            8,385
            
            
            **19,713**
            
            
            4,193Consultant
                - shares of common stock
            
            
            **12,500**
            
            
            -
            
            
            **12,500**
            
            
            -Consultant
                -stock options
            
            
            **-**
            
            
            3,009
            
            
            **-**
            
            
            1,504Total
                expense
            
            **$**
            **132,453**
            
            $
            107,921
            
            **$**
            **77,028**
            
            $
            78,639




6




A
      summary
      of all stock option activity for six months ended June 30, 2007
      follows:


**Number
                  of****Option****s**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Weighted-Average
                  Remaining Contractual****Term**
              
              **Aggregate****Intrinsic
                  Value**Outstanding
                  at December 31, 2006
              
              
              4,380,000
              
              $
              .24Options
                  granted
              
              
              95,000
              
              $
              .55Options
                  expired
              
              
              (14,500
              )
              $
              .41Options
                  exercised
              
              
              (10,000
              )
              $
              .05Outstanding
                  at June 30, 2007
              
              
              4,450,500
              
              $
              .25
              
              
              7.6
                  years
              
              $
              1,627,060Exercisable
                  at June 30, 2007
              
              
              3,724,167
              
              $
              .22
              
              
              7.3
                  years
              
              $
              1,484,327





The
      weighted average fair value of options granted during the six months ended
      June
      30, 2007 was approximately $.37 ($.34 during the six months ended June 30,
      2006). The total intrinsic value of options exercised during the six months
      ended June 30, 2007 and 2006 was $4,700 and $480, respectively.





A
      summary
      of nonvested stock option activity for the six months ended June 30, 2007
      follows:


**Number
                  of Nonvested****Options**
              
              **Weighted
                  Average**
                **Fair
                  Value**
                **at
                  Grant Date**Nonvested
                  outstanding at December 31, 2006
              
              
              784,000
              
              $
              .30Options
                  granted
              
              
              95,000
              
              $
              .37Options
                  vested
              
              
              (144,667
              )
              $
              .23Options
                  forfeited
              
              
              (8,000
              )
              $
              .37Nonvested
                  outstanding at June 30, 2007
              
              
              726,333
              
              $
              .32




At
      June
      30, 2007, there was approximately $133,000 of total unrecognized compensation
      cost related to non-vested options granted under the Plan. That cost is expected
      to be recognized over a weighted average period of one year. The total fair
      value of shares vested during the six months ended June 30, 2006 was
      approximately $33,000.




On
      April
      5, 2007, the Company engaged the services of a consultant, an accredited
      investor, to assist with business development for a term of one year through
      April 4, 2008 and issued it (i) 100,000 restricted shares of common stock and
      (ii) a warrant to acquire 100,000 shares of common stock, exercisable at $.50
      per share, which expires on April 4, 2012. The agreements have been accounted
      for in accordance with EITF 96-18 “Accounting for Equity Instruments That Are
      Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
      Goods or Services” whereby the fair value of the equity instrument is determined
      on the measurement date and the expense recorded as the performance criteria
      are
      met. Total expense recognized for these equity instruments for the six months
      ended June 30, 2007 was $18,594.





On
      April
      24, 2007, upon the exercise of an outstanding stock option under our Plan,
      the
      Company issued 10,000 restricted shares of common and received aggregate
      proceeds of $500.




7





On
      May 1,
      2007, outstanding convertible notes in the aggregate principal amount of $50,000
      with a conversion price of $.05 per share, were converted by the note holders
      in
      accordance with the terms of the notes. Upon conversion, the Company issued
      a
      total of 1,000,000 restricted shares of common stock.





**Note
      4. Supplemental Cash Flow Information**





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





**Six
                Months Ended**
              **June
                30,****2007**
            
            **2006**Conversion
                of notes payable to common stock
            
            **$**
            **50,000**
            
            $
            100,000Issuance
                of 100,000 shares of common stock in exchange for consulting services
                to
                be provided over one year
            
            **$**
            **50,000**
            
            $
            -




**Note
      5. Earnings Per Share**





Basic
      net
      loss per share is based on the weighted average number of common shares
      outstanding during the periods presented. Diluted income (loss) per share is
      based on the weighted average number of common shares outstanding, as well
      as
      dilutive potential common shares which, in the Company’s case, comprise shares
      issuable under stock options, stock warrants and convertible notes payable.
      Stock options, warrants and convertible notes payable with exercise prices
      that
      exceeded the average fair market value of common stock had an antidilutive
      effect and therefore, were excluded from the computation of net income (loss)
      per share. The treasury stock method is used to calculate dilutive shares,
      which
      reduces the gross number of dilutive shares by the number of shares purchasable
      from the proceeds of the equity instruments assumed to be exercised.





If
      the
      Company had generated earnings, common stock equivalents would have been added
      to the weighted average shares outstanding during the three and six months
      ended
      June 30, 2007 and 2006 as follows. These additional shares represent the assumed
      exercise of common stock options, warrants and convertible notes payable whose
      exercise price is less than the average of common stock during the period and
      convertible notes payable. The proceeds of the exercise are assumed to be used
      to purchase common stock for treasury and the incremental shares are added
      to
      the weighted average shares outstanding. 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.





**Six
                Months Ended June 30,**
            
            **Three
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Weighted
                average number of shares outstanding
            
            
            **22,803,805**
            
            
            20,397,940
            
            
            **23,188,372**
            
            
            20,933,053Common
                stock equivalents
            
            
            **19,452,855**
            
            
            5,334,160
            
            
            **19,056,808**
            
            
            8,794,621





**Note
      6. - Employee Pension Plan**





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





**Six
                Months ended**
              **June
                30, 2007**
            
            Six
                Months ended
              June
                30, 2006
            
            **Three
                Months ended**
              **June
                30, 2007**
            
            Three
                Months ended
              June
                30, 2006Interest
                cost
            
            **$**
            **160,693**
            
            **$**
            **151,745**
            
            **$**
            **84,821**
            
            **$**
            **75,872**Expected
                return on plan assets
            
            
            **(137,055**
            **)**
            
            **(137,055**
            **)**
            
            **(68,527**
            **)**
            
            **(68,527**
            **)**Service
                cost
            
            
            **32,500**
            
            
            **32,500**
            
            
            **16,250**
            
            
            **16,250**Expected
                expenses
            
            
            **65,125**
            
            
            **65,125**
            
            
            **32,563**
            
            
            **32,563**Net
                periodic pension cost
            
            **$**
            **121,263**
            
            **$**
            **112,315**
            
            **$**
            **65,107**
            
            **$**
            **56,158**





8





**Note
      7. - New Accounting Pronouncements**





Effective
      January 1, 2007, the Company adopted the provisions of FASB Interpretation
      No.
      48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — An Interpretation
      of FASB Statement No. 109.” FIN 48 provides detailed guidance for the financial
      statement recognition, measurement and disclosure of uncertain tax positions
      recognized in the financial statements in accordance with SFAS No. 109. Tax
      positions must meet a “more-likely-than-not” recognition threshold at the
      effective date to be recognized upon the adoption of FIN 48 and in subsequent
      periods. Upon the adoption of FIN 48, the Company had no unrecognized tax
      benefits. During the six months ended June 30, 2007, the Company recognized
      no
      adjustments for uncertain tax benefits.





Income
      taxes are computed using the asset and liability method of accounting. Under
      the
      asset and liability method, a deferred tax asset or liability is recognized
      for
      estimated future tax effects attributable to temporary differences and
      carryforwards. The measurement of deferred income tax assets is adjusted by
      a
      valuation allowance, if necessary, to recognize future tax benefits only to
      the
      extent, based on available evidence, it is more likely than not such benefits
      will be realized. The Company’s deferred tax assets were fully reserved at June
      30, 2007 and December 31, 2006.





The
      Company recognizes interest and penalties, if any, related to uncertain tax
      positions in selling, general and administrative expenses or to defined benefit
      pension plan expense if they are associated with the Osley & Whitney, Inc.
      Retirement Plan (O&W Plan). The Company has accrued interest and excise
      taxes associated with the contributions that the Company was not able to
      contribute to the O&W Plan. No interest and penalties related to uncertain
      tax positions were accrued at June 30, 2007.





The
      tax
      years 2002 through 2006 remain open to examination by the taxing jurisdictions
      in which the Company operates. The Company expects no material changes to
      unrecognized tax positions within the next twelve months.





**Item
      2.**  **Management’s
      Discussion and Analysis or Plan of Operations**





**Our
      Business**





With
      offices in Pittsford, New York, Vienna, Virginia and Jackson, Mississippi,
      we
      provide business, program management and information technology (IT) services
      and systems support to federal, state and local government and commercial
      clients through our IT Services Group. Our work includes leading edge operations
      supporting complex programs in advanced computing environments (network
      services), server and desktop virtualization technology, wireless technology,
      human capital services, financial services, enterprise architecture, and earned
      value management. We focus on aligning business processes with technology for
      delivery of solutions meeting our clients’ exact needs.





In
      December 2003, we were awarded a Federal Supply Schedule Contract by the U.S.
      General Services Administration (GSA) for IT consulting services. As a GSA
      contractor we can compete for and secure prime contracts with all executive
      agencies of the U.S. Government, as well as state and local governments and
      other national and international organizations. As of June 30, 2007, we have
      one
      prime contract under our GSA schedule with the U.S. Department of Homeland
      Security.





During
      the three months ended June 30, 2007, we were approved as a VMware Authorized
      Consultant (VAC) by VMware, a subsidiary of EMC Corporation (NYSE:EMC). VMware
      is recognized as the industry leader in virtualization technology. As a VAC,
      we
      are trained and certified to deliver consulting services and solutions
      leveraging VMware technology. We are also certified as aVMware Enterprise VIP
      Reseller authorized to resell VMware’s full product line. We are actively
      working with a number of potential customers in that regard. These
      certifications are examples of our concerted effort to grow and expand our
      server virtualization practice. Server
      virtualization involves the creation, allocation, and management of “virtual
      machines,” which entails the virtual representation of hardware by a software
      system. What this means is that traditional “physical servers,” which typically
      run at only 5% to 15% of their capacity, can now be consolidated with the use
      of
      specialized software such as VMware to increase server utilization by a factor
      of ten to one or even greater. Reducing the number of physical machines required
      in a typical environment provides numerous and obvious benefits, including
      equipment cost savings, reduced operational maintenance costs, easier backup,
      improved availability, and better security.  Due to the substantial energy
      savings resulting from reduced infrastructure, virtualization is also a “green”
technology.




In
      July
      2007, we were accepted into the Hewlett Packard (NYSE:HPQ) Developer and
      Solutions Partner Program (DSPP). DSPP
      provides us with a mechanism to work with HP and our joint customers and
      prospects to provide solutions and services that complement HP's broad portfolio
      of products and services. HP has many tools and resources to help us generate
      new sales streams, and improve our mutual profitability, while at the same
      time
      adding unique value for our joint customers. The program comprises practical
      tools and services that we hope will help us in the key areas of marketing
      and
      selling our solutions, optimizing the technology, and collaborating with other
      organizations within our industry.




9




In
      August
      2007, we were notified that we were part of a team led by a large systems
      integrator that was awarded a Government Wide Acquisition Contract (GWAC) under
      GSA’s $50 billion Alliant program.





**Osley
      & Whitney, Inc. Retirement Plan**





Since
      our
      sale of all of the common stock of Osley & Whitney, Inc. (O&W) on
      December 30, 2002, we have continued to act as the sponsor of the O&W
      Retirement Plan (O&W Plan), a defined benefit pension plan.





Although
      we have continued to act as the sponsor of the O&W Plan after the sale,
      recently it was determined that we may not have had, or currently have, a legal
      obligation to do so. During the six months ended June 30, 2007, we submitted
      information advocating this position to the Department of Treasury to ascertain
      whether they concur or disagree with this determination. The Department of
      Treasury is presently reviewing this information. If they do not concur with
      our
      position, we intend to pursue all appropriate further avenues to prevail on
      our
      position. Depending upon the ultimate outcome regarding our obligations as
      sponsor of the O&W Plan, adjustments to our financial statements may be
      necessary.





At
      June
      30, 2007, the O&W Plan had an accrued pension obligation liability of
      $2,598,373 and an accumulated other comprehensive loss of $2,578,639 which
      we
      have recorded as a reduction of stockholders’ equity. The market value of plan
      assets decreased by $5,226 from $3,497,115 at December 31, 2006 to $3,491,889
      at
      June 30, 2007. The decrease was comprised of investment returns of $222,885
      which were offset by benefit payments of $212,111 and expenses paid of $16,000.




Whether
      or not we ultimately will be responsible to fund any O&W Plan deficiencies
      is largely dependent upon the ultimate outcome regarding our obligations as
      sponsor of the O&W Plan, as described above. If it is determined that we are
      responsible for such deficiencies, then we will be required to make
      contributions for deficiencies in 2004, 2005, 2006, 2007, and in future years
      to
      fund any O&W Plan deficiencies. We did not make any contributions in 2004,
      2006 or 2007. During 2005, we made contributions of $6,439 and 500,000 shares
      of
      our common stock, which were valued on the contribution date at $175,000 using
      that day’s closing market price. We currently do not have the funds available to
      make the required contributions which currently approximate $1.5 million, which
      includes the minimum required plan contributions. We recorded defined benefit
      pension expense (including professional services and interest costs) of $189,018
      and $91,783 for the six months ended June 30, 2007 and 2006, respectively.
      In
      2006 and 2005, we recorded aggregate excise taxes of $268,200. We may be
      required to pay interest on these excise taxes and potentially could incur
      additional excise taxes up to 100% of required plan contributions that were
      not
      made.





During
      2006, the Pension Benefit Guarantee Corporation placed a lien on all of our
      assets to secure pension payments due under the O&W Plan. This lien is
      subordinate to liens that secure accounts receivable financing and certain
      notes
      payable.




**Future
      Trends**




We
      believe that our operations, as currently structured, together with our current
      financial resources, will result in improved financial performance in future
      years. Although our future prospects appear promising, the lengthy government
      financing and procurement processes may result in operating losses until sales
      increase to support our infrastructure and provide consistent cash flow to
      support profitability.





In
      the
      future, we may issue additional debt or equity securities to satisfy our cash
      needs. Any debt incurred or issued may be secured or unsecured, at fixed or
      variable interest rates and may contain other terms and conditions that our
      board of directors deems prudent. Any sales of equity securities may be at
      or
      below current market prices. We cannot assure you that we will be successful
      in
      generating sufficient capital to adequately fund our working capital
      needs.




10




**Results
      of Operations**





**Comparison
      of Three and Six Month Periods ended June 30, 2007 and
      2006**





The
      trends suggested by the following tables are not indicative of future operating
      results due to the relatively short track record that we have in focusing on
      providing IT consulting services.





The
      following table compares our statements of operations data for the three months
      ended June 30, 2007 and 2006.





Three
                  Months Ended June 30,2007
                  vs. 2006As
                  a % of
              
              
              
              As
                  a % of
              
              Amount
                  of
              
              %
                  Increase2007
              
              Sales
              
              2006
              
              Sales
              
              Change
              
              (Decrease)Sales
              
              $
              1,812,262
              
              
              100.0
              %
              $
              1,340,566
              
              
              100.0
              %
              $
              471,696
              
              
              35.2
              %Cost
                  of services
              
              
              1,343,342
              
              
              74.1
              
              
              1,048,917
              
              
              78.2
              
              
              294,425
              
              
              28.1Gross
                  profit
              
              
              468,920
              
              
              25.9
              
              
              291,649
              
              
              21.8
              
              
              177,271
              
              
              60.8General
                  and administrative
              
              
              176,267
              
              
              9.7
              
              
              195,627
              
              
              14.6
              
              
              (19,360
              )
              
              (9.9
              )Defined
                  benefit pension plan
              
              
              73,493
              
              
              4.1
              
              
              45,340
              
              
              3.4
              
              
              28,153
              
              
              62.1Selling
              
              
              366,166
              
              
              20.2
              
              
              403,657
              
              
              30.1
              
              
              (37,491
              )
              
              (9.3
              )Research
                  and development
              
              
              41,990
              
              
              2.3
              
              
              72,588
              
              
              5.4
              
              
              (30,598
              )
              
              (42.2
              )Depreciation
                  and amortization
              
              
              8,810
              
              
              0.5
              
              
              30,588
              
              
              2.3
              
              
              (21,778
              )
              
              (71.2
              )Total
                  costs and expenses
              
              
              666,726
              
              
              36.8
              
              
              747,800
              
              
              55.8
              
              
              (81,074
              )
              
              (10.8
              )Operating
                  loss
              
              
              (197,806
              )
              
              (10.9
              )
              
              (456,151
              )
              
              (34.0
              )
              
              258,345
              
              
              (56.6
              )Interest
                  expense, net
              
              
              (65,316
              )
              
              (3.6
              )
              
              (44,028
              )
              
              (3.3
              )
              
              (21,288
              )
              
              48.4Other
                  income
              
              
              6,591
              
              
              0.4
              
              
              -
              
              
              0.0
              
              
              6,591Net
                  loss
              
              $
              (256,531
              )
              
              (14.2
              )%
              $
              (500,179
              )
              
              (37.3
              )%
              $
              243,648
              
              
              (48.7
              )%Net
                  loss per share - basic and diluted
              
              $
              (.01
              )
              
              
              
              $
              (.02
              )
              
              
              
              $
              .01




The
      following table compares our statements of operations data for the six months
      ended June 30, 2007 and 2006.


Six
                  Months Ended June 30,2007
                  vs. 2006As
                  a % of
              
              
              
              As
                  a % of
              
              Amount
                  of
              
              %
                  Increase2007
              
              Sales
              
              2006
              
              Sales
              
              Change
              
              (Decrease)Sales
              
              $
              3,944,669
              
              
              100.0
              %
              $
              2,964,002
              
              
              100.0
              %
              $
              980,667
              
              
              33.1
              %Cost
                  of services
              
              
              2,751,949
              
              
              69.8
              
              
              2,354,776
              
              
              79.4
              
              
              397,173
              
              
              16.9Gross
                  profit
              
              
              1,192,720
              
              
              30.2
              
              
              609,226
              
              
              20.6
              
              
              583,494
              
              
              95.8General
                  and administrative
              
              
              392,479
              
              
              9.9
              
              
              522,422
              
              
              17.6
              
              
              (129,943
              )
              
              (24.9
              )Defined
                  benefit pension plan
              
              
              189,018
              
              
              4.8
              
              
              91,783
              
              
              3.1
              
              
              97,235
              
              
              105.9Selling
              
              
              702,764
              
              
              17.8
              
              
              816,191
              
              
              27.5
              
              
              (113,427
              )
              
              (13.9
              )Research
                  and development
              
              
              87,253
              
              
              2.2
              
              
              140,710
              
              
              4.7
              
              
              (53,457
              )
              
              (38.0
              )Depreciation
                  and amortization
              
              
              18,117
              
              
              0.5
              
              
              43,627
              
              
              1.5
              
              
              (25,510
              )
              
              (58.5
              )Total
                  costs and expenses
              
              
              1,389,631
              
              
              35.2
              
              
              1,614,733
              
              
              54.5
              
              
              (225,102
              )
              
              (13.9
              )Operating
                  loss
              
              
              (196,911
              )
              
              (5.0
              )
              
              (1,005,507
              )
              
              (33.9
              )
              
              808,596
              
              
              (80.4
              )Interest
                  expense, net
              
              
              (129,788
              )
              
              (3.3
              )
              
              (86,690
              )
              
              (2.9
              )
              
              (43,098
              )
              
              49.7Other
                  income
              
              
              6,591
              
              
              0.2
              
              
              498,088
              
              
              16.8
              
              
              (491,497
              )
              
              (98.7
              )Income
                  tax expense
              
              
              (605
              )
              
              (0.0
              )
              
              (7,300
              )
              
              (0.2
              )
              
              6,695
              
              
              (91.7
              )Net
                  loss
              
              $
              (320,713
              )
              
              (8.1
              )%
              $
              (601,409
              )
              
              (20.3
              )%
              $
              280,696
              
              
              (46.7
              )%Net
                  loss per share - basic and diluted
              
              $
              (0.01
              )
              
              
              
              $
              (0.03
              )
              
              
              
              $
              0.02




11




**Sales**





Sales
      for
      the three months ended June 30, 2007 were $1,812,262, an increase of $471,696
      or
      35.2% as compared to sales for the three months ended June 30, 2006 of
      $1,340,566. Sales for the six months ended June 30, 2007 were $3,944,669, an
      increase of $980,667 or 33.1% as compared to sales for the six months ended
      June
      30, 2006 of $2,964,002. A significant portion of this increase was a result
      of
      sales from new projects including a significant server virtualization project
      for a major establishment of the U.S. Government.





Server
      virtualization involves the creation, allocation, and management of “virtual
      machines,” which entails the virtual representation of hardware by a software
      system. What this means is that traditional “physical servers,” which typically
      run at only 5% to 15% of their capacity, can now be consolidated with the use
      of
      specialized software such as VMware to increase server utilization by a factor
      of ten to one or even greater. Reducing the number of physical machines required
      in a typical environment provides numerous and obvious benefits, including
      equipment cost savings, reduced operational maintenance costs, easier backup,
      improved availability, and better security.  Due to the substantial energy
      savings resulting from reduced infrastructure, virtualization is also a “green”
technology. We continue to devote substantial resources to support our expanding
      server and desktop virtualization practice.





In
      March
      2006, one of our subcontracts for services to the U.S. Department of Homeland
      Security ended when the project ended. One other subcontract had staffing
      reductions. Most of our government contracts have a lifecycle; there is a
      beginning, middle and an end. Contracts end naturally when projects are
      completed or when appropriations of funds have been fully depleted and new
      appropriations have not been approved. Our ongoing business development efforts
      entail the submission of numerous contract proposals and the identification
      of
      opportunities for other new contracts to replace sales that do not continue
      in
      the ordinary course of business and to increase our sales.





We
      are
      actively pursuing opportunities to develop additional sales from new and
      existing target markets. In March 2006, we opened a regional office in Jackson,
      Mississippi, and hired a new business development employee and retained a
      lobbying firm to pursue state and local government business opportunities within
      the Gulf Coast region. Moreover, we are also channeling energies towards forming
      alliances with large systems integrators, who are mandated by federal policy
      to
      direct defined percentages of their work to small business subcontractors.
      In
      addition, we are currently working on proposals for contract awards that we
      believe will enhance our position as a government contractor.





Early
      successes in our recent initiatives are evident in the preferred relationships
      we have earned with several large systems integrators and one major product
      house. In August 2007, we were notified that we were part of a team led by
      a
      large systems integrator that was awarded a Government Wide Acquisition Contract
      (GWAC) under GSA’s $50 billion Alliant program. In addition, we are a member of
      a team that won the U.S. State Department’s recent Hybrid Information Technology
      Support Services (HITSS) contract. Under our agreement with the prime
      contractor, we are identified as a primary Earned Value Management resource.
      However, although we believe our future prospects are robust, the lengthy
      government financing and procurement processes may result in continuing
      operating losses until sales increase to support our infrastructure and provide
      consistent profitability.





**Cost
      of Services and Gross Profit**





Cost
      of
      services represents the cost of employee services related to the IT Services
      Group. Cost of services for the three months ended June 30, 2007 was $1,343,342
      or 74.1% of sales as compared to $1,048,917 or 78.2% of sales for the three
      months ended June 30, 2006. Gross profit was $468,920 or 25.9% of sales for
      the
      three months ended June 30, 2007 compared to $291,649 or 21.8% of sales for
      the
      three months ended June 30, 2006. Cost of services for the six months ended
      June
      30, 2007 was $2,751,949 or 69.8% of sales as compared to $2,354,776 or 79.4%
      of
      sales for the six months ended June 30, 2006. Gross profit was $1,192,720 or
      30.2% of sales for the six months ended June 30, 2007 compared to $609,226
      or
      20.6% of sales for the six months ended June 30, 2006.




The
      increase in gross profit in 2007 is due to a change in the mix of our business
      resulting from new projects, including a significant server virtualization
      project, at improved profit margins and a reduction in the costs of employees
      who did not generate billable sales after contract reductions.





Although
      our objective is to maintain an overall gross margin of approximately 30%,
      in
      the future we may submit bids on new work with lower gross profit margins to
      generate opportunities for long-term, larger volume contracts and more stable
      sales.





**General
      and Administrative Expenses**





General
      and administrative expenses include corporate overhead such as compensation
      and
      benefits for administrative and finance personnel, rent, insurance, professional
      fees, travel, and office expenses. General and administrative expenses for
      the
      three months ended June 30, 2007 were $176,267 which was a decrease of $19,360
      or 9.9% as compared to $195,627 for the three months ended June 30, 2006 due
      to
      slight decreases in a variety of general and administrative expense categories.
      As a percentage of sales, general and administrative expenses were 9.7% for
      the
      three months ended June 30, 2007 as compared to 14.6% for the three months
      ended
      June 30, 2006.




12





General
      and administrative expenses for the six months ended June 30, 2007 decreased
      by
      $129,943 or 24.9%. As a percentage of sales, general and administrative expenses
      were 9.9% for the six months ended June 30, 2007 and 17.6% for the six months
      ended June 30, 2006. This change was due in part to an increase in sales for
      the
      six months ended June 30, 2007 compared to 2006. In 2007, we experienced a
      decrease in compensation expense of $76,800 in part from consolidating certain
      administrative functions. In addition, we incurred certain non-recurring
      expenses in 2006 including legal fees of $25,000 due to administering our
      contracts and annual stockholder meeting proxy expenses of approximately
      $18,400.





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





**Defined
      Benefit Pension Plan Expenses**





Defined
      benefit pension plan expenses are expenses (including pension expense, excise
      taxes, professional services, and interest costs) associated with the O&W
      Plan. These expenses were $73,493 for the three months ended June 30, 2007
      and
      $45,340 for the three months ended June 30, 2006, an increase of $28,153, and
      $189,018 for the six months ended June 30, 2007 and $91,783 for the six months
      ended June 30, 2006, an increase of $97,235. The increase is due to accruing
      interest on unfunded contributions and increases in legal and professional
      fees.





During
      2006, the Pension Benefit Guarantee Corporation placed a lien on all of our
      assets to secure pension payments due under the O&W Plan. This lien is
      subordinate to liens that secure accounts receivable financing and certain
      notes
      payable.





Although
      we have acted as the sponsor of the O&W Plan since we acquired O&W,
      recently it was determined that we may not have had, or currently have, a legal
      obligation to do so since December 30, 2002 when we sold all of the common
      stock
      of O&W to a third party. During the six months ended June 30, 2007, we
      incurred additional legal and professional fees in connection with advocating
      this position with the appropriate regulatory authorities to ascertain whether
      they concur or disagree with this determination. We are seeking the concurrence
      of the Department of Treasury and have recently provided to them the information
      related to our determination. They are presently reviewing this
      information.





If
      our
      current efforts do not result in a concurrence with our position, we intend
      to
      pursue all appropriate further avenues to prevail in our position. Depending
      upon the ultimate outcome regarding our obligations as sponsor of the O&W
      Plan, adjustments to our financial statements may be necessary.





**Selling
      Expenses**





For
      the
      three months ended June 30, 2007, we incurred selling expenses of $366,166
      associated with growing the business in our IT Services Group as compared to
      $403,657 for the three months ended June 30, 2006, a decrease of 37,491 or
      9.3%.
      For the six months ended June 30, 2007 we incurred selling expenses of $702,764
      associated with growing business in our IT Services Group compared to $816,191
      for the six months ended June 30, 2006, a decrease of $113,427 or 13.9%.





Selling
      expenses consist of our business development staff including salaries, benefits,
      sales consultants, and travel expenses. As a result of the completion of one
      subcontract during the first quarter of 2006, we reduced certain salaried
      selling positions. During the second quarter of 2006, we hired new business
      development personnel, including a new business development director. In June
      2007, we hired a new business development employee to focus efforts toward
      increasing sales of physical
      to virtual server consolidation projects .





We
      experienced a decrease in consulting expense of $48,588 and $118,493 for the
      three and six months ended June 30, 2007, respectively, as a result of our
      hiring of a consultant as an employee in the third quarter of 2006 and our
      reduction of the use and rate of compensation to other independent consultants.





We
      continued to incur expenses during the three and six months ended June 30,
      2007
      associated with our new business development efforts in the Gulf Coast
      region.





**Research
      and Development Expenses**





For
      the
      three months ended June 30, 2007, we recorded $41,990 of research and
      development expenses, a decrease of $30,598 compared to $72,588 for the three
      months ended June 30, 2006. For the six months ended June 30, 2007, we recorded
      $87,253 of research and development expenses compared to $140,710 for the six
      months ended June 30, 2006, a decrease of $53,457. In 2007, these expenses
      were
      principally related to examining new business opportunities and to a lesser
      extent for the development of an access control terminal and related software
      called TouchThruTM. TouchThruTM is a self-contained terminal enabling physical
      access control using biometric identification. It incorporates fingerprint
      matching technology licensed from Ultra-Scan Corporation, a private technology
      company headquartered in Buffalo, New York. We reduced expenses associated
      with
      this product’s development in 2007.




13





We
      believe that significant resources will be required to market and sell a newly
      designed TouchThruTM product that is based on Ultra-Scan’s next generation
      scanner. Given our limited financial resources at this time and other business
      priorities, this will be deferred until the market is better established and
      we
      have the necessary working capital to support this product. We will continue
      to
      monitor the market and determine the appropriate time to enter this market.





**Depreciation
      and Amortization Expenses**





Depreciation
      and amortization expense decreased by $21,778 to $8,810 for the three months
      ended June 30, 2007 compared to $30,558 for the three months ended June 30,
      2006. Depreciation and amortization expense decreased by $25,510 from $43,627
      for the six months ended June 30, 2006 to $18,117 for the six months ended
      June
      30, 2007. The decrease is due to less depreciation and amortization of assets
      related to the TouchThruTM product, which was considered impaired and written off
      during the last two quarters of 2006.





**Operating
      Loss**





For
      the
      three months ended June 30, 2007 our operating loss was $(197,806) compared
      to
      an operating loss of $(456,151) for the three months ended June 30, 2006; an
      improvement of $258,345. This is principally attributable to the following
      four
      factors: **** first,
      our sales increased by $471,696 from $1,340,566 in 2006 to $1,812,262 in 2007;
      second, our gross profit increased by $177,271; third, our general and
      administrative, selling, research and development, and depreciation and
      amortization expenses decreased by $109,227; and fourth, these expense decreases
      were offset in part by an increase in defined benefit pension plan expenses
      of
      $28,153.





For
      the
      six months ended June 30, 2007 our operating loss was $(196,911) compared to
      an
      operating loss of $(1,005,507) for the six months ended June 30, 2006; an
      improvement of $808,596. This is principally attributable to the following
      four
      factors: **** first,
      our sales increased by $980,667 from $2,964,002 in 2006 to $3,944,669 in 2007;
      second, our gross profit increased by $583,494; third, our general and
      administrative, selling, research and development, and depreciation and
      amortization expenses decreased by $322,337; and fourth, these expenses
      decreases were offset in part by an increase in defined benefit pension plan
      expenses of $97,235.





**Net
      Interest Expense**





Net
      interest expense consists of interest income offset by interest expense on
      indebtedness and fees for financing accounts receivable invoices. Net interest
      expense was $65,316 for the three months ended June 30, 2007 compared to net
      interest expense of $44,028 for the three months ended June 30, 2006. Net
      interest expense was $129,788 for the six months ended June 30, 2007 compared
      to
      net interest expense of $86,690 for the six months ended June 30, 2006. The
      increase in net interest expense of $21,288 and $43,098, for the three and
      six
      months ended June 30, 2007, respectively, was principally due to an increase
      in
      the length of term and volume of accounts receivable invoices that were financed
      in 2007.





**Other
      Income**





For
      the
      three months ended June 30, 2007, we had other income of $6,591 compared to
      $0
      for the three months ended June 30, 2006. For the six months ended June 30,
      2007, we had other income of $6,591 compared to $498,088 for the six months
      ended June 30, 2006.





We
      received and recorded other income of $498,088, net of legal fees and expenses
      of $164,412, in the first quarter of 2006. We were the plaintiff in a lawsuit
      filed in the Superior Court, State of Rhode Island on August 13, 1999
      captioned Infinite Group, Inc. vs. Spectra Science Corporation and Nabil
      Lawandy. In the action, we asserted that by fraud and in breach of fiduciary
      duties owed, Spectra and its president, Nabil Lawandy, caused us to sell to
      Spectra shares of Spectra’s Series A Preferred stock at a substantial discount
      to fair market value. We alleged that in entering into the transaction it relied
      on various representations made by Spectra and Mr. Lawandy, which were untrue
      at
      the time they were made. The trial was completed in February 2005, and the
      jury
      returned a verdict in our favor in the amount of approximately $600,000. We
      appealed the amount of the verdict and entered into a settlement with the
      defendants in January 2006 and recorded other income of $498,088.




14





**Income
      Taxes**





Income
      tax expense was $0 for the three months ended June 30, 2007 and 2006,
      respectively. Income tax expense was $605 and $7,300 for the six months ended
      June 30, 2007 and 2006, respectively, consisting of state taxes.





**Net
      Loss**





For
      the
      three months ended June 30, 2007, ** we
      recorded a net loss in the amount of $(256,531) or $(.01) per share compared
      to
      a net loss of $(500,179) or $(.02) per share for the three months ended June
      30,
      2006 *.* The
      improvement in net loss of $243,648 is principally attributable to an increase
      in gross profit of $177,271 and a decrease in operating costs and expenses
      of
      $81,074, other income of $6,591, which were offset in part by an increase in
      net
      interest expense of $21,288. For the three months ended June 30, 2007 and 2006,
      we recorded expense of $44,815 and $72,942, respectively, for employee stock
      options expense under SFAS 123R and $32,213 and $5,697, respectively, for equity
      instruments issued to consultants.





For
      the
      six months ended June 30, 2007, ** we
      recorded a net loss in the amount of $(320,713) or $(.01) per share compared
      to
      a net loss of $(601,409) or $(.03) per share for the six months ended June
      30,
      2006 *.* The
      improvement in net loss of $280,696 is principally attributable to an increase
      in gross profit of $583,494 and a decrease in operating costs and expenses
      of
      $225,102, which were offset in part by an increase in net interest expense
      of
      $43,098, a decreases in other income of $491,497, and state income taxes of
      $6,695





**Stock-Based
      Compensation**





In
      the
      following table, we present adjustments and pro forma amounts to reflect the
      impact that the adoption of SFAS 123R related to employee stock options had
      on
      our financial statements including net loss for the six months ended June 30,
      2007 and 2006. Such expenses are allocated in the same manner as employee salary
      expense. We believe that these non-generally accepted accounting principles
      (GAAP) financial measures provide investors useful information to facilitate
      the
      comparison of current performance to prior performance. These non-GAAP measures
      should not be considered in isolation or as a substitute for performance
      measures in accordance with GAAP.


Six
                  Months Ended June 30,2007
              
              2007
              
              2007
              
              2006
              
              2006
              
              2006As
                  Reported
              
              Adjustments
              
              Pro
                  Forma
              
              As
                  Reported
              
              Adjustments
              
              Pro
                  FormaSales
              
              $
              3,944,669
              
              $
              -
              
              $
              3,944,669
              
              $
              2,964,002
              
              $
              -
              
              $
              2,964,002Cost
                  of services
              
              
              2,751,949
              
              
              (14,488
              )
              
              2,737,461
              
              
              2,354,776
              
              
              (16,596
              )
              
              2,338,180Gross
                  profit
              
              
              1,192,720
              
              
              14,488
              
              
              1,207,208
              
              
              609,226
              
              
              16,596
              
              
              625,822General
                  and administrative
              
              
              392,479
              
              
              (4,251
              )
              
              388,228
              
              
              522,422
              
              
              (7,022
              )
              
              515,400Defined
                  benefit pension plan
              
              
              189,018
              
              
              -
              
              
              189,018
              
              
              91,783
              
              
              -
              
              
              91,783Selling
              
              
              702,764
              
              
              (64,320
              )
              
              638,444
              
              
              816,191
              
              
              (72,909
              )
              
              743,282Research
                  and development
              
              
              87,253
              
              
              -
              
              
              87,253
              
              
              140,710
              
              
              -
              
              
              140,710Depreciation
                  and amortization
              
              
              18,117
              
              
              -
              
              
              18,117
              
              
              43,627
              
              
              -
              
              
              43,627Total
                  costs and expenses
              
              
              1,389,631
              
              
              (68,571
              )
              
              1,321,060
              
              
              1,614,733
              
              
              (79,931
              )
              
              1,534,802Operating
                  loss
              
              
              (196,911
              )
              
              83,059
              
              
              (113,852
              )
              
              (1,005,507
              )
              
              96,527
              
              
              (908,980
              )Interest
                  expense, net
              
              
              (129,788
              )
              
              -
              
              
              (129,788
              )
              
              (86,690
              )
              
              -
              
              
              (86,690
              )Other
                  income
              
              
              6,591
              
              
              -
              
              
              6,591
              
              
              498,088
              
              
              -
              
              
              498,088Income
                  tax expense
              
              
              (605
              )
              
              -
              
              
              (605
              )
              
              (7,300
              )
              
              -
              
              
              (7,300
              )Net
                  loss
              
              $
              (320,713
              )
              $
              83,059
              
              $
              (237,654
              )
              $
              (601,409
              )
              $
              96,527
              
              $
              (504,882
              )





We
      recorded expense of $49,394 and $11,394 for equity instruments issued to
      consultants for the six months ended June 30, 2007 and 2006, respectively.





**Liquidity
      and Capital Resources**




At
      June
      30, 2007, we had cash of $5,908 available for our working capital needs and
      planned capital asset expenditures, a working capital deficit of approximately
      $2.1 million and a current ratio of .22. The O&W Plan current liabilities
      have a significant impact on our working capital. Without the current
      liabilities of the O&W Plan, working capital was a deficit of approximately
      $338,000. Our objective is to improve our working capital position from
      profitable operations. If we continue to incur operating losses or net losses,
      we may continue to experience working capital shortages that impair our business
      operations and growth strategy. Presently, we have sufficient cash flow and
      short-term financing sources, through sales with recourse of accounts
      receivable, to pay our payrolls and recurring invoices on a timely basis.




15





We
      have
      financed the activity of our IT Services Group through the issuance of notes
      payable to third parties, including related parties, private placements of
      common stock and financing through sales with recourse of our accounts
      receivable.





We
      have
      available a financing line of up to $800,000 with a financial institution that
      allows us to sell selected accounts receivable invoices to the financial
      institution with full recourse against us. We pay fees based on the length
      of
      time that the invoice remains unpaid. At June 30, 2007, we had approximately
      $310,000 of availability under this line and could finance up to another
      approximately $170,000 based on eligible accounts receivable at June 30,
      2007.





We
      have
      used our common stock to provide compensation to certain employees and
      consultants and to fund liabilities. For the six months ended June 30, 2007
      we
      recorded expense of $30,800 related to a warrant issued to a consultant who
      has
      met a portion of his performance criteria by assisting us with increasing our
      sales in 2007. We also recorded expense of $18,594 related to a warrant and
      100,000 shares of our common stock issued to another consultant for services
      to
      be performed over one year.





During
      the six months ended June 30, 2006 we issued non-qualified stock options and
      warrants to other service providers and recorded $11,394 of expense related
      to
      these issuances.





Successes
      in our 2006 and 2007 initiatives are evident in the preferred relationships
      we
      have earned with several large systems integrators and one major product house.
      In addition, we are a member of a team that won the U.S. State Department’s
      recent Hybrid Information Technology Support Services (HITSS) contract. Under
      our agreement with the prime contractor, we are identified as a primary Earned
      Value Management resource. In June 2006, we were awarded a prime contract under
      the Department of the Navy’s SeaPort-Enhanced (SeaPort-e) program. This contract
      allows us to compete for and perform service requirements solicited by various
      Navy commands, the Marine Corps, other organizations within the Department
      of
      Defense (DoD), non-DoD agencies, and certain joint agency organizations for
      work
      that is integrally related to the scope and mission of the contract. This work
      involves professional services in all
      phases of naval ship and weapon systems acquisition and life-cycle support, including
      research and development support, prototyping, technology analysis, acquisition
      logistics, project management support, modeling, test and evaluation trials,
      crisis and consequence management, and engineering support.





During
      the three months ended June 30, 2007, we were approved as a VMware Authorized
      Consultant (VAC) by VMware, a subsidiary of EMC Corporation (NYSE:EMC). VMware
      is recognized as the industry leader in virtualization technology. As a VAC,
      we
      are trained and certified to deliver consulting services and solutions
      leveraging VMware technology. We are also certified as aVMware Enterprise VIP
      Reseller authorized to resell VMware’s full product line. We are actively
      working with a number of potential customers in that regard. These
      certifications are examples of our concerted effort to grow and expand our
      server virtualization practice. Server
      virtualization involves the creation, allocation, and management of “virtual
      machines,” which entails the virtual representation of hardware by a software
      system. What this means is that traditional “physical servers,” which typically
      run at only 5% to 15% of their capacity, can now be consolidated with the use
      of
      specialized software such as VMware to increase server utilization by a factor
      of ten to one or even greater. Reducing the number of physical machines required
      in a typical environment provides numerous and obvious benefits, including
      equipment cost savings, reduced operational maintenance costs, easier backup,
      improved availability, and better security.  Due to the substantial energy
      savings resulting from reduced infrastructure, virtualization is also a “green”
technology.





In
      July
      2007, we were accepted into the Hewlett Packard (NYSE:HPQ) Developer and
      Solutions Partner Program (DSPP). DSPP
      provides us with a mechanism to work with HP and our joint customers and
      prospects to provide solutions and services that complement HP's broad portfolio
      of products and services. HP has many tools and resources to help us generate
      new revenue streams, and improve our mutual profitability, while at the same
      time adding unique value for our joint customers. The program comprises
      practical tools and services that we hope will help us in the key areas of
      marketing and selling our solutions, optimizing the technology, and
      collaborating with other organizations within our industry.





In
      August
      2007, we were notified that we were part of a team led by a large systems
      integrator that was awarded a Government Wide Acquisition Contract (GWAC) under
      GSA’s $50 billion Alliant program.





Although
      our future prospects appear promising, the lengthy government financing and
      procurement processes may result in continuing operating losses until sales
      increase to support our infrastructure and provide consistent cash flow to
      support profitability.





In
      the
      future, we may issue additional debt or equity securities to satisfy our cash
      needs. Any debt incurred or issued may be secured or unsecured, at a fixed
      or
      variable interest rates and may contain other terms and conditions that our
      board of directors deems prudent. Any sales of equity securities may be at
      or
      below current market prices. We cannot assure you that we will be successful
      in
      generating sufficient capital to adequately fund our working capital
      needs.




16





**Risk
      Factors**




You
      should consider the risk factors included in our Annual Report on Form 10-KSB
      for the year ended December 31, 2006 in evaluating our business and us.
      Additional risks and uncertainties not presently known to us, which we currently
      deem immaterial or that are similar to those faced by other companies in our
      industry or business in general, such as competitive conditions, may also impair
      our business operations. If any of the results of the risks occur, our business,
      financial condition, or results of operations could be materially adversely
      affected.





**Item
      3. Controls and Procedures**





Evaluation
      of Disclosure Controls and Procedures. Our
      management, with the participation of the 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, as amended (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
      U.S. Securities and Exchange Commission’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 controls over financial reporting that occurred
      during our fiscal second quarter that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.





**PART
      II**


**OTHER
      INFORMATION**




**Item
      1.**  **Legal
      Proceedings.**





We
      are
      not presently involved in any material legal proceedings.





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





Information
      required by this item has been previously included in our Form 10-QSB for the
      period ended March 31, 2007.





**Item
      3.**  **Defaults
      Upon Senior Securities.**





None.





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





None.





**Item
      5.**  **Other
      Information.**





None.





**Item
      6.**  **Exhibits.**





Exhibit
      No.  Description


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







*
      Filed
      herewith




17




**SIGNATURES**




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




Infinite
                Group, Inc.
              (Registrant)Date:
                August 10, 2007
            
            /s/
                Michael S. SmithChief
                Executive Officer
              (Principal
                  Executive Officer)




Date:
                    August 10, 2007
              
              /s/
                    Michael S. SmithChief
                    Financial Officer
                    (Principal
                      Financial Officer)
  18