**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)





x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 for the quarterly period ended: September 30, 2008





 ̈ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934 for the transition period from _________ to __________




Commission
      file number: 0-21816





**INFINITE
      GROUP, INC.**


(Exact
      name of registrant as specified in its charter)





Delaware
            52-1490422(State
                or other jurisdiction of
            (IRS
                Employerincorporation
                or organization)
            Identification
                No.)





60
      Office
      Park Way


Pittsford,
      New York 14534


(Address
      of principal executive offices)





(585)
      385-0610


(Registrant's
      telephone number)





(Former
      name, former address and former fiscal year,


if
      changed since last report)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes
x No  ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.





Large
                Accelerated filer ̈
              Non-accelerated
                filer ̈
            
            Accelerated
                filer ̈
              Smaller
                reporting companyx





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


Yes  ̈ No x





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date. There were a total of 24,935,328
      shares of the issuer’s common stock, par value $.001 per share, outstanding as
      of November 12, 2008.









INFINITE
      GROUP, INC.


**FORM
      10-Q REPORT**




TABLE
      OF
      CONTENTS




PAGEPART
                I – FINANCIAL INFORMATIONItem
                1.
            Consolidated
                Financial StatementsBalance
                Sheets – September 30, 2008 (Unaudited) and December 31, 2007
                (Audited)
            3Statements
                of Operations (Unaudited) for the three and nine months ended September
                30, 2008 and 2007
            4Statements
                of Cash Flows (Unaudited) for the nine months ended September 30,
                2008 and
                2007
            5Notes
                to Consolidated Financial Statements – (Unaudited)
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            10Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            16Item
                4T.
            Controls
                and Procedures
            16PART
                II – OTHER INFORMATIONItem
                1A. Risk Factors
            16Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            16Item
                6. Exhibits
            17SIGNATURES
            17




**FORWARD-LOOKING
      STATEMENTS**




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




2




**PART
      I**


**FINANCIAL
      INFORMATION**


**Item
      1. Financial Statements**





**INFINITE
      GROUP, INC.**





**Consolidated
      Balance Sheets**





**September 30,**
            
            **December 31,****2008**
              **(Unaudited)**
            
            **2007**
              **(Audited)****ASSETS****Current
                assets:**Cash
            
            **$**
            **39,307**
            
            $
            28,281Accounts
                receivable, net of allowance of $35,000
            
            
            **1,206,999**
            
            
            669,607Prepaid
                expenses and other current assets
            
            
            **58,932**
            
            
            59,381**Total
                current assets**
            
            
            **1,305,238**
            
            
            757,269**Property
                and equipment, net**
            
            
            **60,539**
            
            
            70,723**Other
                assets**–
                security****deposits
            
            
            **12,641**
            
            
            19,523Total
                assets
            
            **$**
            **1,378,418**
            
            $
            847,515**LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCY****Current
                liabilities:**Accounts
                payable
            
            **$**
            **431,210**
            
            $
            299,519Accrued
                payroll
            
            
            **434,646**
            
            
            262,453Accrued
                interest payable
            
            
            **268,645**
            
            
            269,530Accrued
                pension and retirement
            
            
            **2,352,191**
            
            
            2,081,508Accrued
                expenses – other
            
            
            **69,802**
            
            
            86,197Current
                maturities of notes payable
            
            
            **4,325**
            
            
            4,077Notes
                payable
            
            
            **30,000**
            
            
            30,000Notes
                payable-related parties
            
            
            **258,846**
            
            
            140,332**Total
                current liabilities**
            
            
            **3,849,665**
            
            
            3,173,616**Long-term
                obligations:**Notes
                payable
            
            
            **232,502**
            
            
            29,706Notes
                payable-related parties
            
            
            **890,624**
            
            
            1,091,624Accrued
                pension expense
            
            
            **302,395**
            
            
            408,419Total
                liabilities
            
            
            **5,275,186**
            
            
            4,703,365Commitments
                and contingencies (note 6)**Stockholders’
                deficiency:**Common
                stock, $.001 par value, 60,000,000 shares authorized;24,935,328
                (23,614,965 – 2007) shares issued and outstanding
            
            
            **24,935**
            
            
            23,615Additional
                paid-in capital
            
            
            **29,646,038**
            
            
            29,386,215Accumulated
                deficit
            
            
            **(31,340,052**
            **)**
            
            (31,037,991
            )Accumulated
                other comprehensive loss
            
            
            **(2,227,689**
            **)**
            
            (2,227,689
            )Total
                stockholders’ deficiency
            
            
            **(3,896,768**
            **)**
            
            (3,855,850
            )Total
                liabilities and stockholders’ deficiency
            
            **$**
            **1,378,418**
            
            $
            847,515





See
      notes
      to consolidated financial statements.




3




**INFINITE
      GROUP, INC.**




**Consolidated
      Statements of Operations (Unaudited)**





**Three Months Ended**
            
            **Nine Months Ended****September 30,**
            
            **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Sales**
            
            **$**
            **2,478,978**
            
            $
            2,063,644
            
            **$**
            **7,109,403**
            
            $
            6,008,314Cost
                of services
            
            
            **1,795,927**
            
            
            1,570,556
            
            
            **5,164,602**
            
            
            4,322,505**Gross
                profit**
            
            
            **683,051**
            
            
            493,088
            
            
            **1,944,801**
            
            
            1,685,809Costs
                and expenses:General
                and administrative
            
            
            **265,694**
            
            
            238,890
            
            
            **779,849**
            
            
            631,370Defined
                benefit pension plan
            
            
            **67,082**
            
            
            84,017
            
            
            **166,074**
            
            
            273,035Selling
            
            
            **296,597**
            
            
            415,325
            
            
            **1,045,747**
            
            
            1,118,089Depreciation
            
            
            **9,201**
            
            
            7,892
            
            
            **27,523**
            
            
            26,009Research
                and development
            
            
            **-**
            
            
            1,553
            
            
            **-**
            
            
            88,807Total
                costs and expenses
            
            
            **638,574**
            
            
            747,677
            
            
            **2,019,193**
            
            
            2,137,310**Operating
                income (loss)**
            
            
            **44,477**
            
            
            (254,589
            )
            
            **(74,392**
            **)**
            
            (451,501
            )Other
                income (expense):Interest
                income
            
            
            **-**
            
            
            43
            
            
            **-**
            
            
            255Interest
                expense:Related
                parties
            
            
            **(30,638**
            **)**
            
            (34,834
            )
            
            **(95,015**
            **)**
            
            (105,113
            )Other
            
            
            **(41,087**
            **)**
            
            (34,833
            )
            
            **(132,039**
            **)**
            
            (94,555
            )Total
                interest expense
            
            
            **(71,725**
            **)**
            
            (69,667
            )
            
            **(227,054**
            **)**
            
            (199,668
            )Other
                income (expense)
            
            
            **-**
            
            
            (1,634
            )
            
            **-**
            
            
            4,957Total
                other income (expense)
            
            
            **(71,725**
            **)**
            
            (71,258
            )
            
            **(227,054**
            **)**
            
            (194,456
            )Loss
                before income tax expense
            
            
            **(27,248**
            **)**
            
            (325,847
            )
            
            **(301,446**
            **)**
            
            (645,957
            )Income
                tax expense
            
            
            **-**
            
            
            -
            
            
            **(615**
            **)**
            
            (605
            )**Net
                loss**
            
            **$**
            **(27,248**
            **)**
            $
            (325,847
            )
            **$**
            **(302,061**
            **)**
            $
            (646,562
            )Net
                loss per share – basic and diluted
            
            **$**
            **(.00**
            **)**
            $
            (.01
            )
            **$**
            **(.01**
            **)**
            $
            (.03
            )Weighted
                average number of shares outstanding – basic and
                diluted
            
            
            **24,783,698**
            
            
            23,524,965
            
            
            **24,348,508**
            
            
            23,046,833




See
      notes
      to consolidated financial statements.




4




**INFINITE
      GROUP, INC.**




**Consolidated
      Statements of Cash Flows (Unaudited)**





**For the Nine Months Ended****September 30,****2008**
            
            **2007****Operating
                activities:**Net
                loss
            
            **$**
            **(302,061**
            **)**
            $
            (646,562
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Stock
                based compensation
            
            
            **197,727**
            
            
            255,056Depreciation
            
            
            **27,523**
            
            
            26,009Gain
                on disposal of equipment
            
            
            **-**
            
            
            (4,957
            )Increase
                in assets:Accounts
                receivable
            
            
            **(537,392**
            **)**
            
            (139,003
            )Other
                assets
            
            
            **(5,169**
            **)**
            
            (10,641
            )Increase
                in liabilities:Accounts
                payable
            
            
            **131,690**
            
            
            29,452Accrued
                expenses
            
            
            **204,163**
            
            
            222,413Accrued
                pension and retirement
            
            
            **164,659**
            
            
            238,378**Net
                cash used in operating activities**
            
            
            **(118,860**
            **)**
            
            (29,855
            )**Investing
                activities:**Purchase
                of property and equipment
            
            
            **(17,339**
            **)**
            
            (22,686
            )Proceeds
                from notes receivable
            
            
            **-**
            
            
            4,015**Net
                cash used in investing activities**
            
            
            **(17,339**
            **)**
            
            (18,671
            )**Financing
                activities:**Proceeds
                from note payable
            
            
            **200,000**
            
            
            -Repayments
                of notes payable
            
            
            **(2,956**
            **)**
            
            (10,114
            )Repayments
                of notes payable-related parties
            
            
            **(66,486**
            **)**
            
            (7,003
            )Proceeds
                from exercise of stock options
            
            
            **16,667**
            
            
            500**Net
                cash provided by (used in) financing activities**
            
            
            **147,225**
            
            
            (16,617
            )Net
                increase (decrease) in cash
            
            
            **11,026**
            
            
            (65,143
            )Cash –
                beginning of period
            
            
            **28,281**
            
            
            73,786Cash –
                end of period
            
            **$**
            **39,307**
            
            $
            8,643**Supplemental
                disclosure:**Cash
                paid for:Interest
            
            **$**
            **182,909**
            
            $
            140,890Income
                taxes
            
            **$**
            **615**
            
            $
            605





See
      notes
      to consolidated financial statements.




5




**INFINITE
      GROUP, INC.**





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





**Note
      1. Basis of Presentation**





The
      accompanying unaudited consolidated financial statements of Infinite Group,
      Inc.
      (“Infinite Group, Inc.” or the “Company”), included herein have been prepared by
      the Company in accordance with accounting principles generally accepted in
      the
      United States of America (GAAP) for interim financial information and in
      accordance with the instructions to Form 10-Q. Accordingly, they do not include
      all of the information and footnotes required by GAAP for complete financial
      statements. In the opinion of management, all adjustments considered necessary
      for a fair presentation have been included. All such adjustments are of a normal
      recurring nature. The accompanying unaudited consolidated financial statements
      should be read in conjunction with the Company’s audited consolidated financial
      statements and the notes thereto included in the Company’s Annual Report on Form
      10-KSB for the year ended December 31, 2007 filed with the United States (U.S.)
      Securities and Exchange Commission (SEC). Results of consolidated operations
      for
      the nine months ended September 30, 2008 are not necessarily indicative of
      the
      operating results that may be expected for the year ending December 31, 2008.
      The consolidated financial statements herein include the accounts of the Company
      and its wholly owned subsidiaries. The subsidiaries are inactive. All material
      inter-company accounts and transactions have been eliminated.





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





There
      are
      several accounting policies that the Company believes are significant to the
      presentation of its consolidated financial statements. These policies require
      management to make complex or subjective judgments about matters that are
      inherently uncertain. Note 3 to the Company’s audited consolidated financial
      statements for the year ended December 31, 2007 presents a summary of
      significant accounting policies.





**Recent
      Accounting Pronouncements**





**Statement
      of Financial Accounting Standards No. 157, Fair Value
      Measurements**





Statement
      of Financial Accounting Standards No. 157, Fair Value Measurements - In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
      (SFAS No. 157). Among other requirements, SFAS No. 157 defines fair
      value and establishes a framework for measuring fair value and also expands
      disclosure about the use of fair value to measure assets and liabilities. The
      Company was required to adopt SFAS No. 157 on January 1, 2008. Subsequent
      to the Standard's issuance, the FASB issued an exposure draft that provides
      for
      a deferral for the implementation of SFAS 157 for non-financial assets and
      liabilities which are not measured at fair value on a recurring basis (at least
      annually) until fiscal years beginning after November 15, 2008. The
      Company’s adoption of this standard was limited to financial assets and
      liabilities and did not have a material effect on the Company’s financial
      condition or results of operations. The Company is still in the process of
      evaluating the impact of this standard with respect to its effects on
      nonfinancial assets and liabilities and has not yet determined the impact that
      it will have on the financial statements upon full adoption.




**Financial
      Accounting Standards Board issued Statement of Financial Accounting Standards
      No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
      (“SFAS No. 159”)**





In
      February 2007, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits
      companies to elect to follow fair value accounting for certain financial assets
      and liabilities in an effort to mitigate volatility in earnings without having
      to apply complex hedge accounting provisions. The standard also establishes
      presentation and disclosure requirements designed to facilitate comparison
      between entities that choose different measurement attributes for similar types
      of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning
      after November 15, 2007. The
      Company has not yet adopted the fair value option permitted by SFAS No.
      159.




**The
      Hierarchy of Generally Accepted Accounting Principles** **(“SFAS
      No. 162”)**





In
      May
      2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
      Accounting Principles. The purpose of this statement is to improve financial
      reporting by providing a consistent framework for determining applicable
      accounting principles to be used in the preparation of financial statements
      presented in conformity with accounting principles generally accepted in the
      U.S. SFAS No. 162 will become effective 60 days after the SEC’s approval. The
      Company believes that the adoption of this standard on its effective date will
      not have a material effect on its consolidated financial
      statements.




6




**Note
      3. Stock Option Plans**





The
      Company’s board of directors and stockholders have approved stock options plans
      covering up to an aggregate of 5,228,833 shares. Such options may be designated
      at the time of grant as either incentive stock options or nonqualified stock
      options. Stock based compensation includes expense charges related to all
      stock-based awards to employees, directors and consultants. Such awards include
      options, warrants and stock grants.





Effective
      January 1, 2006, the Company adopted the provisions of Statement of Financial
      Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, (SFAS 123R)
      using the modified prospective transition method and the Black-Scholes analysis.
      The Company used volatility of 50% when computing the value of stock options
      and
      warrants during the nine months ended September 30, 2008 and 2007. Each option
      awarded in 2008 and 2007 has a ten year exercise term. The expected dividend
      yield is zero percent. The
      expected life of the options was assumed to be the ten year contractual term.
      For options issued after September 30, 2008 the term is assumed to be 5.75
      years
      using the simplified method for plain vanilla options as stated in SEC Staff
      Accounting Bulletin No. 110 to improve the accuracy of this assumption while
      simplifying record keeping requirements until more detailed information about
      the Company’s exercise behavior is available. The
      risk-free rate for periods within the contractual life of the option is based
      on
      the U.S. Treasury yield curve in effect at the time of grant and ranged from
      3.74% to 4.10% for the nine months ended September 30, 2008 and 4.52% to 4.75%
      for the nine months ended September 30, 2007.





The
      Company recorded expense for options, warrants and common stock issued to
      employees and independent service providers for the three months and nine months
      ended September 30, 2008 and 2007 as follows. There was no impact from SFAS
      123R
      on net loss per share for the three or nine months ended September 30, 2008
      and
      2007.





**Nine Months**
              **ended**
              **September 30,**
              **2008**
            
            Nine Months
              ended
              September 30,
              2007
            
            **Three Months**
              **ended**
              **September 30,**
              **2008**
            
            Three Months
              ended
              September 30,
              2007Employee
                stock options
            
            **$**
            **159,244**
            
            $
            180,068
            
            **$**
            **61,027**
            
            $
            97,009Consultants –
                common stock warrants
            
            
            **25,983**
            
            
            49,988
            
            
            **19,886**
            
            
            13,095Consultant –
                shares of common stock
            
            
            **12,500**
            
            
            25,000
            
            
            **-**
            
            
            12,500Total
                expense
            
            **$**
            **197,727**
            
            $
            255,056
            
            **$**
            **80,913**
            
            $
            122,604





A
      summary
      of all stock option activity for nine months ended September 30, 2008
      follows:


**Number of**
              **Option****s**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Term**
            
            **Aggregate**
              **Intrinsic Value**Outstanding
                at December 31, 2007
            
            
            4,914,500
            
            $
            .27Options
                granted
            
            
            525,000
            
            $
            .56Options
                expired
            
            
            (674,333
            )
            $
            .46Options
                exercised
            
            
            (66,667
            )
            $
            .25Outstanding
                at September 30, 2008
            
            
            4,698,500
            
            $
            .28
            
            6.8
                years
            
            $
            1,193,095Exercisable
                at September 30, 2008
            
            
            4,164,167
            
            $
            .24
            
            6.5
                years
            
            $
            1,185,475





The
      weighted average fair value of options granted during the nine months ended
      September 30, 2008 was approximately $.36 ($.33 during the nine months ended
      September 30, 2007). Options for 66,667 and 10,000 shares were exercised during
      the nine months ended September 30, 2008 and 2007, respectively. The Company
      received aggregate proceeds of $16,667 and $500, respectively, and the options
      had an intrinsic value of $38,000 and $4,700, respectively.




7




A
      summary
      of nonvested stock option activity for the nine months ended September 30,
      2008
      follows:





**Number of**
              **Nonvested**
              **Options**
            
            **Weighted Average**
              **Fair Value**
              **at Grant Date**Nonvested
                outstanding at December 31, 2007
            
            
            662,333
            
            $
            .30Options
                granted
            
            
            525,000
            
            $
            .36Options
                vested
            
            
            (585,667
            )
            $
            .31Options
                forfeited
            
            
            (67,333
            )
            $
            .38Nonvested
                outstanding at September 30, 2008
            
            
            534,333
            
            $
            .34





At
      September 30, 2008, there was approximately $166,000 of total unrecognized
      compensation cost related to non-vested options granted under the Company’s
      stock option plans. That cost is expected to be recognized over a weighted
      average period of one year. The total fair value of shares that vested during
      the nine months ended September 30, 2008 was approximately
      $183,000.





**Note
      4. Supplemental Cash Flow Information**





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


**Nine Months Ended**
                **September 30,****2008**
              
              **2007**Conversion
                  of note payable-related party and related accrued interest payable
                  to
                  1,185,000 shares of common stock
              
              **$**
              **59,250**
              
              $
              -Conversion
                  of notes payable-related party to 1,000,000 shares of common
                  stock
              
              **$**
              **-**
              
              $
              50,000Issuance
                  of 100,000 shares of common stock in exchange for consulting services
                  to
                  be provided over one year
              
              **$**
              **-**
              
              $
              50,000





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





On
      August
      1, 2008, the terms or a warrant issued to a business development consultant
      were
      modified such that a specific performance criterion was eliminated and 100,000
      options vest on periodic schedule through July 1, 2009. During the three months
      ended September 30, 2008, the Company recorded $19,886 of expense associated
      with such change.




**Note
      5. Earnings Per Share**





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





If
      the
      Company had generated earnings, common stock equivalents would have been added
      to the weighted average shares outstanding during the three and nine months
      ended September 30, 2008 and 2007 as set forth below. These additional shares
      represent the assumed exercise of common stock options, warrants and convertible
      notes payable whose exercise price is less than the average common stock price
      during the period. The proceeds of the exercise are assumed to be used to
      purchase common stock for treasury and the incremental shares are added to
      the
      weighted average shares outstanding.




8


**Nine Months Ended**
                **September 30,**
              
              **Three Months Ended**
                **September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Common
                  stock equivalents
              
              
              **19,573,817**
              
              
              19,381,198
              
              
              **19,605,103**
              
              
              19,399,238




**Note
      6.** **Employee
      Pension Plan**





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





During
      2007, the Company submitted information to the Department of Treasury (DOT)
      advocating that it had no legal obligation to act as the sponsor of the O&W
      Plan to ascertain whether the DOT concurred or disagreed with this position.
      The
      DOT is presently reviewing this information. If the DOT does not concur with
      this position, the Company may become obligated for additional estimated excise
      taxes on accumulated unfunded O&W Plan contributions for the plan years
      ended December 31, 2006 and 2007 of approximately $135,000 and $157,000,
      respectively, totaling $292,000, which has not been accrued because of the
      determination that the Company has no legal obligation and the Company’s belief
      that the likelihood is remote that it will be required to pay these excise
      taxes. Further, if the DOT does not concur with this position, the Company
      may
      be required to pay interest on these excise taxes and potentially incur
      additional excise taxes up to 100% of all required plan contributions. No such
      excise taxes or related interest have been assessed and no portion of this
      amount has been accrued at September 30, 2008 since the Company believes that
      the likelihood is remote that it will be required to pay these excise taxes.
      If
      the DOT does not concur with the Company’s position, the Company intends to
      pursue all appropriate further avenues to prevail in its position. During 2006,
      the Pension Benefit Guarantee Corporation placed a lien on all of the Company’s
      assets to secure the contributions due to the O&W Plan. This lien is
      subordinate to liens that secure accounts receivable financing and certain
      notes
      payable.




At
      September 30, 2008 the Company had accrued liabilities of $2,564,170 related
      to
      the O&W Plan and accumulated other comprehensive loss of $2,227,689 which
      was recorded as a reduction of stockholders’ deficiency. The market value of the
      O&W Plan assets decreased from $3,387,749 at December 31, 2007 to $2,655,620
      at September 30, 2008. The decrease was due to investment losses of $367,853,
      benefit payments of $329,194 and expenses paid of $35,082.





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




**Nine Months**
              **ended**
              **September 30,**
              **2008**
            
            **Nine Months**
              **ended**
              **September 30,**
              **2007**
            
            **Three Months**
              **ended**
              **September 30,**
              **2008**
            
            **Three Months**
              **ended**
              **September 30,**
              **2007**Interest
                cost
            
            **$**
            **225,357**
            
            $
            249,181
            
            **$**
            **74,248**
            
            $
            88,488Expected
                return on plan assets
            
            
            **(218,057**
            **)**
            
            (205,581
            )
            
            **(72,686**
            **)**
            
            (68,527
            )Expected
                expenses
            
            
            **48,750**
            
            
            97,689
            
            
            **16,250**
            
            
            32,563Actuarial
                loss
            
            
            **82,364**
            
            
            48,750
            
            
            **27,455**
            
            
            16,250Net
                periodic pension cost
            
            **$**
            **138,414**
            
            $
            190,039
            
            **$**
            **45,267**
            
            $
            68,774





**Note
      7. Long-Term Obligations**





On
      June
      13, 2008, the Company issued a promissory note for $200,000 to an accredited
      investor. The note is unsecured, bears interest at the rate of 12% per annum,
      which is payable monthly, and is due on June 2, 2010. The proceeds of the note
      are being used for working capital purposes.





**Note
      8. Related Parties Consulting Agreement and Notes Payable**





In
      July
      2008, James Villa, President of Intelligent Consulting Corporation (ICC),
      was appointed to the Company’s board of directors to fill a vacancy.  The
      Company has contracted with ICC on a month-to-month basis to provide consulting
      services related to business development and business strategies, special
      projects and other general corporate matters.  During the nine months ended
      September 30, 2008 and 2007 the Company paid ICC $103,210 and $96,300,
      respectively.  Mr. Villa is also the sole member of Northwest Hampton
      Holdings, LLC with which the Company has $352,624 of outstanding
      note **s** payable and $82,024 of accrued interest payable as of September 30,
      2008.




9




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





**IT
      Consulting**




We
      are a
      provider of IT services to
      federal, state and local government and commercial clients. Our expertise
      includes managing leading edge operations and implementing complex programs
      in
      advanced server management, server virtualization, network services, wireless
      technology, human capital services, enterprise architecture, and earned value
      management. We focus on aligning business processes with technology for delivery
      of solutions meeting our clients’ exact needs and providing expert management
      services to the lifecycle of technology-based projects. We have a business
      development office in the Washington,
      D.C. metropolitan area.





We
      have
      several contract vehicles that enable us to deliver a broad range of our
      services and solutions to the U.S. Government. The quality and consistency
      of
      our services and IT expertise allow us to maintain long-term relationships
      with
      our major clients.





**Results
      of Operations**





**Comparison
      of Three and Nine Month Periods ended September 30, 2008 and
      2007**





The
      trends suggested by the following tables are not indicative of future operating
      results.





The
      following table compares our statements of operations data for the three months
      ended September 30, 2008 and 2007.





Three
                Months Ended September 30,2008
                vs. 2007As
                a % of
            
            
            
            As
                a % of
            
            Amount
                of
            
            %
                Increase2008
            
            Sales
            
            2007
            
            Sales
            
            Change
            
            (Decrease)Sales
            
            $
            2,478,978
            
            
            100.0
            %
            $
            2,063,644
            
            
            100.0
            %
            $
            415,334
            
            
            20.1
            %Cost
                of services
            
            
            1,795,927
            
            
            72.4
            
            
            1,570,556
            
            
            76.1
            
            
            225,371
            
            
            14.3Gross
                profit
            
            
            683,051
            
            
            27.6
            
            
            493,088
            
            
            23.9
            
            
            189,963
            
            
            38.5General
                and administrative
            
            
            265,694
            
            
            10.7
            
            
            238,890
            
            
            11.6
            
            
            26,804
            
            
            11.2Defined
                benefit pension plan
            
            
            67,082
            
            
            2.7
            
            
            84,017
            
            
            4.1
            
            
            (16,935
            )
            
            (20.2
            )Selling
            
            
            296,597
            
            
            12.0
            
            
            415,325
            
            
            20.1
            
            
            (118,728
            )
            
            (28.6
            )Depreciation
            
            
            9,201
            
            
            .4
            
            
            7,892
            
            
            .4
            
            
            1,309
            
            
            16.6Research
                and development
            
            
            -
            
            
            -
            
            
            1,553
            
            
            .1
            
            
            (1,553
            )
            
            (100.0
            )Total
                costs and expenses
            
            
            638,574
            
            
            25.8
            
            
            747,677
            
            
            36.2
            
            
            (109,103
            )
            
            (14.6
            )Operating
                income (loss)
            
            
            44,477
            
            
            1.8
            
            
            (254,589
            )
            
            (12.3
            )
            
            299,066
            
            
            (117.5
            )Interest
                expense, net
            
            
            (71,725
            )
            
            (2.9
            )
            
            (69,624
            )
            
            (3.4
            )
            
            (2,101
            )
            
            3.0Other
                expense
            
            
            -
            
            
            -
            
            
            (1,634
            )
            
            (.1
            )
            
            1,634
            
            
            (100.0
            )Net
                loss
            
            $
            (27,248
            )
            
            (1.1)
            %
            $
            (325,847
            )
            
            (15.8)
            %
            $
            298,599
            
            
            (91.6)
            %Net
                loss per share - basic and diluted
            
            $
            (.00
            )
            
            
            
            $
            (.01
            )
            
            
            
            $
            .01




10




The
      following table compares our statements of operations data for the nine months
      ended September 30, 2008 and 2007.





Nine Months Ended September 30,2008 vs. 2007As a % of
            
            
            
            As a % of
            
            Amount of
            
            % Increase2008
            
            Sales
            
            2007
            
            Sales
            
            Change
            
            (Decrease)Sales
            
            $
            7,109,403
            
            
            100.0
            %
            $
            6,008,314
            
            
            100.0
            %
            $
            1,101,089
            
            
            18.3
            %Cost
                of services
            
            
            5,164,602
            
            
            72.6
            
            
            4,322,505
            
            
            71.9
            
            
            842,097
            
            
            19.5Gross
                profit
            
            
            1,944,801
            
            
            27.4
            
            
            1,685,809
            
            
            28.1
            
            
            258,992
            
            
            15.4General
                and administrative
            
            
            779,849
            
            
            11.0
            
            
            631,370
            
            
            10.5
            
            
            148,479
            
            
            23.5Defined
                benefit pension plan
            
            
            166,074
            
            
            2.3
            
            
            273,035
            
            
            4.5
            
            
            (106,961
            )
            
            (39.2
            )Selling
            
            
            1,045,747
            
            
            14.7
            
            
            1,118,089
            
            
            18.6
            
            
            (72,342
            )
            
            (6.5
            )Depreciation
            
            
            27,523
            
            
            .4
            
            
            26,009
            
            
            .4
            
            
            1,514
            
            
            5.8Research
                and development
            
            
            -
            
            
            -
            
            
            88,807
            
            
            1.5
            
            
            (88,807
            )
            
            (100.0
            )Total
                costs and expenses
            
            
            2,019,193
            
            
            28.4
            
            
            2,137,310
            
            
            35.6
            
            
            (118,117
            )
            
            (5.5
            )Operating
                loss
            
            
            (74,392
            )
            
            (1.0
            )
            
            (451,501
            )
            
            (7.5
            )
            
            377,109
            
            
            (83.5
            )Interest
                expense, net
            
            
            (227,054
            )
            
            (3.2
            )
            
            (199,413
            )
            
            (3.3
            )
            
            (27,641
            )
            
            13.9Other
                income
            
            
            -
            
            
            -
            
            
            4,957
            
            
            .1
            
            
            (4,957
            )
            
            (100.0
            )Income
                tax expense
            
            
            (615
            )
            
            -
            
            
            (605
            )
            
            -
            
            
            (10
            )
            
            1.7Net
                loss
            
            $
            (302,061
            )
            
            (4.2
            )%
            $
            (646,562
            )
            
            (10.8
            )%
            $
            344,501
            
            
            (53.3
            )%Net
                loss per share - basic and diluted
            
            $
            (.01
            )
            
            
            
            $
            (.03
            )
            
            
            
            $
            .02





**Sales**





Sales
      for
      the three months ended September 30, 2008 were $2,478,978, an increase of
      $415,344 or 20.1% as compared to sales for the three months ended September
      30,
      2007 of $2,063,644. Sales for the nine months ended September 30, 2008 were
      $7,109,403, an increase of $1,101,089 or 18.3% as compared to sales for the
      nine
      months ended September 30, 2007 of $6,008,314. A significant portion of this
      increase was a result of sales from new projects including the second phase
      of a
      significant server virtualization project for a major establishment of the
      U.S.
      Government which began in the third quarter of 2007 and was substantially
      completed in the second quarter of 2008. Other virtualization projects for
      new
      clients began in the second and third quarters of 2008. We use virtualization
      software provided by third party vendors such as VMware, to enable our clients
      to run multiple operating systems on one physical machine and therefore a
      broader, richer set of business applications.





We
      are
      actively pursuing opportunities to develop additional sales from new and
      existing target markets. In November 2007, we hired a new business development
      employee to focus efforts toward increasing sales in the server virtualization
      arena. Our new director of virtualization services is recognized as one
      of
      the nation’s foremost technical experts who is consistently sought for speaking
      engagements at significant events and by the major industry trade journals. In
      June
      2008, we hired a new business development employee for our regional office
      in
      Jackson, Mississippi to pursue state and local government business opportunities
      within the Gulf Coast region. In September 2008, we hired a new business
      development employee in North Carolina to pursue primarily commercial IT
      opportunities in the southeast U.S. We are also channeling energies towards
      forming alliances with large systems integrators, who are mandated by federal
      policy to direct defined percentages of their work to small business
      subcontractors. In addition, we are currently working on proposals for contract
      awards that we believe will enhance our position as a government contractor.





**Cost
      of Services and Gross Profit**





Cost
      of
      services represents the cost of employee services related to the IT Services
      Group. Cost of services for the three months ended September 30, 2008 was
      $1,795,927 or 72.4% of sales as compared to $1,570,556 or 76.1% of sales for
      the
      three months ended September 30, 2007. Gross profit was $683,051 or 27.6% of
      sales for the three months ended September 30, 2008 compared to $493,088 or
      23.9% of sales for the three months ended September 30, 2007. Cost of services
      for the nine months ended September 30, 2008 was $5,164,602 or 72.6% of sales
      as
      compared to $4,322,505 or 71.9 % of sales for the nine months ended September
      30, 2007. Gross profit was $1,944,801 or 27.4% of sales for the nine months
      ended September 30, 2008 compared to $1,685,809 or 28.1% of sales for the nine
      months ended September 30, 2007.




The
      increase in the amount of gross profit in 2008 is due to increased sales volume
      which was offset by a change in the mix of our contracts as higher margin
      projects were completed and new projects with slightly lower margins were added
      during 2008.




11




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




**General
      and Administrative Expenses**





General
      and administrative expenses include corporate overhead such as compensation
      and
      benefits for administrative and finance personnel, rent, insurance, professional
      fees, travel, and office expenses. General and administrative expenses for
      the
      three months ended September 30, 2008 were $265,694 which was an increase of
      $26,804 or 11.2% as compared to $238,890 for the three months ended September
      30, 2007. As a percentage of sales, general and administrative expense was
      10.7%
      for the three months ended September 30, 2008 and 11.6% for the three months
      ended September 30, 2007.





General
      and administrative expenses for the nine months ended September 30, 2008
      increased by $148,479 or 23.5% from $631,370 for the nine months ended September
      30, 2007 to $779,849 for the nine months ended September 30, 2008. As a
      percentage of sales, general and administrative expenses were 11.0% for the
      nine
      months ended September 30, 2008 and 10.5% for the nine months ended September
      30, 2007.





General
      and administrative expenses increased beginning in July 2007 when we
      reclassified expenses associated with the reassignment of our consultant,
      Intelligent Consulting Corporation (ICC), from research and development to
      general and administrative expenses when the TouchThruTM development activities
      ended. We have contracted with ICC on a month-to-month basis to provide
      consulting services related to business development and business
      strategies, special projects and other general corporate matters. In addition,
      incentive compensation expense associated with our personnel recruiting began
      in
      the fourth quarter of 2007 as a result of our hiring a full-time recruiting
      director responsible for recruiting new billable employees.





We
      anticipate that general and administrative expenses will increase as we continue
      to grow our business and incur travel and other expenses associated with
      recruiting additional personnel and managing a larger business. However, we
      expect that general and administrative expenses will remain relatively stable
      as
      a percentage of sales as our sales increase.





**Defined
      Benefit Pension Plan Expenses**





Defined
      benefit pension plan expenses include expenses (including pension expense,
      professional services, and interest costs) associated with the O&W Plan of
      $67,082 for the three months ended September 30, 2008 and $84,017 for the three
      months ended September 30, 2007, a decrease of $16,935. We incurred expenses
      of
      $166,074 and $273,035 for the nine months ended September 30, 2008 and 2007,
      respectively.





During
      the nine months ended September 30, 2007, we incurred legal and professional
      fees in connection with advocating our legal position with the appropriate
      regulatory authorities. Fees in 2008 are substantially reduced since we are
      awaiting a response from the regulatory authorities to our submission of
      information in 2007.





**Selling
      Expenses**





For
      the
      three months ended September 30, 2008, we incurred selling expenses of $296,597
      associated with expanding our IT Services Group business as compared to $415,325
      for the three months ended September 30, 2007, a decrease of $118,728 or 28.6%.
      For the nine months ended September 30, 2008 we incurred selling expenses of
      $1,045,747 associated with expanding our IT Services Group business compared
      to
      $1,118,089 for the nine months ended September 30, 2007, a decrease of $72,342
      or 6.5%.





The
      decreases for the three and nine months ended September 30, 2008 are principally
      due to changes in certain business development personnel. In the August 2007,
      we
      added a business development employee to prepare proposals for new projects.
      In
      November 2007, we hired a new business development employee who is now our
      director of virtualization services. In June 2008, we hired a new business
      development employee for our regional office in Jackson, Mississippi to pursue
      state and local government business opportunities within the Gulf Coast region.
      In September 2008, we hired a new business development employee in North
      Carolina to pursue primarily commercial IT opportunities in the southeast U.S.
      These employee additions were offset during 2008 by certain business development
      employee terminations including one in our virtualization practice and two
      in
      our federal services practice, which positions were filled by existing
      employees.





We
      experienced a decrease in consulting expense of approximately $52,000 for the
      nine months ended September 30, 2008, as a result of management’s decision to
      reduce the use and rate of compensation to independent consultants. For the
      three months ended September 30, 2008 we experienced an increase in consulting
      expense of approximately $5,300 due to amending the terms of a warrant issued
      to
      a business development consultant and recording $19,886 of expense associated
      with such change, which offset reductions in the use of other consultants.




12




**Depreciation
      Expenses**





Depreciation
      expense was $9,201 and $7,892 for the three months ended September 30, 2008
      and
      2007, respectively, and was $27,523 and $26,009 for the nine months ended
      September 30, 2008 and 2007, respectively. In the normal course of business,
      certain assets, such as personal computers and related software, are upgraded
      and replaced.




**Research
      and Development Expenses**





During
      the third quarter of 2007, we terminated development activities and related
      expenses for TouchThruTM and reassigned an independent consultant from these
      development efforts to other business activities. As a result, we incurred
      no
      research and development expenses in 2008. For the three and nine months ended
      September 30, 2007 we recorded $1,553 and $88,807 of research and development
      expenses. These expenses were principally related to the development of an
      access control terminal and related software called TouchThruTM. TouchThruTM is a
      self-contained terminal enabling physical access control using biometric
      identification. It incorporates fingerprint matching technology licensed from
      Ultra-Scan Corporation, a private technology company headquartered in Buffalo,
      New York.





**Operating
      Income (Loss)**





For
      the
      three months ended September 30, 2008 our operating income was $44,477 compared
      to an operating loss of $(254,589) for the three months ended September 30,
      2007; an improvement of $299,066. This is attributable to an increase in sales
      of $415,334 which contributed an additional $189,963 of gross profit and a
      decrease in operating expenses of $109,103.





For
      the
      nine months ended September 30, 2008 our operating loss was $(74,392) compared
      to an operating loss of $(451,501) for the nine months ended September 30,
      2007;
      an improvement of $377,109. This is attributable to an increase in sales of
      $1,101,089 which contributed an additional $258,992 of gross profit and a
      decrease in operating expenses of $118,117. We believe that our operations,
      as
      currently structured, together with our current financial resources, will result
      in improved financial performance in future periods.




**Net
      Interest Expense**





Net
      interest expense consists of interest income offset by interest expense on
      indebtedness and fees for financing accounts receivable invoices. Net interest
      expense was $71,725 for the three months ended September 30, 2008 compared
      to
      net interest expense of $69,624 for the three months ended September 30, 2007.
      Net interest expense was $227,054 for the nine months ended September 30, 2008
      compared to net interest expense of $199,413 for the nine months ended September
      30, 2007. The increase in net interest expense of $27,641 for the nine months
      ended September 30, 2008 was principally due to an increase in the length of
      term and volume of accounts receivable invoices that were financed in 2008.
      We
      incurred new indebtedness in June 2008 of $200,000 which is being used for
      working capital purposes.





**Other
      Income (Expense)**





Other
      income (expense) was $0 and $(1,634) for the three months ended September 30,
      2008 and 2007, respectively. Other income (expense) was $0 and $ 4,957 for
      the
      nine months ended September 30, 2008 and 2007, respectively. Other income
      (expense) for the three and nine months ended September 30, 2007 was as a result
      of the sale of certain equipment.





**Income
      Taxes**





Income
      tax expense was $0 for the three months ended September 30, 2008 and 2007,
      respectively. Income tax expense was $615 and $605 for the nine months ended
      September 30, 2008 and 2007, respectively, consisting of state
      taxes.





**Net
      Loss**




For
      the
      three months ended September 30, 2008, ** we
      recorded a net loss in the amount of $(27,248) or $(.00) per share compared
      to a
      net loss of $(325,847) or $(.01) per share for the three months ended September
      30, 2007 *.* For the
      nine months ended September 30, 2008, ** we
      recorded a net loss in the amount of $(302,061) or $(.01) per share compared
      to
      a net loss of $(646,562) or $(.03) per share for the nine months ended September
      30, 2007 *.*




**Stock-Based
      Compensation**





The
      following table provides pro forma non-GAAP financial data after adjustment
      for
      the impact that the adoption of SFAS 123R had on our financial statements
      including net loss. Pro forma data is calculated by adding back to net loss
      non-cash compensation expense recorded according to “Share-Based Payment”, (SFAS
      123R) which relates to stock options.




13




Pro
      forma
      data is provided to investors to supplement the results of operations reported
      in accordance with GAAP. Management believes pro forma data is useful to help
      investors analyze the operating trends of the business before and after the
      adoption of SFAS 123R and to assess the relative underlying performance of
      the
      business. Management believes that pro forma data provides an additional tool
      for investors to use in comparing its financial results with other companies
      in
      the industry. By excluding non-cash charges such as SFAS 123R stock-based
      compensation, investors can evaluate our operations and can compare our results
      on a more consistent basis to the results of other companies in the industry.
      Management also uses pro forma data to evaluate potential acquisitions,
      establish internal budgets, and evaluate performance of our business.





We
      consider pro forma data to be an important indicator of our operational strength
      and performance of our business and a useful measure of our historical and
      prospective operating trends. However, there are significant limitations to
      the
      use of pro forma data since it may exclude amounts that impact our profitability
      and operating cash flows. We believe that these limitations are offset by
      clearly identifying the difference between the two measures. Consequently,
      pro
      forma data should not be considered in isolation or as a substitute for net
      income (loss) presented in accordance with GAAP. Pro forma data, as presented
      by
      us, may not be comparable with similarly named measures provided by other
      entities.





Nine Months Ended September 30,2008
            
            2008
            
            2008
            
            2007
            
            2007
            
            2007As Reported
            
            Adjustments
            
            Pro Forma
            
            As Reported
            
            Adjustments
            
            Pro FormaSales
            
            $
            7,109,403
            
            $
            -
            
            $
            7,109,403
            
            $
            6,008,314
            
            $
            -
            
            $
            6,008,314Cost
                of services
            
            
            5,164,602
            
            
            (81,729
            )
            
            5,082,873
            
            
            4,322,505
            
            
            (67,702
            )
            
            4,254,803Gross
                profit
            
            
            1,944,801
            
            
            81,729
            
            
            2,026,530
            
            
            1,685,809
            
            
            67,702
            
            
            1,753,511General
                and administrative
            
            
            779,849
            
            
            (20,194
            )
            
            759,655
            
            
            631,370
            
            
            (12,636
            )
            
            618,734Defined
                benefit pension plan
            
            
            166,074
            
            
            -
            
            
            166,074
            
            
            273,035
            
            
            -
            
            
            273,035Selling
            
            
            1,045,747
            
            
            (57,321
            )
            
            988,426
            
            
            1,118,089
            
            
            (99,730
            )
            
            1,018,359Depreciation
            
            
            27,523
            
            
            -
            
            
            27,523
            
            
            26,009
            
            
            -
            
            
            26,009Research
                and development
            
            
            -
            
            
            -
            
            
            -
            
            
            88,807
            
            
            -
            
            
            88,807Total
                costs and expenses
            
            
            2,019,193
            
            
            (77,515
            )
            
            1,941,678
            
            
            2,137,310
            
            
            (112,366
            )
            
            2,024,944Operating
                loss
            
            
            (74,392
            )
            
            159,244
            
            
            84,852
            
            
            (451,501
            )
            
            180,068
            
            
            (271,433
            )Interest
                expense, net
            
            
            (227,054
            )
            
            -
            
            
            (227,054
            )
            
            (199,413
            )
            
            -
            
            
            (199,413
            )Other
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            4,957
            
            
            -
            
            
            4,957Income
                tax expense
            
            
            (615
            )
            
            -
            
            
            (615
            )
            
            (605
            )
            
            -
            
            
            (605
            )Net
                loss
            
            $
            (302,061
            )
            $
            159,244
            
            $
            (142,817
            )
            $
            (646,562
            )
            $
            180,068
            
            $
            (466,494
            )





We
      recorded expense of $38,483 and $74,488 for equity instruments issued to
      consultants for the nine months ended September 30, 2008 and 2007, respectively.





**Liquidity
      and Capital Resources**





At
      September 30, 2008, we had cash of $39,307 available for our working capital
      needs and planned capital asset expenditures. Our primary liquidity needs are
      the financing of working capital and capital expenditures. Our primary source
      of
      liquidity is cash provided by operations and our $800,000 credit facility.
      At
      September 30, 2008, we had approximately $313,000 of availability under this
      line and had adequate accounts receivable to use the remaining available line.
      During the nine months ended September 30, 2008, cash used by operating
      activities was $118,860.




At
      September 30, 2008, we had a working capital deficit of approximately $2.54
      million and a current ratio of .34. Our objective is to improve our working
      capital position from profitable operations. The O&W Plan current
      liabilities have a significant impact on our working capital. Without the
      current liabilities of the O&W Plan of approximately $2.3 million, working
      capital would have been a deficit of approximately $283,000. If we incur
      operating losses or continue to incur net losses, we may continue to experience
      working capital shortages that impair our business operations and growth
      strategy. Based on current level of operations, we have sufficient cash flow
      and
      short-term financing sources, through sales with recourse of accounts
      receivable, to fund our payroll and accounts payable on a timely basis.




During
      2007 and 2008, we have financed the activity of our IT Services Group through
      the issuance of notes payable to third parties, including related parties and
      financing through sales with recourse of our accounts receivable. In June 2008,
      we raised $200,000 through a working capital loan from a third
      party. ****





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




14




**Future
      Trends**





We
      believe that our operations, as currently structured, together with our current
      financial resources, will result in improved financial performance in future
      periods.





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





**Cash
      Flows from Operating Activities**





During
      the nine months ended September 30, 2008, cash used in operations was $118,859
      compared with cash used in operations of $29,855 for the nine months ended
      September 30, 2007. Our operating cash flow is primarily affected by the overall
      profitability of our contracts, our ability to invoice and collect from our
      clients in a timely manner, and our ability to manage our vendor payments.
      We
      bill our clients weekly or monthly after services are performed, depending
      on
      the contract terms. Our accounts receivable increased principally due to the
      growth of sales in the period. The increase in liabilities is primarily due
      to
      increased accounts payable and accrued pension and retirement expenses.




**Cash
      Flows from Investing Activities**




Cash
      used
      in investing activities for the nine months ended September 30, 2008 was $17,339
      compared with $18,671 for the nine months ended September 30, 2007. Cash used
      in
      investing activities was primarily for capital expenditures for computer
      hardware and software. We do not have any plans for significant capital
      expenditures in the near future.




**Cash
      Flows from Financing Activities**




Cash
      provided by financing activities was $147,225 for the nine months ended
      September 30, 2008 due to $200,000 from a new working capital loan, $16,667
      from
      the exercise of an option for common stock offset by principal payments of
      $69,442 on notes payable. In comparison, for the nine months ended September
      30,
      2007 we used cash from financing activities of $16,617 principally for principal
      payments on notes payable. We anticipate that we will use approximately $4,300
      through the next twelve months for funding current maturities of long-term
      debt
      obligations.




**Credit
      Agreement**




We
      have a
      line of credit of up to $800,000 with a financial institution that allows us
      to
      sell selected accounts receivable invoices to the financial institution with
      full recourse against us. We pay fees based on the length of time that the
      invoice remains unpaid. At September 30, 2008, we had approximately $313,000
      of
      availability under this line and had adequate accounts receivable to use the
      remaining available line.





We
      believe the capital resources available to us under our line of credit and
      cash
      from our operations are adequate to fund our ongoing operations and to support
      the internal growth we expect to achieve for at least the next 12 months.
      However, if we experience significant growth in our sales, we believe that
      this
      may require us to increase our financing line or obtain additional working
      capital from other sources to support our sales growth. We anticipate financing
      our external growth from acquisitions and our longer-term internal growth
      through one or more of the following sources: cash from operations; additional
      borrowing; issuance of equity; use of our existing revolving credit facility;
      or
      a refinancing of our credit facilities.




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





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





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




15




During
      2007, we submitted information advocating this position to the Department of
      Treasury (DOT) to ascertain whether they concur or disagree with this position.
      The DOT is presently reviewing this information. If the DOT does not concur
      with
      this position, we may become obligated for additional estimated excise taxes
      on
      accumulated unfunded O&W Plan contributions for the plan years ended
      December 31, 2006 and 2007 of approximately $135,000 and $157,000, respectively,
      totaling $292,000, which has not been accrued because of the determination
      of no
      legal obligation and our belief that the likelihood is remote that we will
      be
      required to pay these excise taxes. Further, if the DOT does not concur with
      this position, we may be required to pay interest on these excise taxes and
      potentially incur additional excise taxes up to 100% of all required plan
      contributions. No such excise taxes have been assessed and no portion of this
      amount has been accrued at September 30, 2008 since we believe that the
      likelihood is remote that we will be required to pay these excise taxes. If
      the
      DOT does not concur with this position, we intend to pursue all appropriate
      further avenues to prevail on our position.





If
      it is
      determined that we are responsible for O&W Plan deficiencies, then we will
      be required to make contributions for deficiencies in 2004 through 2008 and
      we
      will be required to fund O&W Plan deficiencies in future periods. We did not
      make any O&W Plan contributions in 2004, 2006, 2007 or 2008. During 2005, we
      made contributions valued at approximately $181,000. We currently do not have
      the funds available to make the required cash contributions which currently
      approximate $1.8 million. As a result of our legal position, we do not
      anticipate making any contributions to the Plan during the year ending December
      31, 2008. We recorded defined benefit pension expense (including professional
      services and interest costs) of $166,074 and $273,035 for the nine months ended
      September 30, 2008 and 2007, respectively.





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





At
      September 30, 2008, we had accrued liabilities of $2,564,170 related to the
      O&W Plan and accumulated other comprehensive loss of $2,227,689 which was
      recorded as a reduction of stockholders’ deficiency. The market value of the
      O&W Plan assets decreased from $3,387,749 at December 31, 2007 to $2,655,620
      at September 30, 2008. The decrease was due to investment losses of $367,853,
      benefit payments of $329,194 and expenses paid of $35,082.





**Item
      3.**  **Quantitative** a **nd
      Qualitative Disclosures About Market Risk.**





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




**Item
      4T. Controls and Procedures.**





Evaluation
      of Disclosure Controls and Procedures. Our
      management, with the participation of our president and our 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, our
      president and our chief financial officer concluded that, as of the Evaluation
      Date, our disclosure controls and procedures are effective to ensure that
      information required to be disclosed by us in the reports that we file or submit
      under the Exchange Act (i) is recorded, processed, summarized and reported,
      within the time periods specified in the SEC’s rules and forms and (ii) is
      accumulated and communicated to our management, including our president and
      our
      chief financial officer, as appropriate to allow timely decisions regarding
      required disclosure.





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





**PART
      II**


**OTHER
      INFORMATION**




**Item
      1A. Risk Factors.**





You
      should consider the risk factors included in our Annual Report on Form 10-KSB
      for the year ended December 31, 2007 in evaluating our business and us.
      Additional risks and uncertainties not presently known to us, which we currently
      deem immaterial or that are similar to those faced by other companies in our
      industry or business in general, such as competitive conditions, may also impair
      our business operations. If any of the results of the risks occur, our business,
      financial condition, or results of operations could be materially adversely
      affected.





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





On
      September 29, 2008, we issued 135,000 unregistered shares of our common stock
      to
      an accredited investor upon conversion of $6,750 of accrued interest payable
      on
      outstanding notes payable in accordance with the terms of such
      notes.




16




On
      July
      10, 2008, we issued 200,000 unregistered shares of our common stock to an
      accredited investor upon conversion of $10,000 of principal on outstanding
      notes
      payable in accordance with the terms of such notes.





These
      transactions were exempt from registration, as they were nonpublic offerings
      or
      transactions made pursuant to Sections 4(2) and 4(6) of the Securities Act
      of
      1933, as amended. All shares issued in the transactions described hereinabove
      bore an appropriate restrictive legend.





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





Exhibit No.
            
            Description31.1
            
            Certification
                of President pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.*31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.*32.1
            
            Certification
                of President pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.*32.2
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.*







*
      Filed
      herewith




**SIGNATURES**




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


Infinite
                  Group, Inc.(Registrant)Date:
                  November 12, 2008
              /s/
                  Michael S. SmithMichael
                  S. SmithChief
                  Executive Officer(Principal
                  Executive Officer)Date:
                  November 12, 2008
              /s/
                  James WitzelJames
                  WitzelChief
                  Financial Officer(Principal
                  Financial Officer)




17