UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-QSB

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

                         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 |_| No |X|

Number of shares  outstanding of each of the issuer's  classes of common equity,
as of the latest  practicable  date: As of July 15, 2005,  there were 19,206,965
shares of common stock outstanding.

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

                                       1
<PAGE>

                               INFINITE GROUP INC.
                               FORM 10-QSB REPORT

                               Infinite Group Inc.

                                TABLE OF CONTENTS

                                                                            PAGE

PART I - FINANCIAL INFORMATION

           Item 1.   Consolidated Financial Statements

                     Balance Sheet - June 30, 2004 (unaudited)
                     and December 31, 2003                                    3

                     Statements of Operations-(unaudited) for the three
                     and six month periods ended June 30, 2004 and 2003       4

                     Statements of Cash Flows-(unaudited) for the six
                     month periods ended June 30, 2004 and 2003               5

                     Notes to Consolidated Financial Statements               6

           Item 2.   Management's Discussion and Analysis of Financial
                     Conditions and Results of Operations                    14

           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                                                23

SIGNATURES                                                                   23

                           FORWARD-LOOKING STATEMENTS

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

                                       2
<PAGE>

                                     PART I

                              FINANCIAL INFORMATION

Item 1. Financial Statements

INFINITE GROUP, INC.

Consolidated Balance Sheets
                                                      June 30,      December 31,
                                                       2004            2003
--------------------------------------------------------------------------------
ASSETS                                              (Unaudited)
Current assets:
   Cash                                            $    129,379    $     16,515
   Restricted cash                                       14,321          26,500
   Accounts receivable, net of allowance                646,986         165,830
   Other current assets                                  17,157           1,060
   Assets held for sale                               2,832,563       2,919,154
   Assets of discontinued operations                    854,598         870,287
                                                   ------------    ------------
       Total current assets                           4,495,004       3,999,346

Property and equipment, net                             138,991          99,435

Other assets:
  Note receivable                                        73,897          73,897
  Intangible assets, net                                 56,552          62,918
                                                   ------------    ------------
         Total other assets                             130,449         136,815
                                                   ------------    ------------
Total assets                                       $  4,764,444    $  4,235,596
                                                   ============    ============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
   Notes payable:
     Bank                                          $     98,192    $    152,122
     Other                                               30,000          30,000
     Related parties                                      9,906           9,906
   Accounts payable                                     553,738         613,712
   Accrued expenses                                     676,551         359,804
   Current maturities of long-term obligations        2,211,694       2,360,840
   Liabilities held for sale                            872,981         781,847
   Liabilities of discontinued operations               973,437         933,349
                                                   ------------    ------------
        Total current liabilities                     5,426,499       5,241,580

Long-term obligations
   Bank notes payable                                    68,533          32,852
   Notes payable-related parties                      1,162,124         887,124
   Accrued pension expense                            2,183,751       2,190,214
                                                   ------------    ------------
Total liabilities                                     8,840,907       8,351,770
                                                   ------------    ------------
Commitments and contingencies

Stockholders' deficiency:
   Common stock, $.001 par value, 20,000,000
    shares authorized; 15,386,965 (10,624,465-2003)
    shares issued and outstanding                        15,387          10,624
   Additional paid-in capital                        28,259,873      28,026,510
   Common stock, 1,500,000 authorized, not issued            --          75,000
   Accumulated deficit                              (29,508,595)    (29,297,944)
   Accumulated other comprehensive loss              (2,843,128)     (2,930,364)
                                                   ------------    ------------
 Total stockholders' deficiency                      (4,076,463)     (4,116,174)
                                                   ------------    ------------

Total liabilities and stockholders' deficiency     $  4,764,444    $  4,235,596
                                                   ============    ============

See notes to consolidated financial statements.

                                       3
<PAGE>

INFINITE GROUP, INC.

Consolidated Statements of Operations (Unaudited)

<TABLE>
<CAPTION>
                                                          Six Months Ended                Three Months Ended
                                                              June 30,                         June 30,
                                                     ----------------------------    ----------------------------
                                                        2004            2003             2004            2003
-----------------------------------------------------------------------------------------------------------------
                                                                     (As Restated)                  (As Restated)
<S>                                                  <C>             <C>             <C>             <C>
Sales                                                $  1,829,823    $     91,984    $  1,269,388    $     90,781
Cost of goods and services                              1,193,950          59,251         833,965          59,251
                                                     ------------    ------------    ------------    ------------
Gross profit                                              635,873          32,733         435,423          31,530

Costs and expenses:
   General and administrative                             574,954         511,554         310,775         330,066
   Depreciation and amortization                           12,517              --           5,911              --
   Selling                                                  4,364           5,079           4,195           5,079
   Research and development                               142,955          26,554          74,309          24,622
                                                     ------------    ------------    ------------    ------------
        Total costs and expenses                          734,790         543,187         395,190         359,767
                                                     ------------    ------------    ------------    ------------

Operating income  (loss)                                  (98,917)       (510,454)         40,233        (328,237)

Other expense:
   Interest expense-related parties                       (36,653)         (4,381)        (19,565)         (3,024)
                                                     ------------    ------------    ------------    ------------
       Total other expense                                (36,653)         (4,381)        (19,565)         (3,024)
                                                     ------------    ------------    ------------    ------------

Income (loss) from continuing operations before
         income tax expense                              (135,570)       (514,835)         20,668        (331,261)
Income tax expense                                           (350)             --              --              --
                                                     ------------    ------------    ------------    ------------

Income (loss) from continuing operations                 (135,920)       (514,835)         20,668        (331,261)
Income (loss) from discontinued operations
        (Including $11,243 gain on disposal in the
        three and six months ended June 30, 2003)         (74,731)        315,216          13,938         542,767
                                                     ------------    ------------    ------------    ------------
   Net income (loss)                                 $   (210,651)   $   (199,619)   $     34,606    $    211,506
                                                     ============    ============    ============    ============

Net income (loss) per share-basic:
 Income (loss) from continuing operations            $       (.01)   $       (.08)   $        .00    $       (.05)
 Income (loss) from discontinued operations                  (.01)            .05             .00             .08
                                                     ------------    ------------    ------------    ------------
   Net income (loss)                                 $       (.02)   $       (.03)   $        .00    $        .03
                                                     ============    ============    ============    ============

Net income (loss) per share-diluted:
Income (loss) from  continuing operations            $       (.01)   $       (.07)   $        .00    $       (.04)

Income (loss) from discontinued operations                   (.01)            .04             .00             .07
                                                     ------------    ------------    ------------    ------------
  Net income (loss)                                  $       (.02)   $       (.03)   $        .00    $        .03
                                                     ============    ============    ============    ============

 Weighted average number of shares outstanding:
      Basic                                            13,692,968       6,724,022      13,769,822       7,129,162
                                                     ============    ============    ============    ============
      Diluted                                          13,692,968       7,152,593      14,807,219       7,558,033
                                                     ============    ============    ============    ============
</TABLE>

See notes to consolidated financial statements.

                                       4
<PAGE>

INFINITE GROUP, INC.

Consolidated Statements of Cash Flows (Unaudited)

<TABLE>
<CAPTION>
                                                                                              For the Six Months Ended
                                                                                                      June 30,
                                                                                              -----------------------
                                                                                                 2004         2003
---------------------------------------------------------------------------------------------------------------------
                                                                                                         (As Restated)
<S>                                                                                           <C>          <C>
Operating activities:
  Net loss                                                                                    $(210,651)   $(199,619)
  Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
(Income)loss from discontinued operations                                                        74,731     (315,216)
      Depreciation and amortization                                                              12,517           --
      Stock based compensation                                                                       --       25,000
 (Increase) decrease in:
         Accounts receivable, net                                                              (481,156)     (94,281)
         Other current assets                                                                   (16,097)         (30)
 Increase (decrease) in:
       Accounts payable and accrued expenses                                                    256,773      171,107
       Accrued pension obligations                                                               80,773       99,702
                                                                                              ---------    ---------
Net cash provided by (used in) operating activities of continuing operations                   (283,110)    (313,337)
Net cash provided by (used in) operating activities of discontinued operations                  161,952      126,919
                                                                                              ---------    ---------

Net cash provided by (used in) operating activities                                            (121,158)    (186,418)
                                                                                              ---------    ---------

Investing activities:
    Decrease in restricted funds for asset addition, net                                         12,179       18,074
    Purchase of property and equipment                                                           (3,768)        (105)
                                                                                              ---------    ---------

Net cash provided by (used in) investing activities of continuing operations                      8,411       17,969
Net cash provided by (used in) investing activities of discontinued operations                       --      (39,621)
                                                                                              ---------    ---------

Net cash provided by (used in) investing activities                                               8,411      (21,652)
                                                                                              ---------    ---------


Financing activities:
   Net (repayments) borrowings of bank notes payable                                            (53,930)     (18,925)
   Proceeds from issuance of long-term obligations-related parties                              463,000      240,000
   Repayment of notes payable-related parties                                                  (188,000)     (20,000)
   Repayments of long-term obligations                                                         (158,585)    (111,733)
   Proceeds from issuance of common stock, net of costs                                         163,126      100,000
                                                                                              ---------    ---------
Net cash provided by (used in) financing activities                                             225,611      189,342
                                                                                              ---------    ---------
Net increase (decrease) in cash                                                                 112,864      (18,728)
Cash - beginning of period                                                                       16,515       20,870
                                                                                              ---------    ---------
Cash  - end of period                                                                         $ 129,379    $   2,142
                                                                                              =========    =========

Supplemental disclosure:
   Cash paid for:
       Interest                                                                               $  (7,057)   $      --
                                                                                              =========    =========
       Income taxes                                                                           $    (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,  2003 and the  notes  thereto
included in the  Company's  Annual  report on Form 10-KSB  filed with the United
States Securities and Exchange  Commission.  Results of consolidated  operations
for the six months period ended June 30, 2004 are not necessarily  indicative of
the operating  results to be attained in the year ended  December 31, 2004.  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
present  a  summary  of  significant  accounting  policies.  The  most  critical
accounting policies follow.

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 June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No.  141,  "Business  Combinations,"  and  SFAS No.  142,  "Goodwill  and  Other
Intangible  Assets." Under these new standards,  all acquisitions  subsequent to
June 30, 2001 must be accounted for under the purchase method of accounting.

SFAS No. 142 requires that goodwill be tested  annually for  impairment  using a
two-step process.  The first step was to identify a potential impairment and, in
transition,  this step must be measured as of the  beginning of the fiscal year.
The second  step of the  goodwill  impairment  test  measures  the amount of the
impairment  loss (measured as of the beginning of the year of the adoption),  if
any, and must be completed by the end of our fiscal year.  Any  impairment  loss
resulting from the transitional impairment tests are reflected as the cumulative
effect of a change in accounting principle.

We adopted the  provisions  of SFAS No. 142 in our first quarter ended March 31,
2002.  Goodwill in the amount of $88,769 at December  31,  2001,  relates to the
Laser Fare and Mound  subsidiaries.  Subsequent to December 31, 2001, the assets
of  Mound  were  disposed  of  and  operations  were  ceased,  resulting  in the
write-down of goodwill  amounting to $17,584.  In addition the goodwill relating
to Laser Fare amounting to $71,185 was written off at December 31, 2002. We have
allocated its intangible  assets to its reporting  units.  The remaining  useful
lives of the intangibles have been evaluated and no changes will be made.

SFAS No. 141 also  requires  that upon  adoption  of SFAS No.  142,  the Company
reclassify  the carrying  amounts of certain  intangibles  assets into or out of
goodwill,  based upon certain criteria.  We did not have any  reclassifications.
SFAS No. 142  supersedes APB No. 17,  "Intangible  Assets," and is effective for
fiscal years beginning after December 15, 2001. SFAS No. 142 primarily addresses
the accounting for goodwill and  intangible  assets  subsequent to their initial
recognition.  The  provisions  of SFAS No.  142  prohibit  the  amortization  of
goodwill and  indefinite-lived  intangible  assets;  require  that  goodwill and
indefinite-lived  intangible  assets be tested annually for  impairment,  and in
interim  periods if certain events occur  indicating  that the carrying value of
goodwill and / or  indefinite-lived  intangible assets may be impaired;  require
that reporting units be identified for the purpose of assessing potential future
impairments of goodwill;  and removes the 40-year limitation on the amortization
period of intangible assets that have finite lives.

In August 2001, the FASB issued SFAS No. 143,  "Accounting for Asset  Retirement
Obligations"  (SFAS  143).  SFAS  143  establishes   accounting   standards  for
recognition  and  measurement  of a liability for the costs of asset  retirement
obligations.  Under SFAS 143, the costs of retiring an asset will be recorded as
a liability  when the  retirement  obligation  arises,  and will be amortized to
expense over the life of the related asset.

In August 2001, the Financial  Accounting  Standards Board issued  Statement No.
144 (SFAS  144),  "Accounting  for the  Impairment  or  Disposal  of  Long-Lived
Assets", which provides guidance in the accounting for impairment of disposal of
long-lived  assets.  For long-lived asset to be held and used, the new rules are
similar to previous guidance,  which required the recognition of impairment when
the  undiscounted  cash  flows  will  not  recover  the  carrying  amount.   The
computation  of  fair  value  now  removes  goodwill  from   consideration   and
incorporates a probability-weighted cash flow estimation approach. Additionally,
assets  qualifying  for  discontinued  operations  treatment  have been expanded
beyond the former  major line of  business  or class of  customer  approach.  We
adopted the provisions of SFAS 144 in fiscal 2001 and utilized this guidance for
the disposal of the Plastics Group.  Accordingly,  the assets and liabilities of
the discontinued  operations are reflected as gross amounts, rather than net, in
the accompanying  balance sheet in accordance with SFAS 144. There was no impact
from the adoption of this standard on its impairment  tests of long lived assets
or its accounting for discontinued operations.

                                       7
<PAGE>

In April 2002,  the FASB issued SFAS 145  "Rescission  of SFAS No. 4, 44 and 64,
Amendment of SFAS No.13, and Technical  Corrections."  SFAS No. 145, among other
things, amends SFAS No. 4 and SFAS No. 64, to require that gains and losses from
the   extinguishments   of  debt  generally  be  classified   within  continuing
operations.  The  provisions  of SFAS No. 145 are  effective  for  fiscal  years
beginning  after May 15, 2002 and early  application  is  encouraged.  We do not
believe that the adoption of SFAS No. 145 will have a significant  impact on our
financial statements.

In June 2002, the FASB issued SFAS 146,  "Accounting  for Costs  Associated with
Exit or  Disposal  Activities."  SFAS 146  replaces  Emerging  Issues Task Force
("EITF") Issue 94-3,  "Liability  Recognition for Certain  Employee  Termination
Benefits and Other Costs to Exit an Activity".  This standard requires companies
to recognize  costs  associated  with exit or disposal  activities when they are
incurred  rather than at the date of a commitment  to an exit or disposal  plan.
This statement is effective for exit or disposal  activities  that are initiated
after  December  31,  2002.  We do not believe that the adoption of SFAS No. 146
will have a significant impact on our financial statements.

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.

Note 3. Discontinued Operations and Reclassifications

The  statements of operations and cash flows for the three months ended June 30,
2004 have been restated to account for the discontinued  operations of the Laser
Group, which was sold as discussed below.

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 was included in
loss on disposal of  discontinued  operations in the  consolidated  statement of
operations for the year ended December 31, 2002.

On  December  31,  2003,  the  Company  and LF  entered  into an asset  purchase
agreement  with LFI,  Inc.  ("LFI")  relating to the  purchase by LFI of certain
assets and the  assumption  of certain  liabilities  of LF relating to the laser
engraving and medical products  manufacturing and assembly businesses of LF (the
"Purchase  Agreement").  The  principals  of LFI  are  former  employees  of LF,
including the former  chairman and chief executive  officer of the Company.  The
purchase price for the assets was assumed  liabilities of LF and/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. The balances of the assets held
for sale at  December  31,  2003 was  $2,919,154  with  related  liabilities  of
$781,847.  During the year ended December 31, 2003, LF had loss from  operations
of approximately $417,000.

                                       8
<PAGE>

In accordance  with SFAS 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 of  discontinued  operations  and  assets  held for sale.  The  operating
results for both segments are segregated and reported as discontinued operations
in the accompanying consolidated statements of operations and cash flows.

The  following is a summary of financial  position at June 30, 2004 and December
31, 2003 and results of  operations  for the three and six months ended June 30,
2004 and 2003 for the disposed  Photonics (IP),  Plastics (O&W and EP) and Laser
(LF) segments:
                                           June 30,    December 31,
Financial Position                           2004         2003
                                          ----------   ----------

Assets held for sale:
     Current assets                       $  939,905   $  858,949
     Property and equipment               $1,892,658   $2,060,205
                                          ----------   ----------

          Total assets held for sale      $2,832,563   $2,919,154
                                          ==========   ==========

Accounts payable and accrued
 expenses held for sale                   $  872,981   $  781,847
                                          ==========   ==========

Current assets and total assets of
 discontinued operations                  $  854,598   $  870,287
                                          ==========   ==========

Liabilities of discontinued operations:
     Accounts payable and accrued
      expenses                            $  968,437   $  928,349
     Unsecured note payable               $    5,000   $    5,000
                                          ----------   ----------

     Total liabilities of discontinued
      operations                          $  973,437   $  933,349
                                          ==========   ==========


                                             Three Months Ended
                                                 June 30,
                                          -----------------------
Results of Operations                        2004        2003
                                          ----------   ----------

Revenue from discontinued operations      $  821,648   $2,046,688
                                          ==========   ==========

Income from discontinued operations       $   13,938   $  531,524

Gain on disposal of discontinued
 operations                               $       --   $   11,243
                                          ----------   ----------

Net income from discontinued operations   $   13,938   $  542,767
                                          ==========   ==========

                                       9
<PAGE>

                                              Six Months Ended
                                                  June 30,
                                          -----------------------
Results of Operations                        2004         2003
                                          ----------   ----------

Revenue from discontinued operations      $1,492,158   $3,592,160
                                          ==========   ==========

Income (loss) from
 discontinued operations                  $  (74,731)  $  303,973

Gain on disposal of discontinued
 operations                               $       --   $   11,243
                                          ----------   ----------

Net income (loss) from
 discontinued operations                  $  (74,731)  $  315,216
                                          ==========   ==========

Certain other amounts in the 2003 financial statements have been reclassified to
conform with the 2004 financial statements.


Note 4. Stock Option Plan

      As of June 30, 2004 the Company's Stock Option Plans (the "Plan") provided
for the grant of incentive or  non-qualified  stock  options for the purchase of
common stock for up to approximately  2,314,000  shares to employees,  directors
and  consultants.  The  Plan  is  administered  by  the  compensation  committee
established by the Company's board of directors,  which  determines the terms of
options  including the exercise  price,  expiration  date,  number of shares and
vesting provisions.

      A summary of all stock  option  activity for the six months ended June 30,
2004 is as follows:

<TABLE>
<CAPTION>
                                                                                                       Weighted
                                                         Number                Exercise                Average
                                                       Of Options               Price               Exercise Price
                                                   ---------------------------------------------------------------
<S>                                                   <C>                  <C>                         <C>
Outstanding at December 31, 2003                       1,687,575            $ .05 - $2.50               $ .16
                                                                            =============               =====

Options issued                                          138,500               $ .01-.14                 $ .07
                                                                              =========                 =====

Options expired                                         (21,129)            $ 1.50 - $2.50              $ 1.30
                                                        --------            ==============              ======

Outstanding at June 30, 2004                           1,804,946             $ .01 -$2.50               $ .14
                                                       =========             ============               =====

Exercisable at June 30, 2004                           1,738,279            $ .01 -$ 2.50               $ .14
                                                       =========            =============               =====
</TABLE>

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 increased as follows:


                                       10
<PAGE>

                                                       Three Months Ended
                                                             June 30,
                                                    ---------------------------
Results of Operations                                 2004              2003
                                                    ---------        ----------

Net income-as reported (000's)                      $     35         $      212
Total stock based employee compensation
      expense determined employee compensation
      expense determined under the fair value
      method for all awards (000's)                 $      8         $       69
                                                    ---------        ----------

Net income- pro forma (000's)                       $      27        $      143
                                                    =========        ==========


Income per share as reported-basic and diluted      $     .00        $       03
                                                    =========        ==========
Income per share pro forma-basic and diluted        $     .00        $      .02
                                                    =========        ==========


                                                         Six Months Ended
                                                             June 30,
                                                    ---------------------------
Results of Operations                                 2004              2003
                                                    ---------         ---------

Net loss-as reported (000's)                        $    (211)        $    (200)

Total stock based employee compensation
      expense determined employee compensation
      expense determined under the fair value
      method for all awards (000's)                 $      15         $      76
                                                    ---------         ---------

Net Loss- pro forma (000's)                         $    (226)        $    (276)
                                                    ==========        =========

Loss per share as reported-basic and diluted        $    (.02)        $    (.03)
                                                    ==========        =========
Loss per share pro forma-basic and diluted          $    (.02)        $    (.04)
                                                    ==========        =========

Note  5.  Business Segments

Prior to 2002,  the Company's  business were  organized,  managed and internally
reported as three segments.  The segments are determined based on differences in
products,  production  processes and internal  reporting.  During the year ended
December 31, 2001, the Company  approved of a plan to discontinue the operations
of the Plastics Group. During the fourth quarter of 2002, the Company's 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,
the Company approved the sale of the assets and certain liabilities of its 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.

                                       11
<PAGE>

Beginning in 2003, the Company revised its business strategy and began operating
its newly formed IT Services Group.

All of the segments of the Company  operate  entirely  within the United States.
Revenues from customers in foreign countries are minimal.  Transactions  between
reportable  segments are recorded at cost. The Company  relies 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 the Company's industry segments during the periods
ended June 30, 2004 and 2003, respectively, is set forth as follows.

<TABLE>
<CAPTION>
                           Plastics    Photonics       Laser       IT Services    Unallocated
                            Group        Group         Group          Group       Corporate    Consolidated
-----------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>            <C>           <C>            <C>          <C>
Three Months ended
June 30, 2003

Sales to unaffiliated
customers                 $      --   $        --    $        --   $    90,781    $       --   $    90,781

Operating (loss)          $      --   $        --    $        --   $  (328,237)   $       --   $  (328,237)

Income (loss) from
discontinued operations   $      --   $   516,135    $    26,632   $        --    $       --   $   542,767

Three Months ended
June 30, 2004

Sales to unaffiliated     $      --   $        --    $        --   $ 1,269,388    $       --   $ 1,269,388
customers

Operating income          $      --   $        --    $        --   $    40,233    $       --   $    40,233

Income (loss) from        $      --   $   (19,752)   $    33,690   $        --    $       --   $    13,938
discontinued operations
</TABLE>

<TABLE>
<CAPTION>
                           Plastics    Photonics       Laser       IT Services    Unallocated
                            Group        Group         Group          Group       Corporate    Consolidated
-----------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>            <C>           <C>            <C>          <C>
Six Months
ended June 30, 2003

Sales to unaffiliated     $      --   $        --    $        --   $    91,984    $       --   $    91,984
customers

Operating loss            $      --   $        --    $        --   $  (510,454)   $       --   $  (510,454)

Income (loss) from        $      --   $   444,509    $  (129,293)  $        --    $       --   $   315,216
discontinued operations

Six Months
ended June 30, 2004

Sales to unaffiliated     $      --   $        --    $        --   $ 1,829,823    $       --   $ 1,829,823
customers

Operating loss            $      --   $        --    $        --   $   (98,917)   $       --   $   (98,917)

Income (loss) from        $      --   $   (59,930)   $   (14,801)  $        --    $       --   $   (74,731)
discontinued operations
</TABLE>

                                       12
<PAGE>

Note 6.  Supplemental Cash Flow Information-

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

                                                         Six Months Ended
                                                             June 30,
                                                    -------------------------
                                                        2004         2003
                                                    ------------  -----------
Common stock authorized not issued, transferred
 to issued                                          $    75,000   $        --
                                                    ===========   ===========

Purchase of vehicle through long-term obligations   $    45,120   $       --
                                                    ===========   ===========

Conversion of legal fees outstanding to common
 stock                                              $        --   $    48,000
                                                    ===========   ===========

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 the Company's 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
exercise.  In a loss year, the  calculation  for basic and diluted  earnings per
share is considered to be the same, as the impact of potential  common shares is
anti-dilutive.

      The  following  table  sets  forth the  computation  of basic and  diluted
earnings per share as of:

                                                   Three Months Three Months
                                                      Ended         Ended
                                                  June 30, 2004 June 30, 2003
                                                   -----------   -----------
Numerator:
  Income (loss) available to common stockholders
   from continuing operations                      $    20,668   $  (331,261)
                                                   ===========   ===========

  Weighted average shares outstanding               13,769,822     7,129,462
                                                   ===========   ===========

Denominator for diluted income per share:
  Weighted average shares outstanding               13,769,822     7,129,462
  Common stock options and stock warrants            1,037,397       428,871
                                                   -----------   -----------
  Weighted average shares and conversions           14,807,219     7,558,033
                                                   ===========   ===========

      For the six months  ended  June 30,  2004 and 2003 all  outstanding  stock
options and warrants have not been considered common stock  equivalents  because
their assumed exercise would be anti-dilutive.

                                       13
<PAGE>

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

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

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

The purchase  price for the assets  consisted of LFI's  assumption of certain of
our liabilities in the aggregate amount of approximately  $358,000.  On December
31, 2004, we sold the remaining assets of LF to Rolben  Acquisition  Corporation
(Rolben),  a company  affiliated  with LFI. The purchase price for the remaining
assets consisted of Rolben's  assumption of substantially all of the liabilities
of LF  and  the  delivery  of  promissory  notes  in  the  aggregate  amount  of
approximately  $2.1  million.  Because  certain  required  consents were not yet
obtained at December 31, 2004, we remained  obligated under several notes to UPS
Capital  Business  Credit  (UPS)  and the  Rhode  Island  Industrial  Facilities
Corporation  (RIIFC) in the same amounts as the notes from  Rolben.  These notes
were  refinanced  by the  acquirer in June 2005 and we are  therefore  no longer
obligated under the several notes.

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

Results of operations

Comparison of Three Months ended June 30, 2004 and 2003

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


                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                                             Three Months Ended June 30,
                                            ---------------------------------------------------------------------------------------
                                                                As a % of Net            2003          As a % of Net    Increase
                                                  2004            Revenues           (As Restated)       Revenues      (Decrease)
                                                  ----            --------          --------------       --------      ----------

<S>                                                  <C>            <C>                      <C>            <C>            <C>
Sales                                                $ 1,269,388    100.0 %                  $ 90,781       100.0 %        1,298.3 %
Cost of sales                                            833,965     65.7                      59,251        65.3          1,307.5
                                            ------------------------------        --------------------------------    -------------
Gross profit                                             435,423     34.3                      31,530        34.7          1,281.0
                                            ------------------------------        --------------------------------    -------------
General and administrative                               310,775     24.5                     330,066       363.6             (5.8)
Depreciation and amortization                              5,911      0.5                           -         0.0                -
Selling                                                    4,195      0.3                       5,079         5.6            (17.4)
Research and development                                  74,309      5.9                      24,622        27.1            201.8
                                            ------------------------------        --------------------------------    -------------
Total operating expenses                                 395,190     31.1                     359,767       396.3              9.8
                                            ------------------------------        --------------------------------    -------------
Operating income( loss)                                   40,233      3.2                    (328,237)     (361.6)          (112.3)
Other income (expense) and income taxes, net             (19,565)    (1.5)                     (3,024)       (3.3)           547.0
                                            ------------------------------        --------------------------------    -------------
Income (loss) from continuing operations                  20,668      1.6                    (331,261)     (364.9)          (106.2)
Income  from discontinued operations                      13,938      1.1                     542,767       597.9            (97.4)
                                            ------------------------------        --------------------------------    -------------
Net income                                              $ 34,606      2.7 %                 $ 211,506       233.0 %          (83.6)%
                                            ==============================        ================================    =============
</TABLE>

      Sales

Sales for the three  months  ended  June 30,  2004 were  $1,269,388  which was a
substantial  increase of  $1,178,607  as compared to sales for the three  months
ended June 30, 2003 of $90,781.  The  increase was due to the start up nature of
our IT Services Group,  which began operations in the second quarter of 2003. We
realized sales increases from new contracts with prime  contractors for the U.S.
Government. During 2003, we operated our new IT Services Group for approximately
two quarters and its business base was still developing.

      Cost of Sales and Gross Profit

Cost of  sales  represents  the  cost of  employee  services  related  to the IT
Services  Group.  Cost of sales for the three  months  ended  June 30,  2004 was
$833,965  or 65.7% of sales as  compared  to  $59,251  or 65.3% of sales for the
three months  ended June 30,  2003.  Gross profit was $435,423 or 34.3% of sales
for the three months  ended June 30, 2004  compared to $31,530 or 34.7% of sales
from the three months ended June 30, 2003. Gross profit as a percent of sales is
not  necessarily  indicative  of gross  margins  that we will  earn as our sales
grows.  We expect that gross margins as a percent of sales may decrease as sales
increases due to the competitive nature of our business.

      General and Administrative Expenses

General  and   administrative   expenses  include  corporate  overhead  such  as
compensation  and  benefits  for  administrative  and finance  personnel,  rent,
insurance,   professional  fees,  travel,  and  office  expenses.   General  and
administrative  expenses for the three months ended June 30, 2004 were  $310,775
which was similar as compared to $330,066  for the three  months  ended June 30,
2003. As a percentage of sales,  general and  administrative  expense was 24.5 %
for the  three  months  ended  June 30,  2004  which  represented  expense  from
operations  of  our  IT  Services   Group.   We  anticipate   that  general  and
administrative  expenses will increase as we continue to transition our business
strategy and incur travel and other expenses  associated  with managing a larger
business.  We expect increases in accounting and legal expenses in 2004 and 2005
due to our focus on completing  audits of our financial  statements  and related
public information filings.

                                       15
<PAGE>

General  and  administrative  expense  includes  expenses of the Osley & Whitney
defined  benefit  retirement plan of  approximately  $40,000 and $50,000 for the
three months ended June 30, 2004 and 2003, respectively.

      Depreciation and Amortization

Depreciation and amortization expense was $5,911 for the three months ended June
30,  2004  compared to the three  months  ended June 30,  2003.  This was due to
establishing our new corporate  headquarters in Rochester,  New York in 2003 and
the write off or  disposition  of assets  in our  former  headquarters  in Rhode
Island. We began acquiring depreciable assets in the second quarter of 2003.

      Selling Expenses

For the three months ended June 30, 2004 we incurred  selling expenses of $4,195
associated with growing  business in our IT Services Group as compared to $5,079
for the three months ended June 30, 2003. We expect selling expenses to increase
as we generate sales opportunities and grow our IT Services Group.

      Research and Development

For the three  months  ended June 30, 2004 we  continued  to incur  research and
development  expenses  associated with growing business in our IT Services Group
related to our biometrics  applications and recorded $74,309 of expense compared
to  $24,622  for the three  months  ended  June 30,  2003.  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 three  months  ended June 30,  2004 our  operating  income  was  $40,233
compared to a $(328,237) loss from operations in the comparable  period of 2003.
This is primarily attributable to our focus on our new IT Services Group and the
growth of IT sales which  provided gross profit of $435,423 to fund research and
development, general and administrative expense and interest expenses.

      Other Income (Expense)

Other income and expense  consists of interest  expense on indebtedness  for the
three  months ended June 30,  2004.  Interest  expense was $19,565 for the three
months  ended June 30, 2004  compared to $3,024 for the three  months ended June
30, 2003,  which was an increase of $16,542.  The increase was due to borrowings
from  related  parties to fund the  initial  startup and  development  of the IT
Services Group.

                                       16
<PAGE>

      Income (Loss) from Discontinued Operations

We recorded income from discontinued  operations of $13,938 for the three months
ended June 30, 2004  compared to income of $542,767  for the three  months ended
June 30,  2003.  The  income is the  result  of the  Photonics  Group  which was
reclassified as discontinued operations and was a result of the terminated DARPA
contract and satisfying liabilities for less than the full carrying values.

      Net Income (Loss)

For the three  months ended June 30, 2004,  we recorded  income from  continuing
operations  of $20,668,  and net income of $34,606.  This compares to a net loss
from  continuing  operations of $331,261 or $(.05) per share and a net income of
$211,506,  or  $.03  per  share  (the  difference  of  $.08  per  share  is from
discontinued  operations)  for  the  three  months  ended  June  30,  2003.  The
improvement in profitability is attributable to growth of sales and gross profit
from our new IT Services Group which in 2004 allowed us to fund our research and
development,  general and administrative,  and interest expenses.  Sales for the
2003 period of $90,781  resulted from the start up of the IT Services  Group and
were not  sufficient  to  generate  profitability.  The gain  from  discontinued
operations  for the three months ended June 30, 2003 was realized from the close
down of the DARPA contract of the Photonics Group.

      Comparison of Six Months ended June 30, 2004 and 2003

The following  table compares our statement of operations data for the first six
months of 2004 and 2003. We commenced the operations of our IT Services Group in
the second quarter of 2003. The following  results include the operations of our
IT Services Group beginning in 2003. The trends  suggested by this table are not
indicative  of future  operating  results  due to the  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>

                                                                      Three Months Ended June 30,
                                              -------------------------------------------------------------------------------------
                                                                   As a % of Net          2003          As a % of Net     Increase
                                                           2004      Revenues         (As Restated)       Revenues       (Decrease)
                                                           ----      --------        --------------       --------       ----------
<S>                                                    <C>            <C>                    <C>            <C>            <C>
Sales                                                  $ 1,829,823    100.0 %                $ 91,984       100.0 %        1,889.3 %
Cost of sales                                            1,193,950     65.2                    59,251        64.4          1,915.1
                                              ------------------------------      --------------------------------    -------------
Gross profit                                               635,873     34.8                    32,733        35.6          1,842.6
                                              ------------------------------      --------------------------------    -------------
General and administrative                                 574,954     31.4                   511,554       556.1             12.4
Depreciation and amortization                               12,517      0.7                         -         0.0                -
Selling                                                      4,364      0.2                     5,079         5.5            (14.1)
Research and development                                   142,955      7.8                    26,554        28.9            438.4
                                              ------------------------------      --------------------------------    -------------
Total operating expenses                                   734,790     40.2                   543,187       590.5             35.3
                                              ------------------------------      --------------------------------    -------------
Operating loss                                             (98,917)    (5.4)                 (510,454)     (554.9)           (80.6)
Other income (expense) and income taxes, net               (37,003)    (2.0)                   (4,381)       (4.8)           744.6
                                              ------------------------------      --------------------------------    -------------
Loss from continuing operations                           (135,920)    (7.4)                 (514,835)     (559.7)           (73.6)
Income (loss) from discontinued operations                 (74,731)    (4.1)                  315,216       342.7           (123.7)
                                              ------------------------------      --------------------------------    -------------
Net loss                                                $ (210,651)   (11.5)%              $ (199,619)     (217.0)%            5.5 %
                                              ==============================      ================================    =============
</TABLE>

                                       17
<PAGE>

      Sales

Sales  for the six  months  ended  June  30,  2004  increased  substantially  by
$1,737,839  to $1,829,823 as compared to sales for the six months ended June 30,
2003 of $91,984.  The increase was due to the start up of our IT Services Group,
which  began  operations  in the  second  quarter  of 2003.  We  realized  sales
increases from new contracts  with prime  contractors  for the U.S.  Government.
During 2004 we were in full operation of our IT Services  Group. We also secured
new contracts in 2004.

      Cost of Sales and Gross Profit

Cost of  sales  represents  the  cost of  employee  services  related  to the IT
Services  Group.  Cost of sales  for the six  months  ended  June  30,  2004 was
$1,193,950  or 65.2% of sales as  compared  to $59,251 or 64.4% of sales for the
six months ended June 30, 2003.  Gross profit was $635,873 or 34.8% of sales for
the six months ended June 30, 2004 compared to $32,733 or 35.6% of sales for the
six months  ended June 30, 2003.  We  anticipate  that gross profit  margins may
decline as new  contracts  originate  and our sales grow due to the  competitive
nature of this business.

      General and Administrative Expenses

General  and   administrative   expenses  include  corporate  overhead  such  as
compensation  and  benefits  for  administrative  and finance  personnel,  rent,
insurance,   professional  fees,  travel,  and  office  expenses.   General  and
administrative  expenses  for the six months  ended June 30, 2004  increased  by
$63,400 or 12.4% due to the  increases  in  employee  compensation  and  related
fringe benefits expenses as well as increased  operating expenses as we manage a
larger volume of business.  As a percentage of sales, general and administrative
expense was 31.4% for the six months  ended June 30,  2004.  This relates to the
operation  of  our  IT  Services   Group.   We   anticipate   that  general  and
administrative  expenses will increase as we continue to transition our business
strategy and incur travel and other expenses  associated  with managing a larger
business.  We expect increases in accounting and legal expenses in 2004 and 2005
due to our focus on completing  audits of our financial  statements  and related
public information filings.

General  and  administrative  expense  includes  expenses of the Osley & Whitney
defined benefit  retirement plan of  approximately  $80,000 and $100,000 for the
six months ended June 30, 2004 and 2003, respectively.

      Depreciation and Amortization

Depreciation and amortization  expense was $12,517 for the six months ended June
30,  2004.  This  was due to  establishing  our new  corporate  headquarters  in
Rochester,  New York in 2003 and the write off or  disposition  of assets in our
former  headquarters in Rhode Island. We began acquiring  depreciable  assets in
the  second  quarter  of 2003.  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.

        Selling Expenses

For the six months ended June 30, 2004 we incurred selling expenses of $4,364
associated with growing business in our IT Services Group compared to $5,079 for
the six months ended June 30, 2003. We expect that selling expenses will
increase in the future as we develop new contract opportunities. A portion of
the effort to develop new business for 2004 and 2003 is included in general and
administrative expense since certain members of management also devote their a
portion of their time to developing new revenue opportunities and contracts.

                                       18
<PAGE>

      Research and Development

For the six months  ended  June 30,  2004 we  continued  to incur  research  and
development  expenses  associated with growing business in our IT Services Group
related to our biometrics applications and recorded $142,955 of expense compared
to  $26,554  for  the six  months  ended  June  30,  2003.  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 six months ended June 30, 2004 our operating  loss was $98,917  compared
to a $510,454 loss from  operations in the  comparable  period of 2003.  This is
primarily  attributable to our focus on our new IT Services Group and the growth
of IT sales  which  provided  gross  profit of  $635,873  to fund  research  and
development, general and administrative expense and interest expenses.

      Other Income (Expense)

Other income and expense  consists of interest  expense on indebtedness  for the
six months ended June 30, 2004.  Interest expense was $36,653 for the six months
ended June 30, 2004  compared to $4,381 for the six months  ended June 30, 2003.
The increase  was due to  borrowings  from  related  parties to fund the initial
startup and development of the IT Services Group.

      Income (loss) from Discontinued Operations

We recorded a loss from  discontinued  operations  of $74,731 for the six months
ended June 30, 2004 compared to income of $315,216 for the six months ended June
30, 2003.  These results are from the Photonics Group which was  reclassified as
discontinued  operations  and are results of closing down the  terminated  DARPA
contract and in 2003 the gain resulted from satisfying liabilities for less than
full carrying values.

      Net Income (Loss)

For the six  months  ended June 30,  2004,  we  recorded a loss from  continuing
operations  of $135,920,  or $(.01) per share and net loss of $210,651 or $(.02)
per share. This compares to a net loss from continuing operations of $514,835 or
$(.08) per share and a net loss of $199,619 or $(.03) per share (the  difference
of $.05 per share is from discontinued operations) for the six months ended June
30, 2003. The  improvement in  profitability  is attributable to growth of sales
and gross profit from our new IT Services  which allowed us to fund our research
and development, general and administrative, and interest expenses.

      Liquidity and Capital Resources

As of June 30, 2004 we had unrestricted cash of $129,379, which is available for
working capital and property and equipment acquisitions.

                                       19
<PAGE>

At June 30,  2004 we had a working  capital  deficit of  approximately  $931,000
(approximately  $2,772,000  after  eliminating the assets and liabilities of our
discontinued operations and assets and liabilities held for sale). Approximately
$2,200,000 of this deficit is caused by bank loan covenant violations  resulting
in the classification of long term maturities as current liabilities.

We have financed the activity of our new IT Services  Group through the issuance
of notes payable to related  parties and private  placements of common stock. 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 liquidity needs.

Risk Factors

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

Item 3.  Controls and Procedures

Evaluation of  Disclosure  Controls and  Procedures.  Our  management,  with the
participation  of the chief executive  officer and the 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 the 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 the chief  executive
officer or the chief financial  officer,  that occurred during our fiscal second
quarter that has  materially  affected,  or is  reasonably  likely to materially
affect, our internal control over financial reporting.


                                       20
<PAGE>

                                     PART II

                                OTHER INFORMATION

Item 1:    Legal Proceedings.

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

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

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

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

                                       21
<PAGE>

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

Recent Sales of Unregistered Securities

For the three  and six  months  ended  June 30,  2004,  we  issued  400,000  and
2,520,000  restricted  shares  of  common  stock  at $.05 per  share in  private
placement transactions,  respectively.  In addition we issued 742,500 restricted
common  shares in June 2004 to satisfy  liabilities.  We also  issued  1,500,000
restricted common shares in January 2004 as employee compensation.  These shares
were valued at $.05 per share.

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

Item 3.    Defaults Upon Senior Securities.

The  Company's LF subsidiary  had a $1,250,000  bank term  promissory  note that
required  monthly  principal and interest  payments  amounting to  approximately
$13,000  through  February  2011.  The  outstanding  balance as of June 30, 2004
amounted to $744,441 and bore  interest at the bank's prime rate plus 1.0%.  All
the assets of LF and the guarantee of the Company secured the note. We continued
to be in  violation  of certain  loan  covenants.  These  violations  related to
exceeding  certain  levels of the ratio of debt to  intangible  net  worth,  not
meeting the minimum  current ratio or the working  capital ratio,  and exceeding
capital expenditure limits.  Accordingly,  the entire outstanding portion of the
note was classified as current.

The  Company's LF subsidiary  had a $1,260,000  bank term  promissory  note that
required  monthly  principal and interest  payments  amounting to  approximately
$13,000  through  December  2014.  The  outstanding  balance as of June 30, 2004
amounted to $1,010,527  and bore interest at the bank's prime rate plus .75%. We
continued to be in violation of certain  covenants  under the term of this note.
Accordingly,  the  entire  outstanding  portion  of the note was  classified  as
current.

The  Company's LF  subsidiary  was  obligated  under a capital  lease for the LF
operating facility. The lease provides for monthly payments to an escrow account
in  amounts  sufficient  to allow  for the  repayment  of the  principal  of the
underlying  tax-exempt  bonds together with interest at 7.25% through June 2012.
The  outstanding  balance  as of June 30,  2004  amounted  to  $445,000.  Annual
payments of  principal  were  $40,000 for fiscal  2004 and  increased  by $5,000
annually  through June 2012.  Under the terms of this capital lease, the Company
was  prohibited  from  paying  dividends  or making  other  cash  distributions.
According  to the terms of the lease  agreement,  the  Company  was  required to
comply  with  certain  covenants.  We  continued  to be in  violation  of  these
covenants.  Accordingly,  the entire outstanding  portion of this obligation was
classified as current.

The  aggregate  amount of the  aforementioned  notes  payable and capital  lease
obligations classified as current liabilities was $2,199,969 at June 30, 2004.

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

           None.

Item 5.    Other Information.

           None.

                                       22
<PAGE>

Item 6. Exhibits.

a. Exhibits:

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

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

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

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

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


                                   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 July 26, 2005                               /s/ Michael S. Smith
                                                 -------------------------
                                                 Chief Executive Officer

Date July 26, 2005
                                                 /s/ Michael S. Smith
                                                 --------------------------
                                                 Chief Financial Officer
                                                 (Principal Financial Officer)


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