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 SEPTEMBER 30, 2005

                         Commission File Number 0-21816

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

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

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

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

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

                                 Yes |X| No | |

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

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




                                       1

<PAGE>

                               INFINITE GROUP INC.
                               FORM 10-QSB REPORT

                               Infinite Group Inc.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                    PAGE
<S>                                                                                                                  <C>

PART I - FINANCIAL INFORMATION

         Item 1.  Consolidated Financial Statements

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

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

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

                  Notes to Consolidated Financial Statements                                                         6

         Item 2.  Management's Discussion and Analysis of Financial Conditions and Results of Operations            12

         Item 3.  Controls and Procedures                                                                           20

PART II - OTHER INFORMATION

         Item 1.  Legal Proceedings                                                                                 21

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

         Item 3.  Defaults Upon Senior Securities                                                                   22

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

         Item 5.  Other Information                                                                                 22

         Item 6. Exhibits                                                                                           22

SIGNATURES                                                                                                          23
</TABLE>


                           FORWARD-LOOKING STATEMENTS

         Certain  statements  made in this  Quarterly  Report on Form 10-QSB are
"forward-looking statements" within the meaning of Section 21E of the Securities
and Exchange Act of 1934  regarding the plans and  objectives of management  for
future  operations and market trends and expectations.  Such statements  involve
known and unknown  risks,  uncertainties  and other  factors  that may cause our
actual results,  performance or achievements to be materially different from any
future  results,  performance  or  achievements  expressed  or  implied  by such
forward-looking  statements.  The forward-looking statements included herein are
based on current expectations that involve numerous risks and uncertainties. Our
plans and objectives are based, in part, on assumptions  involving the continued
expansion  of  our  business.  Assumptions  relating  to the  foregoing  involve
judgments with respect to, among other things, future economic,  competitive and
market conditions and future business  decisions,  all of which are difficult or
impossible  to predict  accurately  and many of which are  beyond  our  control.
Although  we  believe  that  our  assumptions   underlying  the  forward-looking
statements are reasonable,  any of the assumptions  could prove  inaccurate and,
therefore,  there  can  be no  assurance  that  the  forward-looking  statements
included in this report will prove to be accurate.  In light of the  significant
uncertainties  inherent in the  forward-looking  statements included herein, the
inclusion of such information  should not be regarded as a representation  by us
or any other person that our  objectives  and plans will be achieved.  The terms
"we", "our", "us", or any derivative  thereof,  as used herein refer to Infinite
Group Inc., a Delaware corporation.



                                       2
<PAGE>



                                     PART I

                              FINANCIAL INFORMATION

Item 1.  Financial Statements

INFINITE GROUP, INC.

Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                         September 30,      December 31,
                                                                              2005              2004
                                                                          (unaudited)        (audited)
                                                                       ----------------- -----------------
<S>                                                                      <C>               <C>
ASSETS
Current assets:
   Cash                                                                  $     79,521      $     97,297
   Restricted cash                                                                 --            30,327
   Accounts receivable, net of allowance of $56,202 ($25,000 - 2004)        1,759,265         1,054,623
  Current portion of notes receivable                                           4,449           270,347
   Inventories                                                                 23,239                --
   Other current assets                                                        40,771            41,207
   Assets of discontinued operations                                               --           205,921
                                                                         ------------      ------------
       Total current assets                                                 1,907,245         1,699,722

Property and equipment, net                                                   293,126           239,907
Other assets:
  Note receivable                                                              79,824         1,940,857
  Other assets                                                                 16,703                --
  Intangible assets, net                                                           --            50,526
                                                                         ------------      ------------
         Total other assets                                                    96,527         1,991,383
                                                                         ------------      ------------
Total assets                                                             $  2,296,898      $  3,931,012
                                                                         ============      ============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
   Notes payable:
      Bank                                                                         --            50,207
      Other                                                                   249,166           176,184
      Related parties                                                         184,906             9,906
   Accounts payable                                                           678,540           504,327
   Accrued expenses                                                           708,256           542,066
   Current maturities of long-term obligations                                 11,725         2,128,572
   Current maturities of long-term obligations-related party                   44,000            44,000
   Liabilities of discontinued operations                                          --           217,300
                                                                         ------------      ------------
        Total current liabilities                                           1,876,593         3,672,562
Long-term obligations:
   Bank notes payable                                                          54,341            64,133
   Notes payable-related parties                                            1,100,124         1,100,124
   Accrued pension expense                                                  2,091,387         2,177,287
                                                                         ------------      ------------
Total liabilities                                                           5,122,445         7,014,106
                                                                         ------------      ------------
Commitments and contingencies

Stockholders' deficiency:
   Common stock, $.001 par value, 20,000,000 shares authorized;
      19,206,965 (17,561,965 in 2004) shares issued and outstanding            19,207            17,562
   Additional paid-in capital                                              28,455,803        28,375,198
   Common stock authorized, not issued                                         40,800                --
   Accumulated deficit                                                    (28,585,466)      (28,719,963)
   Accumulated other comprehensive loss                                    (2,755,891)       (2,755,891)
                                                                         ------------      ------------
 Total stockholders' deficiency                                            (2,825,547)       (3,083,094)
                                                                         ------------      ------------
Total liabilities and stockholders' deficiency                           $  2,296,898      $  3,931,012
                                                                         ============      ============
</TABLE>

See notes to consolidated financial statements

                                       3
<PAGE>

INFINITE GROUP, INC.

Consolidated Statements of Operations (Unaudited)

<TABLE>
<CAPTION>
                                                           Nine Months Ended                   Three Months Ended
                                                              September 30,                        September 30,
                                                    ---------------------------------------------------------------------
                                                         2005              2004              2005              2004
-------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>               <C>               <C>
Sales                                               $  6,370,558      $  3,840,603      $  2,236,008      $  2,010,780
Cost of goods and services                             4,467,602         2,579,607         1,581,574         1,385,657
                                                    ------------      ------------      ------------      ------------
Gross profit                                           1,902,956         1,260,996           654,434           625,123

Costs and expenses:

   General and administrative                          1,208,061           854,043           420,507           279,088
   Depreciation and amortization                          31,593            19,875             7,844             7,358
   Write-off of capitalized financing  costs              44,857                --                --                --
   Selling                                               371,500             4,364           231,428                --
   Research and development                              240,347           214,486            78,423            71,531
                                                    ------------      ------------      ------------      ------------
        Total costs and expenses                       1,896,358         1,092,768           738,202           357,977
                                                    ------------      ------------      ------------      ------------

Operating income  (loss)                                   6,598           168,228           (83,768)          267,146

Other income (expense):
   Interest income                                        66,255                --                --                --
   Interest expense:
      Related parties                                    (68,331)          (57,187)          (23,998)          (20,534)
      Other                                              (81,149)               --           (11,718)               --
                                                    ------------      ------------      ------------      ------------
                                                        (149,480)          (57,187)          (35,716)          (20,534)
                                                    ------------      ------------      ------------      ------------
  Gain on settlement with terminated employee            191,739                --           191,739                --
  Gain on sale of equipment                                8,452                --             8,452                --
                                                    ------------      ------------      ------------      ------------
       Total other income (expense)                      116,966           (57,187)          164,475           (20,534)
                                                    ------------      ------------      ------------      ------------
 Income from continuing operations before
         income tax expense                              123,564           111,041            80,707           246,612
Income tax expense                                        (1,300)             (350)               --                --
                                                    ------------      ------------      ------------      ------------
Income from continuing operations                        122,264           110,691            80,707           246,612

Discontinued operations:

    Income (loss) from discontinued operations            12,233           (90,370)               --           (15,640)
                                                    ------------      ------------      ------------      ------------
   Net income                                       $    134,497      $     20,321      $     80,707      $    230,972
                                                    ============      ============      ============      ============

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

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

 Weighted average number of shares outstanding:
     Basic                                            18,946,141        14,321,335        19,206,965        14,439,201
                                                    ============      ============      ============      ============
     Diluted                                          20,504,570        15,279,074        21,087,499        15,635,062
                                                    ============      ============      ============      ============
</TABLE>

See notes to consolidated financial statements.



                                       4
<PAGE>



INFINITE GROUP, INC.

Consolidated Statements of Cash Flows (Unaudited)

<TABLE>
<CAPTION>
                                                                                          For the Nine Months Ended
                                                                                                 September 30,
                                                                                      -------------------------------
                                                                                            2005              2004
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>              <C>
Operating activities:
  Net income                                                                          $   134,497      $    20,321
  Adjustments to reconcile net income to net cash provided by (used in) operating
activities:

      (Income) loss from discontinued operations                                          (12,233)          90,370
      Gain on sale of equipment                                                            (8,450)              --
      Expenses satisfied with common stock                                                 40,800               --
      Depreciation and amortization and write-off of capitalized financing costs           76,450           19,875
      Gain on settlement with terminated employee                                        (191,739)              --
      (Increase) decrease in:
         Accounts receivable, net                                                        (704,642)        (851,971)
         Inventories                                                                      (23,239)              --
         Other current assets                                                                 436          (24,084)
         Other assets                                                                     (16,703)              --
     Increase (decrease) in:

        Accounts payable                                                                  193,203          (60,801)
        Accrued expenses                                                                  166,189          300,084
        Accrued pension obligations                                                        89,100          121,160
                                                                                      -----------      -----------
Net cash used in operating activities of continuing operations                           (256,331)        (385,046)
Net cash provided by operating activities of discontinued operations                          854          247,703
                                                                                      -----------      -----------
Net cash used in  operating activities                                                   (255,477)        (137,343)
                                                                                      -----------      -----------

Investing activities:
    Decrease (increase) in restricted funds                                                30,327           (7,765)
    Purchase of property and equipment                                                    (81,768)         (60,772)
    Proceeds from notes receivable                                                      2,138,006               --
                                                                                      -----------      -----------
Net cash provided by (used in) investing activities                                     2,086,565          (68,537)
                                                                                      -----------      -----------

Financing activities:
   Net repayments of bank notes payable                                                   (50,207)         (77,730)
   Net borrowings of notes payable-other                                                   72,982               --
   Net borrowings of notes payable-related parties                                        175,000               --
   Proceeds from issuance of long-term obligations-related parties                             --          463,000
   Repayment of notes payable-related parties                                                  --         (205,000)
   Repayments of long-term obligations                                                 (2,126,639)        (201,944)
   Proceeds from issuance of common stock, net of costs                                    80,000          265,626
                                                                                      -----------      -----------
Net cash provided by (used in) financing activities                                    (1,848,864)         243,952
                                                                                      -----------      -----------
Net increase (decrease) in cash                                                           (17,776)          38,072
Cash - beginning of period                                                                 97,297           16,515
                                                                                      -----------      -----------
Cash -  end of period                                                                 $    79,521      $    54,587
                                                                                      ===========      ===========
Supplemental disclosure:
   Cash paid for:
      Interest                                                                        $   119,165      $    13,951
                                                                                      ===========      ===========
      Income taxes                                                                    $     1,300      $       350
                                                                                      ===========      ===========
</TABLE>

See notes to consolidated financial statements.



                                       5
<PAGE>

INFINITE GROUP INC.

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

The accompanying  unaudited  consolidated financial statements of Infinite Group
Inc.  ("Infinite  Group  Inc." or the  "Company"),  included  herein  have  been
prepared by the  Company in  accordance  with  accounting  principles  generally
accepted in the United States of America for interim  financial  information and
with  instructions to Form 10-QSB.  Accordingly,  they do not include all of the
information and footnotes required by accounting  principles  generally accepted
in the United  States of  America  for  complete  financial  statements.  In the
opinion  of  management,   all  adjustments  considered  necessary  for  a  fair
presentation have been included.  All such adjustments are of a normal recurring
nature. The accompanying  unaudited  consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and  footnotes  for the year  ended  December  31,  2004 and the  notes  thereto
included in the  Company's  Annual  report on Form 10-KSB  filed with the United
States Securities and Exchange  Commission.  Results of consolidated  operations
for the nine months ended September 30, 2005 are not  necessarily  indicative of
the operating  results to be attained in the year ending  December 31, 2005. The
consolidated financial statements herein include the accounts of the Company and
its  wholly  owned  subsidiaries.   All  material   inter-company  accounts  and
transactions have been eliminated.

Note 2. Summary of Significant Accounting Policies

Critical Accounting Policies and Estimates

There are several  accounting  policies that we believe are  significant  to the
presentation of our consolidated  financial  statements.  These policies require
management  to make  complex or  subjective  judgments  about  matters  that are
inherently uncertain. Note 3 to our audited consolidated financial statements at
December 31, 2004 presents a summary of  significant  accounting  policies.  The
most critical accounting policies follow.

Inventories

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

Revenue Recognition

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

Stock-Based Compensation

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



                                       6
<PAGE>

Effect of New Accounting  Pronouncements

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

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

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

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

Note 3. Discontinued Operations and Reclassifications

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

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



                                       7
<PAGE>

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

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

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

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

<TABLE>
<CAPTION>
                                                   Three Months Ended September 30,
                                                        2005           2004
                                                      --------       --------
<S>                                                <C>             <C>
Results of Operations
Revenue from discontinued operations                  $     --     $  738,384
                                                      ========     ==========
Loss from discontinued operations                     $     --     $  (15,640)
                                                      ========     ==========
</TABLE>

<TABLE>
<CAPTION>
                                                   Nine Months Ended September 30,
                                                        2005          2004
                                                      --------     ----------
<S>                                                <C>             <C>
Results of Operations
Revenue from discontinued operations                  $     --     $2,230,542
                                                      ========     ==========
Income (loss) from discontinued operations            $ 12,233     $  (90,370)
                                                      ========     ==========
</TABLE>

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



                                       8
<PAGE>

Note 4. Stock Option Plan and Stock Warrants

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

A summary of incentive stock option activity for the nine months ended September
30, 2005 follows:

<TABLE>
<CAPTION>
                                                                                       Weighted
                                                Number             Exercise             Average
                                              Of Options            Price           Exercise Price
                                           ---------------- --------------------- ------------------
<S>                                        <C>              <C>                   <C>
Outstanding at December 31, 2004               1,895,482        $ .01 - $2.50            $ .13
                                                                =============            =====
Options issued                                 2,640,000          $ .09-$.35             $ .18
                                                                =============            =====
Options expired                                (692,982)        $ .01 - $2.50            $ .41
                                               ---------        =============            =====
Outstanding at September 30, 2005              3,842,500         $ .01 -$.35             $ .13
                                               =========         ===========             =====
Exercisable at September 30, 2005              3,842,500         $ .01 -$ .35            $ .13
                                               =========         ============            =====
</TABLE>


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

At December 31, 2004 under the outside  directors' stock option plan, there were
42,000 options  outstanding  to directors at an average  exercise price of $1.15
per share. During the nine months ended September 30, 2005, 500 options expired.
At September 30, 2005, there were 41,500 options  outstanding to directors under
this plan at an average exercise price of $1.05.

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

<TABLE>
<CAPTION>
                                                 Three Months Ended September 30,
                                                          2005          2004
                                                         -----         -----
<S>                                                      <C>           <C>
Results of Operations
Net income - as reported (000's)                         $  81         $ 231
Total stock based employee compensation
      expense determined under the fair value
      method for all awards (000's)                      $ (35)        $  (2)
                                                         -----         -----
   Net income - pro forma (000's)                        $  46         $ 229
                                                         =====         =====
Income per share as reported-basic and diluted           $ .00         $ .02
                                                         =====         =====
Income per share pro forma-basic and diluted             $ .00         $ .02
                                                         =====         =====
</TABLE>



                                       9
<PAGE>

<TABLE>
<CAPTION>
                                                   Nine Months Ended September 30,
                                                         2005          2004
                                                        -----         -----
<S>                                                     <C>           <C>
Results of Operations
Net income - as reported (000's)                        $ 134         $  20
Total stock based employee compensation
      expense determined under the fair value
      method for all awards (000's)                     $(284)        $ (17)
                                                        -----         -----
Net income (loss) - pro forma (000's)                   $(150)        $   3
                                                        =====         =====
Income per share as reported-basic and diluted          $ .01         $ .00
                                                        =====         =====
Income (loss) per share pro forma-basic and diluted     $(.01)        $ .00
                                                        =====         =====
</TABLE>


Note  5.  Business Segments

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

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

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

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                            Photonics                     IT Services
                                              Group         Laser Group       Group        Consolidated
-------------------------------------------------------------------------------------------------------
Three Months ended September 30, 2004
-------------------------------------------------------------------------------------------------------
<S>                                       <C>              <C>            <C>              <C>
Sales to                                  $        --      $        --     $ 2,010,780      $ 2,010,780
unaffiliated customers
-------------------------------------------------------------------------------------------------------
Operating income                          $        --      $        --     $   267,146      $   267,146
-------------------------------------------------------------------------------------------------------
Income (loss) from                        $   (34,651)     $    19,011     $        --      $   (15,640)
discontinued operations
-------------------------------------------------------------------------------------------------------
Three Months ended September 30, 2005
-------------------------------------------------------------------------------------------------------
Sales to unaffiliated                     $        --      $        --     $ 2,236,008      $ 2,236,008
customers
-------------------------------------------------------------------------------------------------------
Operating (loss)                          $        --      $        --     $   (83,768)     $   (83,768)
-------------------------------------------------------------------------------------------------------
Income from                               $        --      $        --     $        --      $        --
discontinued operations
-------------------------------------------------------------------------------------------------------
</TABLE>


                                       10
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                           Photonics         Laser         IT Services   Consolidated
                                             Group           Group           Group
-----------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>             <C>             <C>
Nine Months ended September 30, 2004
-----------------------------------------------------------------------------------------------------
Sales to                                 $        --      $        --     $ 3,840,603     $ 3,840,603
unaffiliated customers
-----------------------------------------------------------------------------------------------------
Operating income                         $        --      $        --     $   168,228     $   168,228
-----------------------------------------------------------------------------------------------------
Income (loss) from                       $   (94,581)     $     4,211     $        --     $   (90,370)
discontinued operations
-----------------------------------------------------------------------------------------------------
Nine Months ended September 30, 2005
-----------------------------------------------------------------------------------------------------
Sales to                                 $        --      $        --     $ 6,370,558     $ 6,370,558
unaffiliated customers
-----------------------------------------------------------------------------------------------------
Operating income                         $        --      $        --     $     6,598     $     6,598
-----------------------------------------------------------------------------------------------------
Income from                              $    12,233      $        --     $        --     $    12,233
discontinued operations
-----------------------------------------------------------------------------------------------------
</TABLE>


Note 6.  Supplemental Cash Flow Information

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

<TABLE>
<CAPTION>
                                                         Nine Months Ended September 30,
                                                               2005           2004
                                                            ----------     ----------
<S>                                                         <C>            <C>
Conversion of accounts payable to common stock              $    2,250     $       --
                                                            ==========     ==========
Common stock  received in  connection  with  settlement
agreement with terminated employee                          $  175,000     $       --
                                                            ==========     ==========
Common stock contributed to Osley & Whitney  Retirement
Plan which  reduced  the  balance  of  accrued  pension
expense obligation                                          $  175,000     $       --
                                                            ==========     ==========
Common  stock  authorized  not issued,  transferred  to
issued                                                      $       --     $   75,000
                                                            ==========     ==========
Purchase of vehicle through long-term obligations           $       --     $   45,120
                                                            ==========     ==========
Conversion of long-term  obligation and related accrued
interest and fees to common stock,  net of  capitalized
costs written off                                           $       --     $    5,000
                                                            ==========     ==========
</TABLE>


Note 7. Earnings Per Share

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



                                       11
<PAGE>

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

<TABLE>
<CAPTION>
                                                       Nine Months ended       Three Months ended
                                                       September 30, 2005      September 30, 2005
<S>                                                    <C>                     <C>
Numerator:
Income available to common stockholders from
continuing operations                                     $   122,264            $    80,707
                                                          ===========            ===========
Weighted average shares outstanding                        18,946,141             19,206,965
                                                          ===========            ===========
Denominator for diluted income per share:
  Weighted average shares outstanding                      18,946,141             19,206,965
  Common stock options and stock warrants                   1,558,429              1,880,534
                                                          -----------            -----------
  Weighted average shares and conversions                  20,504,570             21,087,499
                                                          ===========            ===========
</TABLE>


<TABLE>
<CAPTION>
                                                       Nine Months ended       Three Months ended
                                                       September 30, 2004      September 30, 2004
<S>                                                    <C>                     <C>
Numerator:
Income available to common stockholders from
continuing operations                                     $   110,691           $   246,612
                                                          ===========            ==========
Weighted average shares outstanding                        14,321,335            14,439,201
                                                          ===========            ==========
Denominator for diluted income per share:
  Weighted average shares outstanding                      14,321,335            14,439,201
  Common stock options and stock warrants                     957,739             1,195,861
                                                          -----------            ----------
  Weighted average shares and conversions                  15,279,074            15,635,062
                                                          ===========            ==========
</TABLE>


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

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

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

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

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



                                       12
<PAGE>

Results of Operations

Comparison of Three Months ended September 30, 2005 and 2004

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


<TABLE>
<CAPTION>
                                                                         Three Months Ended September 30,
                                                    ------------------------------------------------------------------------
                                                                   As a % of Net                  As a % of Net    Increase
                                                       2005          Revenues         2004          Revenues      (Decrease)
                                                    ----------      ----------     ----------      ----------     ----------
<S>                                                 <C>            <C>             <C>            <C>             <C>
Sales                                               $2,236,008           100.0%    $2,010,780           100.0%          11.2%
Cost of sales                                        1,581,574            70.7      1,385,657            68.9           14.1
                                                    --------------------------     --------------------------     ----------
Gross profit                                           654,434            29.3        625,123            31.1            4.7
                                                    --------------------------     --------------------------     ----------
General and administrative                             420,507            18.8        279,088            13.9           50.7
Depreciation and amortization                            7,844             0.4          7,358             0.4            6.6
Selling                                                231,428            10.4             --             0.0
Research and development                                78,423             3.5         71,531             3.6            9.6
                                                    --------------------------     --------------------------     ----------
Total operating expenses                               738,202            33.0        357,977            17.8          106.2
                                                    --------------------------     --------------------------     ----------
Operating income (loss)                                (83,768)           (3.7)       267,146            13.3         (131.4)
Gain on settlement with terminated employee            191,739             8.6             --             0.0
Other income (expense) and income taxes, net           (27,264)           (1.2)       (20,534)           (1.0)          32.8
                                                    --------------------------     --------------------------     ----------
Income from continuing operations                       80,707             3.6        246,612            12.3          (67.3)
Loss from discontinued operations                           --             0.0        (15,640)           (0.8)        (100.0)
                                                    --------------------------     --------------------------     ----------
Net income                                          $   80,707             3.6%    $  230,972            11.5%         (65.1)%
                                                    ==========================     ==========================     ==========
</TABLE>

     Sales

Sales for the three months ended September 30, 2005 were $2,236,008 which was an
increase of $225,228  or 11.2% as compared to sales for the three  months  ended
September 30, 2004 of $2,010,780. The increase was due to more billable hours in
our IT Services Group in 2005 from expanded contracts with prime contractors for
the U.S. Government.

     Cost of Sales and Gross Profit

Cost of  sales  represents  the  cost of  employee  services  related  to the IT
Services Group.  Cost of sales for the three months ended September 30, 2005 was
$1,581,574 or 70.7% of sales as compared to $1,385,657 or 68.9% of sales for the
three months  ended  September  30, 2004.  Gross profit was $654,434 or 29.3% of
sales for the three  months  ended  September  30, 2005  compared to $625,123 or
31.1% of sales from the three months ended  September 30, 2004. We experienced a
decrease  in gross  profit  margin as a percent of sales due to the  competitive
nature of our business,  which generally provides for lower gross profit margins
on larger sales volume contracts.  As the mix of different projects changes, our
gross profit margin  changes.  In the future we may submit bids on new work with
lower gross  profit  margins to generate  opportunities  for  long-term,  larger
volume contracts and more stable sales.



                                       13
<PAGE>

     General and Administrative Expenses

General  and   administrative   expenses  include  corporate  overhead  such  as
compensation  and  benefits  for  administrative  and finance  personnel,  rent,
insurance,   professional  fees,  travel,  and  office  expenses.   General  and
administrative  expenses  for the three  months  ended  September  30, 2005 were
$420,507  which was an increase of $141,419 or 50.7% as compared to $279,088 for
the three months ended September 30, 2004. Approximately 62% of this increase is
due to the  increases  in  employee  compensation  and related  fringe  benefits
expenses.  We also incurred  increased  operating expenses as we manage a larger
volume of business.

We  experienced  increases in  accounting  and legal  expenses of  approximately
$42,000 for the three months ended  September  30, 2005  principally  due to our
focus on completing  audits of our financial  statements and related  regulatory
filings,  which  were  completed  and filed  with the  Securities  and  Exchange
Commission in July 2005.

General and  administrative  expense includes expenses  (including  professional
services and interest costs) associated with the Osley & Whitney defined benefit
retirement plan, increased by approximately  $11,100 from approximately  $41,500
for the three months ended September 30, 2004 to  approximately  $51,600 for the
three months ended September 30, 2005.

As a percentage of sales, general and administrative  expense was 18.8 % for the
three months ended September 30, 2005 as compared to 13.9 % for the three months
ended  September  30,  2004.  We  anticipate  that the  amount  of  general  and
administrative  expenses  will  increase as we continue to grow our business and
incur travel and other expenses  associated with managing a larger business.  We
expect that legal and accounting  expenses will decrease in the future since our
public filings for several years were brought current.

       Depreciation and Amortization

Depreciation and amortization expense was relatively unchanged at $7,844 for the
three months ended  September  30, 2005  compared to $7,358 for the three months
ended September 30, 2004.

        Selling Expenses

For the three months ended  September 30, 2005 we incurred  selling  expenses of
$231,428  associated with growing  business in our IT Services Group as compared
to no expenses for the three months ended  September 30, 2004.  Beginning in the
second  quarter of 2005, we added new employees and changed the work  assignment
of one employee and added sales  consultants  to focus on  generating  new sales
leads  and new  contract  opportunities.  We  engaged  the  services  of a sales
consultant in the three months ended September  2005. The consultant  earned and
we therefore expensed $40,800 in fees, payable in shares of our common stock. We
expect that selling  expenses,  consisting  principally  of salaries,  benefits,
sales consultants, and travel expenses will increase as we devote more resources
to increasing our sales.

        Research and Development

For the three months ended September 30, 2005 we continued to incur research and
development  expenses  associated with growing business in our IT Services Group
related to our biometrics  applications and recorded $78,423 of expense compared
to $71,531 for the three months ended  September  30, 2004.  These  expenses are
principally related to the development of an access control terminal and related
software  called  TouchThru(TM).  TouchThru(TM)  is  a  self-contained  terminal
enabling physical access control using biometric identification. It incorporates
fingerprint matching technology licensed from Ultra-Scan Corporation,  a private
technology company headquartered in Buffalo, New York. TouchThru(TM) will be the
first  biometric  product we  introduce,  and we intend to be in a  position  to
market  and sell that  product  beginning  in 2006.  We plan to market  and sell
TouchThru(TM)  in a variety of  industries  and markets,  including the federal,
state and local government, health care, travel and general security, and access
control.


                                       14
<PAGE>

     Income (Loss) From Operations

For the three months ended  September  30, 2005 our  operating  loss was $83,768
compared to net income of $267,146 for the  comparable  period of 2004.  For the
three months ended  September  30, 2005, we  experienced  increases in operating
expenses  of  $380,225  offset  in part by an  improvement  in gross  margin  of
$29,311.

     Other Income (Expense)

Other income and expense consists of three components for the three months ended
September 30, 2005.

One component of other income (expense) for the three months ended September 30,
2005 is a gain on  settlement  with a  terminated  employee of  $191,739,  which
consists  of the return to us of 500,000  shares of our common  stock less legal
expenses that we incurred in  connection  with the  settlement.  The shares were
valued at the fair value on the date the settlement agreement was executed.

Interest  expense was  $35,716 for the three  months  ended  September  30, 2005
compared to expense of $20,534 for the three months ended September 30, 2004, an
increase  of  $15,182.  This  increase  is  principally  due to an  increase  in
short-term  borrowings to finance accounts  receivable of approximately  $10,100
and increased borrowings from a related party. The principal balance due to this
related  party was $175,000 at September  30, 2005 versus zero at September  30,
2004.

Another component of other income (expense) for the three months ended September
30,  2005  consists  of a gain on the sale of  office  equipment  of  $8,452  in
connection  with the relocation and sublease of office space in the  Washington,
D.C. area.

       Income (Loss) from Discontinued Operations

We recorded a loss from discontinued  operations of $15,640 for the three months
ended September 30, 2004 compared with none for the three months ended September
30,  2005.  The loss is the result of the Laser  Group and the  Photonics  Group
which were reclassified as discontinued operations.

     Net Income

For the  three  months  ended  September  30,  2005,  we  recorded  income  from
continuing operations and net income of $80,707 or $.00 per share. This compares
to net income from  continuing  operations of $246,612 or $.02 per share and net
income of $230,972,  or $.02 per share for the three months ended  September 30,
2004. The decrease in  profitability  is  attributable to increases in operating
expenses of $380,225, especially selling expenses, offset in part by the gain on
settlement  with a  terminated  employee of $191,739  for the three months ended
September 30, 2005.




                                       15
<PAGE>

  Comparison of Nine Months ended September 30, 2005 and 2004

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

<TABLE>
<CAPTION>
                                                                        Nine Months Ended September 30,
                                                 -------------------------------------------------------------------------------
                                                                  As a % of Net                     As a % of Net      Increase
                                                    2005            Revenues          2004           Revenues         (Decrease)
                                                 -----------      -----------      -----------      -----------      -----------
<S>                                              <C>              <C>              <C>              <C>              <C>
Sales                                            $ 6,370,558            100.0%     $ 3,840,603            100.0%            65.9%
Cost of sales                                      4,467,602             70.1        2,579,607             67.2             73.2
                                                 ----------------------------      ----------------------------      -----------
Gross profit                                       1,902,956             29.9        1,260,996             32.8             50.9
                                                 ----------------------------      ----------------------------      -----------
General and administrative                         1,208,061               19          854,043             22.2             41.5
Depreciation and amortization                         31,593              0.5           19,875              0.5               59
Write-off of capitalized financing costs              44,857              0.7               --              0.0
Selling                                              371,500              5.8            4,364              0.1         8,412.80
Research and development                             240,347              3.8          214,486              5.6             12.1
                                                 ----------------------------      ----------------------------      -----------
Total operating expenses                           1,896,358             29.8        1,092,768             28.5             73.5
                                                 ----------------------------      ----------------------------      -----------
Operating income                                       6,598              0.1          168,228              4.4            (96.1)
Gain on settlement with terminated employee          191,739              3.0               --              0.0
Other income (expense) and income taxes, net         (76,073)            (1.2)         (57,537)            (1.5)            32.2
                                                 ----------------------------      ----------------------------      -----------
Income from continuing operations                    122,264              1.9          110,691              2.9             10.5
Gain (loss) from discontinued operations              12,233              0.2          (90,370)            (2.4)          (113.5)
                                                 ----------------------------      ----------------------------      -----------
Net income                                       $   134,497              2.1%     $    20,321              0.5%           561.9%
                                                 ============================      ===========      ===========      ===========
</TABLE>


      Sales

Sales for the nine months ended  September 30, 2005 increased  substantially  by
$2,529,955 or 65.9% to $6,370,558 as compared to sales for the nine months ended
September  30,  2004  of  $3,840,603.  The  increase  was  due to the  continued
development  of our IT  Services  Group,  which began  operations  in the second
quarter of 2003. We realized  sales  increases  from new and expanded  contracts
with prime contractors for the U.S. Government.

     Cost of Sales and Gross Profit

Cost of  sales  represents  the  cost of  employee  services  related  to the IT
Services  Group.  Cost of sales for the nine months ended September 30, 2005 was
$4,467,602 or 70.1% of sales as compared to $2,579,607 or 67.2% of sales for the
nine months ended  September 30, 2004.  Gross profit was  $1,902,956 or 29.9% of
sales for the nine months ended  September  30, 2005  compared to  $1,260,996 or
32.8% of sales for the nine months ended  September 30, 2004.  We  experienced a
decrease  in gross  profit  margin as a percent of sales due to the  competitive
nature of our business,  which generally provides for lower gross profit margins
on larger sales volume contracts.  As the mix of different projects changes, our
gross profit margin  changes.  In the future we may submit bids on new work with
lower gross  profit  margins to generate  opportunities  for  long-term,  larger
volume contracts and more stable sales.



                                       16
<PAGE>

     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 nine months ended  September 30, 2005 increased
by  $354,018  or  41.5%.  Approximately  half  of  this  increase  is due to the
increases in employee compensation and related fringe benefits expenses. We also
incurred increased operating expenses as we manage a larger volume of business.

General and  administrative  expenses include  increases in accounting and legal
expenses for the nine months ended September 30, 2005 of approximately  $148,000
principally  due to our focus on completing  audits of our financial  statements
and  related  regulatory  filings,  which  were  completed  and  filed  with the
Securities and Exchange Commission in July 2005.

General and  administrative  expenses include expenses  (including  professional
services and interest costs) associated with the Osley & Whitney defined benefit
retirement  plan, which increased by  approximately  $26,700 from  approximately
$149,100 for the nine months ended September 30, 2004 to approximately  $175,800
for the nine months ended September 30, 2005.

As a percentage of sales,  general and administrative  expense was 19.0% for the
nine  months  ended  September  30,  2005 and  22.2% for the nine  months  ended
September 30, 2004. We anticipate that the amount of general and  administrative
expenses  will  increase as we continue to implement  our business  strategy and
incur travel and other expenses  associated with managing a larger business.  We
expect that legal and accounting  expenses will decrease in the future since our
public  filings  for several  years were  brought  current in the quarter  ended
September 30, 2005.

     Depreciation and Amortization

Depreciation  and  amortization  expense was  $31,593 for the nine months  ended
September 30, 2005  compared to $19,875 for the nine months ended  September 30,
2004. Beginning in the second quarter of 2003, we purchased equipment related to
our Rochester headquarters office, acquired a technology license and capitalized
software  development  costs  related  to our  TouchThru  TM  products.  We have
continued  to acquire  office  equipment  such as personal  computers as we hire
additional  personnel.  We relocated our  Washington,  D.C.  office in the third
quarter of 2005 and acquired additional office equipment. The increase is due to
depreciations and amortization of these recently acquired assets.

        Write-off of Capitalized Closing Costs

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

        Selling Expenses

For the nine months ended  September  30, 2005 we incurred  selling  expenses of
$371,500  associated with growing  business in our IT Services Group compared to
$4,364 for the nine months ended  September  30,  2004.  Beginning in the second
quarter of 2005, we added new  employees and changed the work  assignment of one
employee and added sales  consultants to focus on generating new sales leads and
new contract opportunities. We engaged the services of a sales consultant in the
three  months  ended  September  2005.  The  consultant  earned and we therefore
expensed $40,800 in fees,  payable in shares of our common stock. We expect that
selling  expenses,   consisting   principally  of  salaries,   benefits,   sales
consultants,  and travel  expenses will increase as we devote more  resources to
increasing our sales.



                                       17
<PAGE>

        Research and Development

For the nine months ended  September 30, 2005 we continued to incur research and
development  expenses  associated with growing business in our IT Services Group
related to our biometrics applications and recorded $240,347 of expense compared
to $214,486 for the nine months ended  September  30, 2004.  These  expenses are
principally related to the development of an access control terminal and related
software  called  TouchThru(TM).  TouchThru(TM)  is  a  self-contained  terminal
enabling physical access control using biometric identification. It incorporates
fingerprint matching technology licensed from Ultra-Scan Corporation,  a private
technology company headquartered in Buffalo, New York. TouchThru(TM) will be the
first  biometric  product we  introduce,  and we intend to be in a  position  to
market  and sell that  product  beginning  in 2006.  We plan to market  and sell
TouchThru(TM)  in a variety of  industries  and markets,  including the federal,
state and local government, health care, travel and general security, and access
control.

     Income (Loss) From Operations

For the nine months ended  September  30, 2005 our  operating  income was $6,598
compared to a $168,228 for the comparable  period of 2004.  This is attributable
to our  focus on our new IT  Services  Group and the  growth  of IT sales  which
provided  gross  profit of  $1,902,956,  an increase  of $641,960  over the nine
months ended September 30, 2004, to fund research and  development,  general and
administrative   expense  and  interest   expenses.   Operating   expenses  were
$1,896,358,  for the nine  months  ended  September  30,  2005,  an  increase of
$803,590 over the nine months ended September 30, 2004.

     Other Income (Expense)

Other income and expense consists of three components for the nine months ended
September 30, 2005.

One component of other income (expense) for the three months ended September 30,
2005 is a gain on  settlement  with a  terminated  employee of  $191,739,  which
consists  of his return to us of 500,000  shares of our common  stock less legal
expense  that we incurred in  connection  with the  settlement.  The shares were
valued at the fair value on the date the settlement agreement was executed.

Interest  expense was $149,480  (including  $66,255 of interest expense on notes
payable of LF) for the nine months ended  September 30, 2005 compared to $57,187
for the nine months ended  September 30, 2004. The increase of $92,293 is offset
by $66,255 of interest  income from the notes  receivable  due from the buyer of
LF's  business for a net increase of $26,038.  This net increase is  principally
due to (i) an  increase  in  interest  on notes  payable to  related  parties of
$11,144 due to an increase in the average outstanding principal balance of notes
payable to related  parties;  (ii) an increase in interest to others of $10,100,
which is interest on short-term notes to finance accounts receivable;  and (iii)
an increase in interest on equipment loans.

Another component of other income (expense) for the three months ended September
30,  2005  consists  of a gain on the sale of  office  equipment  of  $8,452  in
connection  with the relocation and sublease of office space in the  Washington,
D.C. area.

      Income (loss) from Discontinued Operations

We recorded income from  discontinued  operations of $12,233 for the nine months
ended September 30, 2005 compared to a loss of $90,370 for the nine months ended
September  30, 2004.  These  results are from the Laser Group and the  Photonics
Group which were reclassified as discontinued operations.

     Net Income (Loss)

For the nine months ended September 30, 2005, we recorded income from continuing
operations of $122,264, or $.01 per share and net income of $134,497 or $.01 per
share.  This  compares to net income from  continuing  operations of $110,691 or
$.01 per share and a net income of $20,321 or $.00 per share (the  difference of
$(.01) per share is from  discontinued  operations)  for the nine  months  ended
September 30, 2004.  The  improvement in  profitability  is  attributable  to an
increase in gross profit of $641,960 and a gain on settlement  with a terminated
employee of $191,739 which offset  increases in operating  expenses of $803,590,
especially  selling  expenses,  for the nine months ended September 30, 2005. We
also recorded a gain from discontinued operations of $12,233 for the nine months
ended  September 30, 2005 versus a loss of $90,370 for the comparable  period of
2004.




                                       18
<PAGE>

      Liquidity and Capital Resources

As of September 30, 2005 we had unrestricted cash of $79,521, which is available
for working capital and property and equipment acquisitions.

At September 30, 2005 we had working capital of $30,652.  Prior to June 30, 2005
we  reported  a working  capital  deficit.  The  improvement  from a deficit  of
$1,972,840  at  December  31,  2004 is a result of the buyer of the  assets  and
businesses of LF obtaining  new bank  financing and paying off all of LF's notes
receivable,  which proceeds were used to pay off LF's bank promissory  notes and
capital  lease  (which  were  all  classified  as  current  liabilities  due  to
violations of certain loan covenants).

We have financed the activity of our new IT Services  Group through the issuance
of notes payable to third parties and to related parties,  private placements of
common stock and financing of our accounts  receivable.  We have established and
use a financing line with a financial institution which enables us to sell, with
full recourse against us, certain accounts receivable  invoices.  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.

We have used our common stock to provide  compensation to certain  employees and
consultants and to fund liabilities.

During the three  months  ended  September  30, 2005,  one  consultant  provided
services to us valued at $40,800.  Those  services are payable in 149,916 shares
of common stock.

During the three months ended  September 30, 2005, we made a contribution to the
Osley & Whitney defined benefit  retirement plan of 500,000 shares of our common
stock, which was valued at $175,000.

Risk Factors

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






                                       19
<PAGE>

Item 3.  Controls and Procedures

Evaluation of  Disclosure  Controls and  Procedures.  Our  management,  with the
participation  of our  chief  executive  officer  and chief  financial  officer,
carried out an evaluation of the  effectiveness of our "disclosure  controls and
procedures"  (as defined in the  Securities  Exchange Act of 1934 (the "Exchange
Act") Rules  13a-15(e) and  15-d-15(e))  as of the end of the period  covered by
this report  (the  "Evaluation  Date").  Based upon that  evaluation,  the chief
executive  officer  and  chief  financial  officer  concluded  that,  as of  the
Evaluation Date, our disclosure controls and procedures are effective, providing
them with  material  information  relating  to the  company  as  required  to be
disclosed  in the reports we file or submit  under the  Exchange Act on a timely
basis.

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





                                       20
<PAGE>

                                     PART II
                                OTHER INFORMATION

Item 1:  Legal Proceedings.

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

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

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

During the three  months ended  September  30,  2005,  we  completed  settlement
negotiations with a former employee.  The parties agreed to settle all claims to
avoid the expense and time of litigation.  The parties executed mutual releases.
The former employee surrendered 500,000 shares of our common stock that he owned
to us, which was recorded at fair value at the date of the settlement agreement.

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




                                       21
<PAGE>


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

         Recent Sales of Unregistered Securities.

During the three months ended  September 30, 2005,  we received  services from a
consultant and are obligated to issue 149,916  restricted shares of common stock
valued at $40,800,  based on the value of the services provided. The shares were
accounted for as common stock  authorized,  not issued at September 30, 2005. We
will issue the shares in the quarter ending December 31, 2005.


Item 3.  Defaults Upon Senior Securities.

         None.


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

         None.

Item 5.  Other Information.

         None.

Item 6. Exhibits.

a. Exhibits:

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

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

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




                                       22
<PAGE>

                                   SIGNATURES

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



                                               Infinite Group, Inc.
                                               ------------------------------
                                               (Registrant)


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


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

                                               (Principal Financial Officer)



                                       23