SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB

(Mark One)

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from . . . . . to . . . . . .

Commission File Number 0-21816

INFINITE GROUP, INC.
(Exact name of registrant as specified in its charter)

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

595 Blossom Road
Suite 309
Rochester, NY 14610
(Address of principal executive offices)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock,
Par value $.001

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 past 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 |_| No |X|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |_|

For the year ended December 31, 2002, the revenues of the registrant were $6,229,910.

As of July 15, 2005, 19,206,965 shares of the Registrant's common stock were outstanding. The aggregate market value of the common stock of the Registrant held by non-affiliates of the Registrant as of July 15, 2005 (based upon the closing price on the "pink sheets" maintained by the National Quotation Bureau Incorporated of $.16 on July 15, 2005) was approximately $3,073,114.

DOCUMENTS INCORPORATED BY REFERENCE

NONE


INFINITE GROUP, INC.

Form 10-KSB

TABLE OF CONTENTS

                                                                                                                 Page
                                                                                                                 ----
PART I
   Item 1.     Business.............................................................................................3
   Item 2.     Properties..........................................................................................25
   Item 3.     Legal Proceedings...................................................................................26
   Item 4.     Submission of Matters to a Vote of Security Holders.................................................27

PART II
   Item 5.     Market for Common Equity and Related Stockholder Matters............................................28
   Item 6.     Management's Discussion and Analysis of Financial Condition
               and Results of Operation............................................................................29
   Item 7.     Financial Statements................................................................................40
   Item 8.     Change in and Disagreements with Accountants on Accounting
               and Financial Disclosure............................................................................40
   Item 8A.    Controls And Procedures.............................................................................41

PART III
   Item 9.     Directors, Executive Officers, Promoters and Control Persons; Compliance With
               Section 16(a) of the Exchange Act...................................................................42
   Item 10.    Executive Compensation..............................................................................44
   Item 11.    Security Ownership of Certain Beneficial Owners and Management and
               Related Stockholder Matters.........................................................................48
   Item 12.    Certain Relationships and Related Transactions......................................................49
   Item 13.    Exhibits............................................................................................51
   Item 14.    Principal Accountant Fees and Services..............................................................53

FORWARD LOOKING STATEMENT INFORMATION

Certain statements made in this Annual Report on Form 10-KSB are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. 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 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 particularly in view of the current state of our operations, the inclusion of such information should not be regarded as a statement by us or any other person that our objectives and plans will be achieved. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth herein under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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PART I

ITEM 1: BUSINESS

We are not current in our periodic filings with the Securities and Exchange Commission. Until 2004 we were not able to pay our auditors, Freed Maxick & Battaglia, CPAs, P.C., for fees incurred prior to their work on the 2002 audit. As a result they ceased all work on our behalf.

Because we did not have financial statements with an independent auditors' report thereon for the year ended December 31, 2002, we were not able to file our 2002 10-KSB by its due date. For the same reason, we were unable to file our Form 10-Q's for the 1st, 2nd and 3rd quarters of 2003, our Form 10-KSB for the year ended December 31, 2003, our Form 10-Q's for the 1st, 2nd and 3rd quarters of 2004 our Form 10-KSB for the year ended December 31, 2004 and our form 10-Q for the first quarter of 2005 in a timely manner. During 2004, we brought our account current with Freed Maxick & Battaglia, CPAs, P.C., and they resumed work on our behalf and completed the audits of our financial statements for the years ended December 31, 2002, 2003 and 2004. Contemporaneous with this filing, we are filing all of our delinquent periodic reports.

Overview

During 2002, we operated two business segments, our Photonics Group until the fourth quarter and our Laser Group for the entire year. We disposed of our Plastics Group in the first quarter of 2002 and shut down our Photonics Group in the fourth quarter of 2002. During 2002, we continued to liquidate the assets of our Osley & Whitney (O&W) subsidiary following the discontinuance of its operation in November 2001. In 2003, we decided to dispose of the net assets of the Laser Fare, Inc. subsidiary (LF) and to restructure our business.

Beginning in 2003 we commenced operations in the field of information technology (IT) consulting services and biometric technology. 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.

We were incorporated under the laws of the state of Delaware on October 14, 1986. On January 7, 1998, we changed our name from Infinite Machines Corp. to Infinite Group, Inc. At December 31, 2002, our principal executive offices were located at 2364 Post Road, Warwick, RI. During the first quarter of 2003, we moved our corporate headquarters to 595 Blossom Road, Suite 309, Rochester, NY 14610. As of January 1, 2005, our business is exclusively in the field of IT consulting services and biometric technology. We maintain a website at www.us-igi.com. The content of our website shall not be deemed part of this report.

The Plastics Group

During the first quarter of 2002, we had a Plastics Group, which consisted of two subsidiaries, O&W and Express Pattern, Inc. (EP). Our Plastics Group provided rapid prototyping services and proprietary mold building services.

During 2001, our board of directors determined to dispose of both O&W and EP. As a result, the operations of O&W were shut down in November 2001 and the assets of EP were disposed of in March 2002.

The loss from discontinued operations of the Plastics Group was $31,310 for 2002 and $1,774,085 for 2001.

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Osley & Whitney (O&W)

During the first quarter of 2002, all of the inventory and equipment of O&W were sold at auction, resulting in net proceeds of approximately $416,000 and a gain of approximately $27,000. During the second quarter of 2002, the carrying value of the O&W land and building was reduced by $151,000, based on estimated net proceeds at that time. The land and building were sold at auction during the third quarter for $650,000, resulting in an additional net loss of approximately $70,000. This closing completed the liquidation of the O&W assets, resulting in a net obligation to a secured lender, including accrued interest and closing expenses, of approximately $211,000. This amount was evidenced by a new note issued by O&W to the secured lender which we guaranteed. The note accrued interest at 7.75% per annum, provided for twelve monthly payments of $7,276 plus interest, and required a balloon payment of approximately $145,000 in November 2003. On August 5, 2003, the secured lender sold the note and the rights thereunder to a third party related to the Company. We negotiated a new note with the third party extending its term through January 1, 2007, providing for interest at the rate of 7.75% per annum and providing the noteholder with the right to convert the note, prior to maturity, into shares of our common stock at a conversion price of $0.05 per share at any time after November 30, 2005. As of December 31, 2004 we were obligated to the new noteholder for principal and accrued interest in the aggregate amount of $234,690.

During the fourth quarter of 2002, we sold all of the issued and outstanding stock of O&W to an unrelated third party for nominal consideration. As part of the stock sale agreement, we retained an O&W pension asset and related obligation, which obligation is included in accrued pension obligation and accumulated other comprehensive loss on the consolidated balance sheet at December 31, 2002. As a result of the sale of stock we wrote off the outstanding intercompany receivables due from O&W. The net impact of the sale and asset write off resulted in a gain of approximately $693,000, which offset the loss on disposal of discontinued operations on the accompanying consolidated statement of operations.

At December 31, 2001, the O&W prepaid pension cost was $904,673. At December 31, 2002, the O&W defined benefit pension plan had an accrued pension obligation liability of $2,159,152 and an accumulated other comprehensive loss of $3,098,705 which we recorded as a reduction of stockholders' equity. This change was due to a decline in the market value of plan assets from $5,019,929 at December 31, 2001 to $3,315,256 at December 31, 2002 comprised of payment of benefits of $822,226 and a negative investment return of $882,447. The benefit obligation increased during 2002 by $505,986 to $5,474,408 at December 31, 2002 as a result of an actuarial computation.

We were required to contribute amounts to the O&W retirement plan in 2004 and future years to fund the deficiency. We did not make a contribution in 2002, 2003 or 2004 and we currently do not have the funds available to make such contributions. We have recorded defined benefit pension income of approximate $35,000 in 2002. We have recorded defined benefit pension expense of approximately $200,000 in 2003 and $160,000 in 2004. In March 2005, we filed a funding waiver application requesting a deferral of the minimum funding standard for the 2005 plan year of $513,551 and for the 2004 plan year of $979,328 (which includes quarterly cash disbursements aggregating approximately $455,000 for the year ending December 31, 2004 and unfunded prior year amounts). We are also evaluating strategies to improve the plan's performance.

Sale of Express Pattern (EP) Assets

On March 14, 2002, we sold the net assets of our Express Pattern subsidiary (EP) for $725,000, consisting of $575,000 in cash (of which $300,000 was paid to the O&W secured lender) and a five-year 8% subordinated $150,000 note, due upon maturity with quarterly interest payments. The purchasers included a former employee of Express Pattern and Thomas J. Mueller, our then chief operating officer, who was a passive investor in the purchasing entity. The sale was negotiated at "arm's length" by disinterested management with the former employee and his advisors. During 2002, we offset a portion of the $150,000 note with the closing costs of the sale amounting to approximately $26,000 paid by EP in completing the deal. In addition, we wrote off $50,000 of the note, due to concerns about collectibility. The loss resulting from this offset and write off, which amounted to approximately $76,000, is included in loss on disposal of discontinued operations in the accompanying consolidated statement of operations for the year ended December 31, 2002. The interest earned on this note through December 31, 2002 in the amount of $9,633 has been fully reserved, because we feel collection of the interest is doubtful at this time. The remaining balance of the note at December 31, 2002 after the offset and write-off is approximately $74,000.

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The Photonics Group

Our Photonics Group ceased operations in 2002. The loss from discontinued operations of the Photonics Group was $856,219 for the year ended December 31, 2002.

In April 2001, we organized Infinite Photonics, Inc. (IPI) to develop and market laser diodes based on our proprietary, patented and patent pending grating coupled surface emitting lasers (GCSEL) diode technology platform developed by our Laser Group's research and development unit.

On January 23, 2002, IPI signed and commenced a $12.0 million research and development contract (contract #MDA972-02-C-0013) with the U.S. Defense Advanced Research Projects Agency (DARPA), which was scheduled to conclude by the end of 2003. The purpose of the contract was to provide DARPA with pump and source laser diodes and grating coupled semiconductor optical amplifiers with powers much higher than the current industry standard of about 0.3 watts (more than one watt with a goal as high as ten watts), high repetition rates (up to 20,000 laser pulses per second), and high beam quality (minimum beam spreading of the laser).

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 process. 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, plant and equipment were impaired, and consequently recorded an impairment loss of approximately $468,000 and $148,000 respectively, which is included in loss on disposal of discontinued operations in the consolidated statement of operations for the year ended December 31, 2002.

The Laser Group

In 2003, we decided to dispose of our Laser Group. We sold a portion of the business on December 31, 2003 and the remaining business on December 31, 2004.

Our Laser Group provided comprehensive laser-based materials and processing services (cutting, welding, drilling and assembly) to aerospace, power generation and medical device customers. The majority of the Laser Group's revenues were derived from purchase orders, usually from repeat customers such as General Electric, United Technologies, Barnes Aerospace and Dey Laboratories. Work began when materials arrived from the customer (our inventories were minimal and the customer was responsible for the quality of the materials), and we cut, welded, drilled and assembled the parts according to engineering drawings and specifications provided by the customer or determined by our engineers with customer approval. Upon completion of the parts, they were inspected by quality control personnel, compared to the engineering specifications, packaged and delivered to the customer. The customer was billed for the number of parts delivered.

Our Laser Group used 26 laser workstations to process parts ranging in size from very large (jet engine or gas turbine parts) to very small medical products, such as stents (stents are medical implants used to open veins for better blood flow). Substantially all of our laser workstations employed multi-axis lasers, commonly used for industrial component fabrication.

To meet aerospace customer needs, our Laser Fare subsidiary was certified for overhaul and repair of jet engine and aerospace parts by the Federal Aviation Administration (FAA). We maintained an overhaul and repair license in order to perform laser material processing services on jet engine parts (cutting, welding, and drilling). To become FAA certified for overhaul and repair of jet engine and aerospace parts, Laser Fare contacted the FAA and submitted a quality manual and the required procedures for the parts involved. After the FAA staff reviewed the documentation, FAA inspectors visited the facility and performed an inspection. Thereafter, they required an inspection if procedures were changed. Our last change was in 2000, for which we passed inspection.

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Our Laser Group also provided laser-related contract research and development. We were both a prime contractor and subcontractor on several projects sponsored by DARPA.

During 2002, the Laser Group employed approximately 68 full-time technical and engineering personnel in our Smithfield, R.I. facilities.

Other Developments During 2002

Termination of Equity Line of Credit

On July 23, 2002 we terminated the equity line of credit agreement which we entered into with Cockfield Holdings Limited (Cockfield) on November 30, 2000. As a result, we were released, and we released Cockfield, from any further obligation thereunder.

As consideration for establishing the equity line of credit, we granted Cockfield warrants to purchase up to 200,000 shares of our common stock. As consideration for the services rendered by Jesup & Lamont as placement agent in connection with the equity line of credit, we granted Jesup & Lamont warrants to purchase up to 100,000 shares of our common stock. These warrants, covering 300,000 shares of our common stock, expired unexercised on November 20, 2003.

Settlement with Estate of Former O&W Stockholder

On January 4, 2002, we entered into a securities purchase agreement with the estate of a former stockholder of O&W, which was amended and restated during the quarter ended June 30, 2002. In accordance with the agreement, as revised, the estate purchased 379,253 shares of our common stock, which were paid for by the cancellation of certain indebtedness we had to the estate amounting to $758,507. The indebtedness related to past due consulting fees, outstanding debt and related accrued interest owed to the estate at December 31, 2001, and fees incurred by the estate relating to the agreement. The original provisions of the agreement, which provided us with an option to repurchase certain of the shares and the estate with the option to sell certain of the shares back to us, was eliminated in the amended and restated agreement. As a result, we are no longer obligated for the indebtedness and we have recorded the purchase of the securities as an increase in equity in the accompanying consolidated balance sheet.

Laurus Master Fund Ltd. Financing

On February 5, 2002, we completed a $1 million debt financing with Laurus Master Fund, Ltd. (Laurus). We received $1 million in cash, less fees amounting to $89,000, in exchange for our issuance of a $1 million two-year convertible note bearing interest and fees at the annual rate of 15%, originally payable monthly. The annual fees were subject to reduction by 1% for every $100,000 in note principal amount converted, up to an aggregate 10%. The outstanding principal and interest was due in full on February 5, 2004. The note was originally convertible, at the option of the holder, into shares of our common stock at a price of $2.00 per share. In the event of a default, the conversion price was subject to downward adjustment.

On June 21, 2002, we completed an additional $500,000 debt financing with Laurus. We received $500,000 in cash, less fees amounting to $37,000, in exchange for the issuance of a $500,000 two-year convertible note bearing interest and fees at the annual rate of 15%, payable monthly. The proceeds from this note were unrestricted and were secured by substantially all of our assets and IPI's assets. The annual fees were subject to reduction by 1% for every $50,000 in note principal amount converted, up to an aggregate 10%. This note was convertible into shares of our common stock at the option of the holder at a price of $2.00 per share. In the event of a default, the conversion price was subject to downward adjustment. In connection with this transaction, detachable warrants to purchase 25,000 shares of our common stock at $2.40 per share were issued to Laurus. The warrants were immediately exercisable and were to expire five years from the date of grant.

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Termination of the DARPA contract in October 2002 constituted an event of default under our financing agreements with Laurus. Upon occurrence of this event, both notes became immediately due and payable. As a result, Laurus took immediate possession of the funds held in IPI's restricted bank accounts. Approximately $1.474 million was withdrawn from these accounts and applied in reduction of the outstanding note balance. We satisfied the remaining deficiency in July 2004 by a cash payment to Laurus of $34,000 and the conversion of the remaining balance including accrued interest into 50,000 unregistered shares of our common stock.

Investor Relations Agreement

On June 18, 2002, we entered into an agreement with Investor Relations Services, Inc. (IRSI) to provide us with investor and public relations services over a two-year period. Under the agreement, IRSI was required to, among other things, expend up to $500,000 of their own funds in furtherance of our investor and public relations programs. In exchange for these services, we issued IRSI 500,000 unregistered shares of our common stock in a private placement transaction. These shares were valued at $750,000 ($1.50 per share). In 2002, IRSI ceased performing services for us and consequently this prepaid expense was written off.

Board of Director Resignation; Consulting Arrangement

J. Terence Feeley resigned as a director and officer in June, 2002. Pursuant to a consulting agreement we entered into with him, Mr. Feeley was obligated to provided consulting services for us, similar to the services he provided during his employment, for a term expiring January 30, 2005, in consideration for payments aggregating $148,220 over the term, substantially all of which were payable during the first twelve month period. In addition, the agreement provided that 591,619 stock options previously granted to Mr. Feeley would remain exercisable through the term of the consulting agreement; provided, however, that we had the right to terminate the extension of the exercise period of the stock option, in the event that we failed to receive by December 1, 2002 documentation from the University of Rhode Island (URI) confirming that there was no contract between URI and Infinite. As a result of the change in employment status and the modification to the original option terms, the options were considered modified and were required to be accounted for as new options issued to a consultant. The options were valued at approximately $504,000 utilizing the Black-Scholes option pricing method. Certain options were fully vested as of June 30, 2002, resulting in compensation costs and an increase in additional paid in capital of approximately $87,000 in the second quarter of 2002. The remaining amount was to be recognized as compensation expense over the remaining vesting term of the options. We recognized compensation expense of approximately $57,000 in the third quarter of 2002. However, during the fourth quarter of 2002 we notified Mr. Feeley that we were terminating the exercise period of his stock options due to our failure to receive documentation from URI that there was no contract between URI and Infinite. In addition, Mr. Feeley discontinued providing services to us. As a result, we will no longer recognize compensation costs, because Mr. Feeley forfeited all non-vested options and the extension of the exercise period was terminated pursuant to the consulting agreement.

In December, 2002, Mr. Feeley commenced an arbitration proceeding against us alleging that we failed to make the payments called for in his consulting agreement, and he seeks to recover approximately $130,000 that he alleges is owed to him. We answered that claim by admitting that a consulting agreement was entered into but denied all of the remaining allegations. We also filed a counterclaim in the arbitration proceeding. In addition, in September 2003, we commenced an action against Mr. Feeley in the Superior Court of the State of Rhode Island alleging that Mr. Feeley breached certain provisions of his employment agreement, breached fiduciary duties he owed to us and that he violated certain provisions of the consulting agreement. We asked for judgment against Mr. Feeley for compensatory damages in amounts to be shown at trial, for preliminary and permanent injunctive relief and other relief as may be appropriate.

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

Developments Since 2002

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 April 30, 2003, Dr. Allan Robbins and Paul Delmore were appointed to fill two existing vacancies on our board. Mr. Brockmyre remained on our board until October 30, 2003 at which time he resigned. On March 15, 2004, Brian Corridan resigned from our board.

As a result of the Government's termination of the DARPA contract in October 2002, we decided to shut down our Photonics Group. Without the government funding provided by the DARPA contract, we decided that we could not raise the funds necessary to successfully commercialize our laser diode technology in the foreseeable future. Consequently, we decided to restructure our business along different lines.

During the second quarter of 2003, we commenced providing services in the field of information technology (IT) consulting services through our IT Services Group. Our IT services include strategic staffing, program management, project management, technical engineering, software development and enterprise resource planning. We have entered into several subcontract agreements with a number of prime contractors to several U.S. government agencies.

In December 2003, we were awarded a Federal Supply Schedule Contract by the U.S. General Services Administration (GSA) for IT consulting services. Having a GSA Contract allows us to compete for and secure prime contracts with all executive agencies of the U.S. government as well as other national and international organizations. To date, we have not derived any revenue under the GSA Contract, and there is no assurance that we will derive revenue under the GSA Contract in future periods.

In June, 2003, we entered into a License Agreement with Ultra-Scan Corporation, a privately held technology company headquartered in Buffalo, New York. The License Agreement gives us the ability to use, market and sell certain proprietary fingerprint recognition technology. We have completed the development of an access control terminal and related software called TouchThru(TM) incorporating that technology. We have established a Biometrics Group and intend to be in a position to market and sell that product beginning in 2006 in a variety of industries and markets, including the federal, state and local government, health care, travel and general security and access control.

As part of our restructured business plan, we decided in 2003 to eliminate certain non-core businesses. As a result, as of December 31, 2003, we sold certain assets and liabilities of our Laser Group to LFI, Inc. (LFI). These assets related to the laser engraving and medical products manufacturing and assembly businesses of the Laser Group. The principals of LFI are former employees of our Laser Group, including Mr. Brockmyre, our former chairman and chief executive officer. This transaction resulted in a loss on disposition of approximately $99,000 during the year ended December 31, 2003. The purchase price for the assets consisted of LFI's assumption of certain of our liabilities in the aggregate amount of approximately $358,000 at December 31, 2003. We sold the remaining assets of our Laser Group to Rolben Acquisition Corporation, a company affiliated with LFI, as of December 31, 2004 and recognized a loss on disposition of approximately $224,000 during the year ended December 31, 2004. The purchase price for the remaining assets consisted of Rolben's assumption of substantially all of the liabilities of Laser Fare, Inc. and the delivery of promissory notes in the aggregate amount of approximately $2.1 million. Because certain required consents were not yet obtained, we remain 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. Upon the delivery of the consents and the full assumption of the RIIFC and UPS obligations by Rolben, and our release from those obligations, the notes from Rolben to us will terminate.

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At various times during 2003, 2004 and 2005, we issued restricted shares of common stock in private placement transactions as follows:

                                                        Shares                             Average Price
                                                        Issued           Consideration       Per Share
                                                        ------           -------------       ---------
Shares issued in financing transactions                9,620,388             $ 486,000        $ 0.05
Shares issued for debt conversions                     1,747,500                87,375        $ 0.05
Shares issued as employee compensation                 1,500,000                75,000        $ 0.05
Stock issued upon exercise of options                     25,000                 2,500        $ 0.10
                                                 -------------------------------------------------------
                                                      12,892,888             $ 650,875        $ 0.05
                                                 =======================================================

At various times subsequent to December 31, 2002, two related parties loaned us a total of $675,800. These loans are evidenced by unsecured promissory notes bearing interest at 6% per annum. The principal and accrued interest on these notes are due and payable between January 1, 2006 and January 1, 2007 and are convertible at the option of the holder at any time after November 30, 2005 into common stock at a price of $.05 per share. (One note in the principal amount of $44,000 is due on January 1, 2006 and is not convertible.) If the principal amounts of all of the convertible notes were converted, we would issue a total of 12,636,000 shares to these two noteholders. In addition, we issued several short-term promissory notes to another individual in the aggregate amount of $265,000 bearing interest at 12% per annum. These promissory notes, which are not convertible, are due in January 2006 and require monthly payments of interest only.

On August 5, 2003, the Bank of Western Massachusetts (BWM) sold a note issued by us in the principal amount of approximately $203,000 and the rights thereunder to a third party. The sale of the note is evidenced by a non-recourse assignment agreement between BWM and the third party. On December 31, 2003, the new noteholder agreed to extend the term of the new note to January 1, 2007 in exchange for the right to convert the principal amount of the note and all accrued interest into shares of our common stock at any time after November 30, 2005 at a price of $.05 per share. As of December 31, 2004, we were obligated to the new noteholder for principal and accrued interest in the aggregate amount of $234,690. If the principal amount and accrued interest as of December 31, 2004 were converted, we would issue a total of 4,693,800 shares to the new noteholder.

The new business strategy described above, as well as the various capital raising activities we engaged in subsequent to December 31, 2002 have allowed us to continue operations during that period. We believe, but can offer no assurances, that our current operations, as restructured, coupled with our demonstrated ability to raise capital, will provide sufficient working capital to fund our operations through 2005.

Competition

Our Laser Group's materials processing business competed with laser and traditional job shops. We principally competed with universities and large corporations for some of our laser research services. Our proprietary technology allowed us to compete in these markets.

We competed with different manufacturers, depending on the type of service or product we provided and the geographic locale of our different operations. Most of our competitors had greater manufacturing, financial, research and development and/or marketing resources than we had. In addition, we may not be able to offer prices as low as some of our competitors because those competitors may have had lower cost structures as a result of their geographic location, economies of scale, or the services they provided. Our inability to provide comparable or better manufacturing services at a lower cost than our competitors could have caused our net sales to decline.

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Our IT Services Group competes mainly with other IT professional services firms operating in the federal, state and local government marketplace. We have entered into subcontracts with systems integrators holding multi-year, multi-million dollar contracts with the U.S. government. In such cases, our competition is mainly with other IT services companies classified as small business entities by government standards. For prime contracts with the U.S. government, we anticipate that our competition will range from small business set aside contracts to full and open competition with large firms.

Our Biometrics Group competes with a significant number of established and startup companies that have developed or are developing and marketing software and hardware for fingerprint biometric access control and security applications. Some of these companies have developed or are developing and marketing semiconductor or optically based direct contact fingerprint image capture devices, or retinal blood vessel, iris pattern, hand geometry, voice or facial structure solutions. Our fingerprint scanning product, TouchThru(TM), faces intense competition from a number of competitors who are actively engaged in developing and marketing fingerprint and hand-recognition products, including Recognition Systems, Inc. (a company owned by Ingersoll Rand, Inc.), Identix, Incorporated, Heimann Biometric Systems GmbH, Sagem Morpho, Inc., Printrak International, Inc., (a company owned by Motorola, Inc.), Cogent, Inc. and CrossMatch Technologies, Inc. In addition, we will face competition from non-biometric technologies such as certificate authorities, and traditional key card, surveillance systems and passwords. The biometric security market is a rapidly evolving and intensely competitive market, and we believe that additional competitors will enter the market and become significant long-term competitors. At June 30, 2005, our primary biometric product, TouchThru(TM), was in the development stage and we have not derived any revenues from the sale of that product nor do we have a backlog of orders.

Our competitors in general have substantially greater capital resources, research and development staffs, manufacturing capabilities, sales and marketing resources, facilities and experience than we do.

Patents and Intellectual Property

Our patents and patent applications relate to diode grating structure, design and processes to produce the diode; thermal management devices to control the heat of the diode and other manufacturing processes; titanium processes for the LENS application, and other manufacturable product discovered or acquired in the course of our research. All of our patents and patent applications relating to our Laser Group and our Photonics Group were determined to be impaired in 2002 and were consequently written off.

In 2003 we acquired certain non-exclusive rights to use intellectual property owned by Ultra-Scan Corporation under a license agreement with a term of three-years. Ultra-Scan's intellectual property covers ultrasonic (acoustic imaging) biometric identification systems and fingerprint matching algorithms and related software.

In 2004, we acquired trademarks for TouchThru(TM), True Identity Access(TM) and True Identity Access Control(TM).

Employees

As of June 30, 2005, we had a total of 68 full-time employees, including 58 in information technology services, two in executive management, two in engineering and product development, four in finance and administration and two in marketing and sales. We are not subject to any collective bargaining agreements and we believe that our relations with our employees are good. We believe that we are currently staffed at an appropriate level to implement and carry out our business plan for the next 12 months.

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Our ability to develop, manufacture and market our products and services, and to establish and maintain a competitive position in our businesses will depend, in large part, upon our ability to attract and retain qualified technical, marketing and managerial personnel, of which there can be no assurance.

Risk Factors

In addition to the other information provided in our reports, you should consider the following factors carefully 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 following risks occur, our business, financial condition, or results of operations could be materially adversely affected.

Risks Related to Information Technology Consulting

We depend on subcontracts with the U.S. government for most of our revenue, and our business would be seriously harmed if the government ceased doing business with us or significantly decreased the amount of business it does with us.

We derived 100% of our total revenue from continuing operations in 2003 and 2004 from U.S. government contracts as a subcontractor. We expect that we will continue to derive most of our revenue for the foreseeable future from work performed under U.S. government contracts. If we were suspended or prohibited from contracting with the U.S. government, or if our reputation or relationship with the U.S. government were impaired, or if any of the foregoing otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, prospects, financial condition and operating results would be materially adversely affected.

Our business could be adversely affected by changes in budgetary priorities of the U.S. government.

Because we derive a significant portion of our revenue from subcontracts with the U.S. government, we believe that the success and development of our business will continue to depend on our successful participation in U.S. government contract programs. Changes in U.S. government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs which call for the types of services that we provide or a change in U.S. government contracting policies, could cause U.S. governmental agencies to reduce their expenditures under contracts, to exercise their right to terminate contracts at any time without penalty, not to exercise options to renew contracts or to delay or not enter into new contracts. Any of those actions could seriously harm our business, prospects, financial condition or operating results. Moreover, although our contracts with governmental agencies often contemplate that our services will be performed over a period of several years, Congress usually must approve funds for a given program each government fiscal year and may significantly reduce or eliminate funding for a program. Significant reductions in these appropriations by Congress could have a material adverse effect on our business. Additional factors that could have a serious adverse effect on our U.S. government contracting business include:

o changes in U.S. government programs or requirements;

o budgetary priorities limiting or delaying U.S. government spending generally, or by specific departments or agencies in particular, and changes in fiscal policies or available funding, including potential governmental shutdowns;

o reduction in the U.S. government's use of technology solutions firms; and

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o an increase in the number of contracts reserved for small businesses, or small business set asides, which could result in our inability to compete directly for these prime contracts.

Our profitability will suffer if we are not able to maintain our pricing and utilization rates and control our costs.

Our profit margin, and therefore our profitability, is largely a function of the rates we charge for our IT Services and the utilization rate, or chargeability, of our employees. Accordingly, if we are not able to maintain the rates we charge for our services or an appropriate utilization rate for our employees, we will not be able to sustain our profit margin and our profitability will suffer. The rates we charge for our IT Services are affected by a number of factors, including:

o our clients' perception of our ability to add value through our services;

o competition;

o introduction of new services or products by us or our competitors;

o pricing policies of our competitors; and

o general economic conditions.

Our utilization rates are also affected by a number of factors, including:

o seasonal trends, primarily as a result of holidays, vacations, and slow downs by our clients, which may have a more significant effect in the fourth quarter;

o our ability to transition employees from completed engagements to new engagements;

o our ability to forecast demand for our services and thereby maintain an appropriately balanced and sized workforce; and

o our ability to manage employee turnover.

We have implemented cost-management programs to manage our costs, including personnel costs, support and other overhead costs. Some of our costs, like office rents, are fixed in the short term, which limits our ability to reduce costs in periods of declining revenues. Our current and future cost-management initiatives may not be sufficient to maintain our margins as our level of revenue varies.

If our clients are not satisfied with our services, our ability to compete for future work and our financial condition may be adversely affected.

If we fail to meet our contractual obligations, we could be subject to legal liability, which could adversely affect our business, operating results and financial condition. The provisions we typically include in our contracts which are designed to limit our exposure to legal claims relating to our services and the applications we develop may not protect us or may not be enforceable under some circumstances or under the laws of some jurisdictions. It is possible, because of the nature of our business, that we may be exposed to legal claims in the future. Currently we do not maintain professional liability insurance. In the event we secure such coverage, the policy limits may not be adequate to provide protection against all potential liabilities. As a consulting firm, we depend to a large extent on our relationships with our clients and our reputation for high-quality services to retain and attract clients and employees. As a result, claims made against our work may damage our reputation, which in turn, could impact our ability to compete for new business.

Our contracts can be terminated by our clients with short notice.

Our clients typically retain us on a non-exclusive, engagement-by-engagement basis. Although they may be subject to penalty provisions, clients may generally cancel a contract at any time. In addition, clients typically may reduce their use of our services under such contract without penalty. If any significant client terminates its relationship with us or substantially decreases its use of our services, it could have a material adverse effect on our business, financial condition and results of operations. When contracts are terminated, we lose the associated revenue and we may not be able to eliminate associated costs in a timely manner. In addition, contracts with the U.S. government contain provisions and are subject to laws and regulations that provide the U.S. government with rights and remedies not typically found in commercial contracts. Among other things, the U.S. government may terminate contracts, with short notice, for convenience and may cancel multi-year contracts if funds become unavailable.

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Unfavorable government audits could require us to refund payments we have received, to forego anticipated revenue and could subject us to penalties and sanctions.

The government agencies we work for generally have the authority to audit and review our contracts with them and/or subcontracts with prime contractors. As part of that process, the government agency reviews our performance on the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. If the audit agency determines that we have improperly received reimbursement, we would be required to refund any such amount. If a government audit uncovers improper or illegal activities by us or we otherwise determine that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with the government. Any such unfavorable determination could adversely impact our ability to bid for new work.

The IT services industry is highly competitive, and we may not be able to compete effectively.

We operate in a highly competitive industry that includes a large number of participants. We believe that we currently compete principally with other IT professional services firms, technology vendors and the internal information systems groups of our clients. Many of the companies that provide services in our markets have significantly greater financial, technical and marketing resources than we do. Our marketplace is experiencing rapid changes in its competitive landscape. Some of our competitors have sought access to public and private capital and others have merged or consolidated with better-capitalized partners. These changes may create more or larger and better-capitalized competitors with enhanced abilities to compete for market share generally and our clients specifically, in some cases, through significant economic incentives to clients to secure contracts. These competitors may also be better able to compete for skilled professionals by offering them large compensation incentives. In addition, one or more of our competitors may develop and implement methodologies that result in superior productivity and price reductions without adversely affecting the competitors' profit margins. In addition, there are relatively few barriers to entry into our markets and we have faced, and expect to continue to face, competition from new entrants into our markets. As a result, we may be unable to continue to compete successfully with our existing or any new future competitors.

Our future success depends on our ability to continue to retain and attract qualified employees.

We believe that our future success depends upon our ability to continue to train, retain, effectively manage and attract highly skilled technical, managerial, sales and marketing personnel. Employee turnover is generally high in IT services industry. If our efforts in these areas are not successful, our costs may increase, our sales efforts may be hindered, and or our customer service may degrade. Although we invest significant resources in recruiting and retaining employees, there is often significant competition for certain personnel in the IT services industry. From time to time, we experience difficulties in locating enough highly qualified candidates in desired geographic locations, or with required specific expertise.

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Our contracts with the U.S. government may be terminated or adversely modified prior to completion, which could adversely affect our business.

U.S. government contracts generally contain provisions, and are subject to laws and regulations, that give the U.S. government rights and remedies not typically found in commercial contracts, including provisions permitting the U.S. government to:

o terminate our existing contracts;

o reduce potential future income from our existing contracts;

o modify some of the terms and conditions in our existing contracts;

o suspend or permanently prohibit us from doing business with the U.S. government or with any specific government agency;

o impose fines and penalties;

o subject us to criminal prosecution;

o subject the award of some contracts to protest or challenge by competitors, which may require the contracting U.S. agency or department to suspend our performance pending the outcome of the protest or challenge and which may also require the government to solicit new bids for the contract or result in the termination, reduction or modification of the awarded contract;

o suspend work under existing multiple year contracts and related task orders if the necessary funds are not appropriated by Congress;

o decline to exercise an option to extend an existing multiple year contract; and

o claim rights in technologies and systems invented, developed or produced by us.

The U.S. government may terminate a contract with us either "for convenience" (for instance, due to a change in its perceived needs or its desire to consolidate work under another contract) or if we default by failing to perform under the contract. If the U.S. government terminates a contract with us for convenience, we generally would be entitled to recover only our incurred or committed costs, settlement expenses and profit on the work completed prior to termination. If the U.S. government terminates a contract with us based upon our default, we generally would be denied any recovery for undelivered work, and instead may be liable for excess costs incurred by the U.S. government in procuring undelivered items from an alternative source. We may in the future receive show-cause or cure notices under contracts that, if not addressed to the U.S. government's satisfaction, could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts.

Our U.S. government contracts typically have terms of one or more base years and one or more option years. Many of the option periods cover more than half of the contract's potential term. U.S. governmental agencies generally have the right not to exercise options to extend a contract. A decision to terminate or not to exercise options to extend our existing contracts could have a material adverse effect on our business, prospects, financial condition and results of operations.

Certain of our U.S. government contracts also contain "organizational conflict of interest" clauses that could limit our ability to compete for certain related follow-on contracts. For example, when we work on the design of a particular solution, we may be precluded from competing for the contract to install that solution. While we actively monitor our contracts to avoid these conflicts, we cannot guarantee that we will be able to avoid all organizational conflict of interest issues.

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In addition, U.S. government contracts are frequently awarded only after formal competitive bidding processes, which have been and may continue to be protracted, and typically impose provisions that permit cancellation in the event that funds are unavailable to the public agency. There is a risk that we may not be awarded any of the competitive bidding processes, which have been and may continue to be protracted, and typically impose provisions that permit cancellation in the event that funds are unavailable to the public agency. In some cases, unsuccessful bidders for public agency contracts are provided the opportunity to formally protest certain contract awards through various agencies, administrative and judicial channels. The protest process may delay a successful bidder's contract performance for a number of weeks, months or more, or cancel the contract award entirely. Although we have not previously experienced a substantial number of contract delays or cancellations due to protest initiated by losing bidders, there is a risk that we may not be awarded contracts for which we bid or, if awarded, that substantial delays or cancellation of purchases may follow as a result of such protests.

The competitive bidding process presents a number of risks, including the following:

o we expend substantial funds, managerial time and effort to prepare bids and proposals for contracts that we may not win;

o we may be unable to estimate accurately the resources and cost that will be required to service any contract we win, which could result in substantial cost overruns; and

o we may encounter expense and delay if our competitors protest or challenge awards of contracts to us in competitive bidding, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in the termination, reduction or modification of the awarded contract.

If we fail to establish and maintain important relationships with government entities and agencies, our ability to successfully bid for new business may be adversely affected.

To develop new business opportunities, we primarily rely on establishing and maintaining relationships with various government entities and agencies. We may be unable to successfully maintain our relationships with government entities and agencies, and any failure to do so could materially adversely affect our ability to compete successfully for new business.

Our business may suffer if our facilities or our employees are unable to obtain or retain the security clearances or other qualifications needed to perform services for our clients.

Many of our U.S. government contracts require employees and facilities used in specific engagements to hold security clearances and to clear National Agency Checks and Defense Security Service checks. Some of our contracts require us to employ personnel with specified levels of education, work experience and security clearances. Depending on the level of clearance, security clearances can be difficult and time-consuming to obtain. If our employees or our facilities lose or are unable to obtain necessary security clearances or successfully clear necessary National Agency or Defense Security Service checks, we may not be able to win new business and our existing clients could terminate their contracts with us or decide not to renew them, and in each instance our operating results could be materially adversely affected.

We must comply with a variety of laws, regulations and procedures and our failure to comply could harm our operating results.

We must observe laws and regulations relating to the formation, administration and performance of U.S. government contracts which affect how we do business with our clients and impose added costs on our business. For example, the Federal Acquisition Regulation and the industrial security regulations of the Department of Defense and related laws include provisions that:

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o allow our U.S. government clients to terminate or not renew our contracts if we come under foreign ownership, control or influence;

o require us to disclose and certify cost and pricing data in connection with contract negotiations;

o require us to prevent unauthorized access to classified information; and

o require us to comply with laws and regulations intended to promote various social or economic goals.

We are subject to industrial security regulations of the Department of Homeland Security and other federal agencies that are designed to safeguard against foreigners' access to classified information. If we were to come under foreign ownership, control or influence, we could lose our facility security clearances, which could result in our U.S. government customers terminating or deciding not to renew our contracts, and could impair our ability to obtain new contracts.

In addition, our employees often must comply with procedures required by the specific agency for which work is being performed, such as time recordation or prohibition on removal of materials from a location.

Our failure to comply with applicable laws, regulations or procedures, including federal procurement regulations and regulations regarding the protection of classified information, could result in contract termination, loss of security clearances, suspension or prohibition from contracting with the U.S. government, civil fines and damages and criminal prosecution and penalties, any of which could materially adversely affect our business.

The U.S. government may revise its procurement or other practices in a manner adverse to us.

The U.S. government may revise its procurement practices or adopt new contracting rules and regulations, such as cost accounting standards. It could also adopt new contracting methods relating to GSA contracts, government-wide contracts, or adopt new standards for contract awards intended to achieve certain social or other policy objectives, such as establishing new set-aside programs for small or minority-owned businesses. In addition, the U.S. government may face restrictions from new legislation or regulations, as well as pressure from government employees and their unions, on the nature and amount of services the U.S. government may obtain from private contractors. These changes could impair our ability to obtain new contracts or contracts under which we currently perform when those contracts are put up for recompetition bids. Any new contracting methods could be costly or administratively difficult for us to implement, and, as a result, could harm our operating results. For example, the Truthfulness, Responsibility and Accountability in Contracting Act, proposed in 2001, would have limited and severely delayed the U.S. government's ability to use private service contractors. Although this proposal was not enacted, it or similar legislation could be proposed at any time. Any reduction in the U.S. government's use of private contractors to provide federal information technology services could materially adversely impact our business.

Failure to maintain strong relationships with other government contractors could result in a decline in our revenue.

We derived 100% of our total revenue in 2003 and 2004 from contracts under which we acted as a subcontractor. As a subcontractor, we often lack control over fulfillment of a contract, and poor performance on the contract by others could tarnish our reputation, even when we perform as required. We expect to continue to depend on relationships with other contractors for a portion of our revenue in the foreseeable future. Moreover, our revenue and operating results could be materially adversely affected if any prime contractor chooses to offer services of the type that we provide or if any prime contractor teams with other companies to independently provide those services.

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Risks Related to Biometrics

Our biometrics business will not grow unless the market for biometric solutions expands both domestically and internationally.

Our product revenues and a portion of our service revenues will be derived from the sale of biometric products and services. Biometric solutions have not yet gained widespread commercial acceptance. We cannot accurately predict the future growth rate, if any, or the ultimate size of the biometric technology market. The expansion of the market for our products and services depends on a number of factors including without limitation:

o the cost, performance and reliability of our products and services and the products and services of competitors;

o customers' perception of the perceived benefit of biometric solutions;

o public perceptions of the intrusiveness of these solutions and the manner in which firms are using the information collected;

o public perceptions regarding the confidentiality of private information;

o proposed or enacted legislation related to privacy of information;

o customers' satisfaction with our products and services; and

o marketing efforts and publicity regarding these products and services.

Certain groups have publicly objected to the use of biometric products for some applications on civil liberties grounds and legislation has been proposed to regulate the use of biometric security products. From time to time, biometrics technologies have been the focus of organizations and individuals seeking to curtail or eliminate such technologies on the grounds that they may be used to diminish personal privacy rights. If such initiatives result in restrictive legislation, the market for biometric solutions may be adversely affected. Even if biometric solutions gain wide market acceptance, our products and services may not adequately address the requirements of the market and may not gain market acceptance.

The terrorist attacks of September 11, 2001 have increased financial expectations that may not materialize.

The September 11, 2001 terrorist attacks may have created an increase in awareness for biometric security solutions generally. However, it is uncertain whether the actual level of demand for our biometric products and services will grow as a result of such increased awareness. Increased demand may not result in an actual increase in our product or services revenues. In addition, it is uncertain which security solutions, if any, will be adopted as a result of the terrorism and whether our products will be a part of those solutions. Efforts in the war against terrorism or the war with Iraq may actually delay funding for the implementation of biometric solutions generally. Even if our products are considered or adopted as solutions to the terrorism, the level and timeliness of available funding are unclear. These factors may adversely impact us and create unpredictability in revenues and operating results.

The biometrics industry is characterized by rapid technological change and evolving industry standards, which could render existing products obsolete.

Our future success will depend upon our ability to develop and introduce a variety of new products and services and enhancements to these new product and services in order to address the changing and sophisticated needs of the marketplace. Frequently, technical development programs in the biometric industry require assessments to be made of the future directions of technology and technology markets generally, which are inherently risky and difficult to predict. Delays in introducing new products, services and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products and services at competitive prices may cause customers to forego purchases of our products and services and purchase those of our competitors.

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Continued participation by us in the market for fingerprint identification systems that are linked to forensic quality databases under the jurisdiction of governmental agencies may require the investment of our resources in upgrading our products and technology for us to compete and to meet regulatory and statutory standards. We may not have adequate resources available to us or may not adequately keep pace with appropriate requirements in order to effectively compete in the marketplace.

Our lengthy and variable sales cycle will make it difficult to predict operating results.

Certain of our products often have a lengthy sales cycle while the customer evaluates and receives approvals for purchase. If, after expending significant funds and effort, we fail to receive an order, a negative impact on our financial results and stock price could result.

It is difficult to predict accurately the sales cycle of any large order for any of our products. If we do not ship and or install one or more large orders as forecast for a fiscal quarter, our total revenues and operating results for that quarter could be materially and adversely affected.

The substantial lead-time required for ordering parts and materials may lead to excess or insufficient inventory.

The lead-time for ordering parts and materials and building our products can be many months. As a result, we must order parts and materials and build our products based on forecasted demand. If demand for our products lags significantly behind our forecasts, we may produce more products than we can sell, which can result in cash flow problems and write-offs or write-downs of obsolete inventory.

Loss of sole or limited source suppliers may result in delays or additional expenses.

We obtain certain components and complete products from a single source or a limited group of suppliers. With the exception of Ultra-Scan Corporation, from whom we obtain the ultra-sound based fingerprint scanner, we do not have long-term agreements with any of our suppliers. We will experience significant delays in manufacturing and shipping of products to customers if we lose these sources or if supplies from these sources are delayed. As a result, we may be required to incur additional development, manufacturing and other costs to establish alternative sources of supply. It may take several months to locate alternative suppliers, if required, or to re-tool our products to accommodate components from different suppliers. We cannot predict if we will be able to obtain replacement components within the time frames we require at an affordable cost, or at all. Any delays resulting from suppliers failing to deliver components or products on a timely basis in sufficient quantities and of sufficient quality or any significant increase in the price of components from existing or alternative suppliers could have a severe negative impact on our financial results and stock price.

We may be subject to loss in market share and market acceptance as a result of manufacturing errors, delays or shortages.

Performance failure in our products or certain of our services may cause loss of market share, delay in or loss of market acceptance, additional warranty expense or product recall, or other contractual liabilities. The complexity of certain of our fingerprint readers makes the manufacturing and assembly process of such products, especially in volume, complex. This may in turn lead to delays or shortages in the availability of certain products, or, in some cases, the unavailability of certain products. The negative effects of any delay or failure could be exacerbated if the delay or failure occurs in products or services that provide personal security, secure sensitive computer data, authorize significant financial transactions or perform other functions where a security breach could have significant consequences.

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If a product or service launch is delayed or is the subject of an availability shortage because of problems with our ability to manufacture or assemble the product or service successfully on a timely basis, or if a product or service otherwise fails to meet performance criteria, we may lose revenue opportunities entirely and/or experience delays in revenue recognition associated with a product or service in addition to incurring higher operating expenses during the period required to correct the defects. There is a risk that for unforeseen reasons we may be required to repair or replace a substantial number of products in use or to reimburse customers for products that fail to work or meet strict performance criteria. We carry product liability insurance, but existing coverage may not be adequate to cover potential claims.

We may be subject to repair, replacement, reimbursement and liability claims as a result of products that fail to work or to meet applicable performance criteria.

There is a risk that for unforeseen reasons we may be required to repair or replace a substantial number of products in use or to reimburse customers for products that fail to work or meet strict performance criteria. We attempt to limit remedies for product or service failure to the repair or replacement of malfunctioning or noncompliant products or services, and also attempt to exclude or minimize exposure to product and related liabilities by including in our standard agreements warranty disclaimers and disclaimers for consequential and related damages as well as limitations on our aggregate liability. From time to time, in certain complex sale or licensing transactions, we may negotiate liability provisions that vary from such standard forms. There is a risk that our contractual provisions may not adequately minimize our product and related liabilities or that such provisions may be unenforceable. We carry product liability insurance, but existing coverage may not be adequate to cover potential claims. We will maintain warranty reserves as deemed adequate by management.

Our TouchThru(TM) access control device is at an early stage of development and may not achieve market acceptance.

One of our primary focuses is the development of our TouchThru(TM) biometric access control device. Many of the benefits of automated finger-print readers in general, and ultra-sound based systems in particular, are not widely known. Therefore, we anticipate that we will need to educate our target markets to generate demand for our products and services and, as a result of market feedback; we may be required to further refine these services. In order to persuade potential customers to purchase our product and services, we will need to overcome industry resistance to, and suspicion of new technologies. We cannot assure you that our TouchThru(TM) access control system will be successfully developed, marketed or produced.

We face intense competition from other biometric solution providers as well as identification and security systems providers.

A significant number of established and startup companies have developed or are developing and marketing software and hardware for fingerprint biometric security applications that currently compete or will compete directly with our current fingerprint security and identity related line of products and applications. Some of these companies have developed or are developing and marketing semiconductor or optically based direct contact fingerprint image capture devices, or retinal blood vessel, iris pattern, hand geometry, voice or facial structure solutions. If one or more of these technologies or approaches were widely adopted, it could significantly reduce the potential market for our products. Our security and identity related products and applications also compete with non-biometric technologies such as certificate authorities, and traditional key, card, surveillance systems and passwords. Many competitors offering products that are competitive with our security and identity related line of products and applications have significantly more financial and other resources than we have. The biometric security market is a rapidly evolving and intensely competitive market, and we believe that additional competitors will enter the market and become significant long-term competitors.

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Our fingerprint scanning product, TouchThru(TM), faces intense competition from a number of competitors who are actively engaged in developing and marketing fingerprint and hand-recognition products, including Recognition Systems, Inc. (a company owned by Ingersoll Rand, Inc.), Identix, Incorporated, Heimann Biometric Systems GmbH, Sagem Morpho, Inc., Printrak International, Inc., (a company owned by Motorola, Inc.), and CrossMatch Technologies, Inc.

We expect competition to increase and intensify in the near term in the biometrics markets. Companies competing with us may introduce products that are competitively priced, that have increased performance or functionality or that incorporate technological advances not yet developed or implemented by us. Some present and potential competitors have financial, marketing, research, and manufacturing resources substantially greater than ours.

In order to compete effectively in this environment, we must continually develop and market new and enhanced products at competitive prices and must have the resources available to invest in significant research and development activities. The failure to do so could have a material adverse effect on our business operations, financial results and stock price.

Failure to maintain the proprietary nature of our technology, intellectual property and manufacturing processes could have a material adverse effect on our business, operating results, financial condition and stock price and on our ability to compete effectively.

Ultra-Scan Corporation, our licensor of the fingerprint scanning technology principally relies upon patent, trademark, copyright, trade secret and contract law to establish and protect its proprietary rights. There is a risk that claims allowed on any patents or trademarks it holds may not be broad enough to protect its technology. In addition, Ultra-Scan's patents or trademarks may be challenged, invalidated or circumvented and we cannot be certain that the rights granted thereunder will provide competitive advantages to us. Moreover, any current or future issued or licensed patents, or trademarks, or currently existing or future developed trade secrets or know-how may not afford sufficient protection against competitors with similar technologies or processes, and the possibility exists that certain of Ultra-Scan's already issued patents or trademarks may infringe upon third party patents or trademarks or be designed around by others. In addition, there is a risk that others may independently develop proprietary technologies and processes, which are the same as, substantially equivalent or superior to ours, or become available in the market at a lower price.

There is a risk that we have infringed or in the future will infringe patents or trademarks owned by others, that we will need to acquire licenses under patents or trademarks belonging to others for technology potentially useful or necessary to us, and that licenses will not be available to us on acceptable terms, if at all.

Ultra-Scan may have to litigate to enforce its patents or trademarks or to determine the scope and validity of other parties' proprietary rights. An adverse outcome in any litigation may have a severe negative impact on our financial results and stock price.

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Risks Related to our Business

We experienced losses in 2002 and 2003.

Our historical operations have not been profitable until 2004. As of December 31, 2002, 2003 and 2004, respectively, we had an accumulated deficit of approximately $28.1 million, $29.3 million and $28.8 million. Although we began to operate the IT business profitably beginning in the second quarter of 2004, and our IT business was profitable for the year, we cannot assure you that our profitability will continue.

We are highly leveraged, which increases our operating deficit and makes it difficult for us to grow.

At December 31, 2004, we had current liabilities, including trade payables, of $3.8 million and long-term liabilities of $3.3 million and a working capital deficit of approximately $2.1 million. We continue to experience working capital shortages that impair our business operations and growth strategy. If we incur operating losses and experience working capital limitations, our business, operations and financial condition will be materially adversely affected.

We have significant liabilities related to the O&W pension plan.

At December 31, 2001 the O&W prepaid pension cost was $904,673. At December 31, 2002, the O&W defined benefit pension plan had an accrued pension obligation liability of $2,159,152 and an accumulated other comprehensive loss of $3,098,705 which we recorded as a reduction of stockholders' equity. This change was due to a decline in the market value of plan assets from $5,019,929 at December 31, 2001 to $3,315,256 at December 31, 2002 comprised of payment of benefits of $822,226 and a negative investment return of $882,447. The benefit obligation increased during 2002 by $505,986 to $5,474,408 at December 31, 2002.

We were required to contribute amounts in 2004 and future years to fund the deficiency. We did not make a contribution in 2002, 2003 or 2004 and we currently do not have the funds available to make such contributions. We have recorded defined benefit pension income of approximately $35,000 in 2002. We have recorded defined benefit pension expense of approximately $200,000 in 2003 and $160,000 in 2004.

We have been dependent on a limited number of high net worth individuals to fund our working capital needs.

During 2003, 2004 and through June 30, 2005, we raised approximately $1.7 million in a combination of equity, debt conversion and debt transactions from a limited number of high net worth investors. We cannot provide assurance that we will be continue to raise additional capital from this group of investors, or that we will be able to secure funding from additional sources.

We will require additional financing in the future, which may not be available on acceptable terms.

We will require additional funds to continue our development of TouchThru(TM) and for working capital and general corporate purposes. We cannot provide assurance that adequate additional financing will be available or, if available, will be offered on acceptable terms. Moreover, our IT Services billings generate accounts receivable that are generally paid within 30 to 60 days from the invoice date. The cost of those sales generally consists of employee salaries and benefits that we must pay prior to our receipt of the accounts receivable to which these costs relate. We therefore need sufficient cash resources to cover such employee-related costs which, in many cases, require us to borrow funds on disadvantageous terms. We have secured an accounts receivable financing line of credit in the amount of $800,000 from an independent finance organization that provides us with the cash needed to cover such employee-related costs. As we grow, additional working capital will be required to support this difference in the timing of cash receipts versus payroll disbursements. Finally, any additional equity financing may be dilutive to stockholders, and debt financings, if available, may involve restrictive covenants that further limit our ability to make decisions that we believe will be in our best interests. In the event we cannot obtain additional financing on terms acceptable to us when required, our operations will be materially adversely affected and we may have to cease or substantially reduce operations.

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If we do not successfully integrate the businesses that we acquire, our results of operations could be adversely affected.

We may grow our business by acquiring companies and businesses that we feel have synergy and will complement our business plan. We regularly evaluate potential business combinations and aggressively pursue attractive transactions. We may be unable to profitably manage businesses that we may acquire or we may fail to integrate them successfully without incurring substantial expenses, delays or other problems that could negatively impact our results of operations.

Acquisitions involve additional risks, including:

o diversion of management's attention;

o difficulty in integration of the acquired business;

o loss of significant clients acquired;

o loss of key management and technical personnel acquired;

o assumption of unanticipated legal or other financial liabilities;

o becoming significantly leveraged as a result of debt incurred to finance acquisitions;

o unanticipated operating, accounting or management difficulties in connection with the acquired entities;

o costs of our personnel's time, travel, legal services and accounting services in connection with a proposed acquisition; that may not be recovered;

o impairment charges for acquired intangible assets, including goodwill that decline in value; and

o dilution to our earnings per share as a result of issuing shares of our stock to finance acquisitions.

Also, client dissatisfaction or performance problems with an acquired firm could materially and adversely affect our reputation as a whole. Further, the acquired businesses may not achieve the revenue and earnings we anticipated. We will continue to evaluate from time to time, on a selective basis, other strategic acquisitions if we believe they will help us obtain well-trained, high-quality employees, new product or service offerings, additional industry expertise, a broader client base or an expanded geographic presence. There can be no assurance that we will be successful in identifying candidates or consummating acquisitions on terms that are acceptable or favorable to us. In addition, there can be no assurance that financing for acquisitions will be available on terms that are acceptable or favorable. We may issue shares of our common stock as part of the purchase price for some or all of these acquisitions. Future issuances of our common stock in connection with acquisitions also may dilute our earnings per share.

If we fail to adequately manage the size of our business, it could have a severe negative impact on our financial results or stock price.

Our management believes that in order to be successful we must appropriately manage the size of our business. This may mean reducing costs and overhead in certain economic periods, and selectively growing in periods of economic expansion. In addition, we will be required to implement operational, financial and management information procedures and controls that are efficient and appropriate for the size and scope of our operations. The management skills and systems currently in place may not be adequate and we may not be able to manage any significant reductions or growth effectively.

22

We may have difficulties in managing our growth.

Our future growth depends, in part, on our ability to implement and expand our financial control systems and to expand, train and manage our employee base and provide support to an expanded customer base. If we cannot manage growth effectively, it could have material adverse effect on our results of operations, business and financial condition. In addition, acquisitions and expansion involve substantial infrastructure costs and working capital. We cannot provide assurance that we will be able to integrate acquisitions, if any, and expansions efficiently. Similarly, we cannot provide assurance that we will continue to expand or that any expansion will enhance our profitability. If we do not achieve sufficient revenue growth to offset increased expenses associated with our expansion, our results will be adversely affected.

We depend on the continued services of our key personnel.

Our future success depends, in part, on the continuing efforts of our senior executive officers, Michael S. Smith and James M. Frost. The loss of any of these key employees may adversely affect our business. At this time we do not have any term "key man" insurance on any of these executives. If we lose the services of any of these senior executives, our business, operations and financial condition could be materially adversely affected.

Risks Related to our Common Stock

Five stockholders own a significant portion of our stock and may delay or prevent a change in control or adversely affect the stock price through sales in the open market.

As of June 30, 2005, five individuals owned approximately 22.3%, 9.2%, 6.9%, 5.7% and 5.5% respectively of our outstanding common stock. In addition, two different individuals have the right to convert debt into shares of common stock at $.05 per share. If each party converted all of the debt into common stock, these two individuals would own approximately 30.5% and 18.4%, respectively, of our outstanding common stock. The debt is not convertible prior to November 30, 2005. The concentration of large percentages of ownership in any single stockholder may delay or prevent a change in control. Additionally, the sale of a significant number of our shares in the open market by a single stockholder or otherwise could adversely affect our stock price.

Our stock price is volatile and could be further affected by events not within our control.

The trading price of our common stock has been volatile and will continue to be subject to:

o volatility in the trading markets generally;

o significant fluctuations in our quarterly operating results;

o announcements regarding our business or the business of our competitors;

o changes in prices of our or our competitors' products and services;

o changes in product mix; and

o changes in revenue and revenue growth rates for us as a whole or for geographic areas, and other events or factors.

Statements or changes in opinions, ratings or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we operate or expect to operate could also have an adverse effect on the market price of our common stock. In addition, the stock market as a whole has from time to time experienced extreme price and volume fluctuations which have particularly affected the market price for the securities of many small cap companies and which often have been unrelated to the operating performance of these companies. Finally, the market on which our stock trades may have a significant impact on the price and liquidity or our shares.

23

Our quarterly revenues, operating results and profitability will vary from quarter to quarter and other factors that may result in increased volatility of our share price.

Our quarterly revenues, operating results and profitability have varied in the past and are likely to vary significantly from quarter to quarter, making them difficult to predict. This may lead to volatility in our share price. The changes in the market price of our common stock may also be for reasons unrelated to our operating performance. Some other factors that may cause the market price of our common stock to fluctuate substantially include:

o the failure to be awarded a significant contract on which we have bid;

o the termination by a client of a material contract;

o announcement of new services by us or our competitors;

o announcement of acquisitions or other significant transactions by us or our competitors;

o changes in or failure to meet earnings estimates by securities analysts;

o sales of common stock by IGI or existing stockholders, or the perception that such sales may occur;

o adverse judgments or settlements obligating us to pay liabilities;

o unforeseen legal expenses, including litigation costs;

o changes in the value of the defined pension plan assets, required cash contributions and related pension expense as well as the impact of regulatory oversight of pension plans in general;

o changes in management;

o general economic conditions and overall stock market volatility;

o changes in or the application of accounting principles generally accepted in the United States;

o reduced demand for products and services caused, for example, by competitors;

o the lack of availability or increase in cost of key components and subassemblies;

o the inability to timely and successfully complete development of complex designs and components, or manufacture in volume and install certain of our products;

o changes in the mix of products and services we or our distributors sell;

o cancellations, delays or contract amendments by government agency customers;

o expenses related to acquisitions or mergers; and

o impairment charges arising out of our assessments of goodwill and intangibles.

The price of our common stock may be adversely affected by the possible issuance of shares as a result of the exercise of outstanding warrants and options.

As of June 30, 2005 we have granted options to employees and directors covering 3,798,500 shares of our common stock under our stock option plans, including 2,528,000 options which are subject to stockholder ratification. In addition, we have issued warrants to purchase 140,000 shares of our common stock at June 30, 2005. As a result of the actual or potential sale of these shares into the market, our common stock price may decrease.

We have been delisted from the NASDAQ market.

Prior to March 2003, our common stock was traded on the NASDAQ SmallCap Market. As a result of our failure to maintain certain listing requirements, our stock was delisted and now trades on the "pink sheets" maintained by the National Quotation Bureau Incorporated. As a consequence of such delisting, investors will find it more difficult to dispose of or to obtain accurate quotations as to the market value of our securities. Among other consequences, we believe that delisting from NASDAQ in fact caused a decline in our stock price, and could increase the difficulty of obtaining future financing.

24

The liquidity of our stock is severely reduced as a result of its classification as "penny stock".

The Securities and Exchange Commission has adopted regulations which generally define a "penny stock" to be any non-NASDAQ equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share. Because our securities are subject to the existing rules on penny stocks, the market liquidity for our securities is severely adversely affected. For any transaction involving a penny stock, unless exempt, the rules require substantial additional disclosure obligations and sales practice obligations on broker-dealers where the sale is to persons other than established customers and accredited investors (generally, those persons with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of the common stock and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the "penny stock" rules restrict the ability of broker-dealers to sell the common stock and accordingly the market for our common stock.

Some provisions in our charter documents and bylaws may have anti-takeover effects.

Our certificate of incorporation and bylaws contain provisions that may make it more difficult for a third party to acquire us, with the result that it may deter potential suitors. For example, our board of directors is authorized, without action of the stockholders, to issue authorized but unissued common stock and preferred stock. The existence of undesignated preferred stock and authorized but unissued common stock enables us to discourage or to make it more difficult to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.

Absence of dividends to stockholders.

We have never declared a dividend on our common stock. We do not anticipate paying dividends on the common stock in the foreseeable future. We anticipate that earnings, if any, will be reinvested in the expansion of our business and debt reduction.

We have agreed to limitations on the potential liability of our directors.

Our certificate of incorporation provides that, in general, directors will not be personally liable for monetary damages to the company or our stockholders for a breach of fiduciary duty. Although this limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission, the presence of these provisions in the certificate of incorporation could prevent us from recovering monetary damages.

ITEM 2: PROPERTIES

The table below lists our manufacturing and administrative office locations and square feet owned or leased. The Rochester, NY and Arlington, VA rent includes utilities. The properties of Laser Fare were sold on December 31, 2004.

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                                   Owned          Leased       Annual Rent   Termination Date
                                   -----          ------       -----------   ----------------
At December 31, 2004:
Arlington, VA                                      1,658       $ 48,082           2007
Rochester, NY                                      1,348       $ 16,176           2005

At December 31, 2003:
Rochester, NY                                      1,348       $ 16,176           2005
Smithfield, RI                     16,800          8,000       $ 43,200      Month to month

At December 31, 2002:
Smithfield, RI                     16,800          8,000       $ 31,429      Month to month

We believe all properties are in good operating condition.

ITEM 3: 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, and the jury returned a verdict 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.

26

We are the plaintiff in a lawsuit filed on April 22, 2005 in the Supreme Court, State of New York, captioned Infinite Group, Inc. v. Mark Ackley and Ackco, Inc. In this action, we allege that Mr. Ackley, our former chief operations officer and director of business development, breached his contractual and fiduciary obligations to us by causing a company he controls to enter into a consulting arrangement with and perform services for another firm while employed by us. We terminated Mr. Ackley's employment for cause on March 11, 2005. We also allege that Mr. Ackley is in violation of his non-compete obligations contained in his employment agreement. We seek monetary damages in amounts to be proved at trial as well as preliminary and permanent injunctive relief as may be appropriate.

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

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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PART II

ITEM 5: MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Prior to March 2003, our common stock was traded on the NASDAQ SmallCap Market. As a result of our failure to maintain certain listing requirements, our stock was delisted and now trades on the "pink sheets" maintained by the National Quotation Bureau Incorporated under the symbol IMCI.PK. The following table sets forth, for the periods indicated, the high and low closing bid quotations per share for our common stock. Quotations represent interdealer prices without an adjustment for retail markups, markdowns or commissions and may not represent actual transactions:

Year Ended December 31, 2005                            High                      Low
------------------------------------------         ---------------         ------------------
First Quarter                                       $    0.20               $    0.07
Second Quarter                                      $    0.34               $    0.10

Year Ended December 31, 2004                            High                      Low
------------------------------------------         ---------------         ------------------

First Quarter                                       $    0.08               $    0.01
Second Quarter                                      $    0.25               $    0.05
Third Quarter                                       $    0.50               $    0.09
Fourth Quarter                                      $    0.20               $    0.04

Year Ended December 31, 2003                            High                      Low
------------------------------------------         ---------------         ------------------

First Quarter                                       $    0.21               $    0.10
Second Quarter                                      $    0.15               $    0.01
Third Quarter                                       $    0.13               $    0.01
Fourth Quarter                                      $    0.07               $    0.01

Year Ended December 31, 2002                            High                      Low
------------------------------------------         ---------------         ------------------

First Quarter                                       $    2.94               $    2.01
Second Quarter                                      $    2.22               $    1.45
Third Quarter                                       $    1.89               $    0.68
Fourth Quarter                                      $    1.25               $    0.13

Year Ended December 31, 2001                            High                      Low
------------------------------------------         ---------------         ------------------

First Quarter                                       $    4.23               $    1.50
Second Quarter                                      $    3.99               $    1.69
Third Quarter                                       $    3.32               $    1.60
Fourth Quarter                                      $    4.17               $    1.50

As of June 30, 2005 we had approximately 1,300 beneficial stockholders.

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Recent Sales of Unregistered Securities.

At various times during 2003, 2004 and 2005, we issued restricted shares of common stock in private placement transactions as follows:

--------------------------------------------------------------------------------------------------------
                                                        Shares                             Average Price
                                                        Issued             Consideration     Per Share
                                                        ------             -------------     ---------
Shares issued in financing transactions                9,620,388              $ 486,000       $ 0.05
Shares issued for debt conversions                     1,747,500                 87,375       $ 0.05
Shares issued as employee compensation                 1,500,000                 75,000       $ 0.05
Shares issued upon exercise of options                    25,000                  2,500       $ 0.10
                                                 =======================================================
                                                      12,892,888              $ 650,875       $ 0.05
--------------------------------------------------------------------------------------------------------

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.

Dividend Policy

We have never declared or paid a cash dividend on our common stock. It has been the policy of our board of directors to retain all available funds to finance the development and growth of our business. The payment of cash dividends in the future will be dependent upon our earnings and financial requirements and other factors deemed relevant by our board of directors.

ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary statement identifying important factors that could cause our actual results to differ from those projected in forward looking statements.

Pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, readers of this report are advised that this document contains both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earnings per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of our plans and objectives with respect to business transactions and enhancement of shareholder value, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about our business prospects.

This report also identifies important factors, which could cause actual results to differ materially from those indicated by the forward looking statements. These risks and uncertainties include the factors discussed under the heading "Risk Factors" beginning at page 11 of this report.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this report.

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We are not current in our periodic filings with the Securities and Exchange Commission. Until 2004 we were not able to pay our auditors, Freed Maxick & Battaglia, CPAs, P.C. for fees incurred prior to their work on the 2002 audit. As a result they ceased all work on our behalf.

Because we did not have financial statements with an independent auditors' report thereon for the year ended December 31, 2002, we were not able to file our 2002 10-KSB by its due date. For the same reason, we were unable to file our Form 10-Q's for the 1st, 2nd and 3rd quarters of 2003, our Form 10-KSB for the year ended December 31, 2003, our Form 10-Q's for the 1st, 2nd and 3rd quarters of 2004 and our Form 10-KSB for the year ended December 31, 2004 and our form 10-Q for the first quarter of 2005 in a timely manner. During 2004, we brought our account current with Freed Maxick & Battaglia, CPAs, P.C. and they resumed work on our behalf and completed the audits of our financial statements for the years ended December 31, 2002, 2003 and 2004. Contemporaneous with this filing, we are filing all of our delinquent periodic reports.

Disposal of Plastics Group

In 2001 and during the first quarter of 2002, we sold or discontinued operations of our Plastics Group. Our Plastics Group had been comprised of Osley & Whitney, Inc. (O&W) and Express Pattern, Inc. (EP), and provided rapid prototyping services and proprietary mold building services.

In cooperation with O&W's secured lender, the majority of O&W's equipment and furnishings were sold at public auction on March 12, 2002, and accounts receivable were remitted to the secured lender as paid. The O&W land and building were sold at auction on July 22, 2002 for $650,000 and the transaction closed on August 8, 2002. This transaction completed the liquidation the O&W's assets, resulting in a net obligation to a secured lender, including accrued interest and closing expenses, of approximately $211,000. This amount was evidenced by a new note issued by O&W to the secured lender, which we guaranteed. The note accrued interest at 7.75% per annum, provided for twelve monthly payments of $7,276 plus interest, and required a balloon payment of approximately $145,000 in November 2003. On August 5, 2003, the secured lender sold the note and the rights thereunder to a related third party. The sale of the note is evidenced by a non-recourse assignment agreement between the lender and the related third party. On December 31, 2003, the new noteholder agreed to extend the term of the new note to January 1, 2007 in exchange for the right to convert the principal amount of the note and all accrued interest into shares of our common stock at any time after November 30, 2005 at a price of $.05 per share. As of December 31, 2004, we were obligated to the new noteholder for principal and accrued interest in the aggregate amount of $234,690.

During the fourth quarter of 2002, we sold all of the issued and outstanding stock of O&W to an unrelated third party for nominal consideration. As part of the stock sale agreement, we retained the O&W pension asset and related obligation, which obligations are included in accrued pension obligation and accumulated other comprehensive loss on the consolidated balance sheet at December 31, 2002. As a result of the sale of stock, we wrote off the outstanding intercompany receivables due from O&W. The net impact on the sale and asset write off resulted in a gain of approximately $693,000, which offset the loss on disposal of discontinued operations on the accompanying consolidated statement of operations.

At December 31, 2001 the O&W prepaid pension cost was $904,673. At December 31, 2002, the O&W defined benefit pension plan had an accrued pension obligation liability of $2,159,152 and an accumulated other comprehensive loss of $3,098,705 which we recorded as a reduction of stockholders' equity. This change was due to a decline in the market value of plan assets from $5,019,929 at December 31, 2001 to $3,315,256 at December 31, 2002 comprised of payment of benefits of $822,226 and a negative investment return of $882,447. The benefit obligation increased during 2002 by $505,986 to $5,474,408 at December 31, 2002 as a result of an actuarial computation.

The Company was required to contribute amounts in 2004 and future years to fund the deficiency. We did not make a contribution in 2002, 2003 or 2004 and we currently do not have the funds available to make such contributions. We have recorded defined benefit pension income of approximately $35,000 in 2002. We have recorded defined benefit pension expense of approximately $200,000 in 2003 and $160,000 in 2004. In March 2005, the Company filed a funding waiver application requesting a deferral of the minimum funding standard for the 2005 plan year of $513,551 and for the 2004 plan year of $979,328 (which includes quarterly cash disbursements aggregating approximately $455,000 for the year ending December 31, 2004 and unfunded prior year amounts). We are also evaluating strategies to improve the plan's performance.

30

Sale of Express Pattern (EP) Assets

On March 14, 2002, we sold the net assets of EP for $725,000, consisting of $575,000 in cash (of which $300,000 was paid to the O&W secured lender) and a five-year 8% subordinated $150,000 note, due upon maturity with quarterly interest payments. The purchasers included a former employee of EP and Thomas J. Mueller, our chief operating officer, who is a passive investor in the purchasing entity. The sale was negotiated at "arm's length" by disinterested management with the former employee and his advisors. During 2002, we offset a portion of the $150,000 note with the closing costs of the sale amounting to approximately $26,000 paid by EP in completing the deal. In addition, we wrote off $50,000 of the note, because this amount was originally intended to cover contingencies that did not materialize. The loss resulting from this offset and write off amounting approximately to $76,000 is included in loss on disposal of discontinued operations in the accompanying consolidated statement of operations for the year ended December 31, 2002. The interest earned on this note through December 31, 2002 in the amount of $9,633 has been fully reserved, because we feel collection of the interest is doubtful at this time. The remaining balance of the note at December 31, 2002 after the offset and write-off is approximately $74,000.

2002 - Recent Sales of Certain Business Segments

During 2002, our business had two segments, our Laser Group and our Photonics Group. In 2002, we discontinued our Photonics Group. In 2003 we continued to operate our Laser Group subsidiary although in 2003, we decided to sell the net assets of the Laser Group and sold a portion of the business on December 31, 2003 and the remaining business on December 31, 2004.

Closing of Photonics Group

Our Photonics Group, which included Infinite Photonics, Inc. and the Advanced Technology Group, manufactured and marketed our proprietary grating coupleted surface emitting laser (GCSEL) diodes. As noted below, our Photonics Group ceased operations in 2002. The loss from discontinued operations of the Photonics Group was $856,219 for the year ended December 31, 2002.

In April 2001, we organized Infinite Photonics, Inc. to develop and market laser diodes based on our proprietary, patented and patent pending grating coupled surface emitting lasers (GCSEL) diode technology platform developed by our Laser Group's research and development unit over the last four years. To date we have obtained one patent (expiring in 2018), have ten patents pending and an additional ten patents are under development for GCSEL and related technologies.

On January 23, 2002, Infinite Photonics, Inc. signed and commenced a $12.0 million research and development contract with DARPA (contract, #MDA972-02-C-0013), which was scheduled to conclude by the end of 2003. The purpose of the contract was to provide DARPA with pump and source laser diodes and grating coupled semiconductor optical amplifiers with powers much higher than the current industry standard of about 0.3 watts (more than one watt with a goal as high as ten watts), high repetition rates (up to 20,000 laser pulses per second), and high beam quality (minimum beam spreading of the laser).

On October 30, 2002, the Contract was terminated for the government's convenience under the clause 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, we have substantially completed the contract termination process. Substantially all costs associated with the termination process have been reimbursed. The termination of the contract has had a detrimental effect to the development of our technology. The company released all Photonics Group employees and the operations of the Photonics Group are dormant. We also determined that our Photonics Group patents were impaired, and consequently recorded an impairment loss of approximately $468,000, which is included in loss on disposal of discontinued operations in the statement of operations for the year ended December 31, 2002.

31

Sale of Laser Group

Our Laser Group was comprised of Laser Fare, Inc. (LF) and Mound Laser & Photonics Center, Inc. (MLPC) and provided comprehensive laser-based materials processing services to leading manufacturers. We disposed of MLPC in 2002 and the operations ceased. In 2003, we decided to sell the net assets of LF. We sold a portion of Laser Fare's business related to medical products and engraving on December 31, 2003 to LFI, Inc., an entity owned by two former employees of our Laser Group, including our former chairman and chief executive officer. This transaction resulted in a loss on disposition of approximately $99,000 during the year ended December 31, 2003. The purchase price for the assets consisted of LFI's assumption of certain of our liabilities in the aggregate amount of approximately $358,000 at December 31, 2003. We sold the remaining assets of our Laser Group to Rolben Acquisition Corporation, a company affiliated with LFI, on December 31, 2004 and recognized a loss on disposal of approximately $224,000 during the year ended December 31, 2004. The purchase price for the remaining assets consisted of Rolben's assumption of substantially all of the liabilities of Laser Fare, Inc. and the delivery of promissory notes in the aggregate amount of approximately $2.1 Million. Because certain required consents were not yet obtained, we remain 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. Upon the delivery of the consents and the full assumption of the RIIFC and UPS obligations by Rolben, and our release from those obligations, the notes from Rolben to us will terminate.

Strategy

In 2002, we focused on our two primary lines of business and actively pursued additional capital through an equity line of credit agreement, private equity sources, strategic alliances, venture capital and investment banking sources. In 2003, 2004 and 2005 we raised capital from private placements of debt and equity securities.

Our business plan included:

o the completion of our disposal of the Plastics Group commenced in 2001,

o the completion of our disposal of the Laser Group commenced in 2003, and

o our focus beginning in 2003 in the field of information technology (IT) consulting services and biometric technology.

Our IT services include strategic staffing, program management, project management, technical engineering, software development, and enterprise resource planning. Beginning in 2003, we have entered into several subcontract agreements with a number of prime contractors to several U.S. government agencies.

In December 2003, we were awarded a Federal Supply Schedule Contract by the U.S. General Services Administration (GSA) for IT consulting services. Having a GSA Contract allows us to compete for and secure prime contracts with all executive agencies of the U.S. Government as well as other national and international organizations.

In 2003, we entered into a License Agreement with Ultra-Scan Corporation, a privately held technology company headquartered in Buffalo, New York. The License Agreement gives us the ability to use, market and sell certain proprietary fingerprint recognition technology. We have completed the development of an access control terminal and related software called TouchThru(TM) incorporating that technology. We intend to be in a position to market and sell that product beginning in 2006 in a variety of industries and markets, including the federal, state and local government, health care, travel and general security and access control.

32

In the past several years the Financial Accounting Standards Board issued new standards, which we have determined, did not have any effect on our financial statements and we anticipate they will not have a material effect on our financial statements through December 31, 2004.

Liquidity and Capital Resources

We have financed our operations beginning in 2003 through a series of private placements of debt and equity securities and cash generated by ongoing operations. As of December 31, 2002, we had cash and cash equivalents of $438,028 available for our working capital needs and planned capital asset expenditures.

During 2000 and 2001, our president and chief executive officer loaned us an aggregate of $1,124,000 evidenced by a series of short-term notes, which bore interest at various interest rates ranging from 10% to 11%. The proceeds of these loans were used for working capital purposes. In consideration for these loans, our president and chief executive officer was issued warrants to purchase 153,000 shares of common stock at exercise prices ranging from $1.03125 to $3.42 per share. As of December 31, 2002, approximately $24,000 of the loans, along with $4,375 of unpaid interest remained outstanding. During 2001, $100,000 of principal was repaid through the issuance of 39,526 shares of common stock issued at a price of $2.53. All share issuances were valued at fair market value on the date of conversion, which was determined based upon price of the common stock on the twenty trading days preceding the conversion.

The December 31, 2002 financial statements reflect a decrease in accounts receivable from December 31, 2001 of approximately $575,000, or 38% to $923,043 from $1,498,463, due to Laser Fare's business. Revenues from our Laser group in 2002 were $6,229,910 a decrease of $1,082,620 or 15% from 2001.

Inventories were owned by our Laser Fare subsidiary and are relatively unchanged from December 31, 2001 to 2002.

For 2001, property and equipment purchases at our Laser Fare subsidiary amounted to $361,993 of which $308,000 related to the LENS process. The majority of the remaining acquisitions occurred at our Infinite Photonics subsidiary (approximately $30,000) and consisted of furniture and fixtures at the Orlando facility. For 2002 purchases of property and equipment were $190,898 for Laser Fare's business.

At December 31, 2002 we had a working capital deficit of approximately $4.4 million, ($3.5 million after eliminating the assets and liabilities of our discontinued operations). The working capital deficit was primarily caused by our primary lenders not having issued their waivers for certain loan covenant violations that existed at December 31, 2002 at our Laser Fare subsidiary, which resulted in recharacterizing our long-term debt to current liabilities. The loan covenants are measured annually at December 31st. The loans totaled approximately $2.6 million at December 31, 2002. The loan covenant violations which existed at December 31, 2002 related to failure to meet certain levels of working capital, debt to tangible net worth ratio and exceeding capital expenditure limits.

At December 31, 2001, we were in violation of certain covenants related to our failure to meet certain levels of debt to tangible net worth ratio and exceeding the capital expenditure limits. We completed the acquisition of the LENS equipment in a non-monetary transaction in 2001, which also caused us to exceed our capital expenditure limitation. The covenant violations were waived by the bank prior to the issuance of our financial statements for 2001.

During the year ended December 31, 2001, we adopted a plan to discontinue the operations of our former Plastics Group, which was suffering recurring losses and required significant levels of cash flows to operate. In addition, during the first quarter of 2002 we sold the assets of our Express Pattern and Mound subsidiaries. These events provided an infusion of approximately $845,000 in cash in 2002, which was used to pay down existing bank debt, as well as for working capital needs.

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As a result of the above transactions, we operated in only one business segment in 2002. The Laser Group had an operating loss of approximately $2,111,000 in 2002 versus a loss of $141,000 in 2001. The operating loss in 2002 was principally due to a decline in sales of $1,082,620 (from $7,312,530 in 2001 to $6,229,910 in 2002).

On July 23, 2002, the equity line of credit agreement which we had entered into with Cockfield Holdings Limited (Cockfield) on November 30, 2000 was terminated. As a result, we were released, and released Cockfield, from any further obligation thereunder.

As consideration for establishing the equity line of credit, we granted Cockfield warrants to purchase up to 200,000 shares of our common stock. As consideration for the services rendered by Jesup & Lamont as placement agent in connection with the equity line of credit, we granted Jesup & Lamont warrants to purchase up to 100,000 shares of our common stock. These warrants, covering 300,000 shares of our common stock, were exercisable at any time prior to November 20, 2003, for $3.135 per share and survived the termination of the agreement. The warrants were not exercised and expired on November 20, 2003.

We closed debt and equity financing transactions in 2003, 2004 and 2005 and installed two receivables-based financing arrangements to provide liquidity using our accounts receivable as collateral.

Asset Based Convertible Note-Originated and Terminated in 2002

On February 5, 2002, we completed a $1 million debt financing with Laurus Master Fund, Ltd. ("Laurus"). We received $1 million in cash, less fees amounting to $89,000, in exchange for its issuance of a $1 million two-year convertible note bearing interest and fees at the annual rate of 15% payable monthly. The annual fees were subject to reduction by 1% for every $100,000 in note principal amount converted, up to an aggregate 10%. The outstanding principal and interest was due in full on February 5, 2004. The note was convertible, at the option of the holder, into shares of common stock at a price of $2.00 per share. In the event of a default, the conversion price was subject to downward adjustment.

On June 21, 2002, we completed an additional $500,000 debt financing with Laurus. We received $500,000 in cash, less fees amounting to $37,000, in exchange for the issuance of a $500,000 two-year convertible note bearing interest and fees at the annual rate of 15% payable monthly. The proceeds from this note were unrestricted and were secured by substantially all of our other assets and our Infinite Photonics, Inc. subsidiary. The annual fees were subject to reduction by 1% for every $50,000 in note principal amount converted, up to an aggregate 10%. This note was convertible into shares of common stock at the option of the holder at a price of $2.00 per share. In the event of a default, the conversion price was subject to downward adjustment. In connection with this transaction, detachable warrants to purchase 25,000 shares of common stock at $2.40 per share were issued to Laurus. The warrants were immediately exercisable and expire five years from the date of grant.

Termination of the DARPA contract in October 2002 constituted an event of default under our financing agreements with Laurus. Upon occurrence of this event, the $1.0 million two-year convertible note issued on February 5, 2002 and the $500,000 convertible note issued on June 21, 2002 became immediately due and payable. As a result, Laurus took immediate possession of the funds held by the Photonics Group in restricted bank accounts. Approximately $1.474 million was withdrawn from these accounts and applied in reduction of the outstanding balance. We satisfied the remaining deficiency in July 2004 by a cash payment to Laurus of $34,000 and the issuance of 50,000 shares of our common stock.

Future Trends

We believe that our operations, as currently structured, together with our current financial resources, will result in improved financial performance in fiscal 2005.

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At December 31, 2002 we had an accrued pension obligation liability of $2,159,152 and an accumulated other comprehensive loss of $3,098,705 recorded as a reduction of stockholders' equity. The Company is required to contribute amounts in 2004 and future years to fund the deficiency. We did not make a contribution in 2002, 2003 or 2004 and we currently do not have the funds available to make such contributions. We have recorded defined benefit pension income of approximate $35,000 in 2002. We have recorded defined benefit pension expense of approximately $200,000 in 2003 and $160,000 in 2004. In March 2005, the Company filed a funding waiver application requesting a deferral of the minimum funding standard for the 2005 plan year of $513,551 and for the 2004 plan year of $979,328 (which includes quarterly cash disbursements aggregating approximately $455,000 for the year ending December 31, 2004 and unfunded prior year amounts). We are also evaluating strategies to improve the plan's investment performance.

There is no assurance, that our current resources will be adequate to fund the liabilities of the former businesses, our current operations and business expansion or that we will be successful in raising additional working capital. 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.

Results of Operations

Laser Group

Revenues from our Laser Group for the years ended December 31, 2002 and 2001 were $6,229,910 and $7,312,530, respectively, with a net operating loss of $2,111,039 and $140,905, respectively. The decrease in revenues was due primarily to decreased laser services performed for several customers in 2002. The increased operating loss resulted from a decline in sales of $1,082,620 and a reduction in gross profit on sales from 29.5% in 2001 to 22.0% in 2002.

The majority of revenues were derived from purchase orders, usually from repeat customers such as General Electric, United Technologies, Barnes Aerospace and Dey Laboratories. Work began when materials arrived from the customer (our inventories were minimal and the customer was responsible for the quality and quantity of the materials), and we cut, welded, drilled and assembled the parts according to engineering drawings and specifications provided by the customer or determined by our engineers with customer approval. Upon completion, the parts were inspected by quality control personnel, compared to the engineering specifications, packaged and delivered to the customer. The customer was billed for the number of parts delivered.

As part of our restructured business plan, we made a decision in 2003 to eliminate certain non-core businesses. On December 31, 2003, we sold certain assets and liabilities of LF to LFI, Inc. (LFI) relating to the laser engraving and medical products manufacturing and assembly businesses of LF. The principals of LFI are former employees of LF, including our former chairman and chief executive officer. The purchase price for the assets was assumed liabilities of LF and/or the Company. On December 31, 2004, we 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 and the receipt of notes receivable in the amount of approximately $2.1 million. LF recorded a loss on sale of approximately $99,000 for the year ended December 31, 2003. LF reclassified the operating assets and liabilities of its businesses as held for sale. The balances of the assets held for sale at December 31, 2003 was $2,508,159 with related liabilities of $781,847. LF also recorded a balance due from the buyer of $410,995 at December 31, 2003, which was transferred into notes receivable at the second closing on December 31, 2004. In addition, LF recorded a loss on disposal of $223,803 in connection with the second closing on December 31, 2004.

Photonics Group

During the fourth quarter of 2002, following termination of the DARPA contract, we released all Photonics Group employees and ceased operations. As a result, the results of the Photonics Group were recorded as a discontinued operation and amounted to a loss from discontinued operations of approximately $344,000 for 2001 and a gain of approximately $84,000 for 2002. In 2002 impairments of patents and property and equipment were also recorded amounting to approximately $468,000 and $148,000, respectively.

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The Photonics Group recorded a loss from discontinued operations of $ 856,219 for 2002 and $343,938 for 2001.

Plastics Group

In November 2001 and December 2001, our board of directors resolved to dispose of O&W and Express Pattern. The formal plan consisted of shutting down the operations of the O&W subsidiary and selling the net assets of the EP subsidiary. Effective November 30, 2001, we shut down the operations of O&W and terminated all of its employees. The loss from the operations of the discontinued business segment amounted to approximately $372,000 during 2001. The loss on disposal of discontinued operations in the amount of $622,000 for the year ending December 31, 2001, represents the write-down of property, plant and equipment and inventory at O&W of $472,000 to their net realizable value and a provision for uncollectible accounts receivable of $150,000.

On March 13, 2002, we sold the net assets of Express Pattern to certain of our officers/employees. The gain resulting from the sale of $45,000 and income of $3,000 up to the decision to dispose of these assets are offset by closing costs of $26,000 and a provision for an uncollectible note of $50,000.

The Plastics Group recorded a loss from discontinued operations of $31,310 for 2002 and $1,774,085 for 2001.

Comparison of the years ended December 31, 2002 and 2001

In 2002, consolidated revenues were $6,229,910 on cost of goods sold of $4,836,867 resulting in a gross profit of $1,393,043 from continuing operations for the year. Restated consolidated revenues from continuing operations in 2001 were $7,312,530 on cost of sales of $4,816,506, resulting in a gross profit of $2,496,024. The decrease of $1,082,620 or 14.8% in consolidated revenues for the year ended December 31, 2002 compared to the year ended December 31, 2001 was due to the remaining operations of the Laser Group. Gross profit also declined by $1,102,981 from 2001 to 2002. Gross profit declined from 34.1 % in 2001 to 22.3% in 2002 principally due to the decline in sales while cost of goods sold remained relatively unchanged.

General and administrative expenses were $3,064,198 for the year ended December 31, 2002 as compared to $2,353,604 for 2001. The increase of $710,594, or 30.2%, was primarily due to increased salaries and personnel at Laser Fare, increased legal, accounting and consultant services, which were offset in part by a reduction in salaried employees and related employee expenses.

Selling expenses were $266,351 for the year ended December 31, 2002 as compared to $307,030 for 2001. The decrease of $40,679, or 13.2%, was primarily attributed to decreased sales salaries and commissions in our Laser Group due to cost cutting measures and better utilization of cross selling to existing customers.

Depreciation and amortization expense totaled $819,307 for the year ended December 31, 2002 as compared to $773,584 for 2001. The increase was primarily due to depreciation expense for new lasers and related equipment which periodically requires replacement or upgrades.

Interest expense was $407,556 during 2002 as compared to $456,179 during 2001, or a decrease of $48,623, or 10.7%. Interest expense to stockholders was $11,768 during 2002 as compared to $128,567 during 2001. The decrease of $116,799 or 90.8% was due primarily to the satisfaction of a capital lease obligation to the president/principal stockholder in exchange for the issuance of common stock during 2001. The decrease is also due to reduced interest expense caused by the general reduction of amounts outstanding in accordance with the terms of the debt. Other interest expense was $395,788 during 2002 as compared to $327,612 during 2001. The increase of $68,176 or 20.8% was due primarily to the origination of debt in 2002 to support our DARPA contract. When the contract was terminated in 2002 the related debt was substantially reduced by December 31, 2002.

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Interest income for the year ended December 31, 2002 was $1,088 as compared to $18,508 for the year ended December 31, 2001 due to comparatively lower invested balances for 2002.

The gain from the disposition of assets in 2002 was $107,418, as compared to a loss of $11,856 in 2001. The 2002 amount relates to the sale of the assets of Mound by our Laser Group. Mound ceased operations in 2002. The 2001 amount relates to a gain on the sale of a laser in our Laser Group in the amount of $9,500 offset by the disposal of an asset no longer used, resulting in a loss of $21,356. Each year as we complete our capital budget, assets at or approaching the end of their useful lives are reviewed for upgrade, disposal or replacement.

We recorded an impairment loss of $1,133,649 in 2002. Various patents of $46,000 used in the Laser Group were determined to be impaired during 2002 and were written off. The remaining patent amounting to approximately $353,000, which was acquired in 2001, relates to a laser application technology which was utilized in the Laser Group. This patent was also determined to be impaired during 2002 and as a result was written off. We also determined that the carrying value of the equipment related to the laser application technology was no longer recoverable and exceeded its fair market value. Since we do not anticipate any future cash flows from the machine and have been unsuccessful in finding a potential buyer for the machine, we determined the machine to be worthless and recorded an impairment loss of the remaining net book value of approximately $735,000.

We recorded a goodwill impairment loss of $71,185 in 2002 relating to Laser Fare.

We had a consolidated net loss from continuing operations of $4,440,604 for the year ended December 31, 2002 as compared to $1,444,521 in 2001. The loss from discontinued operations was $190,206 for the year ended December 31, 2002 as compared to $1,337,993 for 2001. Disappointing results, offshore Asian competition in the mold business, and a weak market after the tragedies of September 11, 2001 lead to the discontinuance of our Plastics Group in 2001.

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 consolidated financial statements present a summary of significant accounting policies. The most critical accounting policies follow.

Revenue Recognition

In 2002 we generated substantially all of our revenue from traditional laser manufacturing services, which included welding, machining, cutting, drilling and engraving. These services related to processes performed on the customers' parts. The services were performed based upon terms specified and agreed upon by both parties prior to commencement. Revenues relating to these services were recognized at the point that the completed product was delivered to the customer.

Accounts Receivable Provisions

As part of the financial reporting process, management estimates and establishes reserves for potential credit losses relating to the collection of certain receivables. This analysis involves a degree of judgment regarding customers' ability and willingness to satisfy its obligations to us. These estimates are based on past history with customers and current circumstances. Management's estimates of doubtful accounts historically have been within reasonable limits of actual bad debts. Management's failure to identify all factors involved in determining the collectibility of an account receivable could result in bad debts in excess of reserves established.

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Deferred Tax Asset Valuation and Income Taxes

Management calculates the future tax benefit relating to certain tax timing differences and available net operating losses and credits available to offset future taxable income. This deferred tax asset is then reduced by a valuation allowance if management believes it is more likely than not that all or some portion of the asset will not be realized. This estimate is based on historical profitability results, expected future performance and the expiration of certain tax attributes which give rise to the deferred tax asset. As of the balance sheet date, a reserve has been established for the entire amount of the deferred tax asset. In the event, we generate future taxable income we will be able to utilize the net operating loss carry forwards subject to any utilization limitations. This will result in the realization of the deferred tax asset, which has been fully reserved. As a result, we would have to revise estimates of future profitability and determine if its valuation reserve requires downward adjustment.

At December 31, 2002, we had federal net operating loss (NOL) carry forwards of approximately $26.6 million that expire in years 2009 through 2022. Our ability to utilize the federal NOL carry forwards may be impaired if we continue to incur operating losses and may be limited by the change of control provisions if we issue substantial numbers of new shares or stock options.

Defined Benefit Plan Assumptions

We have a defined benefit plan, under which participants earned a retirement benefit based upon a formula set forth in the plan. We record income or expense related to the plan using actuarially determined amounts that are calculated under the provisions of SFAS No. 87, "Employers' Accounting for Pensions." Key assumptions used in the actuarial valuations include the discount rate and the anticipated rate of return on plan assets. These rates are based on market interest rates, and therefore fluctuations in market interest rates could impact the amount of pension income or expense recorded for these plans. Despite our belief that these estimates are reasonable for these key actuarial assumptions, future actual results will likely differ from our estimates, and these differences could materially affect our future financial statements either unfavorably or favorably.

The discount rate enables a company to state expected future cash flows at a present value on the measurement date. We have little latitude in selecting this rate since it is based on the yield on high-quality fixed income investments at the measurement date. A lower discount rate increases the present value of benefit obligations and increases pension expense.

To determine the expected long-term rate of return on pension plan assets, management considers a variety of factors including historical returns and asset class return expectations based on the plan's current asset allocation.

Impairment of Long-Lived Assets

We evaluate at each balance sheet date the continued appropriateness of the carrying value of our long-lived assets including our long-term receivables and property, plant and equipment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposals of Long Lived Assets." We review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of any such assets may not be recoverable. If indicators of impairment are present, management would evaluate the undiscounted cash flows estimated to be generated by those assets compared to the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value. We consider continued operating losses, or significant and long-term changes in business conditions, to be the primary indicators of potential impairment. In measuring impairment, we look to quoted market prices, if available, or the best information available in the circumstances.

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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.

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. Our 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. The remaining goodwill, amounting to $71,185, relates to Laser Fare and was also determined to be impaired during 2002, thus resulting in a write-down of $71,185. As a result, we have written off all goodwill at December 31, 2002. The remaining useful lives of the other 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 do not anticipate 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.

On August 1, 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 nor its accounting for discontinued operations.

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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 of SFAS 148.

In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment," that requires companies to expense the value of employee stock options and similar awards for annual periods beginning after June 15, 2005 and applies to all outstanding and unvested stock-based awards at a company's adoption date. We are in the process of reviewing the impact of the adoption of this statement and believe that the adoption of this standard will not have a material effect on the Company's consolidated financial position and results of operations.

ITEM 7: FINANCIAL STATEMENTS

The response to this item is submitted as a separate section of this report beginning on page F-1.

ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

There are not and have not been any disagreements between the us and our accountants on any matter of accounting principles, practices or financial statements disclosure.

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ITEM 8A: 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 fourth quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART III

ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS

Set forth below are the names, ages and positions of our directors and executive officers.

             Name                  Age                                   Position                               Affiliated Since
---------------------------    ------------     ------------------------------------------------------------    ---------------
Michael S. Smith                   51           Chairman of the board, president,  chief executive officer           1995
                                                and chief financial officer

James D. Frost                     56           Chief technology officer and director of delivery                    2003

Paul J. Delmore (1)                48           Director                                                             2003

Allan M. Robbins (1)               54           Director                                                             2003

Deanna Wohlschlegel                33           Corporate secretary and controller                                   2003

(1) Member of the audit and compensation committees.

Each director is elected for a period of one year and serves until his successor is duly elected by our stockholders. Officers are elected by and serve at the will of our board of directors.

Background

The principal occupation of each of our directors and executive officers for at least the past five years is as follows:

Michael S. Smith became a director in 1995 and assumed the positions of chairman, president, chief executive officer and chief financial officer in January 2003. Before joining us, Mr. Smith co-founded and served as the president and chief executive officer of Micropub Systems International Inc., a brewery system manufacturer, from July 1997 to January 2003. Mr. Smith holds a BA degree from Cornell University and a JD degree from Cornell University School of Law.

James D. Frost is our chief technology officer and director of delivery. Mr. Frost is a professional engineer possessing over 25 years of experience at senior and executive levels in information technology, engineering, and environmental business units. Prior to joining us, Mr. Frost was the practice director for Ciber, Inc. where he was responsible for managing the technical IT practice for the federal systems division and the commercial division for the mid-atlantic region. Mr. Frost also led the business process re-engineering and start-up operations for multiple small business enterprises. He has served as the operations mjanager for ABB Environmental Services, and the deputy program manager and section head at Lee Wan & Associates in Oak Ridge, Tennessee. Mr. Frost has also served 20 years in the United States Navy as a Navy Civil Engineer Corps Officer.

Paul J. Delmore became a director in April 2003 and is a member of the audit and compensation committees. Mr. Delmore is a the managing partner of Simpson, Delmore, Greene LLP, a full service law firm located in San Diego, California. Mr. Delmore's practice includes representation of small companies, private and public, with respect to early formation issues, private placements, regulatory requirements for sale of securities, assistance with regulatory filing concerns and mergers and acquisitions. Mr. Delmore has a BA degree from the State University of New York at Oswego and a JD degree from the University of San Diego School of Law. Mr. Delmore is a member of the State Bar of California, the San Diego County Bar Association, the Association of Southern California Defense Counsel and the San Diego Defense Lawyers Association.

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Dr. Allan M. Robbins became a director in April 2003 and is a member of the audit and compensation committees. Dr. Robbins is the Medical Director, Clinical Director and Chief Surgeon at Robbins Eye Associates and Robbins Laser Site in Rochester, New York. He has also served as the CEO of the Genesee Valley Eye Institute. Dr. Robbins has been recognized and received the AMA Commendation for Continuing Medical Education as well as the Americas Top Ophthalmologists 2002-2003 Award from the Consumers Research Council of America. Dr. Robbins is a member of the New York State Medical Society, New York State Ophthalmologist Society, Rochester Ophthalmologist Society, American Academy of Ophthalmology, American College of Surgeons, International Society of Cosmetic Laser Surgeons, International Society of Refractive Surgery (ISRS), Refractive Surgery Interest Group (AAO), is a member of the Monroe County Medical Society Committee for Alternative Medicine, and the American Society of Cataract and Refractive Surgery (ASCRS).

Deanna Wohlschlegel has been our corporate secretary and controller since May 2003. Prior to that Ms. Wohlschlegel was corporate controller for Micropub Systems International, Inc. from January 1999 until joining the company. She has an associates degree in accounting from Finger Lakes Community College.

Committees of the Board of Directors

Our board of directors has an audit committee and a compensation committee. The audit committee reviews the scope and results of the audit and other services provided by our independent accountants and our internal controls. The compensation committee is responsible for the approval of compensation arrangements for our officers and the review of our compensation plans and policies. At December 31, 2002, each committee was comprised of Messrs. Corridan and Smith, our non-employee independent outside directors. At December 31, 2003 and 2004, each committee was comprised of Messrs. Delmore and Robbins, also non-employee independent outside directors.

Stock Options

The following table sets forth certain information regarding options granted by us in 2002 to each of the named executive officers.

                                 Number of Shares      Percent of Total
                                  of Common Stock     Options Granted to
             Name                Underlying Option    Employees in Year    Exercise Price ($/Sh)     Expiration Date
--------------------------     ---------------------- -------------------  -----------------------   ----------------
  J. Terrence Feeley (1)                125,000            23.1%                   $2.50                 Expired

(1) These options have expired unexercised.

43

Director Compensation

We do not pay any directors' fees. Directors are reimbursed for the costs relating to attending board and committee meetings.

Audit Committee Financial Expert

The Audit committee is comprised of Paul Delmore, as chairman, and Allan Robbins. The Board has determined that Paul Delmore qualifies as our "audit committee financial expert," as that term is defined in Item 401(e) of Regulation S-B, and "independent" as that term is used in Item7 (d) (3)(iv) of schedule 14A under the Securities Exchange Act of 1934.

Code of Ethics

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and other persons performing similar functions, as well as all of our other employees and directors. This code of ethics is posted on our website at www.us-igi.com and is filed as Exhibit 14.1 to this report.

ITEM 10: EXECUTIVE COMPENSATION

Summary compensation. The following table sets forth certain information concerning compensation paid for services in all capacities awarded to, earned by or paid to our chief executive officer and the other most highly compensated executive officers during 2002, 2003 and 2004 whose aggregate compensation exceeded $100,000.

44

                                                                                                       All other
            Name and Principal Position                 Year        Salary              Bonus        compensation (1)
----------------------------------------------------- ---------- -------------      -------------     -----------
Michael S. Smith                                        2004         $181,789           $ 3,500            $854
President, Chief Executive Officer, Chief Financial     2003         $108,856           $30,000            ----
Officer and Director commencing May 1, 2003,            2002             ----              ----            ----
Director

Mark J. Ackley                                          2004         $173,682           $10,000            ----
Chief Operating Officer and Director of Business        2003         $103,846           $15,000            ----
Development commencing April 19, 2003                   2002             ----              ----            ----

James D. Frost                                          2004         $173,978           $10,000
Chief Technology Officer and Director of Delivery       2003         $ 89,423           $15,000
commencing May 12, 2003                                 2002             ----              ----

Clifford G. Brockmyre II                                2004             ----              ----            ----
President and Chief Executive Officer                   2003         $149,376           $ 1,500            ----
through January 3, 2003, CEO Laser Fare from            2002         $106,672              ----            ----
January 3, 2003 through December 31, 2003

Clifford G. Brockmyre III                               2004         $ 90,679           $ 1,050            ----
President Laser Fare, Inc.                              2003         $107,655           $ 2,099            ----
through December 31, 2004                               2002         $108,718              ----            ----

Thomas J. Mueller                                       2004             ----              ----            ----
Former Chief Operating Officer                          2003         $ 24,056              ----            ----
through March 14, 2002                                  2002         $ 80,385              ----            ----

J. Terrence Feeley                                      2004             ----              ----            ----
Former President Advanced Technology Group              2003             ----              ----            ----
through June 2002                                       2002         $ 79,521              ----            ----

(1) Reflects stock grants, Company matching contributions to the employee's IRA Plan and Company paid life insurance premiums.

Employment Agreements

Prior to Mr. Brockmyre's resignation on January 3, 2003 we had an employment agreement dated June 30, 2001 with Clifford G. Brockmyre II, our former president and chief executive officer, for a term expiring on June 30, 2003, which provided for an annual salary of $175,000 and various benefits. In addition to the compensation provided under the agreement, Mr. Brockmyre was eligible to participate in our bonus plan and was eligible for other bonuses as determined in the sole direction of the board of directors. The agreement also provided, among other things, that, if Mr. Brockmyre was terminated other than for cause (which is defined to include conviction of a crime involving moral turpitude, engaging in activities competitive with us, divulging confidential information, dishonesty or misconduct detrimental to us or breach of a material term of the agreement), we would pay to him a lump sum payment equal to the product of the sum of (i) the highest annual rate of salary paid to Mr. Brockmyre, and (ii) the highest annual bonus paid to or accrued to the benefit of Mr. Brockmyre during the employment term multiplied by 2.99. The agreement also provided for payments to Mr. Brockmyre, or his estate, in the event of his death or permanent disability. We were released from all obligations to Mr. Brockmyre under his Employment Agreement in connection with our sale of the Laser Fare business in 2003.

In 2003, we entered into employment agreements with Mssrs. Smith, Ackley and Frost. These agreements are essentially identical and provide, among other things, for annual base compensation of $150,000 for five-year terms. In addition, each agreement provides for the issuance of 500,000 shares of our common stock with a value of $25,000 as of the date of issuance and 500,000 employee stock options exercisable at $.05 per share. Each agreement also provides for, among other things, incentive compensation, termination benefits in the event of death, disability and termination for other than cause, and a covenant against competition. Mr. Ackley's employment was terminated for cause in March, 2005.

45

Securities Authorized for Issuance Under Equity Compensation Plans

We have stock option plans, which were adopted by our board and approved by our shareholders, covering an aggregate of 1,840,000 unexercised shares of our common stock at December 31, 2004, consisting of both incentive stock options within the meaning of Section 422 of the United States Internal Revenue Code of 1986 (the Code) and non-qualified options. The option plans are intended to qualify under Rule 16b-3 of the Securities Exchange Act of 1934. Incentive stock options are issuable only to our employees, while non-qualified options may be issued to non-employees, consultants, and others, as well as to employees. We also have a stock option plan which was adopted by our board in March 2005, which has not yet been approved or ratified by our shareholders, covering an aggregate of 4,000,000 unexercised shares of our common stock at June 30, 2005, consisting of both incentive stock options within the meaning of Section 422 of the Code and non-qualified options.

The option plans are administered by the compensation committee of the board of directors, which determines those individuals who shall receive options, the time period during which the options may be partially or fully exercised, the number of share of common stock that may be purchased under each option, and the option price.

The per share exercise price of an incentive or non-qualified stock option may not be less than the fair market value of the common stock on the date the option is granted. The aggregate fair market value (determined as of the date the option is granted) of the shares of common stock for which incentive stock options are first exercisable by any individual during any calendar year may not exceed $100,000. No person who owns, directly or indirectly, at the time of the granting of an incentive stock option to him or her, more than 10% of the total combined voting power of all classes of stock of the company shall be eligible to receive any incentive stock option under the option plans unless the option price is at least $110% of the fair market value of our common stock subject to the option, determined on the date of grant. Non-qualified options are not subject to this limitation.

An optionee may not transfer an incentive stock option, other than by will or the laws of descent and distribution, and during the lifetime of an optionee, the option will be exercisable only by him or her. In the event of termination of employment other than by death or disability, the optionee will have three months after such termination during which to exercise the option. Upon termination of employment of an optionee by reason of death or permanent total disability, the option remains exercisable for one year thereafter to the extent it was exercisable on the date of such termination. No similar limitation applies to non-qualified options.

Pursuant to our option plans, each new non-employee director is automatically granted, upon becoming a director, an option to purchase 7,500 shares of our common stock at the fair market value of such shares on the grant date. In addition, each non-employee director is automatically granted an option to purchase 5,000 shares at the fair market value of such shares on the date of grant, on the date of our annual meeting of stockholders. These options vest 1/3 upon grant and 1/3 at the end of each subsequent year of service. In April 2003, we granted 7,500 options to each of our two new directors. In March 2005, we granted 50,000 non-qualified options to each of our two outside directors. At June 30, 2005, we have granted 142,000 options to members of the board of directors of which 137,000 are exercisable at June 30, 2005 at prices ranging from $.10 to $9.40.

Options under the option plans must be granted within 10 years from the effective date of each respective plan. Incentive stock options granted under the plan cannot be exercised more than 10 years from the date of grant, except that incentive stock options issued to greater than 10% stockholders are limited to four-year terms. All options granted under the plans provide for the payment of the exercise price in cash or by delivery of shares of common stock already owned by the optionee having a fair market value equal to the exercise price of the options being exercised, or by a combination of such methods of payment. Therefore, an optionee may be able to tender shares of common stock to purchase additional shares of common stock and may theoretically exercise all of his stock options without making any additional cash investment.

46

Any unexercised options that expire or that terminate upon an optionee's ceasing to be affiliated with the company become available once again for issuance.

The following table summarizes as of June 30, 2005 the (i) currently exercisable options granted under our plans and (ii) all other securities subject to contracts, options, warrants and rights or authorized for future issuance outside our plans. The shares covered by outstanding options or authorized for future issuance are subject to adjustment for changes in capitalization stock splits, stock dividends and similar events.

                                                                                    Equity Compensation Plan Table

                                                                                                               Number of securities
                                                                                                             remaining available for
                                                                  Number of securities    Weighted-average    future issuance under
                                                                   to be issued upon     exercise price of     equity compensation
                                                                      exercise of           outstanding          plans (excluding
                                                                  outstanding options,   options, warrants   securities reflected in
                                                                  warrants and rights        and rights            column (a))

                                                                          (a)                   (b)                     (c)
Equity Compensation Plans Approved By Security Holders(1)              1,270,500               $0.06                  569,500

Equity Compensation Plans Not Approved By Security Holders(2)          2,518,000               $0.18                1,482,000

Non qualified Options and Warrants to Service Providers                  140,000               $1.98                    -

Total                                                                  3,928,500               $ .20                2,051,500

(1) Includes the 1995, 1996, 1997, 1998 and 1999 Stock Option Plans
(2) Includes the 2005 Stock Option Plan

At June 30, 2005, we had notes payable and accrued interest of $349,552 due to Allan Robbins, a member of our board of directors, and $566,399 due to a related third party. These notes and accrued interest are convertible into shares of our common stock at $.05 per share at the option of the note holder at any time after November 30, 2005. If the principal and accrued interest were converted in full, we would be required to issue 6,991,043 common shares to the board member and 11,327,971 common shares to the related third party.

If all of the aforementioned incentive and non-qualified options and warrants were to be exercised and notes including accrued interest were to be converted to shares of our common stock, we would be obligated to issue an additional 22,247,514 common shares as of June 30, 2005.

Compensation committee interlocks and insider participation in compensation decisions

None of the directors serving on the compensation committee of our board of directors is employed by us. In addition, none of our directors or executive officers is a director or executive officer of any other corporation that has a director or executive officer who is also a member of our board of directors.

47

ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table, together with the accompanying footnotes, sets forth information, as of June 30, 2005, regarding stock ownership of all persons known by us to own beneficially 5% or more of our outstanding common stock, all directors, and all directors and executive officers as a group.

                                            Shares of
          Name of                          Common Stock          Percentage
    Beneficial Owner                 Beneficially Owned (1)(2)   of Class (3)
 -------------------------------     -------------------------  ----------------
Directors and Executive Officers

Michael S. Smith                           1,517,000(4)            6.9%
Paul J. Delmore                            4,982,000(5)           22.7%
Allan M. Robbins                             55,000 (6)               *
James D. Frost                            2,000,000 (7)            9.1%
      All directors and
      executive officers as a
      group (4 persons)                     8,554,000             39.0%

5% Stockholders

David Slavny                                1,100,000              5.7%
Clifford G. Brockmyre (8)                   1,047,463              5.5%

---------------------

* less than 1%

(1) Pursuant to the rules of the Securities and Exchange Commission, shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants or upon the conversion of securities are deemed to be outstanding for the purpose of computing the percent of ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

(2) Assumes that all currently exercisable options or warrants or convertible notes owned by the individual have been exercised.

(3) Assumes that all currently exercisable options or warrants owned by members of the group have been exercised.

(4) Includes 527,000 shares subject to currently exercisable options and 500,000 shares subject to currently exercisable options which are subject to shareholder ratification

(5) Includes (i) 4,827,000 shares owned of record by Upstate Holding Group, LLC, an entity wholly-owned by Mr. Delmore, (ii) 5,000 shares subject to currently exercisable options, (iii) 50,000 shares subject to currently exercisable options which are subject to shareholder ratification and (iv) 100,000 warrants to purchase common stock at $2.00 per share.

(6) Includes 5,000 shares subject to currently exercisable options and 50,000 shares subject to currently exercisable options which are subject to shareholder ratification.

(7) Includes 500,000 shares subject to currently exercisable options and 1,000,000 shares subject to currently exercisable options which are subject to shareholder ratification.

(8) Includes 20,000 shares owned by Mr. Brockmyre's wife as to which shares Mr. Brockmyre disclaims beneficial ownership. The information with respect to this stockholder was derived from his Officers and Directors Questionnaire.

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (SEC). Officers, directors and greater than ten-percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To the best of our knowledge, based solely on review of the copies of such forms furnished to us, or written representations that no other forms were required, we believe that all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent (10%) stockholders were complied with during ended December 31, 2004 with the following exceptions: Allan Robbins, James Frost, Michael Smith, Paul Delmore and Upstate Holding Group, LLC did not timely file their individual Annual Change in Beneficial Ownership of Securities on Form 5. With respect to any of our former directors, officers, and ten percent (10%) stockholders, we do not have any knowledge of any known failures to comply with the filing requirements of Section 16(a).

48

Contemporaneous with the filing of this Report of Form 10-KSB, all required Forms 5 are being filed with the SEC and copies have been furnished to us.

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During 2000 and 2001, our president and chief executive officer loaned us an aggregate of $1,124,000 evidenced by a series of short-term notes, which bore interest at various interest rates ranging from 10% to 11%. In addition, at December 31, 1999, a $40,000 loan from our president and chief executive officer was outstanding. The proceeds of these loans were used for working capital purposes. In consideration for these loans, our president and chief executive officer was issued warrants to purchase 153,000 shares of common stock at exercise prices ranging from $1.03125 to $3.42 per share. As of December 31, 2001, approximately $24,000 of the loans, along with $4,375 of unpaid interest remained outstanding. During 2001, $100,000 of principal was repaid through the issuance of 39,526 shares of common stock issued at a price of $2.53. All share issuances were valued at fair market value on the date of conversion, which was determined based upon price of the common stock on the twenty trading days preceding the conversion.

Total interest paid to Mr. Brockmyre relating to short term borrowing, long term obligations and a capital lease amounted to $168,830 and $117,796 during 2000 and 2001 respectively.

A summary of Mr. Brockmyre's loans to us during 2001 is as follows:

     Loan Date                   Amount             Maturity Date
------------------------    --------------------   ----------------

    1/24/01                     10,000.00              3/25/01

    9/10/01                     51,000.00              10/10/01

    9/17/01                     12,000.00              10/17/01

    10/26/01                   $21,000.00              11/26/01

    10/02/01                     2,000.00              11/02/01

    10/09/01                    23,000.00              11/09/01

    10/18/01                    12,000.00              11/18/01

    10/25/01                    19,000.00              11/25/01

49

During the quarter ended June 30, 2001, we were released from a capital lease due to an affiliate of our president relating to a laser workstation for stent manufacturing and related accrued interest aggregating $448,830. Our president contributed this equipment, which had been purchased in April 2000 for approximately $412,000, to us in exchange for 225,000 shares of our common stock valued at $1.995 per share. The workstation was purchased by the affiliate at a point in time that we did not have the resources to acquire the equipment, which was necessary for our operations. We have been dependent on our president to fund equipment to support our operations.

Mr. Brockmyre's son, Clifford G. Brockmyre III, was employed as the General Manager of our Laser Fare, Inc. subsidiary at an annual salary of $100,000 through December 31, 2004, at which time the business, assets and certain liabilities of Laser Fare were sold.

We believe that the foregoing transactions were on terms no less favorable to us than could have been obtained from third parties. As a matter of policy, in order to reduce the risks of self-dealing or a breach of the duty of loyalty to the company, all transactions between the company and any of its officers, directors or principal stockholders are for bona fide purposes and are approved by a majority of the disinterested members of our Board.

50

ITEM 13: EXHIBITS

The Exhibits listed below are filed as part of this Report:

 3.1        Restated Certificate of Incorporation of the Company. (1)

 3.2        Certificate  of  Amendment of  Certificate  of  Incorporation  dated
            January 7, 1998. (5)

 3.3        Certificate  of  Amendment of  Certificate  of  Incorporation  dated
            February 16, 1999. (6)

 3.4        By-Laws of the Company. (1)

 4.1        Specimen Stock Certificate. (1)

 10.1       Form of Stock Option Plan. (2)

 10.2       Form of Stock Option Agreement. (1)

 10.3       Lease   Agreement   between  Rhode  Island   Industrial   Facilities
            Corporation  and HGG Laser  Fare,  Inc.  for certain  equipment  and
            operating facility in Smithfield, Rhode Island. (3)

 10.4       Loan Agreement  between HGG Laser Fare, Inc. and First National Bank
            of New England and dated December 21, 1995. (4)

 10.5       Consulting  Agreement  between J.  Terrence  Feeley and the  Company
            dated June 27, 2002.*

 10.6       Employment Agreement between Mark Ackley and the Company dated April
            7, 2003.*

 10.7       Employment Agreement between Michael Smith and the Company dated May
            5, 2003.*

 10.8       Employment  Agreement  between James Frost and the Company dated May
            12, 2003.*

 10.9       License  Agreement  between  Ultra-Scan  Corporation and the Company
            dated June 11, 2003.*

 10.10      Promissory Note dated August 13, 2003 in favor of Carle C. Conway.*

 10.11      Promissory Note dated January 16, 2004 in favor of Carle C. Conway.*

 10.12      Promissory Noted dated March 11, 2004 in favor of Carle C. Conway.*

 10.13      Promissory  Note  dated  December  31,  2003 in favor  of  Northwest
            Hampton Holdings, LLC.*

 10.14      Asset Purchase Agreement between LFI, Inc., Laser Fare, Inc. and the
            Company dated December 31, 2003.*

 10.15      Modification Agreement to Promissory Notes between Northwest Hampton
            Holdings, LLC and the Company dated December 1, 2004.*

 10.16      Modification Agreement to Promissory Notes between Allan Robbins and
            the Company dated December 1, 2004.*

 10.17      Asset Purchase Agreement between Rolben Acquisition  Company,  Laser
            Fare, Inc. and the Company dated December 31, 2004.*

 10.18      Modification  Agreement No. 2 to Promissory Notes between  Northwest
            Hampton Holdings, LLC and the Company dated June 1, 2005*

 10.19      Modification  Agreement  No. 2 to  Promissory  Notes  between  Allan
            Robbins and the Company dated June 1, 2005*

 14.1       Code of Ethics*

 21.1       Subsidiaries of the Registrant.*

 23.1       Consent  of  Freed  Maxick  &  Battaglia,   CPAs,  PC,   independent
            registered public accounting firm.*

 31.1       Chief Executive Officer Certification pursuant to section 302 of the
            Sarbanes-Oxley Act of 2002*

 31.2       Chief Financial Officer Certification pursuant to section 302 of the
            Sarbanes-Oxley Act of 2002*

 32.1       Chief Executive Officer Certification pursuant to section 906 of the
            Sarbanes-Oxley Act of 2002*

 32.2       Chief Financial Officer Certification pursuant to section 906 of the
            Sarbanes-Oxley Act of 2002*

-----------------------

*Filed as an exhibit hereto.

51

(1) Previously filed as an Exhibit to the Company's Registration Statement on Form S-1 (File #33-61856). This Exhibit is incorporated herein by reference.

(2) Incorporated by reference to 1993 Preliminary Proxy Statement.

(3) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994.

(4) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995.

(5) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.

(6) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal year ended December, 31, 1998.

52

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The aggregate fees billed by our principal accounting firm, Freed Maxick & Battaglia, CPAs, PC, for fees billed for fiscal years ended December 31, 2002 and 2001 are as follows:

                                       2002       2001
                                    --------- ----------
Audit fees                           $246,331   $236,658
Audit related fees                         --         --
                                    --------- ----------
Total audit and audit related fees   $246,331   $236,658
Tax fees                                1,324        230
All other fees                             --         --
                                    --------- ----------
      Total fees                     $247,655   $236,888
                                    ========= ==========

Audit-Related Fees

The Audit-Related Fees set forth in the table above consist primarily of consulting on regulatory filings and consulting and research on specific accounting issues that pertained to our on-going operations and the disposition transactions we consummated.

Tax Fees

The Tax Fees set forth in the table above are the aggregate fees paid by us for tax services including, the preparation of corporate tax returns.

All Other Fees

All Other Fees were zero for the periods presented.

Each of the permitted non-audit services has been pre-approved by the Audit Committee or the Audit Committee's Chairman pursuant to delegated authority by the Audit Committee, other than de minimus non-audit services for which the pre-approval requirements are waived in accordance with the rules and regulations of the SEC.

Audit Committee Pre-Approval Policies and Procedures

The Audit Committee charter provides that the Audit Committee will pre-approve audit services and non-audit services to be provided by our independent auditors before the accountant is engaged to render these services. The Audit Committee may consult with management in the decision-making process, but may not delegate this authority to management. The Audit Committee may delegate its authority to pre-approve services to one or more committee members, provided that the designees present the pre-approvals to the full committee at the next committee meeting.

53

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on July __, 2005 on its behalf by the undersigned, thereunto duly authorized.

Infinite Group, Inc.

By:   /s/ Michael S. Smith
     ----------------------------------
      Michael S. Smith, President

Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

/s/ Michael S. Smith
-------------------------------------
Michael S. Smith                            Chief Executive Officer, President and        July __, 2005
                                            Director


/s/ Michael S. Smith
-------------------------------------
Michael S. Smith                            Acting Chief Financial Officer                July __, 2005
                                            (principal financial and accounting officer)


/s/ Paul J. Delmore
-------------------------------------
Paul J. Delmore                             Director                                      July __, 2005


/s/ Allan M. Robbins
-------------------------------------
Allan M. Robbins                            Director                                      July __, 2005

54

CONSOLIDATED
FINANCIAL STATEMENTS

INFINITE GROUP, INC.


DECEMBER 31, 2002
with
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


INFINITE GROUP, INC.

CONTENTS


                                                                            Page

Report of Independent Registered Public Accounting Firm..............        1

Consolidated Financial Statements:

      Balance Sheets.................................................        2

      Statements of Operations.......................................        3

      Statements of Changes in Stockholders' Equity (Deficiency).....      4 - 5

      Statements of Cash Flows.......................................      6 - 7

Notes to Consolidated Financial Statements...........................     8 - 39


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Infinite Group, Inc.

We have audited the accompanying consolidated balance sheets of Infinite Group, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity (deficiency) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Infinite Group, Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Infinite Group, Inc.'s internal control over financing reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Infinite Group, Inc. as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

FREED MAXICK & BATTAGLIA, CPAs, PC

Buffalo, New York
October 31, 2003, except for Note 13, as to which the date is September 27, 2004 and Note 2 and Note 18, as to which the date is March 31, 2005

1

INFINITE GROUP, INC.

CONSOLIDATED BALANCE SHEETS


                                                                           December 31,
                                                                   ----------------------------
       ASSETS                                                          2002            2001
                                                                   ------------    ------------
Current assets:
   Cash and cash equivalents                                       $     36,459    $    130,242
   Restricted funds                                                      25,118          86,318
   Accounts receivable, net of allowance                                923,043       1,498,463
   Inventories                                                          127,792         129,824
   Other current assets                                                  42,767         112,728
   Assets of discontinued operations                                    943,683       2,566,674
                                                                   ------------    ------------
     Total current assets                                             2,098,862       4,524,249

Property and equipment, net                                           3,042,587       4,463,122

Other assets:
   Note receivable                                                       73,897              --
   Intangible assets, net                                                60,225       1,045,959
   Prepaid pension cost                                                      --         904,673
                                                                   ------------    ------------
                                                                        134,122       1,950,632
                                                                   ------------    ------------

                                                                   $  5,275,571    $ 10,938,003
                                                                   ============    ============


         LIABILITIES AND STOCKHOLDERS'                                      December 31,
                                                                   ----------------------------
         EQUITY (DEFICIENCY)                                           2002            2001
                                                                   ------------    ------------
Current liabilities:
     Notes payable:
         Bank                                                      $    428,276    $    282,206
         Stockholders/officers                                           83,906         124,906
     Accounts payable                                                 1,317,136       1,146,016
     Accrued expenses                                                   691,332         708,762
     Current maturities of long-term obligations                      2,551,295         841,878
     Current maturities of long-term obligations - stockholders              --         120,000
     Liabilities of discontinued operations                           1,400,203       2,986,904
                                                                   ------------    ------------
              Total current liabilities                               6,472,148       6,210,672

Accrued pension obligation                                            2,159,152              --

Long-term obligations                                                        --       2,586,696
                                                                   ------------    ------------
              Total liabilities                                       8,631,300       8,797,368
                                                                   ------------    ------------

Commitments and contingencies (see Notes 15 and 18)

Stockholders' equity (deficiency):
     Common stock, $.001 par value, 20,000,000 shares
      authorized; 6,314,077 (5,119,047 - 2001) shares
      issued and outstanding                                              6,314           5,119
     Additional paid-in capital                                      27,817,820      25,585,864
     Accumulated deficit                                            (28,081,158)    (23,450,348)
     Accumulated other comprehensive loss                            (3,098,705)             --
                                                                   ------------    ------------
              Total stockholders' equity (deficiency)                (3,355,729)      2,140,635
                                                                   ------------    ------------

                                                                   $  5,275,571    $ 10,938,003
                                                                   ============    ============

See notes to consolidated financial statements.

2

INFINITE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                          Years Ended
                                                                           December 31,
                                                                   --------------------------
                                                                      2002           2001
                                                                   -----------    -----------
                                                                                 (As Restated)
Sales                                                              $ 6,229,910    $ 7,312,530
Cost of goods sold                                                   4,836,867      4,816,506
                                                                   -----------    -----------
Gross profit                                                         1,393,043      2,496,024

Costs and expenses:
     General and administrative                                      3,064,198      2,353,604
     Depreciation and amortization                                     819,307        773,584
     Selling                                                           266,351        307,030
     (Gain) loss on dispositions of assets                            (107,418)        11,856
     Impairment loss on property, plant and equipment
      and intangible assets                                          1,133,649             --
     Goodwill impairment loss                                           71,185             --
     Research and development                                               --         21,132
                                                                   -----------    -----------
         Total costs and expenses                                    5,247,272      3,467,206
                                                                   -----------    -----------

Operating loss                                                      (3,854,229)      (971,182)

Other income (expense):
     Interest expense:
         Stockholders                                                  (11,768)      (128,567)
         Other                                                        (395,788)      (327,612)
     Loss on debt extinguishment                                      (169,894)            --
     Other                                                              (6,916)       (21,135)
     Interest income                                                     1,088         18,508
                                                                   -----------    -----------
      Total other expense                                             (583,278)      (458,806)
                                                                   -----------    -----------

Loss from continuing operations before
 income tax expense                                                 (4,437,507)    (1,429,988)

Income tax expense                                                      (3,097)       (14,533)
                                                                   -----------    -----------

Loss from continuing operations                                     (4,440,604)    (1,444,521)

Loss from discontinued operations, including
 $277,563 loss on disposal ($622,000 - 2001) (Note 4)                 (190,206)    (1,337,993)
                                                                   -----------    -----------

Loss before extraordinary loss                                      (4,630,810)    (2,782,514)

Extraordinary loss (Note 14)                                                --       (273,813)
                                                                   -----------    -----------

Net loss                                                           $(4,630,810)   $(3,056,327)
                                                                   ===========    ===========

Loss per share - basic and diluted:
   Continuing operations                                           $      (.74)   $      (.35)
   Loss from discontinued operations                                      (.03)          (.32)
   Extraordinary loss                                                       --           (.07)
                                                                   -----------    -----------

   Net loss                                                        $      (.77)   $      (.74)
                                                                   ===========    ===========

Weighted average number of common
   shares outstanding - basic and diluted                            5,993,573      4,132,724
                                                                   ===========    ===========

See notes to consolidated financial statements.

3

INFINITE GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years Ended December 31, 2002 and 2001


                                                      Common Stock             Additional
                                                ---------------------------     Paid-in      Accumulated
                                                    Shares        Amount        Capital        Deficit
                                                ------------   ------------   ------------   ------------
Balance - December 31, 2000                        3,635,799   $      3,636   $ 22,653,410   $(20,352,590)
Issuance of common stock in connection with
 conversion of stockholder notes payable             415,256            415        973,930             --
Issuance of common stock in connection
 with conversion of capital lease                    225,000            225        448,605             --
Issuance of common stock in connection
 with the pension plan contribution                  100,000            100        269,900             --
Issuance of common stock, from treasury,
 in connection with a draw on the equity line
 of credit, net of fees                                   --             --             --         (3,869)
Issuance of common stock, net of fees                637,974            638      1,089,616        (35,109)
Issuance of common stock in connection
 with services rendered                                3,750              4          7,496             --
Issuance of common stock in connection
 with the exercise of stock options                  101,268            101        142,907         (2,453)
Cash payment received under common stock
 subscription agreement                                   --             --             --             --
Net loss                                                  --             --             --     (3,056,327)
                                                ------------   ------------   ------------   ------------

Balance - December 31, 2001                        5,119,047   $      5,119   $ 25,585,864   $(23,450,348)

                                                                                 Common
                                                    Treasury Stock                Stock
                                               ----------------------------    Subscription
                                                  Shares          Amount        Receivable        Total
                                               ------------    ------------    ------------    ------------
Balance - December 31, 2000                         (91,936)   $   (229,840)   $   (187,500)   $  1,887,116
Issuance of common stock in connection with
 conversion of stockholder notes payable                 --              --              --         974,345
Issuance of common stock in connection
 with conversion of capital lease                        --              --              --         448,830
Issuance of common stock in connection
 with the pension plan contribution                      --              --              --         270,000
Issuance of common stock, from treasury,
 in connection with a draw on the equity line
 of credit, net of fees                              21,737          54,343              --          50,474
Issuance of common stock, net of fees                65,554         163,884              --       1,219,029
Issuance of common stock in connection
 with services rendered                                  --              --              --           7,500
Issuance of common stock in connection
 with the exercise of stock options                   4,645          11,613              --         152,168
Cash payment received under common stock
 subscription agreement                                  --              --         187,500         187,500
Net loss                                                 --              --              --      (3,056,327)
                                               ------------    ------------    ------------    ------------

Balance - December 31, 2001                              --    $         --    $         --    $  2,140,635

See notes to consolidated financial statements.

4

INFINITE GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

- CONTINUED
Years Ended December 31, 2002 and 2001


                                                                               Additional
                                                          Common Stock          Paid-in      Accumulated
                                                    Shares          Amount      Capital        Deficit
                                                ------------    ------------   ------------   ------------
Issuance of common stock, net of fees                175,000    $        175   $    249,825   $         --
Issuance of common stock in connection
 with the exercise of stock options                    3,786               4          6,128             --
Issuance of common stock as satisfaction
 of liabilities                                       24,100              24         51,309             --
Issuance of common stock in connection
 with services rendered                              543,951             544        793,894             --
Issuance of common stock in connection with
 conversion of stockholder notes payable              68,940              69        129,531             --
Issuance of common stock in connection
 with conversion of notes payable and release
 of guarantee, net of fees                           379,253             379        694,960             --
Issuance of detachable common stock warrants,
 in connection with debt financing                        --              --        103,872             --
Issuance of common stock warrants in
 connection with services rendered                        --              --         58,826             --
Issuance of common stock options in
 connection with services rendered                        --              --        143,611             --

Net loss                                                  --              --             --     (4,630,810)
Other comprehensive loss:
     Change in minimum pension obligation                 --              --             --             --

Total comprehensive loss
                                                ------------    ------------   ------------   ------------
Balance - December 31, 2002                        6,314,077    $      6,314   $ 27,817,820   $(28,081,158)
                                                ============    ============   ============   ============

                                               Accumulated
                                                  Other
                                               Comprehensive
                                                   Loss             Total
                                                ------------    ------------
Issuance of common stock, net of fees                           $    250,000
Issuance of common stock in connection
 with the exercise of stock options                                    6,132
Issuance of common stock as satisfaction
 of liabilities                                                       51,333
Issuance of common stock in connection
 with services rendered                                              794,438
Issuance of common stock in connection with
 conversion of stockholder notes payable                             129,600
Issuance of common stock in connection
 with conversion of notes payable and release
 of guarantee, net of fees                                           695,339
Issuance of detachable common stock warrants,
 in connection with debt financing                                   103,872
Issuance of common stock warrants in
 connection with services rendered                                    58,826
Issuance of common stock options in
 connection with services rendered                                   143,611

Net loss                                                          (4,630,810)
Other comprehensive loss:
     Change in minimum pension obligation         (3,098,705)     (3,098,705)
                                                                ------------
Total comprehensive loss                                          (7,729,515)
                                                ------------    ------------
Balance - December 31, 2002                     $ (3,098,705)   $ (3,355,729)
                                                ============    ============

See notes to consolidated financial statements.

5

INFINITE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                    Years Ended
                                                                                    December 31,
                                                                             --------------------------
                                                                                2002           2001
                                                                             -----------    -----------
                                                                                            (As Restated)
Operating activities:
     Net loss                                                                $(4,630,810)   $(3,056,327)
     Adjustments to reconcile net loss to net cash
      used in operating activities of continuing operations:
         Loss from discontinued operations                                       190,206      1,337,993
         Loss on long-term debt extinguishment                                   169,894             --
         Extraordinary loss                                                           --        273,813
         Depreciation and amortization                                           819,307        773,584
         Amortization of discount on note payable                                 37,073         34,044
         Expenses satisfied via issuance of debt or
          equity instruments                                                     989,382        169,459
         Loss (gain) on dispositions of assets                                  (107,418)        11,856
         Impairment loss                                                       1,204,834             --
         (Increase) decrease in assets:
              Accounts receivable                                                575,420       (684,406)
              Inventories                                                          2,032         23,510
              Other current assets                                                33,962        (38,693)
              Prepaid pension cost                                               (34,880)        91,653
         Increase in liabilities:
              Accounts payable and accrued expenses                              330,583        554,409
                                                                             -----------    -----------
     Net cash used in operating activities of
      continuing operations                                                     (420,415)      (509,105)

     Net cash provided by operating activities of
      discontinued operations                                                    584,120        110,008
                                                                             -----------    -----------

     Net cash provided by (used in) operating activities                         163,705       (399,097)

Investing activities:
     Decrease (increase) in restricted funds, net                                 61,200           (583)
     Purchase of property and equipment                                         (190,898)      (361,993)
     Proceeds from sale of property and equipment                                270,000          9,500
                                                                             -----------    -----------
     Net cash provided by (used in) investing
      activities of continuing operations                                        140,302       (353,076)

     Net cash provided by (used in) investing
      activities of discontinued operations                                    1,295,527       (413,352)
                                                                             -----------    -----------

     Net cash provided by (used in) investing activities                       1,435,829       (766,428)

See notes to consolidated financial statements.

6

INFINITE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED


                                                                   Years Ended
                                                                   December 31,
                                                           --------------------------
                                                               2002           2001
                                                           -----------    -----------
                                                                          (As Restated)
Financing activities:
     Net repayments of bank notes payable                      (64,935)      (241,551)
     Repayment of notes payable - stockholders/officers        (31,000)            --
     Proceeds from notes payable - stockholders/officers            --        260,000
     Proceeds from the issuance of convertible notes
       payable, net of costs                                 1,374,000             --
     Repayments of long-term obligations                    (1,836,697)      (269,478)
     Repayment of long-term obligations - stockholders              --        (13,245)
     Proceeds from issuances of common stock,
      net of expenses                                          256,132      1,476,535
     Cash paid for deferred financing costs                         --        (33,168)
                                                           -----------    -----------
     Net cash provided by (used in) financing
      activities of continuing operations                     (302,500)     1,179,093

     Net cash used in financing activities of
      discontinued operations                               (1,390,817)       (69,227)
                                                           -----------    -----------

     Net cash provided by (used in) financing activities    (1,693,317)     1,109,866
                                                           -----------    -----------

Net increase (decrease) in cash and cash equivalents           (93,783)       (55,659)
Cash and cash equivalents - beginning of year                  130,242        185,901
                                                           -----------    -----------

Cash and cash equivalents - end of year                    $    36,459    $   130,242
                                                           ===========    ===========

Supplemental continuing operations cash flow
 disclosures:
     Cash paid for:
         Interest                                          $   438,124    $   224,849
                                                           ===========    ===========

         Income taxes                                      $     4,048    $    11,662
                                                           ===========    ===========

See notes to consolidated financial statements.

7

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. - PRINCIPLES OF CONSOLIDATION AND BUSINESS

The accompanying consolidated financial statements include the financial statements of Infinite Group, Inc. (IGI), and each of its wholly owned subsidiaries: Infinite Photonics, Inc. (IP), Laser Fare, Inc. (LF), and LF's wholly-owned subsidiary, Mound Laser and Photonics Center, Inc. (MLPC); Osley and Whitney, Inc. (O&W) ; Express Tool, Inc. (ET); Materials and Manufacturing Technologies, Inc. (MMT); Express Pattern (EP) and MetaTek, Inc. (MT) (collectively "the Company"). The Company operated in three segments: the Laser Group (LF, MLPC, ET, MMT and MT) the Photonics Group (IP) and the Plastics Group (O&W and EP). All significant intercompany accounts and transactions have been eliminated.

The Company's continuing operations consist of its Laser Group, which provides traditional laser services, including welding, machining, drilling and engraving manufacturing services. The Plastics Group previously provided proprietary mold building and rapid prototyping services and the Photonics Group previously provided contracted research and development for government and commercial customers in applied photonics and advanced laser technologies. During the years ended December 31, 2001 and 2002, the operations of the Plastics Group and Photonics Group, respectively, were discontinued (see Note
4). Subsequent to December 31, 2002 the Company began a new business venture focusing on consulting and systems design and development and integration services in security applications (Note 2).

NOTE 2. - MANAGEMENT PLANS AND SUBSEQUENT EVENTS

Business Strategy

During fiscal 2002, the Company completed the sale of its subsidiary Express Pattern, which resulted in the infusion of $575,000 in cash that was used to repay certain O&W debt and for working capital purposes (see Note 4).

On October 30, 2002, Infinite Photonics, Inc. (included in the Photonics Group) received a Notice of Termination of its DARPA Contract. The Contract was terminated for the Government's convenience under the clause entitled Termination, Federal Acquisition Regulation (FAR) 52.249.6. The Company worked very closely with the Government throughout the settlement process. The Company presented the Terminating Contracting Officer with all costs associated with the terminated contract and has finalized a negotiated settlement. All work allowable under the Contract that has occurred as of the termination date, and all reasonable costs allowable under the settlement provisions, have been reimbursed by the Government.

On December 31, 2002, the former Chairman and CEO of the Company resigned to become the Chief Executive Officer of Laser Fare. A former outside board member assumed the positions of Chairman of the Board, President and CEO of the Company on January 6, 2003.

Because of the Government's termination of the DARPA contract, the Company's new management team decided to discontinue the Photonics segment of its business (see Note 4). Without the government funding provided by the DARPA contract, management did not believe that sufficient funds could be raised to successfully commercialize its laser diode technology in the foreseeable future. Consequently, the Company decided to restructure its business along different lines.

8

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2. - MANAGEMENT PLANS AND SUBSEQUENT EVENTS - CONTINUED

Subsequent to December 31, 2002, the Company began involvement in the field of information technology consulting and integration, concentrating on the emerging area of biometric technology as a complement to that effort. The Company's IT services include strategic staffing, program management, project management, technical engineering, software development and enterprise resource planning. The Company has entered into several Subcontract Agreements with a number of prime contractors to the Federal Government.

The Company entered into a 3-year Subcontract Agreement with a large computer equipment manufacturer pursuant to which it is engaged in a server management and service program with an establishment of the U.S. Government.

In December 2003, the Company was awarded a Federal Supply Schedule Contract by the U.S. General Services Administration ("GSA"). Having a GSA Contract allows the Company to compete for and secure prime contracts with all executive agencies of the U.S. Government as well as other national and international organizations.

In 2003, the Company entered into a License Agreement with a privately held technology company. The License Agreement gives the Company the ability to use, market and sell certain proprietary fingerprint recognition technology. The Company has completed development of an access control terminal and related software called Touch-Thru(TM) incorporating that technology. The Company intends to be in a position to market and sell that product beginning in 2005 in a variety of industries and markets, including the federal, state and local government, health care, travel and general security and access control.

As part of its restructured business plan, the Company made a decision in 2003 to eliminate certain non-core businesses. 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 CEO of the Company. LF recorded a loss on the sale of approximately $99,000 for the year ended December 31, 2003. During the year ended December 31, 2003, LF had a loss from operations of approximately $417,000, (loss of approximately $1,130,000 in 2002, which includes asset impairment provisions of approximately $742,000). 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 and recognized a loss on the disposition of approximately $224,000. The purchase price was the assumed liabilities of LF plus the issuance of several notes by the buyer to LF.

Capital Formation Strategy

On August 5, 2003, the financial institution which held the consolidated promissory obligation with O&W, that was guaranteed by IGI (See Note 7a), sold the obligation to a related third party. The sale of the consolidated promissory note is evidenced by a non-recourse assignment agreement between the financial institution and the related third party. The financial institution assigned the rights under the consolidated promissory note to the related third party. As of December 31, 2003 the Company is obligated to the related third party for principal and accrued interest in the aggregate amount of approximately $219,000. Subsequent to December 31, 2003 the terms of the note were revised and the principal is now due on January 1, 2007 with principal and accrued interest convertible at the option of the holder any time after September 1, 2005 into shares of common stock at $.05 per share.

9

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2. - MANAGEMENT PLANS AND SUBSEQUENT EVENTS - CONTINUED

At various times subsequent to December 31, 2002 and through March 31, 2005, the Company issued an aggregate of 9,620,388 shares of common stock to nine individual investors resulting in proceeds of $486,000 or an average price of $.05 per share.

At various times subsequent to December 31, 2002 and through March 31, 2005, the Company issued 1,747,500 shares of common stock as payment for notes payable and certain services performed for the Company. The fair market value of the common stock issued equaled the amount of the outstanding liabilities, which amounted to an aggregate of $87,375 or $.05 per share. In addition, the Company issued 1,500,000 common shares for employee services, which were valued at $75,000 or $.05 per share.

At various times subsequent to December 31, 2002 and through March 31, 2005, a related third party and one board member loaned the Company a total of $675,800. These loans are evidenced by unsecured promissory notes bearing interest at 6% per annum. The principal and accrued interest on all but one of these notes are due and payable on January 1, 2007 and are convertible at the option of the holder at any time after September 1, 2005 into common stock at a price of $.05 per share (one note in the principal amount of $44,000 is due on May 18, 2005 and is not convertible).

In addition, at various times subsequent to December 31, 2002, the Company issued several short-term promissory notes to another individual who is a shareholder and the former president of the Company, in the aggregate amount of $265,000, each note bearing interest at 12% per annum. The promissory notes are to be repaid with monthly payments of interest only with a lump sum payment of the principal and interest due in January 2006. These notes have no conversion provisions.

The new business strategy described above, as well as the various capital raising activities engaged in by the Company subsequent to December 31, 2002 have allowed the Company to continue operations during that period. The Company believes, but can offer no assurances, that its current operations, as restructured, coupled with its demonstrated ability to raise capital will provide sufficient working capital to fund its operations through 2005 and beyond.

2005 Stock Option Plan - In March 2005 the Board of Directors authorized and approved a 2005 stock option plan. The plan authorizes the granting of options to purchase up to 4,000,000 shares of the Company's common stock. The plan shall terminate 10 years after the effective date of the plan. The stock option plan is subject to the approval of the shareholders of the Company.

NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents - For purposes of reporting cash flows, the Company considers all highly liquid instruments purchased with original maturities of 90 days or less to be cash equivalents. Cash equivalents at December 31, 2002 and 2001 consist primarily of money market funds.

Restricted Funds - Restricted funds represent escrow funds set aside to meet scheduled payments pursuant to a capital lease financing arrangement (see Note 8). These funds are held in cash deposit and treasury trust accounts.

10

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Accounts Receivable - Credit is granted to substantially all customers throughout the United States. The Company carries its accounts receivable net of an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes the allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. The Company's policy is to not accrue interest on past due receivables. The allowance for doubtful accounts of continuing operations was approximately $38,000 and $40,000 at December 31, 2002 and 2001, respectively. As of December 31, 2001, there was an allowance for doubtful accounts receivable of $150,000 relating to assets of discontinued operations (see Note 4).

Inventories - Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories from continuing operations consist of the following:

December 31,

                    2002       2001
                  --------   --------

Raw materials     $ 54,509   $ 60,805
Work-in-process     73,283     69,019
                  --------   --------

                  $127,792   $129,824
                  ========   ========

Property and Equipment - Additions to property and equipment are recorded at cost and are depreciated over their estimated useful lives utilizing both accelerated and straight-line methods. The cost of improvements to leased properties are amortized over the shorter of the lease term or the life of the improvement. Maintenance and repairs are charged to expenses as incurred while improvements are capitalized.

Organizational and Start-up Costs - In accordance with SOP 98-5, developmental and organizational costs are expensed as incurred.

Intangible Assets - Intangible assets consist of goodwill, deferred financing costs and patents.

Deferred financing costs are amortized using the straight-line method over the terms of the related financing instruments, which range from two to fifteen years. Patents were amortized on the straight-line method over their estimated useful lives, commencing with the date of issuance.

Impairment of Goodwill and Intangible Assets - During 2002, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 142 (FASB 142), "Goodwill and Other Intangible Assets". This standard specifies, among other things, that goodwill no longer be amortized but instead is subject to an impairment test, which is to be performed at least annually. In addition intangible assets that are subject to amortization are to be reviewed for potential impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable.

11

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

At December 31, 2002, the Company determined that the carrying amount of the goodwill in the amount of $71,185 was impaired, and the amount exceeded its fair value. Therefore, the Company recorded an impairment loss of $71,185 during the year ended December 31, 2002. This loss is included in goodwill impairment loss on the consolidated statements of operations for the year ended December 31, 2002.

As a result of suspending the activity of the Photonics Group during 2002 (Note 4), the patents that IP possessed were determined to be impaired and an impairment loss of approximately $468,000 was recorded and is included in loss from discontinued operations in the accompanying consolidated statement of operations for the year ended December 31, 2002.

Various patents amounting to approximately $46,000 used in the Laser Group were also determined to be impaired during 2002 and as a result were written off. The remaining patent amounting to approximately $353,000, which was acquired in 2001, relates to a certain laser application technology, which was to be utilized in the Laser Group. This patent was also determined to be impaired during 2002 and as a result was written off. These impairment losses of approximately $399,000 are included in impairment loss on property, plant and equipment and intangible assets in the accompanying consolidated statement of operations for the year ended December 31, 2002.

Impairment of Long-Lived Assets - During 2001, the Company adopted the provisions of the Financial Accounting Standards Board issued Statement No. 144 (FASB 144), "Accounting for the Impairment or Disposal of Long-Lived Assets", which provides guidance in the accounting for impairment or disposal of long-lived assets. For long-lived assets to be held and used, the new statement required the recognition of an impairment loss when the undiscounted cash flows will not be adequate to recover the carrying amount. The computation incorporates a probability-weighted cash flow estimation approach. The Company periodically reviews the recoverability of the carrying value of its long-lived assets. In determining whether there is an impairment, the Company compares the sum of the expected future net cash flows (undiscounted and without interest charges) to the carrying amount of the asset. In addition, the Company will consider other significant events or changes in the economic and competitive environments that may indicate that the remaining estimated useful lives of its long-lived assets may warrant revision.

As a result of suspending the activity of the Photonics Group (Note 4), the Company determined that the carrying amount of the equipment relating to this Group were no longer recoverable and exceeded its fair market value. As the Company does not anticipate any future cash flows from the equipment, the Company has determined the machine to be impaired and has recorded an impairment loss in the amount of $148,000 for the year ended December 31, 2002. This amount is included in the loss from discontinued operations in the accompanying consolidated statement of operations.

The Company also determined that the carrying amount of the equipment related to the Laser Group's laser application technology was no longer recoverable and exceeded its fair market value. The Company does not anticipate any future cash flows from the machine and has been unsuccessful in finding a potential buyer for the machine. Therefore, the Company determined the machine was worthless and recorded an impairment loss for the remaining net book value of approximately $735,000 in 2002. This amount is included in impairment loss on property, plant and equipment and intangible assets in the accompanying consolidated statement of operations for the year ended December 31, 2002.

12

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Revenue Recognition - Revenues are primarily recognized after the services are performed and the units are shipped. Consulting revenues are recognized as the consulting services are provided. Customer deposits received in advance are recorded as liabilities until associated services are completed. Revenue from research contracts is recognized over the life of the contract as costs are incurred.

During the year ended December 31, 2002 sales to one customer accounted for 17% of total revenues from continuing operations and 24% of accounts receivable at December 31, 2002. Sales to a different customer, included in discontinued operations, accounted for 9% (12% - 2001) of total revenues and 10% (33% - 2001) of accounts receivable at December 31, 2002.

Advertising - The Company expenses advertising costs as incurred. Advertising expense was approximately $19,000 and $30,000 from continuing operations for the years ended December 31, 2002 and 2001, respectively.

Research and Development Costs - All costs related to internal research and development are expensed as incurred. There were no research and development costs incurred during the year ended December 31, 2002. Research and development expense from continuing operations amounted to $21,132 for the year ended December 31, 2001 and consists primarily of salaries. Research and development expenses included in discontinued operations for the year ended December 31, 2001 amounted to $73,533. Contracted research and development conducted for others is classified as cost of sales. Research and development costs that the Company has subcontracted out are recognized as cost of sales as incurred.

Income Taxes - The Company and its wholly owned subsidiaries file consolidated federal income tax returns. Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Earnings Per Share - Basic net loss per share is based upon the actual weighted average number of common shares outstanding during the periods presented. Diluted earnings per share is computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. 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. As of December 31, 2002 and 2001, all outstanding stock options, warrants and convertible obligations have not been considered common stock equivalents because their assumed exercise would be anti-dilutive.

If the Company had generated earnings during the year ended December 31, 2002, 17,002 common stock equivalent shares would have been added to the weighted averages shares outstanding (792,156 - December 31, 2001). These additional shares represent the assumed conversion of convertible debt and the assumed exercise of common stock options and warrants whose exercise price is less than the average fair value of the Company's stock during the year. The proceeds of the exercise are assumed to be used to purchase common shares for treasury and the incremental shares are added to the weighted average shares outstanding.

13

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Comprehensive Loss - The Company follows Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Loss." Comprehensive loss, as defined by Statement 130, is the change in equity of a business enterprise during a reporting period from transactions and other events and circumstances from non-owner sources. In addition to the Company's net loss, the change in equity components under comprehensive loss includes the minimum pension obligation adjustment.

Reclassifications - Certain amounts for 2001 have been reclassified to conform to the 2002 presentation.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments - The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses are reasonable estimates of their fair value due to their short maturity. Based on the borrowing rates currently available to the Company for loans similar to its term debt and notes payable, the fair value approximates its carrying amount.

Stock Based Compensation - The Company accounts for its employee stock option plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense is recognized for the excess of the fair market value of the Company's common stock over the exercise price. In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123) the Company discloses the summary of proforma effects to reported net loss and loss per share for 2002 and 2001, as if the Company had elected to recognize compensation costs based on the fair value of the options granted at grant date (see Note 11). Stock options and warrants issued to non-employees are recognized as compensation expense based on the fair value of the services received or the fair value of the equity instruments issued, whichever is more readily determinable.

NOTE 4. - DISCONTINUED OPERATIONS

Photonics - On October 30, 2002, the Company's IP subsidiary received a Notice of Termination of its DARPA contract. The contract was terminated for the Government's convenience under the clause entitled Termination, Federal Acquisition Regulation (FAR) 52.249.6. The DARPA contract had provided substantially all of the revenue of the Company's IP Subsidiary. As a result of the termination, management has decided to suspend the activities of the Photonics Group and liquidate the remaining assets. During the year ended December 31, 2002 the Company had income from operations up until the decision by management to suspend the activities of the Photonics Group of approximately $84,000. For the year ended December 31, 2001, the Photonics group sustained a loss from operations of $344,000, which is included in loss from discontinued operations on the accompanying consolidated statements of operations. During the year ended December 31, 2002, impairments of the intellectual property and property and equipment were recorded, amounting to approximately $468,000 and $148,000, respectively. These amounts are included in the loss on disposal of discontinued operations in the accompanying statement of operations.

14

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4. - DISCONTINUED OPERATIONS - CONTINUED

Plastics - On March 29, 1999, the Company acquired 100% of the common stock of O&W, a mold building Company. The aggregate consideration paid for the stock was $1.5 million ($300,000 in cash and $1,200,000 in promissory notes, See Notes 9 & 10). The O&W acquisition was accounted for under the purchase method of accounting. In April 1999 the Company formed EP, to compliment its O&W subsidiary. EP was formed to allow customers' design engineers to produce rapid prototype parts. In the fourth quarter of 2001 IGI's Board of Directors resolved to dispose of O&W and EP. The formal plan consisted of shutting down the operations of the O&W subsidiary and selling the net assets of the EP subsidiary.

Effective November 30, 2001, the Company shut down the operations of O&W and terminated all of the employees. During the year ended December 31, 2001, O&W had incurred a loss up until the decision to dispose of the Plastics Group of approximately $751,000, which is included in loss from discontinued operations on the accompanying statements of operations.

As of December 31, 2001 a loss on disposal of discontinued operations of $622,000 was recorded, representing the writedown of property, plant and equipment and inventory to their net realizable value ($472,000) and an allowance for doubtful accounts receivable ($150,000). During the first quarter of 2002, all of the inventory and equipment of O&W were sold at auction, resulting in net proceeds of approximately $416,000 and a gain of approximately $27,000. The carrying value of the O&W land and building was reduced by $151,000 as of June 30, 2002, based on the estimated net proceeds at that time. This land and building was sold at auction during the third quarter of 2002 for $650,000, resulting in an additional loss of approximately $70,000, including closing costs. The aggregate loss from these 2002 transactions was approximately $194,000 and is included in loss on disposal of discontinued operations in the accompanying consolidated statement of operations.

The proceeds from the liquidation were used to repay a portion of the remaining mortgage, term loan and demand note bank obligations, which were secured by the assets. In addition a portion ($300,000) of the proceeds from the sale of the net assets of EP were used to repay a portion of these secured obligations. These obligations were also guaranteed by IGI. As of December 31, 2001 the amounts outstanding under these bank obligations amounted to approximately $1,550,000 and were included in liabilities of discontinued operations in the accompanying balance sheet. The remaining net obligation to the secured lender after the repayments, including accrued interest and closing expenses, amounted to approximately $211,000. IGI assumed this remaining outstanding balance and reduced its intercompany receivable from O&W. The secured lender agreed to convert the balance into a 7.75% term loan due in monthly installments of approximately $7,275 based on a 30-month amortization schedule, with a balloon payment of approximately $145,000 due in October of 2003. As of December 31, 2002, approximately $197,544 remains outstanding under this note and is included in notes payable (see Note 7(a)).

In addition to the above transactions, during the year ended December 31, 2002, O&W recorded an additional reserve for uncollectable receivables and recognized additional obligations to creditors in the aggregate amount of approximately $121,000. These additional costs incurred related to the discontinued operations and are included in the loss on disposal of discontinued operations in the accompanying consolidated statement of operations.

15

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4. - DISCONTINUED OPERATIONS - CONTINUED

During the fourth quarter of 2002, the Company sold all of the issued and outstanding stock (100 shares) of O&W to an unrelated third party for $100. As part of the stock sale agreement, the Company retained the O&W pension asset and related obligation (see Note 13). As a result of the sale of stock, the Company wrote off the outstanding intercompany receivables due from O&W. The net impact on the sale and asset writedown resulted in a gain of approximately $693,000, which is included in loss on disposal of discontinued operations on the accompanying consolidated statement of operations.

On March 14, 2002, the Company sold the net assets of its EP subsidiary for $725,000, consisting of $575,000 in cash (of which $300,000 was paid to the O&W secured lender) and a five-year 8% subordinated $150,000 note, due upon maturity with quarterly interest payments. The purchasers included a former employee of EP and the Company's chief operating officer at the time of sale. The sale was negotiated at "arm's length" by disinterested management with the former employees and his financier. The gain resulting from this transaction amounted to approximately $45,000 and is included in loss on disposal of discontinued operations in the accompanying consolidated statement of operations. During the year ended December 31, 2002 EP's operations resulted in income up until the decision to dispose of the Plastics Group of approximately $3,000 ($379,000 - 2001), which is included in loss from discontinued operations in the accompanying statement of operations. During 2002, IGI offset a portion of the $150,000 note with the closing costs of the sale amounting to approximately $26,000 paid by EP in completing the deal. In addition, the Company wrote off $50,000 of the note, because this amount was originally intended to cover contingencies that did not materialize. The loss resulting from this offset and write off amounting approximately to $76,000 is included in loss on disposal of discontinued operations in the accompanying consolidated statement of operations for the year ended December 31, 2002. The interest earned on this note through December 31, 2002 in the amount of $9,633 has not been recognized, because management feels collection of the interest is doubtful at this time. The remaining balance of the note at December 31, 2002 after the offset and write-off is approximately $74,000.

In accordance with FASB 144, the disposal of the Photonics and Plastics segments have been accounted for as a disposal of business segments and accordingly, the net assets (liabilities) for IP, O&W and EP have been segregated from continuing operations in the accompanying December 31, 2002 consolidated balance sheet and classified as assets of discontinued business segments held for sale. The operating results are segregated and reported as discontinued operations in the accompanying consolidated statement of operations and cash flows. The accompanying consolidated statement of operations and cash flows for the year ended December 31, 2001 have been restated to present separately the operating and cash flow results of the Photonics discontinued segment together with the Plastics discontinued segment. The 2001 consolidated balance sheet has not been restated to segregate IP assets.

16

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4. - DISCONTINUED OPERATIONS - CONTINUED

The following is a summary of financial position and results of operations at December 31, 2002 and 2001 and for the years then ended for the disposed Photonics (IP) and Plastics (O&W and EP) segments:

                                                          December 31,
                                                   --------------------------
Financial Position                                     2002           2001
                                                   -----------    -----------

Current assets                                     $   943,683    $   580,799
Property and equipment                                      --      1,985,875
                                                   -----------    -----------

    Total assets of discontinued operations        $   943,683    $ 2,566,674
                                                   ===========    ===========

Accounts payable and accrued expenses              $ 1,395,203    $   963,646
Unsecured note payable                                   5,000             --
Secured bank obligations                                    --      1,550,038
Capital lease obligations                                   --        473,220
                                                   -----------    -----------

    Total liabilities of discontinued operations   $ 1,400,203    $ 2,986,904
                                                   ===========    ===========

                                                     Years Ended December 31,
                                                   --------------------------
Results of Operations                                  2002           2001
                                                   -----------    -----------

Revenue                                            $ 5,909,777    $ 6,668,581
                                                   ===========    ===========

Income (loss) from discontinued operations         $    87,357    $  (715,993)
Loss on disposal of discontinued operations           (277,563)      (622,000)
                                                   -----------    -----------

    Net loss from discontinued operations          $  (190,206)   $(1,337,993)
                                                   ===========    ===========

NOTE 5. - PROPERTY AND EQUIPMENT

Property and equipment and related accumulated depreciation at IP are included in the December 31, 2001 amounts below, however, amounts at December 31, 2002 are included in assets of discontinued operations (see Note 4). Property and equipment from continuing operations consists of:

                                                                                    December 31,
                                            Depreciable             -----------------------------------------
                                               Lives                     2002                     2001
                                     ---------------------------    ---------------         -----------------

Land                                         N/A                    $      100,000          $       100,000
Building and leaseholds               18      -     40 years             1,064,055                1,007,145
Machinery and equipment               5       -     10 years             5,635,662                6,487,227
Furniture and fixtures                5       -      7 years               656,541                  694,988
                                                                     -------------           --------------
                                                                         7,456,258                8,289,360
Accumulated depreciation                                                (4,413,671)              (3,826,238)
                                                                     --------------          ---------------

                                                                    $    3,042,587          $     4,463,122
                                                                     =============           ==============

17

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5. - PROPERTY AND EQUIPMENT - CONTINUED

Included above is the following property and equipment held under capital leases.

                                           December 31,
                             ------------------------------------------
                                  2002                      2001
                             ----------------          ----------------

Land                         $       100,000           $       100,000
Building and leaseholds              725,762                   725,762
Machinery and equipment              878,052                   878,052
                              --------------            --------------
                                   1,703,814                 1,703,814
Accumulated depreciation          (1,011,555)                 (917,255)
                              ---------------           ---------------

                             $       692,259           $       786,559
                              ==============            ==============

Depreciation charges for assets under capital leases are included in depreciation and amortization expense and amounted to $94,300 and $101,348 in 2002 and 2001, respectively.

During the first quarter of 2002, the Company sold all of the property and equipment of its MLPC subsidiary, including customer lists, to a third party and ceased operations of this subsidiary. The sale price of $300,000 consisted of cash of $270,000 and a $30,000 promissory note, which bears interest at 8% and was due in July 2002. The transaction resulted in a gain of approximately $137,000. During the fourth quarter of 2002, it was determined that the note receivable was not collectible. Accordingly, this asset was written off and reduced the gain for the year ended December 31, 2002 to approximately $107,000.

NOTE 6. - INTANGIBLE ASSETS

Intangible assets consists of the following:

                                         December 31,
                          -------------------------------------------
                               2002                       2001
                          ----------------          -----------------

Deferred financing costs  $       119,499           $       257,958
Patents                             -                       796,985
Goodwill                            -                       249,227
                           --------------             -------------
                                  119,499                 1,304,170
Accumulated amortization          (59,274)                 (258,211)
                           ---------------            --------------

                          $        60,225           $     1,045,959
                           ==============             =============

The approximate future amortization for the deferred financing costs for the next five years is approximately $6,400 per year.

18

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6. - INTANGIBLE ASSETS - CONTINUED

During the year ended December 31, 2002, the Company determined that certain intangibles assets were impaired and as a result the Company adjusted the carrying value of the assets accordingly. Certain deferred financing costs were impaired as a result of the Company repaying the related obligations during the year (See note 8a) and are recorded as a loss on debt extinguishment in the accompanying statement of operations. As a result of suspending the activity of IP (See note 3), the related patent technology was determined to be impaired and an impairment loss was recorded and is included in loss on discontinued operations. In addition, several patents relating to the Laser Group were determined to be impaired and as a result were written off. At December 31, 2002 the Company determined that the carrying amount of goodwill relating to LF was no longer recoverable, and the amount exceeded its fair value. Therefore, the Company recorded an impairment loss (See Note 3). The amount is recorded in goodwill impairment loss in the accompanying statement of operations.

NOTE 7. - NOTES PAYABLE

Notes payable consists of the following:

                                             December 31,
                               ---------------------------------------
                                     2002                    2001
                               ------------------     ----------------

Banks (a)                      $        428,276       $       282,206
Stockholders/officers (b)                83,906               124,906
                                ---------------         -------------

                               $        512,182       $       407,112
                                ===============         =============

(a) Bank revolving demand notes - LF maintained a line of credit with a financial institution that provided for borrowings of up to $525,000 with interest at the bank's prime rate plus .50%. During November 2001, LF refinanced the outstanding balance on the line of credit, which amounted to approximately $285,000, into a demand note. The bank demand note required monthly principal and interest payments amounting to approximately $5,800 through November 2002, at which point the remaining unpaid balance was due. This due date has been extended through November 1, 2004 with a reduction of required monthly principal and interest payments to approximately $4,000 through the extended due date. In addition, LF is required to pay a monthly principal curtailment of $5,000. The outstanding balance as of December 31, 2002 amounted to $230,732 ($282,206 - 2001) and bears interest at the bank's prime rate (4.25% at December 31, 2002) plus 3%. All the assets of LF and the guarantee of the Company secure the note.

IGI guaranteed and assumed the outstanding secured bank obligations of O&W (see Note 4). The remaining obligation with this financial institution is evidenced by a new consolidated promissory note. The new consolidated promissory note is amortized over thirty months, and will be repaid in twelve monthly installments of $7,276 plus interest at 7.75% per annum with a balloon payment of approximately $145,000 due in November 2003. The outstanding balance as of December 31, 2002 amounted to $197,544. The outstanding balances as of December 31, 2001, amounting to $211,005 is included in liabilities of discontinued operations. Subsequent to December 31, 2002 the bank sold this obligation to a related third party (see Note 2).

19

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7. - NOTES PAYABLE - CONTINUED

(b) Notes payable, stockholders/officers - During the year ended December 31, 2001, the Company issued various unsecured short-term notes payable to the president/principal stockholder amounting to $150,000 of which $100,000 was subsequently applied to the purchase of 39,526 shares of common stock of the Company (see Note 10) during 2001. During 2002, the Company repaid $26,000 of the notes. The remaining outstanding balance at December 31, 2002 amounted to $24,000 ($50,000 - 2001) and bears interest at 10%.

During the year ended December 31, 2001, the Company issued unsecured short-term notes payable to various employees/stockholders, amounting to an aggregate of $120,000 of which $50,000 was subsequently applied to the purchase of 25,486 shares of common stock of the Company (see Note 10) during 2001. During 2002 the Company repaid $5,000 of these notes. One of these notes in the amount of $10,000 is between IP and a former employee. The amount is included in notes payable for the year ended December 31, 2001 and as a result of the discontinued operations of IP (see Note 4) the amount has been appropriately recorded as liabilities of discontinued operations for the year ended December 31, 2002. The remaining outstanding balance from continuing operations of $55,000 ($70,000 - 2001) bears interest at 10%.

During the year ended December 31, 2000, the Company issued unsecured short-term notes payable to three employees/stockholders, amounting to $42,500 as consideration for unpaid compensation. During the year ended December 31, 2001, approximately $14,000 of this amount was applied to the exercise of options for 8,104 shares of common stock of the Company (see Note 10). The remaining outstanding balance of $4,906 bears interest at 8% per annum.

NOTE 8. - LONG-TERM OBLIGATIONS

Long-term obligations consists of the following:

                                                  2002                2001
                                             ----------------   -----------------
Term notes (a)                               $     2,031,295    $     2,768,574
Capital lease obligations  (b)                       520,000            660,000
                                              --------------     --------------
                                                   2,551,295          3,428,574
Less current maturities and classifications        2,551,295            841,878
                                              --------------     --------------

Total long-term obligations                  $         -        $     2,586,696
                                              ==============     ==============

(a) Term notes - A $1,250,000 bank term promissory note that requires monthly principal and interest payments amounting to approximately $13,000 through February 2011. The outstanding balance as of December 31, 2002 amounted to $877,760 ($957,882 - 2001) and bears interest at the bank's prime rate (4.25% at December 31, 2002) plus 1.0%. All the assets of LF and the guarantee of the Company secure the note. The Company was in violation of certain loan covenants as of December 31, 2002 and 2001. 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 has been classified as current as of December 31, 2002. The bank waived the violations for the year ended December 31, 2001.

20

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8. - LONG-TERM OBLIGATIONS - CONTINUED

A $1,260,000 bank term promissory note that requires monthly principal and interest payments amounting to approximately $13,000 through December 2014. The outstanding balance as of December 31, 2002 amounted to $1,116,117 ($1,178,766 - 2001) and bears interest at the bank's prime rate (4.25% at December 31, 2002) plus .75%. The Company has violated certain covenants under the term of this and other notes outstanding with the same bank. Accordingly, the entire outstanding portion of the note has been classified as current as of December 31, 2002. The bank waived the violations for the year ended December 31, 2001.

A $125,000 bank term promissory note which requires monthly principal and interest payments amounting to approximately $1,800 through July 2006. The outstanding balance as of December 31, 2001 amounted to $79,926 bearing interest at the bank's prime rate plus 1.0%. All the assets of LF and the guarantee of the Company secured the loan. The note was repaid in full during 2002.

An $828,000 note payable to the estate of a former shareholder of O&W (the Estate), due in three equal annual installments of $276,000, with interest at 8.0%, beginning in April 2000. The outstanding balance as of December 31, 2001 amounted to $552,000. On January 4, 2002, the Company entered into a securities purchase agreement (the "Agreement") with the Estate, which was amended and restated during the quarter ended June 30, 2002. In accordance with the Agreement, as revised, the Estate purchased 379,253 shares of the Company's common stock, which were paid for by the cancellation of certain indebtedness of the Company to the Estate amounting to $758,507 (the "Indebtedness"). The Indebtedness related to past due consulting fees, outstanding debt and related accrued interest owed to the Estate by the Company at December 31, 2001, and fees incurred by the Estate relating to the Agreement.

On February 5, 2002, the Company completed a $1 million debt financing with Laurus Master Fund, Ltd. The Company received $1 million in cash, less fees amounting to $89,000, in exchange for its issuance of a $1 million two-year convertible note bearing interest and fees at the annual rate of 15% payable monthly. The annual fees were subject to reduction by 1% for every $100,000 in note principal amount converted to common stock up to an aggregate 10%. The outstanding principal and interest was due in full on February 5, 2004. The note was convertible, at the option of the holder, into shares of the Company's common stock at a price of $2.00 per share. In the event of a default by the Company, the conversion price is subject to downward adjustment. The proceeds from this note were held in a secured deposit account. Withdrawals from this account were restricted to funding expenses for work under the Defense Advanced Research Projects Agency (DARPA) contract and for the growth of accounts receivable with commercial customers in the operation of the Company's IP Subsidiary. The note was secured by this restricted account, the accounts receivable under the DARPA contract, and substantially all other assets of the Company and its IP subsidiary. In connection with this transaction, detachable warrants to purchase 50,000 shares of the common stock of the Company at $2.40 per share were issued to the investor. The warrants were immediately exercisable and expire five years from the date of grant. A portion of the proceeds, amounting to approximately $53,000, was allocated to the warrants and is reflected as additional paid-in capital and as a note discount. The warrant value was determined using the Black-Scholes option-pricing model. The note discount was being amortized to interest expense over the term of the note.

21

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8. - LONG-TERM OBLIGATIONS - CONTINUED

On June 21, 2002, the Company completed an additional $500,000 debt financing with the Laurus Master Fund, Ltd. The Company received $500,000 in cash, less fees amounting to $37,000, in exchange for its issuance of a $500,000 two-year convertible note bearing interest and fees at the annual rate of 15% payable monthly. The proceeds from this note were unrestricted and were secured by substantially all other assets of the Company and its IP Subsidiary. The annual fees are subject to reduction by 1% for every $50,000 in note principal amount converted, up to an aggregate 10%. This note was convertible into shares of the Company's common stock at the option of the holder at a price of $2.00 per share. In the event of a default by the Company, the conversion price was subject to downward adjustment. In connection with this transaction, detachable warrants to purchase 25,000 shares of the common stock of the Company at $2.40 per share were issued to the investor. The warrants were immediately exercisable and expire five years from the date of grant. A portion of the proceeds of the note amounting to approximately $25,000 has been allocated to the warrants and is reflected as additional paid-in capital and as a note discount. The warrant value was determined using the Black-Scholes option-pricing model. The note discount was being amortized to interest expense over the term of the note.

During the fourth quarter of 2002, the Company's contract with DARPA was terminated, which resulted in an event of default under the Company's financing agreements with Laurus Master Fund, Ltd. Upon occurrence of this event, the $1.0 million two-year convertible note issued on February 5, 2002 and the $500,000 convertible note issued on June 21, 2002 became immediately due and payable. As a result, Laurus Master Fund, Ltd. took immediate possession of the funds held by the Photonics Group in restricted bank accounts. Approximately $1.474 million was applied as a reduction of the outstanding obligation. As of December 31, 2002, $37,418 remains outstanding and is included in the current portion of long-term obligations. Upon termination the unamortized loan closing costs and note discount in the amount of $169,894 were written off and is presented as "loss on debt extinguishment" on the accompanying statement of operations.

(b) Capital lease obligations - The Company is obligated under a capital lease for an 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 December 31, 2002 amounted to $520,000 ($660,000 - 2001). Annual payments of principal are $35,000 for fiscal 2003 and increase by $5,000 annually through June 2012. Under the terms of this credit facility, the Company is prohibited from paying dividends or making other cash distributions. According to the terms of the lease agreement, the Company is required to comply with certain covenants. Certain of these covenants were violated at December 31, 2002. Accordingly, the entire outstanding portion of this obligation has been classified as current.

22

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8. - LONG-TERM OBLIGATIONS - CONTINUED

The Company was also the lessee of certain machinery and equipment under a capital lease that expired in 2002. The outstanding balance as of December 31, 2001 amounted to $74,508. The monthly payments under this lease amount to approximately $7,200, including interest at the rate of 10.47%. The Company entered into another capital lease for certain machinery and equipment during the year ended December 31, 2001. The monthly payments under this lease amounted to approximately $8,700, including interest at 5.42% through June 2005, at which time a balloon payment of approximately $66,000 is due. The outstanding balance as of December 31, 2001 amounted to $398,712. These capital leases are included in liabilities of discontinued operations on the accompanying balance sheet at December 31, 2001. During 2002, the Company completed the sale of the net assets of this subsidiary (see Note 4).

Minimum future annual payments of long-term obligations as of December 31, 2002 are as follows:

2003                                          $     268,235
2004                                                244,084
2005                                                257,840
2006                                                267,058
2007                                                281,761
Thereafter                                        1,590,467
                                               ------------
Total minimum payments                            2,909,445
Less amount representing interest                   358,150
                                               ------------
                                                  2,551,295
Less current maturities                             223,216
Less current maturities due to violation
 of covenant                                      2,328,079
                                               ------------

Total long-term obligations                   $       -
                                               ============

NOTE 9. - LONG-TERM OBLIGATIONS - STOCKHOLDERS

Amounts consisted of convertible notes payable to former shareholders of O&W, aggregating $372,000, due in three equal annual aggregate installments of $124,000, with interest at 8.0%, beginning in April 2000. The outstanding balance as of December 31, 2001 of $120,000 along with accrued interest of $9,600 was satisfied in full during 2002. The Company had the option to pay interest by delivery of shares of the Company's common stock. The former shareholders had the option to convert 50% of the principal balance due into common stock of the Company on each payment date based on the fair value of the stock one-year preceding the payment date. During the years ended December 31, 2002 and December 31, 2001, the final portion of these notes were satisfied through the issuance of 68,940 and 85,526 shares common stock, respectively (see Note 10B).

23

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10. - STOCKHOLDERS' EQUITY (DEFICIENCY)

A. Preferred Stock

The certificate of incorporation authorizes the Board of Directors to issue up to 1,000,000 shares of Preferred Stock. The stock is issuable in series that may vary as to certain rights and preferences, as determined upon issuance, and has a par value of $.01 per share. As of December 31, 2002 and 2001, there were no preferred shares issued or outstanding.

B. Common Stock

During the year ended December 31, 2002, the following common stock transactions took place:

o The Company issued 175,000 shares of common stock to accredited investors at prices ranging from $1.00 to $2.00 per share, resulting in proceeds of $250,000.

o An employee exercised stock options resulting in the issuance of 3,786 shares of common stock. Total consideration resulting from these exercised options amounted to $6,132.

o The Company issued 24,100 shares of common stock as satisfaction of outstanding payroll related liabilities amounting to $51,333. The fair market value of the shares issued equaled the amount of the recorded liability.

o The Company entered into agreements with consultants to provide certain services to the Company. As consideration for these services, the Company issued 543,951 shares of common stock amounting to $794,438. The fair market value of the shares issued equaled the amount of the services provided.

o Stockholder notes payable in the amount of $120,000, along with accrued interest and other expenses amounting to $9,600 aggregating $129,600, were converted into 68,940 shares of the Company's common stock.

o The Company sold 379,253 shares to the "Estate" of a former stockholder of O&W which were paid for by the cancellation of certain indebtedness of the Company to the Estate amounting to $758,507 less costs of $63,168.

During the year ended December 31, 2001, the following common stock transactions took place:

o Stockholder notes payable in the amount of $180,000 and $3,508 of related accrued interest (see Note 7) were converted into 81,280 shares of common stock. The fair market value of the shares issued equaled the amount of the recorded liability.

24

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10. - STOCKHOLDERS' EQUITY (DEFICIENCY) - CONTINUED

o Stockholder term notes in the amount of $739,582 and $42,455 of related accrued interest (see Note 9), as well as accrued employee related expenses of $8,800 were converted into 333,976 shares of common stock. The fair market value of the shares issued equaled the amount of the recorded liability.

o The Company issued 225,000 shares of common stock as satisfaction for a capital lease obligation and related accrued interest, amounting to $448,830 due to the Company's president and principal stockholder (see Note 9). The fair market value of the shares issued equaled the amount of the outstanding liability.

o The Company issued 100,000 shares of its common stock at a price of $2.70 per share as a contribution to the defined benefit pension plan (see Note 13). The total fair market value of common stock contribution amounted to $270,000.

o In connection with a drawdown on the equity line of credit, (Note
10c), the Company issued 21,737 shares of common stock from treasury, resulting in proceeds of $50,474, net of expenses of $12,206.

o In private placement transactions with accredited investors, the Company entered into agreements to sell common stock at prices ranging from $1.25 to $2.25 per share, resulting in the issuance of 703,528 shares of its common stock, of which 65,554 shares were issued from treasury. Total consideration resulting from these agreements amounted to $1,219,029, net of fees of $133,371. In connection with these transactions, the Company granted warrants to the investors to purchase, in aggregate, 24,000 shares of common stock with exercise prices ranging from $3.00 to $4.00 per share. The Company also granted 49,400 warrants to the placement agents with exercise prices ranging from $3.00 to $4.00 per share. A portion of the proceeds, amounting to $51,706 and $62,414, respectively, was allocated to these warrants (see Note 10D). The Company issued 3,750 shares of common stock, valued at $7,500, to a placement agent in exchange for services provided in connection with the private placement transactions. The fair market value of the shares issued equaled the amount of the services provided.

o Various employees exercised stock options with exercise prices ranging from $1.00 to $2.50 per share, resulting in the issuance of 105,913 shares of common stock, of which, 4,645 were issued from treasury. Total consideration resulting from these exercised options amounted to $152,168. In lieu of cash payments, $14,040 related to the satisfaction of outstanding notes payable (see Note 7) and $126,094 reduced outstanding employee related expenses.

o The unpaid portion of $187,500 related to a private placement transaction in 2000, which was recorded as a stock subscription receivable, was received, at which time 93,750 shares were issued.

25

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10. - STOCKHOLDERS' EQUITY (DEFICIENCY) - CONTINUED

C. Equity Line of Credit

On November 20, 2000, the Company entered into an equity line of credit agreement with an accredited investor Cockfield Holdings Limited (Cockfield) to purchase up to 3,000,000 shares of common stock of the Company over a three-year period beginning February 9, 2001. During this three-year period, the Company could request a drawdown under the equity line of credit by selling shares of the Company's common stock to the investor. The price per share was determined using a formula based on 87.5% of the Company's closing share price 20 days immediately following the drawdown date.

During the year ended December 31, 2001, the Company drew down on the equity line of credit and issued 21,737 shares of treasury stock resulting in net proceeds of $50,474 (see Note 10B). The aggregate discount of the selling price from the market price of the Company's common stock on the date of issuance was immaterial.

On July 23, 2002, the Company and Cockfield agreed to terminate the equity line of credit agreement. As a result of the termination, the Company was released, and the Company released Cockfield, from any further obligation under the terms. Unamortized capitalized costs associated with this transaction, amounting to $67,269, were charged to expense during the year ended December 31, 2002 as a result of the termination.

In conjunction with the establishment of the equity line of credit, the Company issued warrants to this investor to purchase 200,000 shares of the Company's common stock for an exercise price of $3.135, which expire November 30, 2003. These warrants survived the termination of the agreement.

D. Warrants

In connection with the issuance of convertible debentures in 1997, the Company issued warrants to the placement agent to purchase up to an aggregate of 10,775 shares of common stock of the Company. The warrants are exercisable for a five-year term commencing February 1997 at an exercise price of $10.30 per share. When the warrants were granted, they were valued and recorded as additional paid-in capital in the accompanying balance sheet. The warrants expired during the year ended December 31, 2002.

In connection with the issuance of notes payable to the Company's president and principal stockholder during 1998, 536,000 detachable warrants were issued. These warrants are exercisable for $5.60 per share and expire during 2003. As the warrants vested, they were valued and recorded as additional paid-in capital in the accompanying balance sheet.

26

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10. - STOCKHOLDERS' EQUITY (DEFICIENCY) - CONTINUED

In connection with common stock issued to the Company's president/principal stockholder during 2000, the Company issued warrants to purchase 33,900 shares of common stock at exercise prices ranging from $1.63 to $3.42 per share. The warrants vested immediately and have a three-year term. A portion of the proceeds, amounting to $105,666 determined utilizing the Black-Scholes pricing model, was allocated to these warrants. During 2000, 25,000 of these warrants were exercised. As of December 31, 2002 and 2001, 8,900 of these warrants remain outstanding.

In connection with a private placement transaction during 2000, the Company issued warrants to various accredited investors to purchase an aggregate of 4,300 shares of common stock at an exercise price of $3.95 per share. The warrants vest immediately and have a three-year term. A portion of the proceeds, amounting to $8,514, determined utilizing the Black-Scholes pricing model, was allocated to these warrants.

In connection with a private placement transaction during 2000, the Company issued a warrant to purchase 50,000 shares of common stock. The warrant is exercisable for a four-year term commencing May 31, 2001 at an exercise price of $1.63 per share. For services rendered in connection with the financing the Company also granted the purchaser's designee a warrant to purchase 100,000 common shares at a price of $2.00 per share, exercisable for a four-year period commencing May 31, 2001. A portion of the proceeds, amounting to $66,025 and $127,779, respectively, determined utilizing the Black-Scholes pricing model, was allocated to these warrants.

In connection with the equity line of credit, discussed in Note 10C, the Company issued a warrant to purchase 200,000 shares of the Company's common stock. In addition, the Company issued, to a placement agent, a warrant to purchase 100,000 shares of common stock. Both warrants are exercisable immediately for a price of $3.135 and expire in November 2003. Both warrants survived the termination of the equity line of credit.

In connection with the private placement transactions during 2001 (see Note 10B), the Company issued warrants to various accredited investors to purchase 24,000 shares of common stock at exercise prices ranging from $3.00 to $4.00. The warrants vested immediately and have a three-year term. A portion of the proceeds, amounting to $51,706, determined utilizing the Black-Scholes pricing model, was allocated to these warrants.

In addition, in connection with the private placement transactions during 2001 (see Note 10B), the Company issued warrants to various placement agents to purchase 49,400 warrants at exercise prices ranging from $3.00 to $4.00. The warrants vested immediately and have a three year term. A portion of the proceeds, amounting to $62,414, determined utilizing the Black-Scholes pricing model, was allocated to these warrants.

27

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10. - STOCKHOLDERS' EQUITY (DEFICIENCY) - CONTINUED

In connection with the debt financing during 2002 (see Note 8), the Company issued detachable warrants to Laurus Master Fund, Ltd. to purchase 75,000 shares of the Company's common stock at $2.40 per share. The warrants were immediately exercisable and expire five years from the date of grant. The warrant value amounting to $103,872 was determined using the Black-Scholes option pricing model.

During 2002, the Company granted common stock warrants to purchase 200,000 shares of the Company's common stock as satisfaction of outstanding liabilities arising from consulting services amounting to $58,826. The warrants are exercisable at $3.00 per share, vested immediately and expire three years from the date of grant.

Following is the weighted average assumptions used in the Black-Scholes pricing model for warrants granted during the years ended December 31, 2002 and 2001.

                                                         2002                   2001
                                                         ----                   ----
                    Expected dividend yield                0%                      0%
                    Expected stock price volatility      100%                    100%
                    Risk-free interest rate             5.40%                   3.80%
                    Expected life of warrants           5.00 years              3.00 years


         The  following  is a summary of the warrant  activity  for the past two
years:

                                                          Number                   Weighted
                                                        of Warrants                 Average
                                                        Outstanding             Exercise Price
                                                        -----------             --------------
                   Outstanding at December 31, 2000         1,009,975              $   4.34
                        Granted                                73,400              $   3.41
                                                       --------------
                   Outstanding at December 31, 2001         1,083,375              $   4.28
                        Granted                               275,000              $   2.84
                        Expired                               (10,775)             $  10.30
                                                       ---------------

                   Outstanding at December 31, 2002         1,347,600              $   3.93
                                                       ==============

All warrants are exercisable as of December 31, 2002 and 2001.

28

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10. - STOCKHOLDERS' EQUITY (DEFICIENCY) - CONTINUED

Warrants outstanding at December 31, 2002 are made up of the following:

                                                  Weighted
                        Number of                  Average
                        Warrants               Exercise Price
                        --------               --------------

$3.00 and Less               225,000              $   2.05
                                                   =======
$3.01 - $5.00                586,600              $   3.13
                                                   =======
Greater than $5.00           536,000              $   5.60
                      --------------               =======

     Total                 1,347,600              $   3.93
                      ==============               =======

NOTE 11. - STOCK OPTION PLANS

The Company's Board of Directors has approved stock option plans adopted in 1993, 1994, 1995, 1996, 1997, 1998 and 1999 authorizing the granting of options to purchase up to an aggregate of 2,340,000 shares. Such options may be designated at the time of grant as either incentive stock options or nonqualified stock options. As of December 31, 2002, options to purchase 1,657,647 shares remain un-issued under these plans.

A. Employee Stock Option Plans

The Company grants stock options to its key employees, as it deems appropriate. In addition, the Company previously followed an All Employee Incentive Stock Option Plan whereby all full-time employees of the Company who met certain eligibility requirements were granted stock options from the above plans. Subsequent to January 2, 1999, the Company discontinued grants under this plan. The options are only exercisable as long as the optionee continues to be an employee of the Company.

The following is a summary of stock option activity for individuals classified as employees for the past two years:

                                                              Number                   Weighted
                                                             of Shares                  Average
                                                           Under Option             Exercise Price
                                                           ------------             --------------
Outstanding at December 31, 2000                               880,264                     1.76
     Granted                                                   175,000                     2.02
     Exercised                                                (105,913)                    1.41
     Expired                                                   (12,814)                    2.50
                                                           ------------
Outstanding at December 31, 2001                               936,537                     1.84
     Granted                                                   540,000                     1.62
     Exercised                                                  (3,786)                    1.62
     Converted to nonqualified stock options
      (see Note 11B)                                          (591,619)                    2.03
     Expired                                                  (580,551)                    1.55
                                                           ------------
Outstanding at December 31, 2002                               300,581                     1.64
                                                           ===========

Exercisable at December 31, 2002                               160,997                     1.87
                                                           ===========

29

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11. - STOCK OPTION PLANS - CONTINUED

The average fair value of options granted was $1.21 and $1.58 per share for the years ended December 31, 2002 and 2001, respectively. The exercise price for all options granted equaled or exceeded the market value of the Company's common stock on the date of grant.

Options outstanding at December 31, 2002 are made up of the following:

                                            Options Outstanding                    Options Exercisable
                                --------------------------------------------   --------------------------
                                                  Weighted
                                                   Average
                                                  Remaining      Weighted                       Weighted
                                   Number        Contractal      Average         Number          Average
                                     of           Life in        Exercise         of            Exercise
                                  Options          Years          Price         Options          Price
                                --------------  -------------   ------------   ----------   -------------
$1.50 and Less                      240,719           3.42        $  1.45         101,135      $    1.50
                                                   =======         ======                       ========
$1.51 - $2.50                        56,194           4.94        $  2.48          56,194      $    2.12
                                                   =======         ======                       ========
Greater than $2.50                    3,668            .85        $  5.50           3,668      $    5.50
                                 ----------        =======         ======      ----------       ========

    Total                           300,581           3.67                        160,997
                                 ==========        =======                     ==========

B. Nonqualified Stock Option

In connection with services performed for the Company during 2000, 65,000 options to purchase shares of common stock at a price of $1.50 were granted. The options were immediately exercisable and expire on December 31, 2009. The fair value assigned to these options, determined utilizing the Black-Scholes pricing model, amounted to approximately $47,000 and has been reflected as additional paid-in capital in the accompanying balance sheet.

During the year ended December 31, 2002 an employee changed his employment status and became an outside consultant for the Company. As part of his compensation the Company allowed the employee to maintain 591,619 employee stock options previously granted to him during his employment with the Company and scheduled to expire after termination as an employee. As a result of the change in employment status and the modification to the original option terms the options were considered modified and are required to be accounted for as new options issued to a consultant. As a result the Company valued the options utilizing the Black-Scholes option pricing method, aggregating approximately $504,000. This amount was being recognized as compensation expense over the remaining vesting term of the options. The expense relating to these options for 2002 amounted to approximately $144,000. During the fourth quarter of 2002 the consultant discontinued providing services and as a result the Company will no longer recognize compensation costs, because the consultant forfeited all non vested options.

30

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11. - STOCK OPTION PLANS - CONTINUED

C. Directors' Stock Option Plan

In April 1993, the Board of Directors and stockholders of the Company adopted a non-discretionary outside directors' stock option plan that provides for the grant to non-employee directors of non-qualified stock options to purchase up to 50,000 shares of common stock. Under this plan, each non-employee director is granted 7,500 options upon becoming a director and 5,000 each year thereafter. In 2002, there were 10,000 options granted (10,000 - 2001) and none forfeited (15,500 - 2001). At December 31, 2002, there were 44,500 (34,500 - 2001) options outstanding to directors under this plan, of which 34,502 options were exercisable (23,667
- 2001). These options are exercisable at prices ranging from $.14 to $9.40 per share. The options vest over a two-year service period. The options expire at various dates from 2005 to 2012.

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 cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net loss and loss per share from continuing operations would have increased as follows:

                                                                     2002                   2001
                                                                ---------------        ---------------
Net loss - as reported (000's)                                  $      4,630           $     3,056
Total stock based employee compensation
 expense determined under the fair value
 method for all awards (000's)                                           454                   347
                                                                  ----------             ---------

Net loss - pro forma (000's)                                    $      5,084           $     3,403
                                                                  ==========             =========

Loss per share as reported                                      $       .77            $       .74
                                                                  =========              =========
Loss per share pro forma                                        $       .85            $       .82
                                                                  =========              =========

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions:

                                                                   2002                  2001
                                                             ------------------    -----------------
Expected dividend yield                                              0%                    0%
Expected stock price volatility                                    100%                  100%
Risk-free interest rate                                              4%                    4%
Expected life of options                                        5.09 years               5.27 years

31

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12. - INCOME TAXES

At December 31, 2002, the Company had federal net operating loss carryforwards of approximately $26,600,000 and state net operating loss carryforwards of approximately $15,200,000, which expire from 2009 through 2022. Due to a greater than 50% change in stock ownership of certain subsidiaries, the utilization of net operating loss carryforwards generated to the date of such change may be limited.

At December 31, 2002, a net deferred tax asset, representing the future benefit attributed primarily to the available net operating loss carryforwards, in the amount of approximately $11,073,000, had been fully offset by a valuation allowance because management believes that the regulatory limitations on utilization of the operating losses and concerns over achieving profitable operations diminish the Company's ability to demonstrate that it is more likely than not that these future benefits will be realized before they expire.

The following is a summary of the Company's temporary differences and carryforwards which give rise to deferred tax assets and liabilities:

                                              2002            2001
                                         ------------    ------------
Deferred tax assets:
     Net operating loss and tax credit
      carryforwards                      $ 10,122,000    $  6,950,000
                                         ============    ============
     Defined benefit pension liability        928,000              --
     Reserves and other                       460,000         402,000
                                         ------------    ------------
         Gross deferred tax asset          11,510,000       7,352,000

Deferred tax liabilities:
     Property and equipment                  (437,000)       (550,000)
     Defined benefit pension asset                 --        (362,000)
                                         ------------    ------------
         Gross deferred tax liability        (437,000)       (912,000)
                                         ------------    ------------

Net deferred tax asset                     11,073,000       6,440,000
Deferred tax asset valuation allowance    (11,073,000)     (6,440,000)
                                         ------------    ------------

Net deferred tax asset                   $         --    $         --
                                         ============    ============

The Statutory U.S. Federal rate is 34% for the year ended December 31, 2002 and 2001. The effective income tax rate is (.07%) for the year ended December 31, 2002 and (1%) for the year ended December 31, 2001. The primary difference between the U.S. Statutory Federal income tax rate and the effective income tax rate is the tax impact of the valuation allowance.

NOTE 13. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS

Profit Sharing Plans - LF has a qualified salary reduction profit sharing 401(k) plan for eligible employees. Participants may defer up to 20% of their compensation each year up to the dollar limit set by the Internal Revenue Code. LF's contribution to the profit-sharing plan is discretionary. During 2002, a $25,826 ($27,836 - 2001) contribution was made to the profit-sharing plan.

32

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS - CONTINUED

Defined Benefit Plan - The Company has a contributory defined benefit pension plan that covered all salaried and hourly employees at O&W that were scheduled to work at least 1,000 hours per year. During the year ended December 31, 2001 the Company discontinued the operations of O&W (see Note 4) but retained the obligation to fund the plan into the future. The termination of the employees' services earlier than expected resulted in a plan curtailment, accounted for in accordance with Statement of Financial Standards Statement 88 in 2001. No future benefits will be earned by plan participants. However, the plan will remain in existence and continue to pay benefits as participants qualify, invest assets and receive contributions. The Company's policy is to fund pension costs accrued. Net periodic pension expense includes the following components.

                                        2002         2001
                                     ---------    ---------
Interest cost                        $ 340,188    $ 359,922
Expected return on plan assets        (398,318)    (526,588)
Actuarial loss                          23,250       11,933
Service cost                                --      246,386
                                     ---------    ---------

    Total pension expense (income)   $ (34,880)   $  91,653
                                     =========    =========

The following sets forth the funded status of the plan and the amounts shown in the accompanying balance sheets:

                                                   2002           2001
                                               -----------    -----------

Projected benefit obligation:
    Benefit obligation at beginning of year    $ 4,968,422    $ 5,336,583
    Service cost                                        --        246,386
    Interest cost                                  340,188        359,922
    Plan participants' contributions                    --        142,767
    Actuarial loss (gain)                          988,024        (37,077)
    Curtailment                                         --       (774,183)
    Benefits paid                                 (822,226)      (255,147)
    Expenses paid                                       --        (50,829)
                                               -----------    -----------

    Benefit obligation at end of year            5,474,408      4,968,422

Plan assets at fair value:
    Fair value of plan assets at
     beginning of year                           5,019,929      5,305,009
    Actual return of plan assets                  (882,447)      (391,871)
    Employer contributions                              --        270,000
    Plan participants' contributions                    --        142,767
    Benefits paid                                 (822,226)      (255,147)
    Expenses paid                                       --        (50,829)
                                               -----------    -----------

    Fair value of plan assets at end of year     3,315,256      5,019,929
                                               -----------    -----------

Funded status                                   (2,159,152)        51,507
Unrecognized actuarial loss                     (3,098,705)       853,166
                                               -----------    -----------
                                                (5,257,857)       904,673

Adjustment required to recognize minimum
 pension liability                               3,098,705             --
                                               -----------    -----------

Prepaid (accrued) pension cost                 $(2,159,152)   $   904,673
                                               ===========    ===========

33

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13. - EMPLOYEE PENSION AND PROFIT-SHARING PLANS - CONTINUED

The major actuarial assumptions used in the calculation of the pension obligation were as follows:

                                           2002              2001
                                     ---------------   --------------
Discount rate                                  7.0%             7.0%
Expected return on plan assets                 8.5%            10.0%
Rate of increase in compensation               N/A             N/A

NOTE 14. - EXTRAORDINARY LOSS

In December 2001, the outstanding balance of the ten-year promissory note, payable to the president/principal stockholder was applied to the purchase of common stock of the Company (see Note 10). As a result, the unamortized deferred financing costs and note discount relating to the detachable warrants issued with the debt were written off in 2001. The aggregate amount of $273,813 is considered a loss on early extinguishment of debt and is classified as an extraordinary item in the accompanying consolidated statement of operations.

NOTE 15. - COMMITMENTS

A. Lease Commitments

The Company utilizes certain equipment, vehicles and facilities under operating leases that expire at various dates through 2005. Rent expense under operating leases for the years ended December 31, 2002 and 2001, was approximately $272,000 and $319,000, respectively.

Following is the approximate future minimum payments required under these leases:

2003                    $        198,000
2004                             177,000
2005                             147,000
                          --------------
                        $        522,000

34

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15. - COMMITMENTS - CONTINUED

B. Employment Contracts

The Company was obligated under various employment agreements with certain officers and other employees that expire at various times from 2002 through 2003. The agreements provide for minimum aggregate annual salaries of approximately $900,000. Certain agreements also provided for, among other things, incentive compensation if certain performance measures were met, and for severance payments. For the years ended December 31, 2002 and 2001 no incentive compensation was earned.

In 2003, LF entered into an employment agreement with its Chairman and Chief Executive Officer. The agreement provides for base compensation of $150,000 for a five-year term as well as, among other things, incentive compensation, termination benefits in the event of death, disability and termination for other than cause and covenants against competition.

In 2003, the Company entered into employment agreements with three of its officers. The agreements provide for aggregate base compensation of $450,000 for a five-year term. In addition, the agreements provide for the issuance of an aggregate of 1,500,000 shares of common stock of the Company with a value of $75,000 and an aggregate of 1,500,000 stock options. The agreements provide for, among other things, incentive compensation, termination benefits in the event of death, disability and termination for other than cause and covenants against competition.

35

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16. - SUPPLEMENTAL CASH FLOW INFORMATION

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

                                                                           2002             2001
                                                                     --------------   --------------
Conversion of long-term obligation and related
 accrued interest and fees to common stock, net
 of capitalized costs written off (see Note 8a)                      $      695,339   $           --
                                                                     ==============   ==============

Notes receivable issued in connection with
 the sale of assets (see Note 4)                                     $      150,000   $           --
                                                                     ==============   ==============

Conversion of long-term obligations
 - stockholders and related accrued
 interest to common stock (see Note 9)                               $      129,600   $           --
                                                                     ==============   ==============

Value of detachable common stock
 warrants issued with long-term obligations
 (see Note 8a)                                                       $      103,872   $           --
                                                                     ==============   ==============

Common stock warrants issued as
 satisfaction of accounts payable                                    $       51,333   $           --
                                                                     ==============   ==============

Satisfaction of obligations to  stockholders  and related  accrued
 interest  in lieu of cash  payments  as  consideration  for stock
 issued (see Notes 7b, 9 and 10b)                                    $           --   $    1,393,852
                                                                     ==============   ==============

Intellectual property received in exchange for
 preferred stock investment and satisfaction
 of accounts receivable (see Note 3)                                 $           --   $      353,512
                                                                     ==============   ==============

Contribution of common stock to pension
 plan to satisfy obligation (see Note 13)                            $           --   $      270,000
                                                                     ==============   ==============

Acquisition of equipment in exchange
 for services rendered                                               $           --   $      239,476
                                                                     ==============   ==============

Advance - stockholder satisfied in lieu
 of cash payment as consideration for
 long-term obligation - stockholder                                  $           --   $       50,249
                                                                     ==============   ==============

Common stock, stock options and
 warrants issued for services provided                               $           --   $        7,500
                                                                     ==============   ==============

36

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 17. - BUSINESS SEGMENTS

The Company's businesses 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, 2002, the Company decided to discontinue the operation of its Photonics Group and liquidate its remaining assets as a result of its major customer canceling their contract. During the year ended December 31, 2001 the Company approved of a plan to discontinue the operations of the Plastics Group (see Note 4). Currently, the Company's businesses are organized, managed and internally reported as one segment, the Laser 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 intersegment 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 2002 and 2001 is set forth as follows:

37

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 17. - BUSINESS SEGMENTS - CONTINUED

                                                Laser       Photonics        Plastics    Unallocated
           2002                                 Group         Group           Group       Corporate     Eliminations   Consolidated
                                            ------------   ------------   ---------- -   ------------   ------------   ------------
Sales to unaffiliated customers             $  6,229,910   $         --   $         --   $         --   $         --   $  6,229,910
                                            ============   ============   ============   ============   ============   ============
Operating loss                              $  2,111,039   $         --   $         --   $  1,743,190   $         --   $  3,854,229
                                            ============   ============   ============   ============   ============   ============
Loss (gain) from discontinued operations,
  including corporate overhead allocation   $         --   $    856,219   $     31,310   $   (697,323)  $         --   $    190,206
                                            ============   ============   ============   ============   ============   ============
Interest income                             $      1,088   $         --   $         --   $         --   $         --   $      1,088
                                            ============   ============   ============   ============   ============   ============
Interest expense                            $    208,962   $         --   $         --   $    198,594   $         --   $    407,556
                                            ============   ============   ============   ============   ============   ============
Identifiable assets                         $  4,234,559   $    943,683   $         --   $     97,329   $         --   $  5,275,571
                                            ============   ============   ============   ============   ============   ============
Depreciation and amortization               $    689,882   $         --   $         --   $    129,425   $         --   $    819,307
                                            ============   ============   ============   ============   ============   ============
Capital expenditures                        $    190,898   $         --   $         --   $         --   $         --   $    190,898
                                            ============   ============   ============   ============   ============   ============
Capital expenditures of discontinued
  segment                                   $         --   $    149,604   $         --   $         --   $         --   $    149,604
                                            ============   ============   ============   ============   ============   ============


           2001
Sales to unaffiliated customers             $  7,312,530   $         --   $         --   $         --   $         --   $  7,312,530
Intersegment sales                               188,235             --             --             --       (188,235)            --
                                            ------------   ------------   ------------   ------------   ------------   ------------
    Total revenue                           $  7,500,765   $         --   $         --   $         --   $   (188,235)  $  7,312,530
                                            ============   ============   ============   ============   ============   ============
Operating loss                              $    140,905   $         --   $         --   $    833,296   $     (3,019)  $    971,182
                                            ============   ============   ============   ============   ============   ============
Loss from discontinued operations,
 including corporate overhead allocation    $         --   $    343,938   $  1,774,085   $   (749,197)  $    (30,833)  $  1,337,993
                                            ============   ============   ============   ============   ============   ============
Interest income                             $      3,397   $         --   $         --   $     48,963   $    (33,852)  $     18,508
                                            ============   ============   ============   ============   ============   ============
Interest expense                            $    282,940   $         --   $         --   $    173,239   $         --   $    456,179
                                            ============   ============   ============   ============   ============   ============
Extraordinary loss                          $         --   $         --   $         --   $   (273,813)  $         --   $   (273,813)
                                            ============   ============   ============   ============   ============   ============
Identifiable assets                         $  6,371,894   $    452,211   $  2,566,942   $  1,546,956   $         --   $ 10,938,003
                                            ============   ============   ============   ============   ============   ============
Depreciation and amortization               $    710,650   $         --   $         --   $     62,934   $         --   $    773,584
                                            ============   ============   ============   ============   ============   ============
Capital expenditures                        $    361,993   $         --   $         --   $         --   $         --   $    361,993
                                            ============   ============   ============   ============   ============   ============
Capital expenditures of discontinued
  segment                                   $         --   $     29,456   $    430,224   $         --   $         --   $    459,680
                                            ============   ============   ============   ============   ============   ============

38

INFINITE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18. - LITIGATION

The Company is a 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, the Company asserts 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. The Company alleges that in entering into the transaction it relied on various representations made by Spectra and Mr. Lawandy, which were untrue at the time they were made. In the action, The Company seeks 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, and the jury returned a verdict in favor of the Company in the amount of approximately $600,000. The Company has not recorded the award in its financial statements due to the uncertainty associated with the collection of the judgment.

The Company is the respondent in an arbitration proceeding filed on December 10, 2002 captioned J. Terrence Feeley v. Infinite Group, Inc. The Claimant, a former employee of the Company and former member of the Company's 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 the Company has failed to make such cash payments and has breached the agreement and seeks all monies owed to him, said amount being approximately $130,000. The Company answered the claim by admitting that a letter agreement was entered into but denied all of the remaining allegations.

The Company also filed a counterclaim in the arbitration proceeding. The Company filed a related claim against the respondent in the Superior Court, State of Rhode Island on September 5, 2003. The Company claims that the defendant breached certain provisions of his employment agreement, breached fiduciary duties he owed to the Company and violated several provisions of the June 27, 2002 letter agreement. The Company seeks compensatory damages in amounts to be shown at trial, and preliminary and permanent injunctive relief and other relief as may be appropriate. As of December 31, 2003, the Company has recorded the amount under the original agreement less payments made to date as a liability until they are legally released from obligation.

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 Superior Court, State of Rhode Island. 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.

The Company and Infinite Photonics, Inc. ("IPI") are defendants in two essentially identical lawsuits filed on June 24, 2004 in the Superior Court, State of Rhode Island captioned Donald Steinman v. Infinite Photonics and Infinite Group, Inc. and Thomas McDonald v. Infinite Photonics and Infinite Group, Inc. The plaintiffs are former employees of IPI who are claiming one year's severance pay and benefits as a result of the termination of their employment with IPI following the termination of the DARPA contract (see Note
4). IPI has recorded a liability for the full amount of the claim of $264,398. The Company is sued under an alter-ego theory. Defendants have answered the complaints and have moved to dismiss. The parties have settled the claims and the cases have been dismissed. All payments were reimbursed by DARPA in connection with the contract termination process.

39

June 27, 2002

Mr. J. Terence Feeley 40 Charlotte Avenue

Saunderstown, Rhode Island 02864

Dear Terry:

This letter will acknowledge that you have requested that the Board of Directors of Infinite Group, Inc. (the "Company") agree to the early termination of your employment agreement with the Company dated July 1, 1999 (the "Employment Agreement") in connection with your desire to retire and that you be retained by the Company as a consultant in connection with its business. The Board of Directors of the Company hereby agrees to acknowledge your retirement request and to retain you as a consultant in consideration of your obligations hereunder and in exchange for your execution of the Release annexed hereto as Exhibit A (the "Release"), on the following terms and conditions.

1. The Employment Agreement is hereby terminated and of no further force or effect.

2. You hereby resign from all offices which you may hold with the Company.

3. You hereby resign as a director of the Company.

4. You hereby resign as an officer and director of each subsidiary of the Company.

5. The Company hereby retains you as a Special Consultant to its President and Board of Directors and you agree to provide consulting services to the Company during the period commencing on the date hereof and terminating on June 30, 2004 (the "Consulting Period"). In performing such services, you will report to the President and Chief Executive Officer and/or Chairman of the Board of the Company. Such services shall be consistent with the services which you have previously provided to the Company and shall include providing the President and Chief Executive Officer and/or Chairman with analysis and advice with respect to those matters for which you previously had responsibility. During the Consulting Period you shall provide such services at times and locations mutually acceptable to you and the Company.

During the Consulting Period, the Company shall compensate you as follows:


(a) you shall receive a semi-monthly payment commencing on June 1, 2002 and terminating on May 15, 2003 in the amount of $5,700.00. These payments will be made to you in your capacity as an independent consultant (and not an employee) to the Company and will not reflect any tax or FICA withholding;

(b) the Company shall provide you with group health benefits through June 30, 2003 covering you and your family, on such terms as they are generally made available to executive officers of the Company during such period;

(c) the Company shall reimburse you for all pre-approved expenses reasonably incurred by you in connection with your performance of consulting services hereunder.

6. (a) The Company hereby acknowledges that it currently owes Donna Feeley, your wife, the sum of $10,000. The Company hereby agrees to repay this amount to her in two equal installments with interest at the rate of 10% per annum on or before July 15, 2002, and December 31, 2002, respectively. This amount represents all amounts, absolute or contingent, owed by the Company to Donna Feeley.

(b) The Company hereby acknowledges that there are no loans currently outstanding from the Company to you.

7. The Company hereby acknowledges that you have been granted options to purchase shares of Company Common Stock under the Company's Stock Option Plans. The Company covenants and agrees that you shall have ninety (90) days from the end of the Consulting Period (until September 30, 2004, except as otherwise provided for herein) to exercise your options with respect to these shares. All such options shall, as a matter of law, be deemed non-qualified stock options and, upon exercise, shall be subject to applicable tax withholding obligations.

8. The Company and you acknowledge that there is presently a bona fide dispute with respect to whether you entered into a contract on the Company's behalf with the University of Rhode Island ("URI") with respect to a certain Optimec Laser Engineered Net Shape machine known as an Optimec 750. URI contends that you entered into a contract with it on the Company's behalf and you have contended that no such contract exists. In the event that the Company does not receive documentation from URI on or before December 1, 2002, confirming that no contract exists and/or that the Company has no liability to URI, then, in such event, upon notice to you, the Company may terminate the Consulting Period and its related obligations to you hereunder.

9. (a) In consideration of the Company's execution of this Agreement, you hereby agree with the Company that during the period commencing on the date hereof and terminating on June 30, 2005, you will not (1) solicit proxies with respect to any voting securities of the Company in opposition to the slate of directors proposed by the board of directors of the Company; (ii) become a


"participant" in any "election contest" relating to the election of directors of the Company (as such terms are used in Rule 14(a)11 of Regulation 14A under the Securities Act of 1934); or (iii) lend your support to or authorize your name to be used in connection with any "election contest" (whether or not the lending of your support or the use of your name would cause you to be a "participant"). In addition, during the period commencing on the date hereof and terminating on June 30, 2005, you will not disparage or denigrate in any manner the Company, any or its subsidiaries or affiliates, or any of its or their respective officers or directors.

(b) In consideration of the Company's execution of this Agreement, you hereby agree that in connection with the sale by you or any of your affiliates of shares of Company Common Stock, now owned or hereafter acquired ("Shares"), except as otherwise agreed to in writing by the Company, (i) the maximum number of Shares which may be sold on the NASDAQ Small Cap Market or a subsequent market or exchange on which the shares are listed and/or traded (the "NSCM") on any day shall be equal to twenty percent (20%) of the average of the number of shares of Common Stock traded on the NSCM for the seven trading days preceding such sale.

10. You hereby acknowledge and agree that your breach of any provision contained in paragraph 9 hereof would cause irreparable damage to the Company which would not be measurable; and that the Company's remedy at law for any such breach would be inadequate and the Company shall be entitled, in addition to any other remedy available to the Company, to temporary or permanent injunctive relief to enjoin any actual or threatened breach of such provision.

11. In consideration of your execution of this Agreement, the Company hereby agrees with you that during the period commencing on the date hereof and terminating on June 30, 2005, the Company will not disparage or denigrate you in any manner.

12. The Company hereby acknowledges and agrees that its breach of the provisions contained in paragraph 10 hereof would cause irreparable damage to you which would not be measurable; and that your remedy at law for any such breach would be inadequate and you shall be entitled, in addition to any other remedy available to you, to temporary or permanent injunctive relief to enjoin any actual or threatened breach of such provision.

13. It is specifically acknowledged and agreed to by the Company and you that the restrictions contained in the last sentence of Paragraph 9(a) and in Paragraph 11 shall not restrict either party from testifying truthfully or providing information if compelled to do so by applicable law.

14. Reference is made to Sections 12 and 14 of the Employment Agreement wherein you have undertaken certain agreements and covenants with the Company with respect to non-competition and confidential information. You hereby agree that these provisions are fully incorporated herein by reference and shall survive the termination of the Employment Agreement and shall be in full force and effect. You further agree that the applicable period of your covenant not to compete shall run from the date hereof through June 30, 2004.


15. Notwithstanding anything to the contrary contained in the Release, the Company shall indemnify you with respect to any third party claim arising out of, or related to, your service as an officer, director or employee of the Company or any of its subsidiaries to the same extent and on the same terms and conditions as shall apply from time to time to the Company's then current officers, directors or employees under the Company's generally applicable policies regarding indemnification.

16. All cash payments to be made hereunder shall be net of all applicable income and employment taxes required to be withheld therefrom.

17. If any disputes, claims or controversies should arise between the parties, the parties shall make a good faith attempt to resolve such issues on an informal basis between themselves. Should such efforts fail, however, any and all disputes, claims or controversies that may arise between the parties, their employees or agents, relating to this Agreement or relating to or arising out of the employment relationship or the termination of the employment relationship, or where either party attempts to hold the other party, its employees or agents liable, shall be submitted to arbitration. This includes, but is not limited to, claims under the Age Discrimination in employment Act, Title VII of the Civil Rights Act, the Americans with Disabilities Act, Sections 1981 through 1988 of Title 42 of the United States Code, the Rhode Island laws against discrimination, the Conscientious Employee Protection Act, federal and state Family and Medical Leave laws, federal and state Equal Pay laws, defamation, as well as any other federal, state or local law, ordinance or regulation, or based on any public policy, contract, tort or common law or any claim for costs, fees or other expenses including attorneys fees. Specifically excluded from any agreement to or requirement to arbitrate are any claims by the Company that you have violated Sections 9 or 14 of this Agreement or any claims by you that the Company has violated Section 11 of this Agreement.

The parties agree that such arbitration shall be their sole and exclusive remedy. The parties understand that other options such as federal and state and judicial remedies exist and that regardless of the nature of the dispute or claim, the parties agree to resolve such dispute or claim only by arbitration and are waiving their rights to obtain any legal or equitable relief from a court or agency.

The arbitration shall be pursuant to the Federal Arbitration Act and shall be arbitrated by a single arbitrator in accordance with the rules for employment disputes of the American Arbitration Association. The arbitrator shall have the authority to award any type of legal or equitable relief that would be available in a court of competent jurisdiction to the extent such relief is available under law. The fees pertaining to the arbitration, including the AAA's administrative fees and the arbitrator's fee shall be split between the parties, subject to reallocation by the arbitrator in the award.

The parties agree that any arbitration claim will be timely only if brought within the time which an administrative charge or complaint would have to be filed if the claim is one which could be filed with an agency. If the


arbitration claim is one which raises an issue that might have been brought in court, then the arbitration claim must be filed within the time set by the appropriate statute of limitations.

18. In consideration of the Company's execution of this Agreement, you hereby agree and acknowledge that the name "Laser Fare", and any derivative or variation thereof, is the exclusive property of the Company and shall not be used by you or any entity with which you are affiliated in any manner or respect.

19. In consideration of the Company's execution of this Agreement, you hereby acknowledge and represent to the Company that Schedule A annexed hereto contains a list of all contracts which you have entered into on behalf of the Company, or any of its affiliates or subsidiaries, which either require future performance by the Company or pursuant to which the Company has any liability.

20. Miscellaneous. This Agreement may be amended only by a written instrument signed by you and the Company. Except for separate agreements between you and the Company specifically mentioned herein, this Agreement shall constitute the entire agreement between the Company and you with respect to its subject matter. The Separation Agreement and Release shall be governed by the laws of the State of Rhode Island, other than the provisions thereof relating to conflict of laws. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs and assigns. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. In the event that any of the terms and conditions of this Agreement are or become invalid or unenforceable, the remaining provisions shall remain in force. Any notices to be given and any payments to be made hereunder shall be delivered in hand or sent by registered mail, return receipt requested, to the respective party at (i) the Company's headquarters, if notice shall be to the Company, or
(ii) your address of permanent residence as listed on the Company's records from time to time or to such other address as either such party shall direct in accordance with the requirements of this Section 20.

This Agreement shall become effective on the seventh calendar day following the date on which you sign the release provided that, in the event you exercise your revocation right under the release, this Agreement shall become null and void, ab initio.


Please acknowledge your understanding, acceptance and agreement with the foregoing by signing this letter at the designated location below.

Sincerely,

Infinite Group, Inc

By:

Clifford G. Brockmyre President and Chief Executive

Officer
Agreed to and Accepted:


J. Terence Feeley

Solely with respect to Section 6 hereof:


Donna Feeley

EXHIBIT A

RELEASE OF CLAIMS BY J. TERENCE FEELEY

(i) In consideration of the payments and other consideration set forth in the annexed letter agreement (the "Agreement"), the receipt and sufficiency of which you hereby acknowledge, on behalf of yourself, your family, your heirs, executors, administrators, successors and assigns, you irrevocably and unconditionally release, acquit and forever discharge the Company, and its past and present employees, directors, officers, agents, stockholders, parents, subsidiaries, affiliates, successors, predecessors and assigns (collectively referred to as "Releasees"), from any and all claims, controversies, liabilities, demands, causes of action, debts, obligations, promises, acts, agreements, rights of contribution and/or indemnification, and damages of whatever kind or nature, whether known or unknown, suspected or unsuspected, foreseen or unforeseen, liquidated or contingent, actual or potential, joint or individual, that you now have or may have against the Releasees to the date of this Release of Claims ("Release"). Such released claims include, without limitation, any and all claims related to all aspects of your employment with The Company or your separation from that employment including, but not limited to, claims for breach of contract, employment discrimination under Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1991, the Equal Pay Act of 1963, the Americans with Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Age Discrimination in Employment Act of 1967, as amended, the Older Workers Benefit Protection Act of 1990, the Civil Rights Act of 1866, the Family and Medical Leave Act of 1993, or under any other federal, state, local or municipal laws, rules or regulations, including, without limitation, the laws of the State of Rhode Island, as well as any and all claims arising out of, based upon or relating to your employment or termination of your employment with the Company, and all claims for punitive or compensatory damages.

(ii) You acknowledge and agree that in consideration for the payments provided to you by the Company in the Agreement, this Release constitutes a knowing and voluntary waiver of all rights or claims you may have against The Company including, but not limited to, all rights or claims arising under the Age Discrimination in Employment Act of 1967. You further acknowledge and agree that you have signed this Release freely and voluntarily and without duress or coercion, and with full knowledge of its significance and consequences and of the rights relinquished, surrendered, released and discharged.

(iii) You acknowledge and agree that the payments set forth in the Agreement as consideration for this Release is in addition to anything of value to which you are otherwise entitled by law or the Releasees' policies.

(iv) You acknowledge and agree that you have carefully read and understand the terms of this Release, all of which have been fully explained to you.

(v) You acknowledge that the Company has advised you to consult with legal counsel or a representative of your choice before signing this Release and that you had a fair opportunity to do so.


(vi) You understand that, by signing this Release, you do not waive rights or claims that (a) you have under the Agreement, or (b) may arise after the date you execute this Release.

(viii) You acknowledge that you may revoke this Release in writing at any time during the seven (7) calendar days following the date on which you sign this Release, and the Separation Payment set forth in Section 1 of the Separation Agreement and the terms of this Release, and the Agreement, shall not be effective or enforceable until such seven-day revocation period has expired without your exercising your revocation right.

Dated:                                     Signed:
       --------------------                       -----------------------------
                                                  J. Terence Feeley


EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 7th day of April, 2003, by and among INFINITE GROUP, INC., a Delaware corporation having its principal place of business at 595 Blossom Road, Suite 309, Rochester, New York 14610 (the "Company"), and MARK J. ACKLEY, an individual residing at 211 Terry Hill Road, Horseheads, NY 14845 (the "Executive").

W I T N E S S E T H

WHEREAS, the Executive wishes to be employed by the Company; and

WHEREAS, the Company, recognizing the unique skills and abilities of the Executive, wishes to employ the Executive as its Chief Operations Officer and Director of Business Development; and

WHEREAS, the parties desire by this Agreement to set forth the terms and conditions of the employment relationship between the Company and the Executive.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants in this Agreement, the Company and the Executive agree as follows:

1. Employment and Duties. The Company hereby employs the Executive as Chief Operations Officer and Director of Business Development on the terms and conditions provided in this Agreement and Executive agrees to accept such employment subject to the terms and conditions of this Agreement. The Executive shall perform the duties and responsibilities as are customary for the officer of a corporation in such positions, and shall perform such other duties and responsibilities as are reasonably determined from time to time by the Company's Board of Directors (the "Board"). The Executive shall report to and be supervised by the President and Chief Executive Officer of the Company. The Executive agrees to devote substantially all his attention and time during normal business hours to the business and affairs of the Company and to use his reasonable best efforts to perform faithfully and efficiently the duties and responsibilities of his positions and to accomplish the goals and objectives of the Company as may be established by the Board. Notwithstanding the foregoing, the Executive may engage in the following activities (and shall be entitled to retain all economic benefits thereof including fees paid in connection


therewith) as long as they do not interfere in any material respect with the performance of the Executive's duties and responsibilities hereunder and, with respect to subsections (i) and (ii) below, that such activity is pre-approved by the Company's President and Chief Executive Officer: (i) serve on corporate, civic, religious, educational and/or charitable boards or committees, provided that the Executive shall not serve on any board or committee of any corporation or other business which competes with the Business (as defined in Section 10(a) below); (ii) deliver lectures, fulfill speaking engagements or teach on a part-time basis at educational institutions; and (iii) make investments in businesses or enterprises and manage his personal investments; provided that with respect to such activities Executive shall comply with any business conduct and ethics policy applicable to employees of the Company.

2. Term. The term of this Agreement shall commence on April 7, 2003 (the "Commencement Date"), and shall terminate on April 4, 2008, unless extended or earlier terminated in accordance with the terms of this Agreement (the "Termination Date"). Such term of employment is herein sometimes referred to as the "Employment Term". The Employment Term shall be extended for successive one year periods unless either party notifies the other in writing at least 180 days before the Termination Date, or any anniversary of the Termination Date, as the case may be, that he or it chooses not to extend the Employment Term.

3. Compensation. As compensation for performing the services required by this Agreement, and during the term of this Agreement, the Executive shall be compensated as follows:

(a) Base Compensation. The Company shall pay to the Executive an annual salary ("Base Compensation") of $150,000.00, payable in equal installments pursuant to the Company's customary payroll procedures in effect for its executive personnel at the time of payment, but in no event less frequently than monthly, subject to withholding for applicable federal, state, and local income and employment related taxes. The Executive may be entitled to such increases in Base Compensation with respect to each calendar year during the term of this Agreement, as shall be determined by the Company's Compensation Committee (the "Committee"), in its sole and absolute discretion, based on an annual review of the Executive's performance .

(b) Incentive Compensation. In addition to Base Compensation, the Executive may be entitled to receive additional compensation ("Incentive Compensation") in the discretion of the Committee. The Incentive Compensation shall be pursuant to short-term and/or long-term incentive compensation and/or bonus programs which currently exist or may be established by the Company. The minimum executive annual bonus program is established at 30% of base

2

Compensation and paid annually (assuming performance criteria and goals are met). For purposes of this Agreement, the Executive's "Pro Rata Share" of Incentive Compensation for any calendar year of the Company shall be a fraction whose numerator shall be equal to the number of months (or parts of months) during which the Executive was actually employed by the Company during any such calendar year and whose denominator shall be the total number of months in such calendar year.

(c) Stock and Stock Options. The Executive shall receive upon the signing of this Agreement (i) 500,000 shares of Common Stock of the Company; and
(ii) 500,000 options granted pursuant to the Company's Employee Stock Option Plan.

4. Employee Benefits. During the Employment Term and subject to the limitations set forth in this Section 4, the Executive and his eligible dependents shall have the right to participate in any retirement plans (qualified and non-qualified), stock option plan, pension, insurance, health, disability or other benefit plan or program that has been or is hereafter adopted by the Company (or in which the Company participates), according to the terms of such plan or program, on terms no less favorable than the most favorable terms granted to senior executives of the Company.

5. Vacation and Leaves of Absence. The Executive shall be entitled to the normal and customary amount of paid vacation provided to senior executive officers of the Company, but in no event less than 20 days during each 12 month period, beginning on the Commencement Date of this Agreement. The Executive may carry over a maximum of 5 unused vacation days, out of the allotted 20 days, from one year to the next. If during any 12-month period the executive uses 20 days of vacation, then any unused vacation shall not accrue and not carry over to the following year. Upon any termination of this Agreement for any reason whatsoever, accrued and unused vacation for the year in which this Agreement terminates will be paid to the Executive within 10 days of such termination based on his annual rate of Base Compensation in effect on the date of such termination. In addition, the Executive may be granted leaves of absence with or without pay for such valid and legitimate reasons as the Company in its sole and absolute discretion may determine, and the Executive shall be entitled to the same sick leave and holidays provided to other senior executives of the Company.

3

6. Expenses.

(a) Business Expenses. The Executive shall be promptly reimbursed against presentation of vouchers or receipts for all reasonable and necessary expenses incurred by him in connection with the performance of his duties hereunder.

(b) Automobile Expense. During the Employment Term, in order to facilitate the performance of the Executive's duties hereunder, and otherwise for the convenience of the Company, the Company shall provide the Executive with an insured automobile, or shall reimburse the Executive for the cost of leasing an automobile (provided that the lease payments with respect to such automobile shall not exceed $500 per month) and shall pay or reimburse Executive (upon presentation of vouchers or receipts) for the reasonable cost of all maintenance, insurance, repairs, and other reasonable expenses related to such automobile. If the Executive decides to utilize his own personal vehicle, the company shall reimburse the Executive $700 per month. The Executive will then be responsible for all costs associated with the daily operation of said vehicle, including but not limited to: fuel costs, maintenance, insurance, etc.

(c) Life Insurance. During the Employment Term, the Company shall pay the premiums on a $1 million term life insurance policy on the Executive with the beneficiary of such policy designated by the Executive. This is in addition to whatever Insurance is required by the lending institutions on the life of the Executive.

7. Indemnification.

(a) General. The Company agrees that if the Executive is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Corporation, or the Company, is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee or agent while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by applicable law (in accordance with the certificate of incorporation and/or bylaws of the Company), as the same exists

4

or may hereafter be amended, against all Expenses (as defined below) incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if the Executive has ceased to be an officer, director or agent, or is no longer employed by the Company and shall inure to the benefit of his heirs, executors and administrators.

(b) Expenses. As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement.

(c) Enforcement. If a claim or request under this Agreement is not paid by the Company, or on their behalf, within fifteen days after a written claim or request has been received by the Company, the Executive may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim or request and if successful in whole or in part, the Executive shall be entitled to be paid also the expenses of prosecuting such suit. The burden of proving that the Executive is not entitled to indemnification for any reason shall be upon the Company.

(d) Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Executive.

(e) Partial Indemnification. If the Executive is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify the Executive for the portion of such Expenses to which the Executive is entitled.

(f) Advances of Expenses. Expenses incurred by the Executive in connection with any Proceeding shall be paid by the Company in advance upon request of the Executive that the Company pay such Expenses.

(g) Notice of Claim. The Executive shall give to the Company notice of any claim made against his for which indemnity will or could be sought under this Agreement. In addition, the Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within the Executive's power and at such times and places as are convenient for the Executive.

(h) Defense of Claim. With respect to any Proceeding as to which the Executive notifies the Company of the commencement thereof: (i) the Company will

5

be entitled to participate therein at its own expense; and (ii) except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to the Executive. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which the Executive shall have reasonably concluded that there may be a conflict of interest between the Company and the Executive in the conduct of the defense of such action.

The Company shall not be liable to indemnify the Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on the Executive without Executive's written consent. Neither the Company nor the Executive shall unreasonably withhold or delay their consent to any proposed settlement.

(i) Non-exclusivity. The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 7 shall not be exclusive of any other right which the Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the Company, agreement, vote of stockholders or disinterested directors or otherwise.

(j) Directors and Officers Liability Policy. The Company agrees to use reasonable efforts to maintain directors and officers liability insurance covering the Executive in a reasonable and adequate amount determined by the Company.

8. Termination and Termination Benefits.

(a) Termination For Cause. Notwithstanding any provision contained herein, the Company may terminate this Agreement at any time during the Employment Term for "Cause". For purposes of this subsection 8(a)(i), "Cause" shall mean (1) the continuing willful failure by the Executive to substantially perform his duties hereunder for any reason other than total or partial incapacity due to physical or mental illness, or (2) gross negligence or gross malfeasance on the part of the Executive in the performance of his duties hereunder that causes material harm to the Company. Termination pursuant to this subsection 8(a)(i) shall be effective immediately upon giving the Executive written notice thereof stating the reason or reasons therefor with respect to clause (2) above, and 15 days after written notice thereof from the Company to the Executive specifying the acts or omissions constituting the failure and requesting that they be remedied with respect to clause (1) above, but only if

6

the Executive has not cured such failure within such 15 day period. In the event of a termination pursuant to this subsection 8(a)(i), the Executive shall be entitled to payment of his Base Compensation and the benefits pursuant to
Section 4 hereof up to the effective date of such termination and it is also the intention and agreement of the Company that Executive shall not be deprived by reason of termination for Cause of any payments, options or benefits which have been vested or have been earned or to which Executive is entitled as of the effective date of such termination.

(b) Termination due to Disability. If due to illness, physical or mental disability, or other incapacity, the Executive shall fail, for a total of any six consecutive months ("Disability"), to substantially perform the principal duties required by this Agreement, the Company may terminate this Agreement upon 30 days' written notice to the Executive. In such event, the Executive shall be (1) paid his Base Compensation until the Termination Date and his Pro Rata Share of any Incentive Compensation to which he would have been entitled for the year in which such termination occurs, and (2) provided with employee benefits pursuant to Section 4, until the Termination Date, provided, however, that any compensation to be paid to the Executive pursuant to this subsection 8(a)(ii) shall be offset against any payments received by the Executive pursuant to any policy of disability insurance the premiums of which are paid for by the Company. The Executive shall also be paid any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued / unused vacation pay.

(c) Termination In the event Company does not elect to extend the Employment Term, for reasons not outlined in paragraphs a and b above, as provided for in Section 2 hereof, in consideration for the post-employment covenant against competition set forth in Section 10 hereof, the Executive shall be paid:. (i) a lump-sum payment equal to the product of twenty-four times the Monthly Salary Amount in addition to his Base Compensation at the rate in effect at the time of termination, through the Termination Date.. (ii) his Pro Rata Share of any Incentive Compensation to which he would have been entitled for the year in which such termination occurs; (iii) any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued / unused vacation pay; (iv) continuation until the expiration of the Employment Term and for twelve months thereafter, of the health and welfare benefits of the Executive and any long-term disability

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insurance generally provided to senior executives of the Company (as provided for by Section 4 of this Agreement) (or the Company shall provide the economic equivalent thereof); provided, however, if the Executive obtains new employment and such employment makes the Executive eligible for health and welfare or long-term disability benefits which are equal to or greater in scope then the benefits then being offered by the Company, then the Company shall no longer be required to provide such benefits to the Executive; and (v) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans or programs of the Company.

(d) Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided or maintained by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other existing or future agreements with the Company. Except as otherwise expressly provided for in this Agreement, amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plans or programs of the Company at or subsequent to the date of termination shall be payable in accordance with such plans or programs.

(e) Vesting of Stock Grants and Stock Options. In the event of any termination of this Agreement, Executive's rights with regard to any stock grants, loan agreements or stock options shall be as set forth in the respective agreement containing the terms and conditions pertaining thereto. Notwithstanding the foregoing, in the event that the Executive is terminated for reasons other than for "Cause," any stock options then held by the Executive shall immediately vest in the Executive and shall remain exercisable for the period specified in the grant agreement notwithstanding any provision therein to the contrary..

(f) Certain Additional Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986 or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be

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entitled to receive an additional payment (an "Excise Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Excise Gross-Up Payment and any ordinary income tax on the Excise Gross-Up Payment in order to put the Executive in the same net after-tax position as if the payment were not subject to any Excise Tax. Subject to the provisions of this Section 8(e), all determinations required to be made hereunder, including whether an Excise Gross-Up Payment is required and the amount of such Excise Gross-Up Payment, shall be made by Freed, Maxick & Battaglia, PC or such other accounting firm which at the time audits the financial statements of the Company (the "Accounting Firm") at the sole expense of the Company, which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the date of termination of the Executive's employment under this Agreement, if applicable, or such earlier time as is requested by the Company.

If the Accounting Firm determines that no Excise Tax is payable by the Executive, the Company shall use its reasonable best efforts to cause the Accounting Firm to furnish the Executive with an opinion that he has substantial authority not to report any Excise Tax on his federal income tax return. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Excise Gross-Up Payments, which will not have been made by the Company, should have been made (an "Underpayment") consistent with the calculations required to be made hereunder. If the Company exhausts its remedies pursuant hereto and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Excise Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii)

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take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including (without limitation) accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith to contest effectively such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions hereof the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine, provided that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance, and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which an Excise Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle

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or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

If, after the receipt by the Executive of an amount advanced by the Company pursuant hereto, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements hereof) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant hereto, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Excise Gross-Up Payment required to be paid.

(g) Death Benefit. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of the Executive's death. In such event the Company shall continue to pay Executive's Base Compensation to his wife, if she survives him, or, if she does not survive him, to his estate, through the Termination Date. In addition, the Company shall pay to Executive's wife, if she survives him, or, if she does not survive him, to his estate, the Pro Rata Share of any Incentive Compensation to which Executive would have been entitled for the year in which such death occurs. In addition, the Company shall provide the Executive's wife and/or eligible family members with health and medical benefits pursuant to Section 4, to the extent available, through the Termination Date.

(h) Payment.. Except as otherwise provided in this Agreement, any payments to which the Executive shall be entitled under this Section 8, including, without limitation, any economic equivalent of any benefit, shall be made as promptly as possible following the date of termination. If the amount of any payment due to the Executive cannot be finally determined within 90 days after the Date of Termination, such amount shall be estimated on a good faith basis by the Company and the estimated amount shall be paid no later than 90 days after such Date of Termination. As soon as practicable hereafter, the final

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determination of the amount due shall be made and any adjustment requiring a payment to or from the Executive shall be made as promptly as practicable.

(i) No Mitigation. The Executive shall not be required to mitigate the amount of any payments provided for by this Agreement by seeking employment or otherwise, nor shall the amount of any payment or benefit provided in this Agreement be reduced by any compensation or benefit earned by the Executive after termination of his employment.

9. Company Property. All advertising, promotional, sales, suppliers, manufacturers and other materials or articles or information, including without limitation data processing reports, customer lists, customer sales analyses, invoices, product lists, price lists or information, samples, or any other materials or data of any kind furnished to the Executive by the Company or developed by the Executive on behalf of the Company or at the Company's direction or for the Company's use or otherwise in connection with the Executive's employment hereunder, are and shall remain the sole and confidential property of the Company; if the Company requests the return of such materials at any time during or at or after the termination of the Executive's employment, the Executive shall immediately deliver the same to the Company.

10. Covenant Not To Compete.

(a) Covenants Against Competition. The Executive acknowledges that as of the execution of this Employment Agreement (i) the Company is engaged in the business described in its current filings with the Securities and Exchange Commission (the "Business"); (ii) the Company's Business is conducted currently throughout the United States and may be expanded to other locations; (iii) his employment with the Company will have given him access to confidential information concerning the Company; and (iv) the agreements and covenants contained in this Agreement are essential to protect the business and goodwill of the Company. Accordingly, the Executive covenants and agrees as follows:

(i) Non-Compete. Without the prior written consent of the Board of the Company, the Executive shall not during the Restricted Period (as defined below) within the Restricted Area (as defined below) (except in the Executive's capacity as an officer of the Company or any of its affiliates), (a) engage or participate in the Business (or any Business which the Company may become engaged in during the Employment Term which, for purposes of this Agreement, shall be included in the definition of the "Business"); (b) enter the employ of, or render any services (whether or not for a fee or other

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compensation) to, any person engaged in the Business; or (c) acquire an equity interest in any such person; provided, that the foregoing restrictions shall not apply at any time if the Executive's employment is terminated during the Term by the Executive for Good Reason (as defined in Section 8(b) below) or by the Company other than for "Cause"; provided, further, that during the Restricted Period the Executive may own, directly or indirectly, solely as a passive investment, securities of any company traded on any national securities exchange or on the National Association of Securities Dealers Automated Quotation System.

As used herein, "Restricted Period" shall mean the period commencing on the Effective Date and ending on the second anniversary of the Executive's termination of employment.

"Restricted Area" shall mean any place within the United States and any other country in which the Company is then actively considering conducting Business.

(b) Confidential Information; Personal Relationships. The Executive acknowledges that the Company has a legitimate and continuing proprietary interest in the protection of its confidential information and has invested substantial sums and will continue to invest substantial sums to develop, maintain and protect confidential information. The Executive agrees that, during and after the Restricted Period, without the prior written consent of the Board, the Executive shall keep secret and retain in strictest confidence, and shall not knowingly use for the benefit of himself or others all confidential matters relating to the Company's Business including, without limitation, operational methods, marketing or development plans or strategies, business acquisition plans, joint venture proposals or plans, and new personnel acquisition plans, learned by the Executive heretofore or hereafter (such information shall be referred to herein collectively as "Confidential Information"); provided, that nothing in this Agreement shall prohibit the Executive from disclosing or using any Confidential Information (A) in the performance of his duties hereunder, (B) as required by applicable law, (C) in connection with the enforcement of his rights under this Agreement or any other agreement with the Company, or (D) in connection with the defense or settlement of any claim, suit or action brought or threatened against the Executive by or in the right of the Company. Notwithstanding any provision contained herein to the contrary, the term Confidential Information shall not be deemed to include any general knowledge, skills or experience acquired by the Executive or any knowledge or information known or available to the public in general. Moreover, the Executive shall be

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permitted to retain copies of, or have access to, all such Confidential Information relating to any disagreement, dispute or litigation (pending or threatened) involving the Executive.

(c) Employees of the Company and its Affiliates. During the Restricted Period, without the prior written consent of the Board of the Company, the Executive shall not, directly or indirectly, hire or solicit, or cause others to hire or solicit, for employment by any person other than the Company or any affiliate or successor thereof, any employee of, or person employed within the two years preceding the Executive's hiring or solicitation of such person by, the Company and its affiliates or successors or encourage any such employee to leave his employment. For this purpose, any person whose employment has been terminated involuntarily by the Company shall be excluded from those persons protected by this Section for the benefit of the Company.

(d) Business Relationships. During the Restricted Period, the Executive shall not, directly or indirectly, request or advise a person that has a business relationship with the Company to curtail or cancel such person's business relationship with the Company.

(e) Rights and Remedies Upon Breach. If the Executive breaches, threatens to commit a breach of, any of the provisions contained in Section 10 of this Agreement (the "Restrictive Covenants"), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity.

(i) Specific Performance. The right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company.

(ii) Accounting. The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by the Executive as the result of any action constituting a breach of Restrictive Covenants.

(f) Severability of Covenants. The Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in duration and geographical scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable,

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the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect without regard to the invalid portions. The provisions set forth in Section 10 above shall be in addition to any other provisions of the business conduct and ethics policy applicable to employees of the Company and its subsidiaries during the term of Executive's employment.

(g) Saving Clause. If the period of time or the area specified in subsection (a) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such number of months or the area shall be reduced by the elimination of such portion thereof or both so that such restrictions may be enforced in such area and for such time as is adjudged to be reasonable. If the Executive violates any of the restrictions contained in the foregoing subsection (a), the restrictive period shall not run in favor of the Executive from the time of the commencement of any such violation until such time as such violation shall be cured by the Executive to the satisfaction of Company.

11. Executive's Representation and Warranties. Executive represents and warrants that he has the full right and authority to enter into this Agreement and fully perform his obligations hereunder, that he is not subject to any non-competition agreement other than with the Company, and that his past, present and anticipated future activities have not and will not infringe on the proprietary rights of others. Executive further represents and warrants that he is not obligated under any contract (including, but not limited to, licenses, covenants or commitments of any nature) or other agreement or subject to any judgment, decree or order of any court or administrative agency which would conflict with his obligation to use his best efforts to perform his duties hereunder or which would conflict with the Company's business and operations as presently conducted or proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business as officer and employee by Executive will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under any contract, covenant or instrument to which Executive is currently a party.

12. Miscellaneous.

(a) Integration; Amendment. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters set forth herein and supersedes and renders of no force and effect all prior understandings and agreements between the parties with respect to the matters

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set forth herein. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties.

(b) Severability. If any part of this Agreement is contrary to, prohibited by, or deemed invalid under applicable law or regulations, such provision shall be inapplicable and deemed omitted to the extent so contrary, prohibited, or invalid, but the remainder of this Agreement shall not be invalid and shall be given full force and effect so far as possible.

(c) Waivers. The failure or delay of any party at any time to require performance by the other party of any provision of this Agreement, even if known, shall not affect the right of such party to require performance of that provision or to exercise any right, power, or remedy hereunder, and any waiver by any party of any breach of any provision of this Agreement shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right, power, or remedy under this Agreement. No notice to or demand on any party in any case shall, of itself, entitle such party to other or further notice or demand in similar or other circumstances.

(d) Power and Authority. The Company represents and warrants to the Executive that it has the requisite corporate power to enter into this Agreement and perform the terms hereof; that the execution, delivery and performance of this Agreement by it has been duly authorized by all appropriate corporate action; and that this Agreement represents the valid and legally binding obligation of the Company and is enforceable against it in accordance with its terms.

(e) Burden and Benefit; Survival. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, personal and legal representatives, successors and assigns. In addition to, and not in limitation of, anything contained in this Agreement, it is expressly understood and agreed that the Company's obligation to pay Termination Compensation as set forth herein shall survive any termination of this Agreement.

(f) Governing Law; Headings. This Agreement and its construction, performance, and enforceability shall be governed by, and construed in accordance with, the laws of the State of New York. Headings and titles herein are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.

(g) Arbitration; Remedies. Any dispute or controversy arising under this Agreement or as a result of or in connection with Executive's employment (other than disputes arising under Section 10) shall be arbitrated and settled pursuant to the National Rules for the Resolution of Employment Disputes of the

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American Arbitration Association which are then in effect in a proceeding held in Rochester, New York. This provision shall also apply to any and all claims that may be brought under any federal or state anti-discrimination or employment statute, rule or regulation, including, but not limited to, claims under: the National Labor Relations Act; Title VII of the Civil Rights Act; Sections 1981 through 1988 of Title 42 of the United States Code; the Employee Retirement Income Security Act; the Immigration Reform and Control Act; the Americans With Disabilities Act; the Age Discrimination in Employment Act; the Fair Labor Standards Act; the Occupational Safety and Health Act; the Family and Medical Leave Act; and the Equal Pay Act. The decision of the arbitrator and award, if any, is final and binding on the parties and the judgment may be entered in any court having jurisdiction thereof. The parties will agree upon an arbitrator from the list of labor arbitrators supplied by the American Arbitration Association. The parties understand and agree, however, that disputes arising under Section 10 of this Agreement may be brought in a court of law or equity without submission to arbitration.

(h) Jurisdiction. Except as otherwise provided for herein, each of the parties (a) submits to the exclusive jurisdiction of any state court sitting in New York or federal court sitting in New York in any action or proceeding arising out of or relating to this Agreement, (b) agrees that all claims in respect of the action or proceeding may be heard and determined in any such court, (c) agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court and (d) waives any right such party may have to a trial by jury with respect to any action or proceeding arising out of or relating to this Agreement. Each of the parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other party with respect thereto. Any party may make service on another party by sending or delivering a copy of the process to the party to be served at the address and in the manner provided for giving of notices in Section
12(i). Nothing in this Section, however, shall affect the right of any party to serve legal process in any other manner permitted by law.

(i) Notices. All notices called for under this Agreement shall be in writing and shall be deemed given upon receipt if delivered personally or by confirmed facsimile transmission and followed promptly by mail, or mailed by registered or certified mail (return receipt requested), postage prepaid, to the

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parties at their respective addresses (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof) as set forth in the preamble to this Agreement or to any other address or addressee as any party entitled to receive notice under this Agreement shall designate, from time to time, to others in the manner provided in this subsection 12(i) for the service of notices.

Any notice delivered to the party hereto to whom it is addressed shall be deemed to have been given and received on the day it was received; provided, however, that if such day is not a business day then the notice shall be deemed to have been given and received on the business day next following such day. Any notice sent by facsimile transmission shall be deemed to have been given and received on the business day next following the day of transmission.

(j) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday on which federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.


MARK J. ACKLEY

INFINITE GROUP, INC.

By:_____________________________
Michael S. Smith
President and Chief Executive Officer

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EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 5th day of May, 2003, by and among INFINITE GROUP, INC., a Delaware corporation having its principal place of business at 595 Blossom Road, Suite 309, Rochester, New York 14610 (the "Company"), and MICHAEL S. SMITH, an individual residing at 10 Milford Road, Rochester, New York 14625 (the "Executive").

W I T N E S S E T H

WHEREAS, the Executive is currently employed by the Company and serves as the Company's interim President and Chief Executive Officer; and

WHEREAS, the Company, recognizing the unique skills and abilities of the Executive, wishes to insure that the Executive will continue to be employed by the Company; and

WHEREAS, the Executive desires to continue in the employment of the Company as President and Chief Executive Officer of the Company; and

WHEREAS, the parties desire by this Agreement to set forth the terms and conditions of the employment relationship between the Company and the Executive.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants in this Agreement, the Company and the Executive agree as follows:

1. Employment and Duties. The Company hereby employs the Executive as President and Chief Executive Officer on the terms and conditions provided in this Agreement and Executive agrees to accept such employment subject to the terms and conditions of this Agreement. The Executive shall be responsible for the overall management and operations of the Company, shall perform the duties and responsibilities as are customary for the officer of a corporation in such positions, and shall perform such other duties and responsibilities as are reasonably determined from time to time by the Company's Board of Directors (the "Board"). The Executive shall report to and be supervised by the Board. The Executive shall be based at the Company's offices in Rochester, New York or such other place which shall be within a twenty mile radius thereof that shall constitute the Company's headquarters and, except for business travel incident to his employment under this Agreement, the Company agrees the Executive shall not be required to relocate. The Executive agrees to devote substantially all his attention and time during normal business hours to the business and affairs of the Company and to use his reasonable best efforts to perform faithfully and efficiently the duties and responsibilities of his positions and to accomplish the goals and objectives of the Company as may be established by the Board. Notwithstanding the foregoing, the Executive may engage in the following activities (and shall be entitled to retain all economic benefits thereof


including fees paid in connection therewith) as long as they do not interfere in any material respect with the performance of the Executive's duties and responsibilities hereunder and, with respect to subsections (i) and (ii) below, that such activity is pre-approved by the Company's Chairman of the Board: (i) serve on corporate, civic, religious, educational and/or charitable boards or committees, provided that the Executive shall not serve on any board or committee of any corporation or other business which competes with the Business (as defined in Section 10(a) below); (ii) deliver lectures, fulfill speaking engagements or teach on a part-time basis at educational institutions; and (iii) make investments in businesses or enterprises and manage his personal investments; provided that with respect to such activities Executive shall comply with any business conduct and ethics policy applicable to employees of the Company. The Executive shall serve as a member of the Board during the Employment Term (as defined below).

2. Term. The term of this Agreement shall commence on May 5, 2003 (the "Commencement Date"), and shall terminate on May 2, 2008, unless extended or earlier terminated in accordance with the terms of this Agreement (the "Termination Date"). Such term of employment is herein sometimes referred to as the "Employment Term". The Employment Term shall be extended for successive one year periods unless either party notifies the other in writing at least 180 days before the Termination Date, or any anniversary of the Termination Date, as the case may be, that he or it chooses not to extend the Employment Term.

3. Compensation. As compensation for performing the services required by this Agreement, and during the term of this Agreement, the Executive shall be compensated as follows:

(a) Base Compensation. The Company shall pay to the Executive an annual salary ("Base Compensation") of $150,000.00, payable in equal installments pursuant to the Company's customary payroll procedures in effect for its executive personnel at the time of payment, but in no event less frequently than monthly, subject to withholding for applicable federal, state, and local income and employment related taxes. The Executive may be entitled to such increases in Base Compensation with respect to each calendar year during

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the term of this Agreement, as shall be determined by the Company's Compensation Committee (the "Committee"), in its sole and absolute discretion, based on an annual review of the Executive's performance .

(b) Incentive Compensation. In addition to Base Compensation, the Executive may be entitled to receive additional compensation ("Incentive Compensation") in the discretion of the Committee. The Incentive Compensation shall be pursuant to short-term and/or long-term incentive compensation and/or bonus programs which currently exist or may be established by the Company. The minimum executive annual bonus program is established at 30% of base Compensation and paid annually (assuming performance criteria and goals are met). For purposes of this Agreement, the Executive's "Pro Rata Share" of Incentive Compensation for any calendar year of the Company shall be a fraction whose numerator shall be equal to the number of months (or parts of months) during which the Executive was actually employed by the Company during any such calendar year and whose denominator shall be the total number of months in such calendar year.

(c) Stock and Stock Options. The Executive shall receive upon the signing of this Agreement: (i) 500,000 shares of Common Stock of the Company; and (ii) 500,000 options granted pursuant to the Company's Employee Stock Option Plan.

4. Employee Benefits. During the Employment Term and subject to the limitations set forth in this Section 4, the Executive and his eligible dependents shall have the right to participate in any retirement plans (qualified and non-qualified), stock option plan, pension, insurance, health, disability or other benefit plan or program that has been or is hereafter adopted by the Company (or in which the Company participates), according to the terms of such plan or program, on terms no less favorable than the most favorable terms granted to senior executives of the Company.

5. Vacation and Leaves of Absence. The Executive shall be entitled to the normal and customary amount of paid vacation provided to senior executive officers of the Company, but in no event less than 20 days during each 12 month period, beginning on the Commencement Date of this Agreement. The Executive may carry over a maximum of 5 unused vacation days, out of the allotted 20 days, from one year to the next. If during any 12-month period the executive uses 20 days of vacation, then any unused vacation shall not accrue and not carry over to the following year. Upon any termination of this Agreement for any reason whatsoever, accrued and unused vacation for the year in which this Agreement terminates will be paid to the Executive within 10 days of such termination

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based on his annual rate of Base Compensation in effect on the date of such termination. In addition, the Executive may be granted leaves of absence with or without pay for such valid and legitimate reasons as the Company in its sole and absolute discretion may determine, and the Executive shall be entitled to the same sick leave and holidays provided to other senior executives of the Company.

6. Expenses.

(a) Business Expenses. The Executive shall be promptly reimbursed against presentation of vouchers or receipts for all reasonable and necessary expenses incurred by him in connection with the performance of his duties hereunder.

(b) Automobile Expense. During the Employment Term, in order to facilitate the performance of the Executive's duties hereunder, and otherwise for the convenience of the Company, the Company shall provide the Executive with an automobile, or shall reimburse the Executive for the cost of leasing an automobile (provided that the lease payments with respect to such automobile shall not exceed $500 per month) and shall pay or reimburse Executive (upon presentation of vouchers or receipts) for the reasonable cost of all maintenance, insurance, repairs, and other reasonable expenses related to such automobile. If the Executive decides to utilize his own personal vehicle, the company shall reimburse the Executive $700 per month. The Executive will then be responsible for all costs associated with the daily operation of said vehicle, including but not limited to: fuel costs, maintenance, insurance, etc.

(c) Life Insurance. During the Employment Term, the Company shall pay the premiums on a $1 million term life insurance policy on the Executive with the beneficiary of such policy designated by the Executive. This is in addition to whatever Insurance is required by the lending institutions on the life of the Executive.

7. Indemnification.

(a) General. The Company agrees that if the Executive is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Corporation, or the Company, is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer,

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member, employee or agent while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by applicable law (in accordance with the certificate of incorporation and/or bylaws of the Company), as the same exists or may hereafter be amended, against all Expenses (as defined below) incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if the Executive has ceased to be an officer, director or agent, or is no longer employed by the Company and shall inure to the benefit of his heirs, executors and administrators.

(b) Expenses. As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement.

(c) Enforcement. If a claim or request under this Agreement is not paid by the Company, or on their behalf, within fifteen days after a written claim or request has been received by the Company, the Executive may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim or request and if successful in whole or in part, the Executive shall be entitled to be paid also the expenses of prosecuting such suit. The burden of proving that the Executive is not entitled to indemnification for any reason shall be upon the Company.

(d) Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Executive.

(e) Partial Indemnification. If the Executive is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify the Executive for the portion of such Expenses to which the Executive is entitled.

(f) Advances of Expenses. Expenses incurred by the Executive in connection with any Proceeding shall be paid by the Company in advance upon request of the Executive that the Company pay such Expenses.

(g) Notice of Claim. The Executive shall give to the Company notice of any claim made against his for which indemnity will or could be sought under

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this Agreement. In addition, the Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within the Executive's power and at such times and places as are convenient for the Executive.

(h) Defense of Claim. With respect to any Proceeding as to which the Executive notifies the Company of the commencement thereof: (i) the Company will be entitled to participate therein at its own expense; and (ii) except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to the Executive. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which the Executive shall have reasonably concluded that there may be a conflict of interest between the Company and the Executive in the conduct of the defense of such action.

The Company shall not be liable to indemnify the Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on the Executive without Executive's written consent. Neither the Company nor the Executive shall unreasonably withhold or delay their consent to any proposed settlement.

(i) Non-exclusivity. The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 7 shall not be exclusive of any other right which the Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the Company, agreement, vote of stockholders or disinterested directors or otherwise.

(j) Directors and Officers Liability Policy. The Company agrees to use reasonable efforts to maintain directors and officers liability insurance covering the Executive in a reasonable and adequate amount determined by the Company.

8. Termination and Termination Benefits.

(a) Termination For Cause. Notwithstanding any provision contained herein, the Company may terminate this Agreement at any time during the Employment Term for "Cause". For purposes of this subsection 8(a)(i), "Cause" shall mean (1) the continuing willful failure by the Executive to substantially perform his duties hereunder for any reason other than total or partial

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incapacity due to physical or mental illness, or (2) gross negligence or gross malfeasance on the part of the Executive in the performance of his duties hereunder that causes material harm to the Company. Termination pursuant to this subsection 8(a)(i) shall be effective immediately upon giving the Executive written notice thereof stating the reason or reasons therefor with respect to clause (2) above, and 15 days after written notice thereof from the Company to the Executive specifying the acts or omissions constituting the failure and requesting that they be remedied with respect to clause (1) above, but only if the Executive has not cured such failure within such 15 day period. In the event of a termination pursuant to this subsection 8(a)(i), the Executive shall be entitled to payment of his Base Compensation and the benefits pursuant to
Section 4 hereof up to the effective date of such termination and it is also the intention and agreement of the Company that Executive shall not be deprived by reason of termination for Cause of any payments, options or benefits which have been vested or have been earned or to which Executive is entitled as of the effective date of such termination.

(b) Termination due to Disability. If due to illness, physical or mental disability, or other incapacity, the Executive shall fail, for a total of any six consecutive months ("Disability"), to substantially perform the principal duties required by this Agreement, the Company may terminate this Agreement upon 30 days' written notice to the Executive. In such event, the Executive shall be (1) paid his Base Compensation until the Termination Date and his Pro Rata Share of any Incentive Compensation to which he would have been entitled for the year in which such termination occurs, and (2) provided with employee benefits pursuant to Section 4, until the Termination Date, provided, however, that any compensation to be paid to the Executive pursuant to this subsection 8(a)(ii) shall be offset against any payments received by the Executive pursuant to any policy of disability insurance the premiums of which are paid for by the Company. The Executive shall also be paid any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued / unused vacation pay.

(c) Termination. If at the end of the Employment Term, the Company elects for reasons other than those outlined in paragraphs a and b above not to extend the Employment Term as provided for in Section 2 hereof, in consideration for the post-employment covenant against competition set forth in Section 10 hereof, the Executive shall be paid:. (i) a lump-sum payment equal to the product of twelve times the Monthly Salary Amount in addition to his Base Compensation at the rate in effect at the time of termination, through the

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Termination Date; provided, however, that at the sole discretion of the Company, the Company may extend the Executive's post-employment covenant against competition for an additional one-year period upon notice to the Executive and the payment of a second lump sum payment equal to the product of twelve times the Monthly Salary Amount. ; (ii) his Pro Rata Share of any Incentive Compensation to which he would have been entitled for the year in which such termination occurs; (iii) any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued / unused vacation pay; (iv) continuation until the expiration of the Employment Term and for twelve months thereafter, of the health and welfare benefits of the Executive and any long-term disability insurance generally provided to senior executives of the Company (as provided for by Section 4 of this Agreement) (or the Company shall provide the economic equivalent thereof); provided, however, if the Executive obtains new employment and such employment makes the Executive eligible for health and welfare or long-term disability benefits which are equal to or greater in scope then the benefits then being offered by the Company, then the Company shall no longer be required to provide such benefits to the Executive; and (v) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans or programs of the Company. As used in this Section 8(c), "Monthly Salary Amount" shall mean an amount equal to one-twelfth of the sum of (y) the Executive's then current annual Base Salary plus (z) the average cash incentive compensation paid to the Executive during the three years immediately preceding the termination date.

(d) Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided or maintained by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other existing or future agreements with the Company. Except as otherwise expressly provided for in this Agreement, amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plans or programs of the Company at or subsequent to the date of termination shall be payable in accordance with such plans or programs.

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(e) Vesting of Stock Grants and Stock Options. In the event of any termination of this Agreement, Executive's rights with regard to any stock grants, loan agreements or stock options shall be as set forth in the respective agreement containing the terms and conditions pertaining thereto. Notwithstanding the foregoing, in the event that the Executive is terminated for reasons other than for "Cause," any stock options then held by the Executive shall immediately vest in the Executive and shall remain exercisable for the period specified in the grant agreement notwithstanding any provision therein to the contrary..

(f) Certain Additional Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986 or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (an "Excise Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Excise Gross-Up Payment and any ordinary income tax on the Excise Gross-Up Payment in order to put the Executive in the same net after-tax position as if the payment were not subject to any Excise Tax. Subject to the provisions of this Section 8(e), all determinations required to be made hereunder, including whether an Excise Gross-Up Payment is required and the amount of such Excise Gross-Up Payment, shall be made by Freed, Maxick & Battaglia, PC or such other accounting firm which at the time audits the financial statements of the Company (the "Accounting Firm") at the sole expense of the Company, which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the date of termination of the Executive's employment under this Agreement, if applicable, or such earlier time as is requested by the Company.

If the Accounting Firm determines that no Excise Tax is payable by the Executive, the Company shall use its reasonable best efforts to cause the Accounting Firm to furnish the Executive with an opinion that he has substantial authority not to report any Excise Tax on his federal income tax return. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm

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hereunder, it is possible that Excise Gross-Up Payments, which will not have been made by the Company, should have been made (an "Underpayment") consistent with the calculations required to be made hereunder. If the Company exhausts its remedies pursuant hereto and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Excise Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including (without limitation) accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith to contest effectively such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions hereof the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive

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agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine, provided that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance, and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which an Excise Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

If, after the receipt by the Executive of an amount advanced by the Company pursuant hereto, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements hereof) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant hereto, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Excise Gross-Up Payment required to be paid.

(g) Death Benefit. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of the Executive's death. In such event the Company shall continue to pay Executive's Base Compensation to his wife, if she survives him, or, if she does not survive him, to his estate, through the Termination Date. In addition, the Company shall pay to Executive's wife, if she survives him, or, if she does not survive him, to his estate, the Pro Rata Share of any Incentive Compensation to which Executive would have been entitled for the year in which such death occurs. In addition, the Company shall

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provide the Executive's wife and/or eligible family members with health and medical benefits pursuant to Section 4, to the extent available, through the Termination Date.

(h) Payment.. Except as otherwise provided in this Agreement, any payments to which the Executive shall be entitled under this Section 8, including, without limitation, any economic equivalent of any benefit, shall be made as promptly as possible following the date of termination. If the amount of any payment due to the Executive cannot be finally determined within 90 days after the Date of Termination, such amount shall be estimated on a good faith basis by the Company and the estimated amount shall be paid no later than 90 days after such Date of Termination. As soon as practicable hereafter, the final determination of the amount due shall be made and any adjustment requiring a payment to or from the Executive shall be made as promptly as practicable.

(i) No Mitigation. The Executive shall not be required to mitigate the amount of any payments provided for by this Agreement by seeking employment or otherwise, nor shall the amount of any payment or benefit provided in this Agreement be reduced by any compensation or benefit earned by the Executive after termination of his employment.

9. Company Property. All advertising, promotional, sales, suppliers, manufacturers and other materials or articles or information, including without limitation data processing reports, customer lists, customer sales analyses, invoices, product lists, price lists or information, samples, or any other materials or data of any kind furnished to the Executive by the Company or developed by the Executive on behalf of the Company or at the Company's direction or for the Company's use or otherwise in connection with the Executive's employment hereunder, are and shall remain the sole and confidential property of the Company; if the Company requests the return of such materials at any time during or at or after the termination of the Executive's employment, the Executive shall immediately deliver the same to the Company.

10. Covenant Not To Compete.

(a) Covenants Against Competition. The Executive acknowledges that as of the execution of this Employment Agreement (i) the Company is engaged in the business described in its current filings with the Securities and Exchange Commission (the "Business"); (ii) the Company's Business is conducted currently throughout the United States and may be expanded to other locations; (iii) his

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employment with the Company will have given him access to confidential information concerning the Company; and (iv) the agreements and covenants contained in this Agreement are essential to protect the business and goodwill of the Company. Accordingly, the Executive covenants and agrees as follows:

(i) Non-Compete. Without the prior written consent of the Board of the Company, the Executive shall not during the Restricted Period (as defined below) within the Restricted Area (as defined below) (except in the Executive's capacity as an officer of the Company or any of its affiliates), (a) engage or participate in the Business (or any Business which the Company may become engaged in during the Employment Term); (b) enter the employ of, or render any services (whether or not for a fee or other compensation) to, any person engaged in the Business; or (c) acquire an equity interest in any such person; provided, that the foregoing restrictions shall not apply at any time if the Executive's employment is terminated during the Term by the Company other than for "Cause"; provided, further, that during the Restricted Period the Executive may own, directly or indirectly, solely as a passive investment, securities of any company traded on any national securities exchange or on the National Association of Securities Dealers Automated Quotation System.

As used herein, "Restricted Period" shall mean the period commencing on the Effective Date and ending on the first anniversary of the Executive's termination of employment; provided, however, that the Restricted Period may be extended by the Company in its sole discretion for an additional year upon notice to the Executive and the payment to the Executive of a second lump sum payment as provided in Section 8(c) above.

"Restricted Area" shall mean any place within the United States and any other country in which the Company is then actively considering conducting Business.

(b) Confidential Information; Personal Relationships. The Executive acknowledges that the Company has a legitimate and continuing proprietary interest in the protection of its confidential information and has invested substantial sums and will continue to invest substantial sums to develop, maintain and protect confidential information. The Executive agrees that, during and after the Restricted Period, without the prior written consent of the Board, the Executive shall keep secret and retain in strictest confidence, and shall not knowingly use for the benefit of himself or others all confidential matters

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relating to the Company's Business including, without limitation, operational methods, marketing or development plans or strategies, business acquisition plans, joint venture proposals or plans, and new personnel acquisition plans, learned by the Executive heretofore or hereafter (such information shall be referred to herein collectively as "Confidential Information"); provided, that nothing in this Agreement shall prohibit the Executive from disclosing or using any Confidential Information (A) in the performance of his duties hereunder, (B) as required by applicable law, (C) in connection with the enforcement of his rights under this Agreement or any other agreement with the Company, or (D) in connection with the defense or settlement of any claim, suit or action brought or threatened against the Executive by or in the right of the Company. Notwithstanding any provision contained herein to the contrary, the term Confidential Information shall not be deemed to include any general knowledge, skills or experience acquired by the Executive or any knowledge or information known or available to the public in general. Moreover, the Executive shall be permitted to retain copies of, or have access to, all such Confidential Information relating to any disagreement, dispute or litigation (pending or threatened) involving the Executive.

(c) Employees of the Company and its Affiliates. During the Restricted Period, without the prior written consent of the Board of the Company, the Executive shall not, directly or indirectly, hire or solicit, or cause others to hire or solicit, for employment by any person other than the Company or any affiliate or successor thereof, any employee of, or person employed within the two years preceding the Executive's hiring or solicitation of such person by, the Company and its affiliates or successors or encourage any such employee to leave his employment. For this purpose, any person whose employment has been terminated involuntarily by the Company shall be excluded from those persons protected by this Section for the benefit of the Company.

(d) Business Relationships. During the Restricted Period, the Executive shall not, directly or indirectly, request or advise a person that has a business relationship with the Company to curtail or cancel such person's business relationship with the Company.

(e) Rights and Remedies Upon Breach. If the Executive breaches, threatens to commit a breach of, any of the provisions contained in Section 10 of this Agreement (the "Restrictive Covenants"), the Company shall have the following rights and remedies, each of which rights and remedies shall be

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independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity.

(i) Specific Performance. The right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company.

(ii) Accounting. The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by the Executive as the result of any action constituting a breach of Restrictive Covenants.

(f) Severability of Covenants. The Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in duration and geographical scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect without regard to the invalid portions. The provisions set forth in Section 10 above shall be in addition to any other provisions of the business conduct and ethics policy applicable to employees of the Company and its subsidiaries during the term of Executive's employment.

(g) Saving Clause. If the period of time or the area specified in subsection (a) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such number of months or the area shall be reduced by the elimination of such portion thereof or both so that such restrictions may be enforced in such area and for such time as is adjudged to be reasonable. If the Executive violates any of the restrictions contained in the foregoing subsection (a), the restrictive period shall not run in favor of the Executive from the time of the commencement of any such violation until such time as such violation shall be cured by the Executive to the satisfaction of Company.

11. Executive's Representation and Warranties. Executive represents and warrants that he has the full right and authority to enter into this Agreement and fully perform his obligations hereunder, that he is not subject to any non-competition agreement other than with the Company, and that his past, present and anticipated future activities have not and will not infringe on the proprietary rights of others. Executive further represents and warrants that he

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is not obligated under any contract (including, but not limited to, licenses, covenants or commitments of any nature) or other agreement or subject to any judgment, decree or order of any court or administrative agency which would conflict with his obligation to use his best efforts to perform his duties hereunder or which would conflict with the Company's business and operations as presently conducted or proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business as officer and employee by Executive will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under any contract, covenant or instrument to which Executive is currently a party.

12. Miscellaneous.

(a) Integration; Amendment. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters set forth herein and supersedes and renders of no force and effect all prior understandings and agreements between the parties with respect to the matters set forth herein. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties.

(b) Severability. If any part of this Agreement is contrary to, prohibited by, or deemed invalid under applicable law or regulations, such provision shall be inapplicable and deemed omitted to the extent so contrary, prohibited, or invalid, but the remainder of this Agreement shall not be invalid and shall be given full force and effect so far as possible.

(c) Waivers. The failure or delay of any party at any time to require performance by the other party of any provision of this Agreement, even if known, shall not affect the right of such party to require performance of that provision or to exercise any right, power, or remedy hereunder, and any waiver by any party of any breach of any provision of this Agreement shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right, power, or remedy under this Agreement. No notice to or demand on any party in any case shall, of itself, entitle such party to other or further notice or demand in similar or other circumstances.

(d) Power and Authority. The Company represents and warrants to the Executive that it has the requisite corporate power to enter into this Agreement and perform the terms hereof; that the execution, delivery and performance of this Agreement by it has been duly authorized by all appropriate corporate

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action; and that this Agreement represents the valid and legally binding obligation of the Company and is enforceable against it in accordance with its terms.

(e) Burden and Benefit; Survival. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, personal and legal representatives, successors and assigns. In addition to, and not in limitation of, anything contained in this Agreement, it is expressly understood and agreed that the Company's obligation to pay Termination Compensation as set forth herein shall survive any termination of this Agreement.

(f) Governing Law; Headings. This Agreement and its construction, performance, and enforceability shall be governed by, and construed in accordance with, the laws of the State of New York. Headings and titles herein are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.

(g) Arbitration; Remedies. Any dispute or controversy arising under this Agreement or as a result of or in connection with Executive's employment (other than disputes arising under Section 10) shall be arbitrated and settled pursuant to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association which are then in effect in a proceeding held in Rochester, New York. This provision shall also apply to any and all claims that may be brought under any federal or state anti-discrimination or employment statute, rule or regulation, including, but not limited to, claims under: the National Labor Relations Act; Title VII of the Civil Rights Act; Sections 1981 through 1988 of Title 42 of the United States Code; the Employee Retirement Income Security Act; the Immigration Reform and Control Act; the Americans With Disabilities Act; the Age Discrimination in Employment Act; the Fair Labor Standards Act; the Occupational Safety and Health Act; the Family and Medical Leave Act; and the Equal Pay Act. The decision of the arbitrator and award, if any, is final and binding on the parties and the judgment may be entered in any court having jurisdiction thereof. The parties will agree upon an arbitrator from the list of labor arbitrators supplied by the American Arbitration Association. The parties understand and agree, however, that disputes arising under Section 10 of this Agreement may be brought in a court of law or equity without submission to arbitration.

(h) Jurisdiction. Except as otherwise provided for herein, each of the parties (a) submits to the exclusive jurisdiction of any state court sitting in New York or federal court sitting in New York in any action or proceeding arising out of or relating to this Agreement, (b) agrees that all claims in respect of the action or proceeding may be heard and determined in any such

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court, (c) agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court and (d) waives any right such party may have to a trial by jury with respect to any action or proceeding arising out of or relating to this Agreement. Each of the parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other party with respect thereto. Any party may make service on another party by sending or delivering a copy of the process to the party to be served at the address and in the manner provided for giving of notices in Section
12(i). Nothing in this Section, however, shall affect the right of any party to serve legal process in any other manner permitted by law.

(i) Notices. All notices called for under this Agreement shall be in writing and shall be deemed given upon receipt if delivered personally or by confirmed facsimile transmission and followed promptly by mail, or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at their respective addresses (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof) as set forth in the preamble to this Agreement or to any other address or addressee as any party entitled to receive notice under this Agreement shall designate, from time to time, to others in the manner provided in this subsection 12(i) for the service of notices.

Any notice delivered to the party hereto to whom it is addressed shall be deemed to have been given and received on the day it was received; provided, however, that if such day is not a business day then the notice shall be deemed to have been given and received on the business day next following such day. Any notice sent by facsimile transmission shall be deemed to have been given and received on the business day next following the day of transmission.

(j) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday on which federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday.

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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.


MICHAEL S. SMITH

INFINITE GROUP, INC.

By:

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EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 5th day of May, 2003, by and among INFINITE GROUP, INC., a Delaware corporation having its principal place of business at 595 Blossom Road, Suite 309, Rochester, New York 14610 (the "Company"), and JAMES D. FROST, an individual residing at 141 Rogers Ridge Road, Kingston, Tennessee 37763 (the "Executive").

W I T N E S S E T H

WHEREAS, the Executive wishes to be employed by the Company; and

WHEREAS, the Company, recognizing the unique skills and abilities of the Executive, wishes to employ the Executive as its Chief Technology Officer and Director of Delivery; and

WHEREAS, the parties desire by this Agreement to set forth the terms and conditions of the employment relationship between the Company and the Executive.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants in this Agreement, the Company and the Executive agree as follows:

1. Employment and Duties. The Company hereby employs the Executive as Chief Technology Officer and Director of Delivery on the terms and conditions provided in this Agreement and Executive agrees to accept such employment subject to the terms and conditions of this Agreement. The Executive shall perform the duties and responsibilities as are customary for the officer of a corporation in such positions, and shall perform such other duties and responsibilities as are reasonably determined from time to time by the Company's Board of Directors (the "Board"). The Executive shall report to and be supervised by the President and Chief Executive Officer of the Company. The Executive agrees to devote substantially all his attention and time during normal business hours to the business and affairs of the Company and to use his reasonable best efforts to perform faithfully and efficiently the duties and responsibilities of his positions and to accomplish the goals and objectives of the Company as may be established by the Board. Notwithstanding the foregoing, the Executive may engage in the following activities (and shall be entitled to retain all economic benefits thereof including fees paid in connection therewith) as long as they do not interfere in any material respect with the performance of the Executive's duties and responsibilities hereunder and, with


respect to subsections (i) and (ii) below, that such activity is pre-approved by the Company's President and Chief Executive Officer: (i) serve on corporate, civic, religious, educational and/or charitable boards or committees, provided that the Executive shall not serve on any board or committee of any corporation or other business which competes with the Business (as defined in Section 10(a) below); (ii) deliver lectures, fulfill speaking engagements or teach on a part-time basis at educational institutions; and (iii) make investments in businesses or enterprises and manage his personal investments; provided that with respect to such activities Executive shall comply with any business conduct and ethics policy applicable to employees of the Company.

2. Term. The term of this Agreement shall commence on May 5, 2003 (the "Commencement Date"), and shall terminate on May 2, 2008, unless extended or earlier terminated in accordance with the terms of this Agreement (the "Termination Date"). Such term of employment is herein sometimes referred to as the "Employment Term". The Employment Term shall be extended for successive one year periods unless either party notifies the other in writing at least 180 days before the Termination Date, or any anniversary of the Termination Date, as the case may be, that he or it chooses not to extend the Employment Term.

3. Compensation. As compensation for performing the services required by this Agreement, and during the term of this Agreement, the Executive shall be compensated as follows:

(a) Base Compensation. The Company shall pay to the Executive an annual salary ("Base Compensation") of $150,000.00, payable in equal installments pursuant to the Company's customary payroll procedures in effect for its executive personnel at the time of payment, but in no event less frequently than monthly, subject to withholding for applicable federal, state, and local income and employment related taxes. The Executive may be entitled to such increases in Base Compensation with respect to each calendar year during the term of this Agreement, as shall be determined by the Company's Compensation Committee (the "Committee"), in its sole and absolute discretion, based on an annual review of the Executive's performance .

(b) Incentive Compensation. In addition to Base Compensation, the Executive may be entitled to receive additional compensation ("Incentive Compensation") in the discretion of the Committee. The Incentive Compensation shall be pursuant to short-term and/or long-term incentive compensation and/or bonus programs which currently exist or may be established by the Company. The minimum executive annual bonus program is established at 30% of base Compensation and paid annually (assuming performance criteria and goals are met). For purposes of this Agreement, the Executive's "Pro Rata Share" of

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Incentive Compensation for any calendar year of the Company shall be a fraction whose numerator shall be equal to the number of months (or parts of months) during which the Executive was actually employed by the Company during any such calendar year and whose denominator shall be the total number of months in such calendar year.

(c) Stock and Stock Options. The Executive shall receive upon the signing of this Agreement (i) 500,000 shares of Common Stock of the Company; and
(ii) 500,000 options granted pursuant to the Company's Employee Stock Option Plan.

4. Employee Benefits. During the Employment Term and subject to the limitations set forth in this Section 4, the Executive and his eligible dependents shall have the right to participate in any retirement plans (qualified and non-qualified), stock option plan, pension, insurance, health, disability or other benefit plan or program that has been or is hereafter adopted by the Company (or in which the Company participates), according to the terms of such plan or program, on terms no less favorable than the most favorable terms granted to senior executives of the Company.

5. Vacation and Leaves of Absence. The Executive shall be entitled to the normal and customary amount of paid vacation provided to senior executive officers of the Company, but in no event less than 20 days during each 12 month period, beginning on the Commencement Date of this Agreement. The Executive may carry over a maximum of 5 unused vacation days, out of the allotted 20 days, from one year to the next. If during any 12-month period the executive uses 20 days of vacation, then any unused vacation shall not accrue and not carry over to the following year. Upon any termination of this Agreement for any reason whatsoever, accrued and unused vacation for the year in which this Agreement terminates will be paid to the Executive within 10 days of such termination based on his annual rate of Base Compensation in effect on the date of such termination. In addition, the Executive may be granted leaves of absence with or without pay for such valid and legitimate reasons as the Company in its sole and absolute discretion may determine, and the Executive shall be entitled to the same sick leave and holidays provided to other senior executives of the Company.

6. Expenses.

(a) Business Expenses. The Executive shall be promptly reimbursed against presentation of vouchers or receipts for all reasonable and necessary expenses incurred by him in connection with the performance of his duties hereunder.

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(b) Automobile Expense. During the Employment Term, in order to facilitate the performance of the Executive's duties hereunder, and otherwise for the convenience of the Company, the Company shall provide the Executive with an insured automobile, or shall reimburse the Executive for the cost of leasing an automobile (provided that the lease payments with respect to such automobile shall not exceed $500 per month) and shall pay or reimburse Executive (upon presentation of vouchers or receipts) for the reasonable cost of all maintenance, insurance, repairs, and other reasonable expenses related to such automobile. If the Executive decides to utilize his own personal vehicle, the company shall reimburse the Executive $700 per month. The Executive will then be responsible for all costs associated with the daily operation of said vehicle, including but not limited to: fuel costs, maintenance, insurance, etc.

(c) Life Insurance. During the Employment Term, the Company shall pay the premiums on a $1 million term life insurance policy on the Executive with the beneficiary of such policy designated by the Executive. This is in addition to whatever Insurance is required by the lending institutions on the life of the Executive.

7. Indemnification.

(a) General. The Company agrees that if the Executive is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Corporation, or the Company, is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee or agent while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by applicable law (in accordance with the certificate of incorporation and/or bylaws of the Company), as the same exists or may hereafter be amended, against all Expenses (as defined below) incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if the Executive has ceased to be an officer, director or agent, or is no longer employed by the Company and shall inure to the benefit of his heirs, executors and administrators.

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(b) Expenses. As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement.

(c) Enforcement. If a claim or request under this Agreement is not paid by the Company, or on their behalf, within fifteen days after a written claim or request has been received by the Company, the Executive may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim or request and if successful in whole or in part, the Executive shall be entitled to be paid also the expenses of prosecuting such suit. The burden of proving that the Executive is not entitled to indemnification for any reason shall be upon the Company.

(d) Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Executive.

(e) Partial Indemnification. If the Executive is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify the Executive for the portion of such Expenses to which the Executive is entitled.

(f) Advances of Expenses. Expenses incurred by the Executive in connection with any Proceeding shall be paid by the Company in advance upon request of the Executive that the Company pay such Expenses.

(g) Notice of Claim. The Executive shall give to the Company notice of any claim made against his for which indemnity will or could be sought under this Agreement. In addition, the Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within the Executive's power and at such times and places as are convenient for the Executive.

(h) Defense of Claim. With respect to any Proceeding as to which the Executive notifies the Company of the commencement thereof: (i) the Company will be entitled to participate therein at its own expense; and (ii) except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to the Executive. The

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Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which the Executive shall have reasonably concluded that there may be a conflict of interest between the Company and the Executive in the conduct of the defense of such action.

The Company shall not be liable to indemnify the Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on the Executive without Executive's written consent. Neither the Company nor the Executive shall unreasonably withhold or delay their consent to any proposed settlement.

(i) Non-exclusivity. The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 7 shall not be exclusive of any other right which the Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the Company, agreement, vote of stockholders or disinterested directors or otherwise.

(j) Directors and Officers Liability Policy. The Company agrees to use reasonable efforts to maintain directors and officers liability insurance covering the Executive in a reasonable and adequate amount determined by the Company.

8. Termination and Termination Benefits.

(a) Termination For Cause. Notwithstanding any provision contained herein, the Company may terminate this Agreement at any time during the Employment Term for "Cause". For purposes of this subsection 8(a)(i), "Cause" shall mean (1) the continuing willful failure by the Executive to substantially perform his duties hereunder for any reason other than total or partial incapacity due to physical or mental illness, or (2) gross negligence or gross malfeasance on the part of the Executive in the performance of his duties hereunder that causes material harm to the Company. Termination pursuant to this subsection 8(a)(i) shall be effective immediately upon giving the Executive written notice thereof stating the reason or reasons therefor with respect to clause (2) above, and 15 days after written notice thereof from the Company to the Executive specifying the acts or omissions constituting the failure and requesting that they be remedied with respect to clause (1) above, but only if the Executive has not cured such failure within such 15 day period. In the event of a termination pursuant to this subsection 8(a)(i), the Executive shall be

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entitled to payment of his Base Compensation and the benefits pursuant to
Section 4 hereof up to the effective date of such termination and it is also the intention and agreement of the Company that Executive shall not be deprived by reason of termination for Cause of any payments, options or benefits which have been vested or have been earned or to which Executive is entitled as of the effective date of such termination.

(b) Termination due to Disability. If due to illness, physical or mental disability, or other incapacity, the Executive shall fail, for a total of any six consecutive months ("Disability"), to substantially perform the principal duties required by this Agreement, the Company may terminate this Agreement upon 30 days' written notice to the Executive. In such event, the Executive shall be (1) paid his Base Compensation until the Termination Date and his Pro Rata Share of any Incentive Compensation to which he would have been entitled for the year in which such termination occurs, and (2) provided with employee benefits pursuant to Section 4, until the Termination Date, provided, however, that any compensation to be paid to the Executive pursuant to this subsection 8(a)(ii) shall be offset against any payments received by the Executive pursuant to any policy of disability insurance the premiums of which are paid for by the Company. The Executive shall also be paid any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued / unused vacation pay.

(c) Termination In the event Company does not elect to extend the Employment Term, for reasons not outlined in paragraphs a and b above, as provided for in Section 2 hereof, in consideration for the post-employment covenant against competition set forth in Section 10 hereof, the Executive shall be paid:. (i) a lump-sum payment equal to the product of twenty-four times the Monthly Salary Amount in addition to his Base Compensation at the rate in effect at the time of termination, through the Termination Date.. (ii) his Pro Rata Share of any Incentive Compensation to which he would have been entitled for the year in which such termination occurs; (iii) any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued / unused vacation pay; (iv) continuation until the expiration of the Employment Term and for twelve months thereafter, of the health and welfare benefits of the Executive and any long-term disability insurance generally provided to senior executives of the Company (as provided for by Section 4 of this Agreement) (or the Company shall provide the economic

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equivalent thereof); provided, however, if the Executive obtains new employment and such employment makes the Executive eligible for health and welfare or long-term disability benefits which are equal to or greater in scope then the benefits then being offered by the Company, then the Company shall no longer be required to provide such benefits to the Executive; and (v) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans or programs of the Company.

(d) Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided or maintained by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other existing or future agreements with the Company. Except as otherwise expressly provided for in this Agreement, amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plans or programs of the Company at or subsequent to the date of termination shall be payable in accordance with such plans or programs.

(e) Vesting of Stock Grants and Stock Options. In the event of any termination of this Agreement, Executive's rights with regard to any stock grants, loan agreements or stock options shall be as set forth in the respective agreement containing the terms and conditions pertaining thereto. Notwithstanding the foregoing, in the event that the Executive is terminated for reasons other than for "Cause," any stock options then held by the Executive shall immediately vest in the Executive and shall remain exercisable for the period specified in the grant agreement notwithstanding any provision therein to the contrary..

(f) Certain Additional Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986 or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (an "Excise Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Excise Gross-Up Payment and any ordinary income tax on the Excise Gross-Up Payment in order to put the Executive in the same net after-tax position as if the payment were not subject to any Excise Tax. Subject to the

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provisions of this Section 8(e), all determinations required to be made hereunder, including whether an Excise Gross-Up Payment is required and the amount of such Excise Gross-Up Payment, shall be made by Freed, Maxick & Battaglia, PC or such other accounting firm which at the time audits the financial statements of the Company (the "Accounting Firm") at the sole expense of the Company, which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the date of termination of the Executive's employment under this Agreement, if applicable, or such earlier time as is requested by the Company.

If the Accounting Firm determines that no Excise Tax is payable by the Executive, the Company shall use its reasonable best efforts to cause the Accounting Firm to furnish the Executive with an opinion that he has substantial authority not to report any Excise Tax on his federal income tax return. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Excise Gross-Up Payments, which will not have been made by the Company, should have been made (an "Underpayment") consistent with the calculations required to be made hereunder. If the Company exhausts its remedies pursuant hereto and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Excise Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including (without limitation) accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith to contest effectively such claim; and (iv) permit the Company to

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participate in any proceedings relating to such claim; provided that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions hereof the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine, provided that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance, and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which an Excise Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

If, after the receipt by the Executive of an amount advanced by the Company pursuant hereto, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements hereof) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount

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advanced by the Company pursuant hereto, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Excise Gross-Up Payment required to be paid.

(g) Death Benefit. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of the Executive's death. In such event the Company shall continue to pay Executive's Base Compensation to his wife, if she survives him, or, if she does not survive him, to his estate, through the Termination Date. In addition, the Company shall pay to Executive's wife, if she survives him, or, if she does not survive him, to his estate, the Pro Rata Share of any Incentive Compensation to which Executive would have been entitled for the year in which such death occurs. In addition, the Company shall provide the Executive's wife and/or eligible family members with health and medical benefits pursuant to Section 4, to the extent available, through the Termination Date.

(h) Payment.. Except as otherwise provided in this Agreement, any payments to which the Executive shall be entitled under this Section 8, including, without limitation, any economic equivalent of any benefit, shall be made as promptly as possible following the date of termination. If the amount of any payment due to the Executive cannot be finally determined within 90 days after the Date of Termination, such amount shall be estimated on a good faith basis by the Company and the estimated amount shall be paid no later than 90 days after such Date of Termination. As soon as practicable hereafter, the final determination of the amount due shall be made and any adjustment requiring a payment to or from the Executive shall be made as promptly as practicable.

(i) No Mitigation. The Executive shall not be required to mitigate the amount of any payments provided for by this Agreement by seeking employment or otherwise, nor shall the amount of any payment or benefit provided in this Agreement be reduced by any compensation or benefit earned by the Executive after termination of his employment.

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9. Company Property. All advertising, promotional, sales, suppliers, manufacturers and other materials or articles or information, including without limitation data processing reports, customer lists, customer sales analyses, invoices, product lists, price lists or information, samples, or any other materials or data of any kind furnished to the Executive by the Company or developed by the Executive on behalf of the Company or at the Company's direction or for the Company's use or otherwise in connection with the Executive's employment hereunder, are and shall remain the sole and confidential property of the Company; if the Company requests the return of such materials at any time during or at or after the termination of the Executive's employment, the Executive shall immediately deliver the same to the Company.

10. Covenant Not To Compete.

(a) Covenants Against Competition. The Executive acknowledges that as of the execution of this Employment Agreement (i) the Company is engaged in the business described in its current filings with the Securities and Exchange Commission (the "Business"); (ii) the Company's Business is conducted currently throughout the United States and may be expanded to other locations; (iii) his employment with the Company will have given him access to confidential information concerning the Company; and (iv) the agreements and covenants contained in this Agreement are essential to protect the business and goodwill of the Company. Accordingly, the Executive covenants and agrees as follows:

(i) Non-Compete. Without the prior written consent of the Board of the Company, the Executive shall not during the Restricted Period (as defined below) within the Restricted Area (as defined below) (except in the Executive's capacity as an officer of the Company or any of its affiliates), (a) engage or participate in the Business (or any Business which the Company may become engaged in during the Employment Term which, for purposes of this Agreement, shall be included in the definition of the "Business"); (b) enter the employ of, or render any services (whether or not for a fee or other compensation) to, any person engaged in the Business; or (c) acquire an equity interest in any such person; provided, that the foregoing restrictions shall not apply at any time if the Executive's employment is terminated during the Term by the Executive for Good Reason (as defined in Section 8(b) below) or by the

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Company other than for "Cause"; provided, further, that during the Restricted Period the Executive may own, directly or indirectly, solely as a passive investment, securities of any company traded on any national securities exchange or on the National Association of Securities Dealers Automated Quotation System.

As used herein, "Restricted Period" shall mean the period commencing on the Effective Date and ending on the second anniversary of the Executive's termination of employment.

"Restricted Area" shall mean any place within the United States and any other country in which the Company is then actively considering conducting Business.

(b) Confidential Information; Personal Relationships. The Executive acknowledges that the Company has a legitimate and continuing proprietary interest in the protection of its confidential information and has invested substantial sums and will continue to invest substantial sums to develop, maintain and protect confidential information. The Executive agrees that, during and after the Restricted Period, without the prior written consent of the Board, the Executive shall keep secret and retain in strictest confidence, and shall not knowingly use for the benefit of himself or others all confidential matters relating to the Company's Business including, without limitation, operational methods, marketing or development plans or strategies, business acquisition plans, joint venture proposals or plans, and new personnel acquisition plans, learned by the Executive heretofore or hereafter (such information shall be referred to herein collectively as "Confidential Information"); provided, that nothing in this Agreement shall prohibit the Executive from disclosing or using any Confidential Information (A) in the performance of his duties hereunder, (B) as required by applicable law, (C) in connection with the enforcement of his rights under this Agreement or any other agreement with the Company, or (D) in connection with the defense or settlement of any claim, suit or action brought or threatened against the Executive by or in the right of the Company. Notwithstanding any provision contained herein to the contrary, the term Confidential Information shall not be deemed to include any general knowledge, skills or experience acquired by the Executive or any knowledge or information known or available to the public in general. Moreover, the Executive shall be permitted to retain copies of, or have access to, all such Confidential Information relating to any disagreement, dispute or litigation (pending or threatened) involving the Executive.

(c) Employees of the Company and its Affiliates. During the Restricted Period, without the prior written consent of the Board of the Company, the Executive shall not, directly or indirectly, hire or solicit, or cause others to hire or solicit, for employment by any person other than the

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Company or any affiliate or successor thereof, any employee of, or person employed within the two years preceding the Executive's hiring or solicitation of such person by, the Company and its affiliates or successors or encourage any such employee to leave his employment. For this purpose, any person whose employment has been terminated involuntarily by the Company shall be excluded from those persons protected by this Section for the benefit of the Company.

(d) Business Relationships. During the Restricted Period, the Executive shall not, directly or indirectly, request or advise a person that has a business relationship with the Company to curtail or cancel such person's business relationship with the Company.

(e) Rights and Remedies Upon Breach. If the Executive breaches, threatens to commit a breach of, any of the provisions contained in Section 10 of this Agreement (the "Restrictive Covenants"), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity.

(i) Specific Performance. The right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company.

(ii) Accounting. The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by the Executive as the result of any action constituting a breach of Restrictive Covenants.

(f) Severability of Covenants. The Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in duration and geographical scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect without regard to the invalid portions. The provisions set forth in Section 10 above shall be in addition to any other provisions of the business conduct and ethics policy applicable to employees of the Company and its subsidiaries during the term of Executive's employment.

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(g) Saving Clause. If the period of time or the area specified in subsection (a) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such number of months or the area shall be reduced by the elimination of such portion thereof or both so that such restrictions may be enforced in such area and for such time as is adjudged to be reasonable. If the Executive violates any of the restrictions contained in the foregoing subsection (a), the restrictive period shall not run in favor of the Executive from the time of the commencement of any such violation until such time as such violation shall be cured by the Executive to the satisfaction of Company.

11. Executive's Representation and Warranties. Executive represents and warrants that he has the full right and authority to enter into this Agreement and fully perform his obligations hereunder, that he is not subject to any non-competition agreement other than with the Company, and that his past, present and anticipated future activities have not and will not infringe on the proprietary rights of others. Executive further represents and warrants that he is not obligated under any contract (including, but not limited to, licenses, covenants or commitments of any nature) or other agreement or subject to any judgment, decree or order of any court or administrative agency which would conflict with his obligation to use his best efforts to perform his duties hereunder or which would conflict with the Company's business and operations as presently conducted or proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business as officer and employee by Executive will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under any contract, covenant or instrument to which Executive is currently a party.

12. Miscellaneous.

(a) Integration; Amendment. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters set forth herein and supersedes and renders of no force and effect all prior understandings and agreements between the parties with respect to the matters set forth herein. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties.

(b) Severability. If any part of this Agreement is contrary to, prohibited by, or deemed invalid under applicable law or regulations, such provision shall be inapplicable and deemed omitted to the extent so contrary,

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prohibited, or invalid, but the remainder of this Agreement shall not be invalid and shall be given full force and effect so far as possible.

(c) Waivers. The failure or delay of any party at any time to require performance by the other party of any provision of this Agreement, even if known, shall not affect the right of such party to require performance of that provision or to exercise any right, power, or remedy hereunder, and any waiver by any party of any breach of any provision of this Agreement shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right, power, or remedy under this Agreement. No notice to or demand on any party in any case shall, of itself, entitle such party to other or further notice or demand in similar or other circumstances.

(d) Power and Authority. The Company represents and warrants to the Executive that it has the requisite corporate power to enter into this Agreement and perform the terms hereof; that the execution, delivery and performance of this Agreement by it has been duly authorized by all appropriate corporate action; and that this Agreement represents the valid and legally binding obligation of the Company and is enforceable against it in accordance with its terms.

(e) Burden and Benefit; Survival. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, personal and legal representatives, successors and assigns. In addition to, and not in limitation of, anything contained in this Agreement, it is expressly understood and agreed that the Company's obligation to pay Termination Compensation as set forth herein shall survive any termination of this Agreement.

(f) Governing Law; Headings. This Agreement and its construction, performance, and enforceability shall be governed by, and construed in accordance with, the laws of the State of New York. Headings and titles herein are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.

(g) Arbitration; Remedies. Any dispute or controversy arising under this Agreement or as a result of or in connection with Executive's employment (other than disputes arising under Section 10) shall be arbitrated and settled pursuant to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association which are then in effect in a proceeding held in Rochester, New York. This provision shall also apply to any and all claims that may be brought under any federal or state anti-discrimination or employment statute, rule or regulation, including, but not limited to, claims under: the National Labor Relations Act; Title VII of the Civil Rights Act; Sections 1981

16

through 1988 of Title 42 of the United States Code; the Employee Retirement Income Security Act; the Immigration Reform and Control Act; the Americans With Disabilities Act; the Age Discrimination in Employment Act; the Fair Labor Standards Act; the Occupational Safety and Health Act; the Family and Medical Leave Act; and the Equal Pay Act. The decision of the arbitrator and award, if any, is final and binding on the parties and the judgment may be entered in any court having jurisdiction thereof. The parties will agree upon an arbitrator from the list of labor arbitrators supplied by the American Arbitration Association. The parties understand and agree, however, that disputes arising under Section 10 of this Agreement may be brought in a court of law or equity without submission to arbitration.

(h) Jurisdiction. Except as otherwise provided for herein, each of the parties (a) submits to the exclusive jurisdiction of any state court sitting in New York or federal court sitting in New York in any action or proceeding arising out of or relating to this Agreement, (b) agrees that all claims in respect of the action or proceeding may be heard and determined in any such court, (c) agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court and (d) waives any right such party may have to a trial by jury with respect to any action or proceeding arising out of or relating to this Agreement. Each of the parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other party with respect thereto. Any party may make service on another party by sending or delivering a copy of the process to the party to be served at the address and in the manner provided for giving of notices in Section
12(i). Nothing in this Section, however, shall affect the right of any party to serve legal process in any other manner permitted by law.

(i) Notices. All notices called for under this Agreement shall be in writing and shall be deemed given upon receipt if delivered personally or by confirmed facsimile transmission and followed promptly by mail, or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at their respective addresses (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof) as set forth in the preamble to

17

this Agreement or to any other address or addressee as any party entitled to receive notice under this Agreement shall designate, from time to time, to others in the manner provided in this subsection 12(i) for the service of notices.

Any notice delivered to the party hereto to whom it is addressed shall be deemed to have been given and received on the day it was received; provided, however, that if such day is not a business day then the notice shall be deemed to have been given and received on the business day next following such day. Any notice sent by facsimile transmission shall be deemed to have been given and received on the business day next following the day of transmission.

(j) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday on which federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.


JAMES D. FROST

INFINITE GROUP, INC.

By:
Michael S. Smith
President and Chief Executive Officer

18

LICENSE AGREEMENT

This Agreement, effective as of the date of last execution, by and between Ultra-Scan Corporation, having its principal place of business at 4240 Ridge Lea Road, Suite 10, Amherst, New York 14226 ("Ultra-Scan"), and Infinite Group, Inc., having a place of business at 595 Blossom Road, Suite 309, Rochester, New York 14610 (IGI).

RECITALS:

Ultra-Scan has developed unique technology related to the capture, mapping and matching of ultrasonic images of human fingerprints for biometric identification purposes.

Ultra-Scan possesses valuable proprietary information pertaining to the design, operation, integration and manufacture of ultrasonic imaging devices and systems.

Ultra-Scan has obtained patent coverage for ultrasonic biometric imaging devices, fingerprint image matching software, related hardware, software and other technology, and owns additional patent applications in the U.S. and other countries.

Ultra-Scan, as part of its business, wishes to grant to IGI a license in accordance with and subject to the terms of this Agreement.

IGI is a systems integrator and developer of secure communication and other electronic systems for commercial and governmental operations.

IGI wishes to promote and provide Ultra-Scan's unique ultrasonic biometric technology to IGI's present and future customers for live-scan identification purposes.

IGI wishes to perform certain systems integration services for its current and potential future customers in relation to Ultra-Scan Technology.

For these reasons IGI wishes to obtain from Ultra-Scan license rights in accordance with and subject to the terms of this Agreement.

Therefore, Ultra-Scan and IGI agree follows:

1.0 DEFINITIONS:

As used in this Agreement:

1.1 "Licensed Patents" means U.S. Patents Numbers 5,524,174; 5,456,256; 5,587,533; 5,647,364; 5,689,576; 5,935,071 and 6,296,610 ("174 Patent", "256 Patent", "533 Patent", "364 Patent", "576 Patent", "071 Patent" and "610 Patent") relating to ultrasonic biometric imaging and identification, any patent anywhere in the world that relies on the `174 Patent, `256 Patent, `533 Patent, `364 Patent, `576 Patent, `071 Patent or the `610 Patent for priority, any patent issuing on any such application, and any reissue, reexamination, or extension of any such patent.

1.2 "Licensed Trademarks" means the trademarks and servicemarks Ultra-Scan(R), ID ExpressTM, ID Express DeveloperTM, and True Identity BiometricsTM, which are

Page 1 of 8 Pages


used on or in connection with products embodying Ultra-Scan Technology, as well as any additional U.S. or foreign trademarks or servicemarks obtained by Ultra-Scan.

1.3 "AFIS" means an Automated Fingerprint Identification System.

1.4 "DLL" (Dynamic Link Library) means software for processing plain impression fingerprint images. They are primary level software routines, which are a separate but embedded component of an AFIS. DLLs do not include source code.

1.5 "ID Express Developer" means an Automated Fingerprint Identification System that is proprietary to Ultra-Scan. It consists of a plurality of DLLs and application software, but does not include source code.

1.6 "IV & V" means independent verification and validation, a process of analyzing actual performance data for a Licensed System to assess the fingerprint identification process performance, determine error rates and causes and identify potential measures available to improve system efficiency and/or accuracy.

1.7 "Licensed System," means Ultra-Scan biometric components comprising ultrasonic imaging stations and associated hardware and fingerprint processing and matching software.

1.8 "End User" means any bona fide customer of IGI who purchases, rents, leases, or otherwise obtains any Licensed System.

1.9 "Third Party System Integrators" means those entities, if any, who have been selected by IGI and trained and approved by Ultra-Scan, that IGI utilizes for the integration, installation and/or service and support of Licensed Systems.

1.10 "Ultra-Scan Technology" means all information possessed by Ultra-Scan including trade secrets and know-how relating to the design and/or production of ultrasonic scanning devices, fingerprint image capture, processing and matching software and associated DLLs.

1.11 "Licensed Territory" means the continental United States.

1.12 "Licensed Field" means those governmental and/or commercial entities requiring live-scan biometric identification of individuals for various purposes relating to airports.

1.13 "Information" means: (a) information previously or subsequently shared between the Parties that derives independent economic value from not being generally known to others who could gain economic benefit from its use or disclosure, and (b) any such information, whether by electronic transfer or physical embodiment, of specifications, drawings, engineering materials, work papers, analyses, compilations, projections, studies or documents. It does not include any information which (a) is already known to the public prior to disclosure; or (b) is subsequently made known to the public without any violation of this Agreement; or (c) is rightfully received by a Party from a third party without similar restriction and without breach of this Agreement; or
(d) is independently developed; or (e) is required to be disclosed pursuant to a court order; or (f) is subject to disclosure in accordance with applicable securities laws, as reasonably determined by either party on advice of counsel.

Page 2 of 8 Pages


2.0 WARRANTIES:

2.1 Each Party warrants that it has the right to enter into this Agreement, and further warrants that the making of this Agreement does not violate any agreement existing between it and any other person or entity.

2.2 Ultra-Scan warrants that it has the right to license the Licensed Systems, Licensed Patents and Licensed Trademarks.

2.3 Ultra-Scan warrants that the Licensed Systems supplied by Ultra-Scan will be free from defects in workmanship and material, and will meet the required product specifications at the time of delivery.

2.4 Ultra-Scan Corporation warrants its products to be free from defects in materials and workmanship under normal use for a period of ninety (90) days for software and one (1) year for hardware, beginning on the original date of installation. Service including replacement or repair of hardware items at the discretion of Ultra-Scan will be performed during this warranty period by Ultra-Scan, directly or indirectly, at Ultra-Scan's expense.

2.5 THE WARRANTIES SET FORTH ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

3.0 GRANT:

Subject to the terms set forth in this Agreement, Ultra-Scan hereby grants to
IGI:

3.1 A non-exclusive, royalty bearing license, without the right to sublicense, to use, sell and offer to sell the Licensed Systems, within the Licensed Field, in the Licensed Territory for the term of this Agreement.

3.2 A non-exclusive license to obtain and use Ultra-Scan Technology.

3.3 A non-exclusive license to use the Licensed Trademarks in relation to the Licensed Systems in accordance with the guidelines provided by Ultra-Scan.

3.4 This Agreement does not transfer to IGI any rights of, or claims to, ownership in the Licensed Patents, Licensed Trademarks or Ultra-Scan Technology.

4.0 PAYMENTS:

4.1 IGI agrees to pay to Ultra-Scan a nonrefundable license fee of ten thousand dollars ($10,000USD) for the license granted by this Agreement and for a software developer's kit which shall include one (1) ultrasonic fingerprint reader. Additional readers may be purchased by IGI at a price to be determined.

4.2 IGI agrees to pay to Ultra-Scan a recurring fee to be negotiated in good faith by the parties in response to the specific conditions provided by each potential project. Nothing in this Agreement shall require IGI to enter into a transaction-based compensation arrangement with any End User.

Page 3 of 8 Pages


4.3 Notwithstanding paragraph 4.2 above, the Parties agree to negotiate in good faith a fee structure for any projects requiring a Licensed System, but for which the fees in paragraph 4.2 are not appropriate. Such negotiations will include initial and/or recurring fees for that project, and will be memorialized in an addendum to this Agreement and signed by both Parties.

4.4 In the event that negotiations are undertaken in accordance with paragraph 4.3 above and the resultant fee structure does not include provisions for maintenance of software and hardware beyond the warranty period, the Parties agree that Ultra-Scan will require an annual fee for extended warranty support, and that such an extended warranty may be offered by Ultra-Scan directly to the End User.

4.5 Payment terms are net thirty (30) days from invoice date, subject to late fees of 1.5% per month

5.0 REQUIREMENTS:

5.1 In order to assure prompt resolution of End User business process issues, IGI agrees to act as primary system service and support provider and first point of contact for End Users for all requests for service or maintenance, and to provide on site or call center service to:

a) Identify the type of failure and determine whether the source of the reported failure in the system is related to the Licensed System hardware or software, or elsewhere in the applications system, a telecom deficiency, operator error or other; and/or

b) Take direct action to correct the deficiency or recommend End User action to correct the deficiency; and/or

c) Coordinate directly with Ultra-Scan or in conference with both the End User and Ultra-Scan to identify symptom(s) and source(s) of malfunction or anomaly and develop a plan for necessary corrective action, including execution of Ultra-Scan's depot level warranty and product service support support.

5.2 IGI agrees to send appropriate employees to Ultra-Scan's Amherst, NY, facilities to receive Ultra-Scan systems training. Ultra-Scan agrees to provide training and documentation to IGI personnel to assist IGI in the integration and installation of Licensed Systems and IGI's direct service and support for End Users.

5.3 Ultra-Scan agrees to provide direct, on site support to IGI and/or End Users for purposes of installation, training, IV&V service and troubleshooting and maintenance support only as specified in an individual project quotation and/or separately agreed to in writing.

5.4 The Parties agree that for purposes of quality control and proper operation, Licensed Systems may only be proposed, sold or installed as complete ultrasound biometric systems. No elements or components may be added to, or deleted from, any Licensed System without prior written approval by Ultra-Scan.

5.5 The Parties agree that for purposes of quality control and proper operation, Ultra-Scan shall retain the right to approve or disapprove the integration of Licensed Systems with any other biometric system or components. Such approval will not be unreasonably withheld. This right of approval shall include systems that are to be installed for demonstration or promotional purposes.

Page 4 of 8 Pages


5.6 IGI agrees to include in each contract between IGI and an End User for a Licensed System, provisions granting Ultra-Scan the right to inspect and test each installed Licensed System at the expense and discretion of Ultra-Scan. Both parties agree that exceptions will be granted where certain customers may have special security requirements that inhibit or prevent such access.

5.7 The Parties agree that Ultra-Scan shall perform IV & V services after each system has been operational for a length of time to be determined. These services will be provided at a rate to be negotiated in good faith by the Parties. Said negotiated rates will be recorded in a signed addendum and incorporated herein by this reference.

5.8 IGI is authorized and required to grant each End-User the license attached hereto as Appendix A, with no additions or deletions thereto, and obtain affirmative acceptance of said license's terms and conditions.

5.9 The parties agree that any or all of the requirements set forth in paragraphs 5.1 through 5.8 above may be replaced by such other agreed-upon terms as may be appropriate to the special needs, status and/or security circumstances of some projects.

6.0 TERM AND TERMINATION:

6.1 The term of this Agreement is two (2) years beginning on the date of last execution. This Agreement will be renewed for successive two (2) year periods at the end of this term unless either Party provides written notice to the other Party of intent not to renew. Such notice must be given at least ninety (90) days prior to the then-current termination date. Duties and obligations that survive such termination are detailed in paragraph 6.2 below.

6.2 Upon any termination of this Agreement becoming effective, IGI will be relieved of all duties and obligations hereunder except for the obligation to pay to Ultra-Scan any fees accrued and unpaid up to that time, or that subsequently become due. Any fees as required by paragraphs 4.2 through 4.4 above shall be due for each installed Licensed System so long as it remains installed, and the need to pay such fees shall survive this Agreement.

6.3 Either Party may terminate this Agreement for a material breach by the other Party of the provisions hereof. Termination shall be effective thirty (30) days after written notice to the other Party, if the breach has not been remedied during that period. Failure to make timely payments of any fees due to Ultra-Scan will constitute a material breach. The right of Ultra-Scan or IGI to terminate under the provisions of this Article shall not be an exclusive remedy.

7. 0 MARKINGS & USAGE:

7.1 IGI agrees to use the Licensed Trademarks in relation to all products and systems utilizing Ultra-Scan Technology in a manner that acknowledges the participation and contribution by Ultra-Scan. Such use shall be in accordance with standards, specifications, and instructions approved by Ultra-Scan.

7.2 Each Party agrees not to do or fail to do anything that will impair the rights of the other Party in that Party's trademarks or trade names. Each Party

Page 5 of 8 Pages


acknowledges that it does not acquire any ownership rights or title to the trademarks or trade names of the other Party through this license.

8.0 ASSIGNMENT

8.1 This Agreement has been entered into by Ultra-Scan in reliance on the particular qualifications of IGI and is personal to IGI. IGI may not assign this Agreement or any of the licenses or rights granted herein. Any attempt by IGI to assign this Agreement shall be considered an express condition subsequent that will result in the immediate revocation of this Agreement. Notwithstanding the foregoing, this Agreement and any of the licenses or rights granted herein may be assigned to any entity that controls, is controlled by or is under common control with IGI.

8.2 The license granted in this Agreement shall be binding upon any IGI successor.

8.3 The license granted in this Agreement shall be binding upon any successor of Ultra-Scan who holds ownership or control of the Licensed Patents and Licensed Trademarks.

8.4 Ultra-Scan may assign, pledge, or encumber its monetary rights under this Agreement.

9.0 INFRINGEMENT AND INDEMNIFICATION:

9.1 IGI agrees to notify Ultra-Scan of any third party that IGI believes may be infringing a Licensed Patent and/or a Licensed Trademark and agrees to provide to Ultra-Scan any information IGI has in support of such belief. Ultra-Scan shall have the right, but not the obligation, to use such information in an infringement action against such third party. IGI agrees to cooperate with Ultra-Scan in any action for infringement of a Licensed Patent and/or a Licensed Trademark brought by Ultra-Scan, and Ultra-Scan agrees to reimburse IGI for all reasonable costs incurred by providing such requested cooperation.

9.2 The Parties agree to each indemnify, defend and hold harmless the other Party, its directors, shareholders, officers, agents employees, successors and assigns from and against any and all liabilities, obligations and costs of whatever nature arising from or related in any way to any negligent act or omission by a Party, or to any breach of this Agreement.

9.3 In no event will either Party be responsible for any incidental, consequential, indirect, special punitive or exemplary damages of any kind, including, without limitation, any damages for lost goodwill, lost profits, lost business or other indirect economic damages including injury to property, whether such claim is based on contract, tort or other legal theory, as a result of a breach of any warranty or any other term of this Agreement, and regardless of whether a Party was advised or had reason to know the possibility of such damages in advance.

10.0 CONFIDENTIALITY/NONCIRCUMVENTION:

10.1 The Parties agree that all terms and conditions of this Agreement and any other business agreements of the Parties are proprietary and confidential.

Page 6 of 8 Pages


10.2 The Parties agree to keep the Information they receive from each other confidential at all times and agree not to disclose the Information, in whole or in part, to any third party without the prior written consent of the other Party. The Parties agree to inform their respective employees of the confidential nature of the Information and to obtain their agreement to be bound by the terms of this Agreement.

10.3 The obligation to protect any confidential information that may have been received during the term of this Agreement shall survive the Agreement.

10.4 Information deemed confidential may be disclosed by either Party in response to an order by a court or other regulatory agency having jurisdiction over either Party as may be required the rules or regulations of said agency, or upon advice of counsel. Disclosure may also be made in any legal proceeding brought to enforce the rights of either Party under this Agreement. In the event any such disclosure is required, the disclosing Party will provide the other Party with adequate advance notice to allow such Party sufficient time to seek court protection for such Information. 10.5 Ultra-Scan agrees that it will not, directly or indirectly, solicit or accept any business from any source (including any subsidiary or affiliate of such source) that is first made available to Ultra-Scan by IGI without the express written consent of IGI, and that it will follow the reasonable directions of IGI with respect to any contact and/or communication with any such source. IGI agrees that Ultra-Scan shall have the right to participate in the preparation of any proposals or bids to End Users, to include input on pricing methods and levels for each project.

11.0 INTELLECTUAL PROPERTY:

11.1 The Parties agree that Ultra-Scan will have sole and exclusive ownership of all rights in the Ultra-Scan Technology, including, without limitation, the Ultra-Scan hardware and software products and all enhancements thereto. In the event IGI or any of its agents creates, develops or suggests any enhancements to the Ultra-Scan Technology, IGI hereby assigns and agrees to assign such enhancements to Ultra-Scan; provided that Ultra-Scan grants to IGI a nonexclusive license to use such enhancements. Any proprietary application software developed by IGI in accordance with the terms of this license is excluded from the requirements of this paragraph.

11.2 The parties agree that the gray-scale images of fingerprints, as stored in the applicable database, but without any identifying data, shall be the property of Ultra-Scan, to be used for IV & V analysis and other internal uses within Ultra-Scan.

12.0 MISCELLANEOUS:

12.1 This Agreement constitutes the entire agreement and understanding of the parties with regard to the subject matter hereof and merges and supersedes all prior discussions, negotiations, understandings, and agreements between the Parties.

12.2 Notices and other communications between the Parties shall be deemed to be validly given when transmitted by certified or registered mail, overnight delivery service, facsimile or personal delivery to the other Party.

Page 7 of 8 Pages


12.3 Ultra-Scan agrees to provide IGI employees and Third Party System Integrators appropriate training on Ultra-Scan systems and application at the Ultra-Scan facilities in Amherst, NY, at no charge to IGI. IGI will be responsible for all travel and incidental expenses incurred by IGI or Third Party personnel in connection with such training.

12.4 The Parties agree that any controversies arising under this Agreement shall be presented before the State Courts for the State of New York, or the Federal District Court for the Western District of New York. Ultra-Scan and IGI hereby submit themselves to the personal jurisdiction of such courts in connection with any such proceedings, and agree to accept service of process by mail. This clause shall not prevent either Party from seeking remedies from the International Trade Council in Washington, D.C.

12.5 The Parties agree that this Agreement shall be governed by the laws of the State of New York exclusively, both substantive and procedural (without regard to its choice of laws provisions) and of the United States.

12.6 The Parties agree that this Agreement is severable as to any word or provision that is held to be unenforceable, but not the provisions in paragraphs 4.2 through 4.5, which are so fundamental to this Agreement that the severance of either of them will automatically terminate this Agreement.

12.7 This Agreement may not be modified, discharged or amended except by a writing signed by both Parties, however, the Parties agree to make such modifications or amendments in response to reasonable End User requirements that are acceptable to both Parties. Such acceptance shall not be unreasonably withheld.

12.8 All shipments from Ultra-Scan, whether shipped as new products, warranty replacements or service, or software upgrades shall be made FOB Buffalo, NY per U.C.C. 2-319.

12.9 Ultra-Scan and IGI will prepare a press release to be released jointly as soon as practicable after the execution of this Agreement. No other press releases relating to this Agreement or the subject matter herein will be made by either Party without the prior written consent of the other Party.

In witness whereof, the parties have executed this Agreement in duplicate:

Ultra-Scan Corporation                    Infinite Group, Inc.



By: _______________________________       By: ________________________________

R. Terren Dunlap, CEO                     Michael S. Smith, President and CEO

Date: _____________________________       Date: _____________________________

Page 8 of 8 Pages


PROMISSORY NOTE

$150,000.00 Dated: August 13, 2003

FOR VALUE RECEIVED, INFINITE GROUP, INC., a corporation with offices at 595 Blossom Road, Suite 309, Rochester, NY 14610 14623 (the "Borrower"), hereby promises to pay to CARLE C. CONWAY, an individual residing at 10113 NE Kitsap Street, Bainbridge Island, WA 98110 (the "Lender"), the principal sum of One Hundred Fifty Thousand Dollars ($150,000.00), plus interest at the annual rate of twelve percent (12%), in lawful money of the United States of America, upon the following terms:

Due Date                Payment

September 12, 2003            $1,500.00
October 12, 2003              $1,500.00
November 12, 2003             $1,500.00
December 12, 2003             $1,500.00
January 12, 2004              $1,500.00
February 12, 2004             $1,500.00
March 12, 2004                $1,500.00
April 12, 2004                $1,500.00
May 12, 2004                  $1,500.00
June 12, 2004                 $1,500.00
July 12, 2004                 $1,500.00
August 12, 2004               $1,500.00
September 12, 2004            $1,500.00
October 12, 2004              $1,500.00
November 12, 2004             $1,500.00
December 12, 2004             $1,500.00
January 12, 2005              $1,500.00
February 12, 2005             $1,500.00
March 12, 2005                $1,500.00
April 12, 2005                $1,500.00
May 12, 2005                  $1,500.00
June 12, 2005                 $1,500.00
July 12, 2005                 $1,500.00
August 12, 2005               $1,500.00
September 12, 2005            $1,500.00
October 12, 2005              $1,500.00
November 12, 2005             $1,500.00
December 12, 2005             $1,500.00
January 12, 2006            $151,500.00

Borrower shall have the right, at its option and without prior notice to Lender, and without penalty, to prepay all or any part of the outstanding principal amount of this Note at any time.

Upon the occurrence of any of the following events of default, the entire indebtedness evidenced by this Note, including expenses of collection, shall immediately become due and payable without further notice, presentation or demand:

(i) The failure to pay a monthly installment within ten (10) days of its due date following the Lender's written notice of default and demand;


(ii) The bankruptcy of Borrower or the filing by Borrower of a voluntary petition under any provision of the bankruptcy laws; the institution of bankruptcy proceedings in any form against Borrower which shall be consented to or permitted to remain undismissed or unstayed for ninety (90) days; or the making by Borrower of an assignment for the benefit of creditors;

(iii) The taking of any judgment against Borrower, which judgment is not paid in accordance with its terms, satisfied, discharged, stayed or bonded within ninety (90) days from the entry thereof; or

(iv) The assignment of this Note by Borrower, provided, however, that Borrower may assign this Note to any person or entity that controls, is controlled by or is under common control with, Borrower.

No failure on the part of Lender to exercise, and no delay in exercising, any of the rights provided for herein, shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right preclude any other or future exercise thereof or the exercise of any other right.

Lender shall not, without the express prior written consent of Borrower, assign, sell, gift or otherwise transfer this Note to any third party, provided, however, that Lender may assign this Note to any person or entity that controls, is controlled by or is under common control with, Lender without the prior consent of Borrower.

This Note is secured by in accordance with that certain Collateral Security Agreement of even date herewith by and between the Lender and the Borrower.

Borrower agrees to pay all costs and expenses incurred by Lender in enforcing this Note, including without limitation all reasonable attorneys fees and expenses incurred by Lender.

This Note shall be governed by and construed in accordance with the laws of the State of New York.

IN WITNESS WHEREOF, Borrower has caused this Note to be executed and delivered as of the date set forth above.

INFINITE GROUP, INC.

By:_______________________________________
Michael S. Smith, President

2

PROMISSORY NOTE

$50,000.00 Dated: January 16, 2004

FOR VALUE RECEIVED, INFINITE GROUP, INC., a corporation with offices at 595 Blossom Road, Suite 309, Rochester, NY 14610 14623 (the "Borrower"), hereby promises to pay to CARLE C. CONWAY, an individual residing at 10113 NE Kitsap Street, Bainbridge Island, WA 98110 (the "Lender"), the principal sum of Fifty Thousand Dollars ($50,000.00), plus interest at the annual rate of twelve percent (12%), in lawful money of the United States of America, upon the following terms:

Due Date                         Payment
--------                         -------

February 16, 2004             $     500.00
March 16, 2004                $     500.00
April 16, 2004                $     500.00
May 16, 2004                  $     500.00
June 16, 2004                 $     500.00
July 16, 2004                 $     500.00
August 16, 2004               $     500.00
September 16, 2004            $     500.00
October 16, 2004              $     500.00
November 16, 2004             $     500.00
December 16, 2004             $     500.00
January 16, 2005              $     500.00
February 16, 2005             $     500.00
March 16, 2005                $     500.00
April 16, 2005                $     500.00
May 16, 2005                  $     500.00
June 16, 2005                 $     500.00
July 16, 2005                 $     500.00
August 16, 2005               $     500.00
September 16, 2005            $     500.00
October 16, 2005              $     500.00
November 16, 2005             $     500.00
December 16, 2005             $     500.00
January 16, 2006              $  50,500.00

Borrower shall have the right, at its option and without prior notice to Lender, and without penalty, to prepay all or any part of the outstanding principal amount of this Note at any time.

Upon the occurrence of any of the following events of default, the entire indebtedness evidenced by this Note, including expenses of collection, shall immediately become due and payable without further notice, presentation or demand:

(i) The failure to pay a monthly installment within ten (10) days of its due date following the Lender's written notice of default and demand;

(ii) The bankruptcy of Borrower or the filing by Borrower of a voluntary petition under any provision of the bankruptcy laws; the institution of bankruptcy proceedings in any form against Borrower which shall be consented to or permitted to remain undismissed or unstayed for ninety (90) days; or the making by Borrower of an assignment for the benefit of creditors;


(iii) The taking of any judgment against Borrower, which judgment is not paid in accordance with its terms, satisfied, discharged, stayed or bonded within ninety (90) days from the entry thereof; or

(iv) The assignment of this Note by Borrower, provided, however, that Borrower may assign this Note to any person or entity that controls, is controlled by or is under common control with, Borrower.

No failure on the part of Lender to exercise, and no delay in exercising, any of the rights provided for herein, shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right preclude any other or future exercise thereof or the exercise of any other right.

Lender shall not, without the express prior written consent of Borrower, assign, sell, gift or otherwise transfer this Note to any third party, provided, however, that Lender may assign this Note to any person or entity that controls, is controlled by or is under common control with, Lender without the prior consent of Borrower.

This Note is secured by in accordance with that certain Collateral Security Agreement of dated August 13, 2003 by and between the Lender and the Borrower.

Borrower agrees to pay all costs and expenses incurred by Lender in enforcing this Note, including without limitation all reasonable attorneys fees and expenses incurred by Lender.

This Note shall be governed by and construed in accordance with the laws of the State of New York.

IN WITNESS WHEREOF, Borrower has caused this Note to be executed and delivered as of the date set forth above.

INFINITE GROUP, INC.

By:_______________________________________
Michael S. Smith, President

2

PROMISSORY NOTE

$65,000.00 Dated: March 11, 2004

FOR VALUE RECEIVED, INFINITE GROUP, INC., a corporation with offices at 595 Blossom Road, Suite 309, Rochester, NY 14610 14623 (the "Borrower"), hereby promises to pay to CARLE C. CONWAY, an individual residing at 10113 NE Kitsap Street, Bainbridge Island, WA 98110 (the "Lender"), the principal sum of Sixty Five Thousand Dollars ($65,000.00), plus interest at the annual rate of twelve percent (12%), in lawful money of the United States of America, upon the following terms:

Due Date                           Payment

April 11, 2004                $     650.00
May 11, 2004                  $     650.00
June 11, 2004                 $     650.00
July 11, 2004                 $     650.00
August 11, 2004               $     650.00
September 11, 2004            $     650.00
October 11, 2004              $     650.00
November 11, 2004             $     650.00
December 11, 2004             $     650.00
January 11, 2005              $     650.00
February 11, 2005             $     650.00
March 11, 2005                $     650.00
April 11, 2005                $     650.00
May 11, 2005                  $     650.00
June 11, 2005                 $     650.00
July 11, 2005                 $     650.00
August 11, 2005               $     650.00
September 11, 2005            $     650.00
October 11, 2005              $     650.00
November 11, 2005             $     650.00
December 11, 2005             $     650.00
January 11, 2006              $  65,650.00

Borrower shall have the right, at its option and without prior notice to Lender, and without penalty, to prepay all or any part of the outstanding principal amount of this Note at any time.

Upon the occurrence of any of the following events of default, the entire indebtedness evidenced by this Note, including expenses of collection, shall immediately become due and payable without further notice, presentation or demand:

(i) The failure to pay a monthly installment within ten (10) days of its due date following the Lender's written notice of default and demand;

(ii) The bankruptcy of Borrower or the filing by Borrower of a voluntary petition under any provision of the bankruptcy laws; the institution of bankruptcy proceedings in any form against Borrower which shall be consented to or permitted to remain undismissed or unstayed for ninety (90) days; or the making by Borrower of an assignment for the benefit of creditors;

(iii) The taking of any judgment against Borrower, which judgment is not paid in accordance with its terms, satisfied, discharged, stayed or bonded within ninety (90) days from the entry thereof; or


(iv) The assignment of this Note by Borrower, provided, however, that Borrower may assign this Note to any person or entity that controls, is controlled by or is under common control with, Borrower.

No failure on the part of Lender to exercise, and no delay in exercising, any of the rights provided for herein, shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right preclude any other or future exercise thereof or the exercise of any other right.

Lender shall not, without the express prior written consent of Borrower, assign, sell, gift or otherwise transfer this Note to any third party, provided, however, that Lender may assign this Note to any person or entity that controls, is controlled by or is under common control with, Lender without the prior consent of Borrower.

This Note is secured by in accordance with that certain Collateral Security Agreement of dated August 13, 2003 by and between the Lender and the Borrower.

Borrower agrees to pay all costs and expenses incurred by Lender in enforcing this Note, including without limitation all reasonable attorneys fees and expenses incurred by Lender.

This Note shall be governed by and construed in accordance with the laws of the State of New York.

IN WITNESS WHEREOF, Borrower has caused this Note to be executed and delivered as of the date set forth above.

INFINITE GROUP, INC.

By:_______________________________________
Michael S. Smith, President

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PROMISSORY NOTE

$203,323.70 Dated: December 31, 2003

FOR VALUE RECEIVED, INFINITE GROUP, INC., a corporation with offices at 595 Blossom Road, Suite 309, Rochester, NY 14610 (the "Borrower"), hereby promises to pay to NORTHWEST HAMPTON HOLDINGS, LLC, a New York limited liability company with an address at 6640 Golf View Rise, Victor, NY 14564 (the "Lender"), the principal sum of Two Hundred Three Thousand Three Hundred Twenty Three Dollars and Seventy Cents ($203,323.70), plus interest at the annual rate of 7.75% in one lump sum on January 1, 2007.

THIS NOTE CANCELS AND REPLACES IN ITS ENTIRETY THAT CERTAIN CONSOLIDATED PROMISSORY NOTE DATED OCTOBER 10, 2002 IN THE ORIGINAL PRINCIPAL AMOUNT OF $211,004.53 MADE PAYABLE BY OSLEY & WHITNEY, INC. TO THE BANK OF WESTERN MASSACHUSETTS, WITH GUARANTOR RATIFICATION BY INFINITE GROUP, INC., WHICH WAS TRANSFERRED AND ASSIGNED TO THE LENDER BY THE BANK OF WESTERN MASSACHUSETTS PURSUANT TO A NON-RECOURSE ASSIGNMENT AND ALLONGE TO CONSOLIDATED PROMISSORY NOTE, EACH DATED AUGUST 5, 2003.

Borrower shall have no right to prepay all or any part of the outstanding principal amount of this Note at any time.

Upon the occurrence of any of the following events of default, the entire indebtedness evidenced by this Note, including expenses of collection, shall immediately become due and payable without further notice, presentation or demand:

(i) The failure to pay the principal amount of this Note together with accrued interest within ten (10) days of its due date following the Lender's written notice of default and demand;

(ii) The bankruptcy of Borrower or the filing by Borrower of a voluntary petition under any provision of the bankruptcy laws; the institution of bankruptcy proceedings in any form against Borrower which shall be consented to or permitted to remain undismissed or unstayed for ninety (90) days; or the making by Borrower of an assignment for the benefit of creditors;

(iii) The taking of any judgment against Borrower, which judgment is not paid in accordance with its terms, satisfied, discharged, stayed or bonded within ninety (90) days from the entry thereof; or

(iv) The assignment of this Note by Borrower, provided, however, that Borrower may assign this Note to any person or entity that controls, is controlled by or is under common control with, Borrower.

No failure on the part of Lender to exercise, and no delay in exercising, any of the rights provided for herein, shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right preclude any other or future exercise thereof or the exercise of any other right.

Lender shall not, without the express prior written consent of Borrower, assign, sell, gift or otherwise transfer this Note to any third party, provided, however, that Lender may assign this Note to any person or entity that controls, is controlled by or is under common control with, Lender without the prior consent of Borrower.


Lender shall have the right in his sole discretion upon written notice to the Borrower at any time after September 1, 2005 to convert all or part of the principal amount of this Note, together with accrued and unpaid interest, late fees and other charges, for common stock of the Borrower at the conversion rate of $.05 per share, as adjusted to reflect stock splits, distributions, recapitalizations, etc.

Borrower agrees to pay all costs and expenses incurred by Lender in enforcing this Note, including without limitation all reasonable attorneys fees and expenses incurred by Lender.

This Note shall be governed by and construed in accordance with the laws of the State of New York.

IN WITNESS WHEREOF, Borrower has caused this Note to be executed and delivered as of the date set forth above.

INFINITE GROUP, INC.

By:_______________________________________
Michael S. Smith, President

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ASSET PURCHASE AGREEMENT

ASSET PURCHASE AGREEMENT ("this Agreement") is made as of December 31, 2003 among LASER FARE, INC., a Rhode Island corporation ("Seller"), INFINITE GROUP, INC., a Delaware corporation (the "Shareholder"); and LFI, INC., a Rhode Island corporation ("Buyer").

RECITALS:

A. Seller is engaged in the business of (a) laser engraving and (b) manufacturing and assembling medical products (collectively, the "Business"), as well as other business activities.

B. The Shareholder owns all of the issued and outstanding capital stock of Seller; and

C. Buyer desires to purchase substantially all of the business and assets of Seller relating to the Business, and Seller and the Shareholder desire that Seller sell such business and assets relating to the Business to Buyer under the terms of this Agreement.

NOW THEREFORE, in consideration of the mutual promises contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

ARTICLE I

PURCHASE AND SALE OF ASSETS

1.1 Assets to be Purchased and Sold. At the Closing (defined in Section 4.1), Seller shall sell and convey to Buyer, and Buyer shall purchase and acquire from Seller, all of the business and tangible and intangible assets of Seller relating to the Business existing and owned by Seller on the Closing Date other than the Excluded Assets (defined in Section 1.2). The assets of Seller to be purchased hereunder (which exclude the Excluded Assets) are referred to as the "Purchased Assets". The Purchased Assets shall include without limitation all goodwill relating to the Business and the following assets and property, and all additions thereto relating to the Business, less dispositions in the ordinary course of business and permitted under this Agreement, before the Closing Date (defined in Section 4.1):

(a) all furniture and equipment and other tangible personal property, (the "Equipment"), including, without limitation, the items of Equipment described in Exhibit 1.1(a);

(b) all inventory, including raw materials, work-in-process, finished goods and packaging materials (the "Inventory");


(c) all rights under the contracts, leases and agreements described or referred to in Exhibit 1.1(c) hereto (the "Operating Agreements"), true and correct copies of which are being delivered to Buyer concurrently with this Agreement;

(d) all intellectual properties, including, without limitation, trade secrets, trademarks, trade names, copyrights and other rights or registrations, (collectively, the "Intellectual Property");

(e) all executory or continuing agreements and other contracts or commitments for the procurement of products entered into in the ordinary course of the Business ("Customer Orders"), listed in Exhibit 1.1(d) hereto;

(f) all lists and records relating to the Business, including lists and records of Seller's present and former customers, vendors, suppliers, and customers (the "Business Records");

(g) all Licenses (as defined below); and

(h) all accounts receivable, deposits, pre-paid rent and similar property, and all payments thereunder (collectively, "Accounts Receivable").

1.2 Excluded Assets. The Purchased Assets shall not include any assets or properties of Seller existing on the Closing Date that are not related to the Business or cash, the name "Laser Fare" or any Internet domain name (the "Excluded Assets").

ARTICLE II
LIMITED ASSUMPTION OF LIABILITIES

2.1 Assumption of Liabilities. At the Closing, Buyer shall assume and be responsible for performance of the executory obligations of Seller under the Operating Agreements and Customer Orders, but only such obligations which are in existence on the Closing Date and under which Seller is not in default at that time (the "Assumed Orders"). On the Payment Date (defined below), Buyer shall assume and be responsible for performance of the obligations of Seller listed in Exhibit 2.1 (the "Assumed Payables"). The obligations assumed by Buyer pursuant to the Section 2.1 are called the "Assumed Liabilities".

2.2 Excluded Liabilities. Apart from the Assumed Liabilities, Buyer will neither assume nor have any responsibility for any obligations, liabilities or indebtedness of Seller of any kind. All such obligations, liabilities and indebtedness of Seller, except the Assumed Liabilities, are referred to as the "Excluded Liabilities".

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ARTICLE III
PURCHASE PRICE AND PAYMENT

3.1 Purchase Price. In addition to the Assumed Liabilities, Buyer shall pay Seller, by wire transfer or bank check on the Payment Date an amount equal to (a) the principal amount and current month's accrued interest thereon, payable as of the Closing Date under Seller's promissory note to First International Bank (the "Bank") dated March 9, 1998 in the original principal amount of $525,000, as amended and restated November 7, 2001 plus (b) the fair market value as of the Closing Date of the Equipment listed in Exhibit 3.1, securing promissory notes of Seller to the Bank dated June 29, 1999 in the original principal amount of $1,260,000 and dated February 13, 1996 in the original principal amount of $1,250,000 respectively (identified by the Bank as # 001-0001-3001181-0001 and # 001-0001-30011-0002, respectively) (the "Purchase Price"). Seller agrees that it will not modify or amend, or increase any borrowing under, any of such promissory notes.

3.2 Allocation of Purchase Price. The consideration for the Purchased Assets will be allocated between Seller and among the Purchased Assets as set forth on Exhibit 3.2, which allocation shall be within classes or categories as provided in Section 1060 of the Internal Revenue Code of 1986, as amended. Each of Buyer and Seller agrees that it will adopt and utilize the amounts so allocated for purposes of all federal, state and other tax returns filed by it and it will not voluntarily take any position inconsistent therewith upon examination of any such tax return, in any claim, in any litigation or otherwise with respect to such tax returns. The provisions of this Section 3.2 shall survive the Closing Date without limitation.

3.3 Payment Date. The Payment Date shall be the date on which the conditions set forth in Sections 8.1 (b) and (h) shall have been satisfied.

ARTICLE IV
CLOSING

4.1 Closing; Closing Date. The Closing of the purchase and sale of the Purchased Assets provided in this Agreement (the "Closing") shall take place at the offices of Cameron & Mittleman LLP at 10:00 a.m. on December 31, 2003 or at such earlier time and place as the parties may agree. The time and the date of Closing are referred to as the "Closing Date".

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDER

To induce Buyer to enter into this Agreement and to purchase the Purchased Assets, Seller and the Shareholder, jointly and severally, represent and warrant to Buyer that, except as otherwise known by Clifford G. Brockmyre ("CGB") or Roland Benjamin (together, "Buyer's Principals"):

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5.1 Corporate Organization and Authority.

(a) Seller is a corporation duly organized and validly existing in good standing under the laws of Rhode Island with full corporate power and authority to conduct its business as now conducted, to own its assets and enter into and perform its obligations under this Agreement. Seller's execution, delivery and performance of this Agreement and the sale to Buyer of the Purchased Assets have been duly authorized by all requisite corporate action on the part of Seller. This Agreement constitutes, and all bills of sale, assignments, agreements and other instruments and documents to be executed and delivered by Seller hereunder will constitute, Seller's legal, valid and binding obligations, enforceable against Seller in accordance with their respective terms.

(b) The Shareholder is a corporation duly organized and validly existing in good standing under the laws of Delaware with full corporate power and authority to conduct its business as now conducted, to own its assets and enter into and perform its obligations under this Agreement. The Shareholder's execution and delivery and performance of this Agreement have been duly authorized by all requisite corporate action on the part of the Shareholder. This Agreement constitutes, and all documents and instruments to be executed and delivered by the Shareholder hereunder will constitute, the Shareholder's legal, valid and binding obligations, enforceable against the Shareholder in accordance with their respective terms.

5.2 Subsidiaries, Foreign Qualification and Ownership.

(a) Seller has no subsidiaries and no other equity investments in any other corporation, partnership or other business entity. Seller is not required to qualify to transact business as a foreign corporation in any jurisdiction.

(b) Seller's authorized capital stock consists of 2,000 shares of no par value common stock, of which 1,173 shares have been duly authorized for issuance, have been validly issued and are outstanding, are fully paid and non-assessable, and are owned of record and beneficially by the Shareholder.

5.3 Absence of Conflicts and Consent Requirements.

(a) Seller's execution and delivery of this Agreement and performance of its obligations hereunder will not (i) conflict with, violate or result in any breach or default or, with notice or lapse of time constitute a default, under (A) Seller's Articles of Incorporation or Bylaws, or (B) any mortgage, indenture, agreement, instrument or other contract to which Seller is a party or by which Seller or its property is bound, (ii) result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any assets or properties of Seller, or (iii) violate any judgment, order, decree, law, statute, regulation or other judicial or governmental restriction to which Seller or any of its assets is subject or by which it is bound. Except as set

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forth in Exhibit 5.3 hereto, Seller's execution and delivery of this Agreement and performance of its obligations hereunder, including the sale of the Purchased Assets, will not require the consent of, or any prior filing with or notice to, any governmental authority, lender or other third party, and any such consent, filing or notice will be received or delivered, as the case may be, on or prior to the Closing Date.

(b) The Shareholder's execution and delivery of this Agreement and performance of its obligations hereunder will not (i) conflict with, violate or result in any breach or default or, with notice or lapse of time constitute a default, under (A) the Shareholder's Certificate of Incorporation or Bylaws, or (B) any mortgage, indenture, agreement, instrument or other contract to which the Shareholder is a party or by which the Shareholder or its property is bound,
(ii) result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the purchased assets, or (iii) violate any judgment, order, decree, law, statute, regulation or other judicial or governmental restriction to which the Shareholder or any of its assets is subject or by which it is bound. Except as set forth in Exhibit 5.3 hereto, the Shareholder's execution and delivery of this Agreement and performance of its obligations hereunder, will not require the consent of, or any prior filing with or notice to, any governmental authority, lender or other third party, and any such consent, filing or notice will be received or delivered, as the case may be, on or prior to the Closing Date.

5.4 Financial Statements. Seller has delivered to Buyer true and correct copies of the unaudited balance sheet for the period ended ___________, 2003 (the "Current Balance Sheet") and its related statements of income and retained earnings and cash flows (the "Financial Statements"). The Financial Statements
(a) present fairly the financial position of Seller at the periods then ended and the results of its operations and cash flows for the periods then ended, (b) have been prepared in accordance with GAAP consistently applied, (c) show all material liabilities, absolute and contingent, of Seller required to be shown by generally accepted accounting principles ("GAAP") and (d) contain no misrepresentations, misstatements or omissions of material facts.

5.5 Absence of Certain Changes. Since the date of the Current Balance Sheet, there has not been any material adverse change in the financial position of Seller or in the results of its operations or to its assets, properties or business.

5.6 Title to Assets.

(a) Contract Rights. The rights of Seller under the Operating Agreements and the Customer Orders are valid and enforceable by Seller and will, at the Closing, be validly assigned to and thereupon enforceable by Buyer, in each case in accordance with their respective terms. Neither Seller nor any of the other parties thereto is in default in any material respect (nor does any

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circumstance exist which, with notice or the passage of time or both, would result in such a default) under any of the Operating Agreements or Customer Orders, and the assignment by Seller of its rights thereunder to Buyer will not violate the terms thereof.

(b) Purchased Assets. Except for security interests described in Exhibit 5.6 (the "UPS Security Interests") which UPS Security Interests shall be released and terminated prior to the Payment Date, Seller has good and marketable title to the Purchased Assets, free and clear of all liens, claims, security interests and encumbrances and has the right to convey the Purchased Assets to Buyer. At the Closing, Seller shall have conveyed to Buyer good and marketable title to the Purchased Assets free and clear of all liens, claims, security interests and encumbrances except the UPS Security Interest, and Seller will warrant and defend the title to the Purchased Assets in Buyer against the lawful claims of all persons whomsoever. The Purchased Assets described in Exhibit 8.1(b) are owned free and clear of any lien or security interest granted by the Shareholder, and the representations in this sentence shall not be limited by any knowledge of the Principals.

5.7 Loss Contingencies. There are no claims, actions, suits or other proceedings pending, or to the knowledge of Seller threatened, against Seller or any of the Purchased Assets before any court, agency or other judicial, administrative or other governmental body or arbitrator, and to Seller's knowledge, no state of facts exists which would be likely to give rise to any such claim, action, suit or other proceeding.

5.8 Compliance With Law. Seller has complied with, and is in compliance with, all laws, statutes, regulations, rules and other requirements of any governmental authority applicable to Seller, its assets and properties and the conduct of its business. The permits and licenses (the "Licenses") listed in Exhibit 5.8 are the only licenses, permits or authorizations of any governmental authority required in connection with Seller's business. All of the Licenses are in full force and effect.

5.9 Taxes.

(a) Returns and Payment of Taxes. All Federal, state and local income, excise or franchise tax returns, real estate and personal property tax returns, sales and use tax returns and all other tax returns required to be filed on or prior to the Payment Date by Seller with all taxing authorities have been or prior to the Payment Date will have been filed. All amounts shown to be due and payable on such returns, all other taxes, duties and other governmental charges payable by Seller or imposed upon any of the Purchased Assets and for the payment of which there may arise any lien upon the Purchased Assets sold hereunder subsequent to such sale, and all deficiencies, assessments, penalties and interest with respect thereto, in each case due and payable on or before the Closing Date, have been or prior to the Closing Date will have been paid.

(b) Sales, Use and Excise Taxes. All sales, use and excise taxes collectible with respect to all transactions connected with Seller's business

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through the Closing Date have been or will be collected, all amounts due in connection therewith to state and local revenue authorities have been or will be remitted to the appropriate authorities, and no lien or claim with respect thereto will be asserted by such authorities before or after the Closing Date.

(c) Withholding of Taxes. There has been withheld or collected from each payment made to each employee of Seller the amount of all taxes (including without limitation federal income taxes, Federal Insurance Contributions Act taxes, and state and local income, payroll and wage taxes) required to be withheld or collected therefrom prior to the date hereof and the same have been paid to the proper tax depositories or collecting authorities. Seller shall withhold, collect and pay all such amounts required during the period between the date hereof and the Payment Date.

5.10 Employee Benefit Plans. Buyer, by reason of the transactions contemplated by this Agreement, will not incur any claims, losses, damages, costs, and expenses with respect to or in connection with any pension, welfare, fringe, or other employee benefit plan maintained or contributed to by Seller or any predecessor that provides or provided benefits to any current or former employees or other parties who performed services for Seller (or their beneficiaries or dependents).

5.11 Employee Relations. To Seller's knowledge, no officer or employee of Seller is subject to any agreement with any other person or entity which requires such officer or employee to keep confidential any trade secrets, proprietary data, customer lists or other business information or which restricts such officer or employee from engaging in competitive activities or solicitation of customers.

5.12 Prospective Changes. Except as described in Exhibit 5.12 hereto, neither Seller nor the Shareholder knows of any impending changes in its assets, liabilities, relations with employees, competitive situation or relations with its suppliers or customers, or in any governmental actions or regulations affecting the Business, which, if they occur, could have a material adverse effect on the Business.

5.13 Products. There are no orders, decrees, statements, citations or decisions by any court or governmental or regulatory body, or other claim pending or threatened that any product, procured, sold or distributed by Seller within the last five (5) years is defective or fails to meet in any material respect any standards promulgated by any such governmental or regulatory body. There have been no recalls ordered by any such governmental or regulatory body with respect to any such product.

5.14 No Material Misstatements or Omissions. The representations and warranties of Seller in this Agreement do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements made therein not misleading.

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5.15 Continued Representations. Each of the representations and warranties contained in this Article V or in any certificate or document delivered pursuant to the provisions of this Agreement, shall be true and correct upon and as of the Closing Date and the Payment Date as though such representations and warranties were made at and as of the Closing Date and the Payment Date, all of which shall be deemed to be restated and fully applicable on and as of the Closing Date.

ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER

To induce Seller to enter into this Agreement and to sell the Purchased Assets, Buyer hereby represents and warrants to the Seller that:

6.1 Corporate Organization and Authority. Buyer is a corporation duly organized and validly existing in good standing under the laws of Rhode Island, with full corporate power and authority to conduct its business as now conducted and to enter into and perform its obligations under this Agreement. Buyer's execution, delivery and performance of this Agreement and its acquisition of and payment for the Purchased Assets have been duly authorized by all requisite corporate action on the part of Buyer and this Agreement constitutes, and all agreements and other instruments and documents to be executed and delivered by Buyer hereunder will constitute, Buyer's legal, valid and binding obligations, enforceable against Buyer in accordance with its terms.

6.2 Absence of Conflicts and Consent Requirements. Buyer's execution and deliver of this Agreement and performance of its obligations hereunder, including the purchase of and payment for the Assets hereunder, do not and will not conflict with, violate or result in any breach or default or, with notice or lapse of time, or both, constitute a default, under Buyer's Articles of Incorporation or Bylaws or any mortgage, indenture, agreement, instrument or other contract to which Buyer is a party or any judgment, order, decree, law, statute, regulation or other judicial or governmental restriction to which Buyer is subject. Buyer's execution and delivery of this Agreement and performance of its obligations hereunder, including the purchase of and payment for the Purchased Assets, do not and will not require the consent of, or any prior filing with or notice to, any governmental authority or other third party.

6.3 Continued Representations. Each of the foregoing representations and warranties contained in Article VI or in any certificate or document delivered by Buyer pursuant to the provisions of this Agreement, shall be true and correct upon and as of the Closing Date and the Payment Date as though such representations and warranties were made at and as of the Closing Date and the Payment Date, all of which shall be deemed to be restated and fully applicable on and as of the Closing Date and the Payment Date.

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ARTICLE VII
CERTAIN COVENANTS AND AGREEMENTS

7.1 Conduct Prior to Closing.

(a) Ordinary Course of Business. Through the Closing Date, unless Buyer otherwise, consents in writing, Seller will not and the Shareholder will not permit Seller to, conduct the Business, except in the ordinary course, will not dispose of any of the Equipment, will not enter into any contract, lease, agreement, transaction or arrangement which, if existing on the date hereof, would be required to be disclosed herein in response to any of the representations or warranties set forth in Article V hereof, and will not take any other action which would cause any representation or warranty made in Article V hereof to be incorrect in any material respect if such representation or warranty were made on any date through the Closing Date.

(b) Access. Through the Closing Date, Seller and the Shareholder shall give Buyer and its agents, lenders, attorneys and representatives full access to such of its properties, books, records and documents as Buyer may reasonably request.

(c) Press Releases and Announcements. Through the Payment Date, Buyer and Seller will cooperate in the preparation and dissemination of any press releases, announcements and other disclosures to others relating to the transactions contemplated hereby, and neither party shall make any such press releases, announcements or other disclosures, without the prior written consent of the other party; provided, however, that this section shall not preclude either party from making any disclosure as to the transactions contemplated hereby which the disclosing party reasonably believes is required by applicable law or is necessary in order to obtain any third-party consent or approval to the transactions contemplated by this Agreement.

(d) Buyer's Conduct of the Business. Through the Payment Date, unless Seller and the Shareholder otherwise consent in writing, Buyer will not conduct the Business except in the ordinary course, will not dispose of any of the Equipment, will not enter into any contract, lease, agreement, transaction or arrangement not in the ordinary course of Business, and will not take any other action which would cause any representation or warranty made in Article VI hereof to be incorrect in any material respect if such representation or warranty were made on any date through the Closing Date and the Payment Date. Through the Payment Date, Buyer will not declare any dividends on its capital stock or any cash bonuses or other distributions to any employee or representative of Buyer except in the ordinary course of Business or as otherwise expressly authorized in writing by Seller and Shareholder.

7.2 Seller's Employees. Concurrently with or prior to the Closing, Buyer may offer employment to Seller's employees currently engaged in the Business (and only such employees) on such terms and conditions as Buyer may deem appropriate in its sole discretion. In no event shall Buyer be or become liable

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to Seller or its employees on account of wages, vacation pay, severance pay, benefit or any other matter relating to or arising in connection with such employees' employment by Seller or the Shareholder, except as expressly included in the Assumed Liabilities.

7.3 Further Assurances. Each of Seller and Buyer agrees that at any time and from time to time it will promptly execute and deliver to the other such further assurances, instruments and documents and take such further action as the other may reasonably request in order to carry out the full intent and purpose of this Agreement.

7.4 Fees, Expenses and Sales Taxes. Whether or not the transactions contemplated by this Agreement are consummated, Seller, Buyer, and the Shareholder shall each pay its or his own fees and other costs or expenses incident to the negotiation, preparation and execution of this Agreement and the transactions contemplated hereby, including the fees and expenses of its or her own counsel, accountants, appraisers and other experts.

7.5 No Brokers. Each of Seller and Buyer represents that no broker or finder has been involved or engaged by it in connection with the transactions contemplated hereby.

ARTICLE VIII
CONDITIONS TO CLOSING

8.1 Conditions to Buyer's Obligations. The obligations of Buyer to complete the Closing are contingent upon the fulfillment of each of the following conditions on or before the Closing Date or the Payment Date, as the case may be, except to the extent that Buyer may, in its absolute discretion, waive in writing any one or more thereof, in whole or in part:

(a) Bringdown. The representations and warranties of Seller and the Shareholder set forth in this Agreement shall be true and correct in all material respects on the Closing Date and the Payment Date with the same force and effect as though made on the Effective Date; all terms, covenants and conditions to be complied with and performed by Seller and the Shareholder under this Agreement on or before the Closing Date and/or the Payment Date shall have been duly complied with and duly performed; and Seller and the Shareholder shall have delivered to Buyer at Closing a certificate, dated the Closing Date or the Payment Date as the case may be, to such effect;

(b) The Shareholder shall have delivered written confirmation acceptable to Buyer that the equipment described in Exhibit 8.1(b), is, and has been at least since December, 31, 2001, owned by Seller, free and clear of all liens, claims and encumbrances of every kind, whatsoever except UPS Security Interests, but free and clear of security interests granted to Laurus Master

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Fund, Ltd. by the Shareholder. The parties expressly agree and acknowledge that such equipment is included in the Purchased Assets to be sold to Buyer hereunder;

(c) Instruments of Transfer. Seller shall have delivered to Buyer such assignments, bills of sale, certificates of title, and other instruments of transfer, all in form reasonably satisfactory to Buyer, as are necessary to fully and effectively convey to Buyer all of the Purchased Assets in accordance with the terms hereof;

(d) Consents; Estoppel Certificates. The consents described in Exhibit 5.3 hereto, and all other consents required for Seller to perform its obligations hereunder, shall have been obtained in form and substance reasonably satisfactory to Buyer. Buyer shall have received estoppel certificates in form and substance reasonably satisfactory to Buyer from each of the parties to the Operating Agreements and Customer Orders;

(e) No Adverse Proceedings. No action, suit or proceeding before any court or governmental or regulatory authority shall have been commenced, no investigation by any governmental or regulatory authority shall have been commenced, and no action, suit or proceeding by any governmental or regulatory authority shall have been threatened, against any of the parties to this Agreement, or any of the principals, officers or directors of any of them, or any of the Purchased Assets seeking to restrain, prevent or change the transactions contemplated hereby or questioning the validity or legality of any of such transactions or seeking damages in connection with any of such transactions.

(f) Seller Closing Deliveries. Seller shall have provided to Buyer on or before the Closing Date or the Payment Date, as applicable, the following:

(i) a good standing certificate issued by the Secretary of State of Rhode Island;

(ii) certified copies of resolutions of the Shareholder and board of directors of Seller authorizing the execution, delivery and performance by Seller of this Agreement, the conveyance of the Purchased Assets and the transactions contemplated hereby;

(iii) UCC-11 Information Statements from all relevant jurisdictions relating to the existence of any Uniform Commercial Code financing statements and any statements of assignment thereof with respect to the Purchased Assets and shall cause its counsel to provide a report of such search to Buyer at the Closing;

(iv) copies of all required notices to appropriate taxing authorities with respect to the sale of the Purchased Assets and evidence of payment of all required taxes, together with tax lien releases or

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waivers to enable the Purchased Assets to be sold hereunder to the Buyer free and clear of all liens and encumbrances; and

(iv) all information reasonably requested by Buyer;

(g) Indemnification Agreement. Seller and the Shareholder shall have delivered to CGB an Indemnification Agreement in form and substance satisfactory to him, under which Seller and the Shareholder agree to indemnify and hold harmless CGB against and from all liability of CGB to Rhode Island Industrial Facilities Corporation, UPS Capital Business Credit (f/k/a First International Bank) or any of their respective successors or assigns.

(h) UCC Termination Statements. Seller shall have delivered to Buyer written evidence satisfactory to Buyer that all security interests in and liens against the Purchased Assets, including the UPS Security Interests, have been released and terminated.

(i) Other Assurances. Each of Seller and the Shareholder shall have delivered to Buyer such other and further certificates, assurances and documents as Buyer may reasonably request in order to evidence the accuracy of Seller's and the Shareholder's representations and warranties, the performance of its covenants and agreements to be performed at or prior to the Closing, and the fulfillment of the conditions to Buyer's obligations.

8.2 Conditions to Seller's Obligations. The obligations of Seller to complete the Closing are contingent upon the fulfillment of each of the following conditions on or before the Closing Date or the Payment Date as the case may be, except to the extent that Seller may, in its absolute discretion, waive any one or more thereof in whole or in part:

(a) Bringdown. The representations and warranties of Buyer set forth in the Agreement shall be true and correct in all material respects on the Closing Date or the Payment Date, as applicable, with the same force and effect as though made on the Closing Date or the Payment Date, as applicable; all terms, covenants and conditions to be complied with and performed by Buyer under this Agreement on or before the Closing Date or Payment Date, as applicable, shall have been duly complied with and duly performed; and Buyer shall have delivered to Seller at Closing a certificate, dated the Closing Date or Payment Date, as applicable, to such effect.

(b) Corporate Approval. Buyer shall have delivered to Seller copies of any resolutions approving the transactions contemplated by this Agreement, certified by the Secretary of the Buyer.

(c) No Adverse Proceedings. No action, suit or proceeding before any court or governmental or regulatory authority shall have been commenced, no investigation by any governmental or regulatory authority shall have been

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commenced, and no action, suit or proceeding by any governmental or regulatory authority shall have been threatened, against any of the parties to this Agreement, or any of the principals, officers or directors of any of them, or any of the Purchased Assets seeking to restrain, prevent or change the transactions contemplated hereby or questioning the validity or legality of any of such transactions or seeking damages in connection with any of such transactions.

(d) CGB Agreement. By written agreement, effective as of the Payment Date, CGB shall have (i) acknowledged and approved in writing the assumption by Buyer of the agreements and obligations of Seller and/or the Shareholder to CGB listed in Exhibit 8.2(d) and (ii) released Seller and the Shareholder on account of all liability under such agreements and obligations.

(e) Other Assurances. Buyer shall have delivered to Seller such other and further certificates, assurances and documents as Seller may reasonably request in order to evidence the accuracy of Buyer's representations and warranties, the performance of its covenants and agreements to be performed at or prior to the Closing, and the fulfillment of the conditions to Seller's obligations.

8.3 Payment of Purchase Price and Assumption of Obligations. On the Payment Date, Buyer shall pay the Purchase Price to Seller, and shall assume the Assumed Liabilities.

ARTICLE IX
TERMINATION; RIGHTS TO PROCEED

9.1 Termination. At any time prior to the Closing, this Agreement may be terminated as follows:

(a) by mutual written consent of all the parties to this Agreement; or

(b) at the election of the affected party, whether Buyer or Seller, subject to the limitations contained in Section 11.5, if any of the conditions to its obligations set forth in Article VIII of this Agreement has not been satisfied at or prior to the Closing, by written notice given to the other and setting forth such conditions which have not been so satisfied.

9.2 Effect of Termination. All obligations of the parties hereunder shall cease upon any termination pursuant to Section 9.1; provided, however that nothing herein shall relieve any party from any liability or a material error or omission in any of its representations or warranties contained herein or a material failure to comply with any of its covenants, conditions or agreements contained herein.

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ARTICLE X
RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING

10.1 Survival of Representations and Warranties. All representations, warranties, agreements, covenants and obligations herein or in any schedule, exhibit, certificate or financial statement delivered by any party or the other party incident to the transaction contemplated hereby are material, shall be deemed to have been relied upon by the other party and shall survive the Closing regardless of any investigation and shall not merge in the performance of any obligation by either party hereto.

10.2 Collection of Assets. Seller agrees that it will promptly transfer or deliver to Buyer from time to time, any cash or other property that Seller may receive with respect to any claims, contracts, licenses, leases, commitments, sales orders, purchase orders, receivables of any character or any other items included in the Purchased Assets.

10.3 Payment of Obligations. Seller shall pay, and the Shareholder shall cause Seller to pay, all of the Excluded Liabilities in the ordinary course of business as they become due.

ARTICLE XI
INDEMNIFICATION

11.1 Indemnification of Buyer by Seller and the Shareholder. Seller and the Shareholder, jointly and severally, shall indemnify and hold Buyer, Buyer's Principals and its and their attorneys, affiliates, representatives, agents, officers, directors, successors or assigns harmless from and against any liability, loss, cost, expense, judgment, order, settlement, obligations, deficiency, claim, suit, proceeding (whether formal or informal), investigation, Lien or other damage, including, without limitation, reasonable attorneys' fees and expenses (collectively, "Damages"), resulting from, arising out of or incurred with respect to:

(a) a breach of any representation, warranty, covenant or agreement of Seller or the Shareholder contained herein, including, without limitation, agreements under Article XIII hereof; or

(b) the Excluded Liabilities.

11.2 Indemnification of Seller. Buyer shall indemnify and hold Seller and its attorneys, affiliates, representatives, agents, officers, directors, successors or assigns, harmless from and against any Damages resulting from, arising out of, or incurred with respect to:

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(a) a breach of any representation, warranty, covenant or agreement by Buyer contained herein; or

(b) the Assumed Liabilities.

ARTICLE XII
NON-COMPETITION

12.1 In consideration of Buyer's consummation of the transaction contemplated by this Agreement, and as a material inducement to Buyer to enter into this Agreement, Seller and the Shareholder covenant and agree as follows:

(a) During the period beginning on the Closing Date and ending on the second anniversary of the Closing Date (the "Noncompete Period"), neither Seller nor the Shareholder will at any time, in any capacity, directly or indirectly, do any of the following: (i) be a Competing Organization or provide any management, consulting, financial, administrative or other service to any Competing Organization, including, without limitation, participating directly or indirectly as an officer, director, stockholder (excluding a less than 1% stockholder in a publicly held corporation), member, operator, sole proprietor, independent contractor, consultant, franchisor, franchisee, owner, employee, agent, representative or partner of, or having any direct or indirect financial interest (including, without limitation, the interest of a creditor) in, any Competing Organization, or (ii) knowingly allow Seller's name or any derivation thereof to be used by any Competing Organization. "Competing Organization" will include any individual, corporation, partnership, joint venture, limited liability company, organization, business or other enterprise (A) located or doing business anywhere in the United States (the "Geographic Area"), and (B) then engaged in or about to become engaged in, a business identical to or similar to the Business.

(b) During the Noncompete Period, neither Seller nor the Shareholder will at any time in any capacity, directly or indirectly, (i) induce or attempt to induce any employee (including leased employees) of Buyer or any of its Affiliates to leave their employ, or otherwise solicit the employment of any such employee of Buyer or any of its Affiliates, hire any such employee or in any way interfere with the relationship between Buyer or any of its Affiliates and any of such employees, (ii) induce or attempted to induce any customer, supplier, licensee, licensor, franchisee, or other business relation of either Buyer or any of its Affiliates to cease doing business with them or in any way interfere with the relationship between Buyer or any of its Affiliates and any of their respective customers or business relations, or (iii) solicit the business of any then existing customer of Buyer or any of its Affiliates relating to the Business.

(c) If, at the time of enforcement of any of the provisions of this Article XII, a court of competent jurisdiction holds that the restrictions stated in Article XII are unreasonable under the circumstance then existing or are otherwise illegal, invalid or unenforceable in any respect by reason of its

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duration, definition of Geographic Area or scope of activity, or any other reason, the parties agree that the maximum period, scope or geographical area reasonable or otherwise enforceable under such circumstances will be substituted for the state period, scope or area.

(d) Without limiting any of Buyer's rights under this Agreement, the parties hereto acknowledge that Buyer will be entitled to enforce its rights under this Article XII specifically, to recover damages and costs (including reasonable attorney's fees) caused by any breach of any provisions of this Article XII and to exercise all other rights existing in its favor. The parties acknowledge and agree that the breach of any term or provision of this Article XII by Seller or the Shareholder will materially and irreparably harm Buyer, that money damages will accordingly not be an adequate remedy for any breach of the provisions of this Article XII by Seller or the Shareholder and that Buyer in its sole discretion and in addition to any other remedies it may have at law or in equity may apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Article XII.

12.2 In consideration of Seller's consummation of the transaction contemplated by this Agreement, and as a material inducement to Seller to enter into this Agreement, Buyer and the Principals covenant and agree as follows:

(a) During the Non-Compete Period, neither Buyer nor the Principals will at any time, in any capacity, directly or indirectly, do any of the following: (i) be a Seller Competing Organization or provide any management, consulting, financial, administrative or other service to any Seller Competing Organization, including, without limitation, participating directly or indirectly as an officer, director, stockholder (excluding a less than 1% stockholder in a publicly held corporation), member, operator, sole proprietor, independent contractor, consultant, franchisor, franchisee, owner, employee, agent, representative or partner of, or having any direct or indirect financial interest (including, without limitation, the interest of a creditor) in, any Seller Competing Organization, or (ii) knowingly allow Seller's name or any derivation thereof to be used by any Seller Competing Organization. "Seller Competing Organization" will include any individual, corporation, partnership, joint venture, limited liability company, organization, business or other enterprise (A) located or doing business anywhere in the United States (the "Geographic Area"), and (B) then engaged in or about to become engaged in, the business now conducted by Seller, other than the Business.

(b) During the Noncompete Period except as contemplated by this Agreement, neither Buyer nor the Principals will at any time in any capacity, directly or indirectly, (i) induce or attempt to induce any employee (including leased employees) of Seller or any of its Affiliates to leave their employ, or otherwise solicit the employment of any such employee of Seller or any of its Affiliates, hire any such employee or in any way interfere with the relationship between Seller or any of its Affiliates and any of such employees, (ii) induce or attempted to induce any customer, supplier, licensee, licensor, franchisee,

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or other business relation of either Seller or any of its Affiliates to cease doing business with them or in any way interfere with the relationship between Seller or any of its Affiliates and any of their respective customers or business relations, or (iii) solicit the business of any then existing customer of Seller or any of its Affiliates relating to Seller's business other than the Business.

(c) If, at the time of enforcement of any of the provisions of this Article XII, a court of competent jurisdiction holds that the restrictions stated in Article XII are unreasonable under the circumstance then existing or are otherwise illegal, invalid or unenforceable in any respect by reason of its duration, definition of Geographic Area or scope of activity, or any other reason, the parties agree that the maximum period, scope or geographical area reasonable or otherwise enforceable under such circumstances will be substituted for the state period, scope or area.

(d) Without limiting any of Seller's rights under this Agreement, the parties hereto acknowledge that Seller will be entitled to enforce its rights under this Article XII specifically, to recover damages and costs (including reasonable attorney's fees) caused by any breach of any provisions of this Article XII and to exercise all other rights existing in its favor. The parties acknowledge and agree that the breach of any term or provision of this Article XII by Buyer or the Principals will materially and irreparably harm Seller, that money damages will accordingly not be an adequate remedy for any breach of the provisions of this Article XII by Buyer or the Principals and that Seller in its sole discretion and in addition to any other remedies it may have at law or in equity may apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Article XII.

ARTICLE XIII
PAYMENT DATE TERMINATION

13.1 Termination. In the event the Payment Date has not occurred on or before February 15, 2004, or such later date, not later then March 15, 2004, as Buyer may designate (the "Termination Date"), the parties agree that any and all obligations of Buyer, CGB and/or Roland Benjamin to Seller and/or the Shareholder under or in connection with this Agreement and the transactions contemplated hereby (collectively, "Buyer's Obligations") shall terminate and be of no force or effect in the same manner as if this Agreement had not been executed and delivered. The Shareholder and Seller expressly acknowledge and agree that in no event shall Buyer, CGB and/or Roland Benjamin have any liability on account of the Assumed Liabilities in the event of termination in accordance with this Section 13.1.

13.2 Reconveyance; Assumption.

(a) On the Termination Date, Buyer shall transfer and assign to Seller: (i) the Purchased Assets, except those sold, transferred or converted to cash in the ordinary course of business since the Closing Date; (ii) all customer orders in existence as of such date, including all Assumed Orders to

17

the extent not then completed; and (iii) all accounts receivable and inventory of Buyer owned as of such date. Such transfer and assignment shall be without representation or warranty of any kind whatsoever except Buyer shall warrant that title to such property will be free of liens and encumbrances created by Buyer.

(b) Seller and the Shareholder, jointly and severally, agree to (i) pay Buyer on the Termination Date an amount equal to (A) all liabilities and indebtedness of every kind whatsoever of Buyer arising in connection with the formation and organization of Buyer and the conduct of Buyer's business and (B) all capital contributions made to Buyer and (ii) assume in writing on the Termination Date all customer orders, including all Assumed Order to the extent not then completed and similar obligations of Buyer.

(c) The provisions of Sections 11.1 and 13.2 shall survive the termination of this Agreement pursuant to Section 13.1.

ARTICLE XIV
MISCELLANEOUS

14.1 Merger Clause. This Agreement contains the final, complete and exclusive statement of the agreement between the parties with respect to the transactions contemplated herein and all prior or contemporaneous written or oral agreements with respect to the subject matter hereof are merged herein.

14.2 Amendments. No change, amendment, qualification or cancellation hereof shall be effective unless in writing and executed by each of the parties hereto by their duly authorized officers.

14.3 Benefits and Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Buyer may form a wholly-owned subsidiary or other business entity for the purpose of assuming all of Buyer's rights and obligations under this Agreement.

14.4 Notices. All notices, requests and demands and other communications hereunder must be in writing and shall be deemed to have been duly given when personally delivered, or when place in the United States Mails and forwarded by Registered or Certified Mail, return receipt requested, postage prepaid, or delivered pre-paid by a nationally recognized courier service, addressed to the party to whom such notice is being given at the following addresses:

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If to Seller or the Shareholder:

Infinite Group, Inc.

595 Blossom Road
Suite 309
Rochester, New York 14610

Attention: Michael Smith, President

If to Buyer:

LFI, Inc.
c/o Clifford G. Brockmyre 7 Industrial Drive South Smithfield, Rhode Island 02917

Any party may change the address(es) to which notices to it are to be sent by giving notice of such change to the other parties in accordance with this Section.

14.5 Captions. The captions are for convenience of reference only and shall not be construed as a part of this Agreement.

14.6 Governing Law. This Agreement shall be construed, interpreted, enforced and governed by and under the laws of Rhode Island.

14.7 Exhibits. All of the Exhibits hereto referred to in this Agreement are hereby incorporated herein by reference and shall be deemed and construed to be a part of this Agreement for all purposes.

14.8 Severability. The invalidity or unenforceability of any one or more phrases, sentences, clauses or provisions of this Agreement shall not affect the validity or enforceability of the remaining portions of this Agreement or any part thereof.

14.9 Counterparts. This Agreement may be executed in any number of counterparts, all of which shall constitute one and the same instrument.

14.10 Time. Time is of the essence of this Agreement and all of its terms and conditions.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, Seller, the Shareholder and Buyer have each executed this Agreement or caused this Agreement to be executed by their respective duly authorized officers as of the day and year first above written.

LASER FARE, INC.

By:
President

INFINITE GROUP, INC.

By:
President

LFI, INC.

By:
President

MODIFICATION AGREEMENT TO
PROMISSORY NOTES

This MODIFICATION AGREEMENT is made as of December 1st, 2004 between Infinite Group, Inc., a Delaware corporation with offices at 595 Blossom Road, Suite 309, Rochester, NY 14610 ("Borrower") and Northwest Hampton Holdings, LLC, a New York limited liability company with an address at 6640 Golf View Rise, Victor, NY 14564 ("NWHH").

WHEREAS, NWHH is the holder of eight (8) Promissory Notes originally issued by the Borrower to Northeast Hampton Holdings, LLC ("NEHH"), as described in more detail in the attached Schedule A (collectively, the Notes); and

WHEREAS, NEHH has assigned the Notes to NWHH pursuant to an Assignment of Promissory Notes dated December 1, 2004; and

WHEREAS, the parties desire to modify the terms and conditions of the Promissory Notes as follows:

NOW, THEREFORE, the parties agree as follows:

1) The Notes and each of them are modified to provide that the time at which the entire principal balance and accrued interest shall be due and payable is January 1, 2007.

2) The Notes and each of them are modified to provide that the holder shall have the right in its sole discretion upon written notice to the Borrower at any time after September 1, 2005 to convert all or part of the principal amount of the Notes, together with accrued and unpaid interest, for common stock of the Borrower at the conversion rate of $.05 per share, as adjusted to reflect stock splits, distributions, recapitalizations, etc.

3) Except as modified by this Agreement, all of the terms, covenants and conditions of the Notes shall remain the same.

In witness whereof, Borrower and NWHH have executed this Agreement under the day and year first written above.

INFINITE GROUP, INC.


By: Michael S. Smith, President

NORTHWEST HAMPTON HOLDINGS, LLC


By: James A. Villa, President

PROMISSORY NOTES OF INFINITE GROUP, INC.
IN FAVOR OF NORTHEAST HAMPTON HOLDINGS, LLC

Holder                        Principal Amt                   Date

Northeast Hampton

Holdings, LLC                  $100,000                       1/16/03
Northeast Hampton
Holdings, LLC                  $100,000                       7/17/03
Northeast Hampton
Holdings, LLC                  $    800                       9/10/03
Northeast Hampton
Holdings, LLC                  $  3,000                       11/5/03
Northeast Hampton
Holdings, LLC                  $ 40,000                       11/6/03
Northeast Hampton
Holdings, LLC                  $ 50,000                      11/21/03
Northeast Hampton
Holdings, LLC                  $  2,000                       1/30/04
Northeast Hampton
Holdings, LLC                  $ 22,000                       3/11/04


MODIFICATION AGREEMENT TO
PROMISSORY NOTES

This MODIFICATION AGREEMENT is made as of December 1st, 2004 between Infinite Group, Inc., a Delaware corporation with offices at 595 Blossom Road, Suite 309, Rochester, NY 14610 ("Borrower") and Allan Robbins, an individual residing at 1575 Bayshore Boulevard, Rochester, NY 14622 (the "Lender").

WHEREAS, THE Lender is the holder of eight (8) Convertible Promissory Notes issued by the Borrower to the Lender, as described in more detail in the attached Schedule A (collectively, the Notes); and

WHEREAS, the parties desire to modify the terms and conditions of the Promissory Notes as follows:

NOW, THEREFORE, the parties agree as follows:

1) The Notes and each of them are modified to provide that the time at which the entire principal balance and accrued interest shall be due and payable is January 1, 2007.

2) The Notes and each of them are modified to provide that the holder shall have the right in his sole discretion upon written notice to the Borrower at any time after September 1, 2005 to convert all or part of the principal amount of the Notes, together with accrued and unpaid interest, for common stock of the Borrower at the conversion rate of $.05 per share, as adjusted to reflect stock splits, distributions, recapitalizations, etc.

3) Except as modified by this Agreement, all of the terms, covenants and conditions of the Notes shall remain the same.

In witness whereof, Borrower and The Lender have executed this Agreement under the day and year first written above.

INFINITE GROUP, INC.


By: Michael S. Smith, President


Allan Robbins

CONVERTIBLE PROMISSORY NOTES OF INFINITE GROUP, INC.

IN FAVOR OF ALLAN ROBBINS

Holder                      Principal Amt                       Date

Allan Robbins                  $  25,000                       2/25/03
Allan Robbins                  $  15,000                       4/15/03
Allan Robbins                  $  60,000                       4/25/03
Allan Robbins                  $  40,000                       5/22/03
Allan Robbins                  $  60,000                        7/2/03
Allan Robbins                  $  40,000                       12/4/03
Allan Robbins                  $    4,000                       1/2/04
Allan Robbins                  $  70,000                       2/26/04


ASSET PURCHASE AGREEMENT

ASSET PURCHASE AGREEMENT ("this Agreement") is made as of December 31, 2004 among LASER FARE, INC., a Rhode Island corporation ("Seller"), INFINITE GROUP, INC., a Delaware corporation (the "Shareholder"); and ROLBEN ACQUISITION COMPANY, a Rhode Island corporation ("Buyer").

RECITALS:

A. Seller is engaged in the business of laser manufacturing.

B. The Shareholder owns all of the issued and outstanding capital stock of Seller; and

C. Buyer desires to purchase substantially all of the business and assets of Seller, and Seller and the Shareholder desire that Seller sell such business and assets to Buyer under the terms of this Agreement.

NOW THEREFORE, in consideration of the mutual promises contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

ARTICLE I
PURCHASE AND SALE OF ASSETS

1.1 Assets to be Purchased and Sold. Effective the date hereof, Seller shall sell and convey to Buyer, and Buyer shall purchase and acquire from Seller, all of the business and tangible and intangible assets of Seller existing and owned by Seller as of the date hereof other than the Excluded Assets (defined in Section 1.2). The assets of Seller to be purchased hereunder (which exclude the Excluded Assets) are referred to as the "Purchased Assets". The Purchased Assets shall include without limitation all goodwill and the following assets and property:

(a) all personal property such as (without limitation) machinery, equipment, tools, dies, molds, drawings, furniture and fixtures, inventories and raw materials and supplies, work-in-progress and finished goods, customer lists, customer purchase orders, and goodwill;

(b) all rights, title and interest in and to Seller's intellectual properties, such as (without limitation) know-how, trade secrets, trademarks, trade names, copyrights, patents and other rights or registrations, internet domain names and the name "Laser Fare";

(c) all accounts receivable of Seller;


(d) all rights of Seller in, to and under a certain Lease Agreement dated as of June 1, 1992 (the "RIIFC Lease") between Seller and Rhode Island Industrial Facilities Corporation ("RIIFC");

(e) all rights under the contracts, leases and agreements described or referred to in Exhibit A hereto (the "Operating Agreements"), true and correct copies of which are being delivered to Buyer concurrently with this Agreement;

(f) all executory or continuing agreements and other contracts or commitments for the procurement of products entered into in the ordinary course of the Business ("Customer Orders"), including those, if any, listed in Exhibit B hereto;

(g) all books and records of Seller, including operating records, property records, purchasing and sale records and any computer software relating thereto; and

(h) all cash.

1.2 Excluded Assets. The Purchased Assets shall not include (a) any intercompany credits due to Seller from Shareholder, (b) any intellectual property relating to the Grating Coupled Surface Emitting Laser ("GCSEL") technology or (c) any property of Infinite Photonics, Inc. located at Seller's facilities (the "Excluded Assets").

ARTICLE II
LIMITED ASSUMPTION OF LIABILITIES

2.1 Assumption of Liabilities. Concurrently herewith, Buyer shall assume and be responsible for the following liabilities of Seller and Shareholder (the "Assumed Liabilities"):

(a) obligations under the RIIFC Lease and the related Industrial Revenue Bond due June 2012 (the "RIIFC Obligations") to Rhode Island Industrial Facilities Corporation ("RIIFC") to the extent provided in a certain Assignment of even date by Seller to Buyer;

(b) obligations with respect to accounts payable, Employee Obligations (defined below) and other related obligations incurred in the ordinary course of Seller's business consistent with prior practices and obligations, if any, for payments in lieu of taxes to the Town of Smithfield as required under the RIIFC Lease ("Smithfield Taxes");

(c) obligations under the Operating Agreements and Customer Orders;

(d) obligations, if any, to University of Rhode Island ("URI"); and

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(e) obligations, if any, to National Center for Manufacturing Sciences ("NCMS") for certain royalties pursuant to letter agreement dated March 23, 2000 (the "NCMS Obligations")

The term "Employee Obligations" shall mean to the extent unpaid in the ordinary course of business (i) regular payroll obligations for the pay period from January 1, 2004 through the closing date and (ii) vacation pay, sick pay and 401(k) contributions for the period from January 1, 2004 through the closing date to the extent not previously paid.

2.2 Excluded Liabilities. Apart from the Assumed Liabilities, Buyer will neither assume nor have any responsibility for any obligations, liabilities or indebtedness of Seller of any kind. All such obligations, liabilities and indebtedness of Seller, except the Assumed Liabilities, are referred to as the "Excluded Liabilities". The parties expressly acknowledge and agree that the Excluded Liabilities include (a) intercompany liabilities due to Shareholder from Seller, (b) obligations, if any, to Messrs. Landi, Feeley, McDonald, Garreau or Steinman or other current or former employees of Seller and/or Shareholder (including obligations on account of withholding and similar taxes) except Employee Obligations, (c) income taxes, if any, of Seller, (d) obligations, if any, of Seller and/or Shareholder to Spectra Science and (e) fees of lawyers and accountants of Infinite or Seller other than those to Aubrey, Dixon & Riley, Bulkley, Richardson & Gelinas and Cameron & Mittleman
LLP.

ARTICLE III
PURCHASE PRICE AND PAYMENT

3.1 Purchase Price. The consideration for the Purchased Assets shall be the Assumed Liabilities and the execution and delivery by Buyer of its promissory notes of even date in the original principal amounts of $50,207.37, $697,990.11, $974,109.99 and $415,000.

3.2 Allocation of Purchase Price. The consideration for the Purchased Assets will be allocated between Seller and among the Purchased Assets as provided in Section 1060 of the Internal Revenue Code of 1986, as amended. Each of Buyer and Seller agrees that it will adopt and utilize the amounts so allocated for purposes of all federal, state and other tax returns filed by it and it will not voluntarily take any position inconsistent therewith upon examination of any such tax return, in any claim, in any litigation or otherwise with respect to such tax returns. The provisions of this Section 3.2 shall survive the Closing Date without limitation.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDER

To induce Buyer to enter into this Agreement and to purchase the Purchased Assets, Seller and the Shareholder, jointly and severally, represent and warrant

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to Buyer that, except as otherwise known by Clifford G. Brockmyre ("CGB") or Roland Benjamin (together, "Buyer's Principals"):

4.1 Corporate Organization and Authority.

(a) Seller is a corporation duly organized and validly existing in good standing under the laws of Rhode Island with full corporate power and authority to conduct its business as now conducted, to own its assets and enter into and perform its obligations under this Agreement. Seller's execution, delivery and performance of this Agreement and the sale to Buyer of the Purchased Assets have been duly authorized by all requisite corporate action on the part of Seller. This Agreement constitutes, and all bills of sale, assignments, agreements and other instruments and documents to be executed and delivered by Seller hereunder will constitute, Seller's legal, valid and binding obligations, enforceable against Seller in accordance with their respective terms.

(b) The Shareholder is a corporation duly organized and validly existing in good standing under the laws of Delaware with full corporate power and authority to conduct its business as now conducted, to own its assets and enter into and perform its obligations under this Agreement. The Shareholder's execution and delivery and performance of this Agreement have been duly authorized by all requisite corporate action on the part of the Shareholder. This Agreement constitutes, and all documents and instruments to be executed and delivered by the Shareholder hereunder will constitute, the Shareholder's legal, valid and binding obligations, enforceable against the Shareholder in accordance with their respective terms.

4.2 Subsidiaries, Foreign Qualification and Ownership.

(a) Seller has no subsidiaries and no other equity investments in any other corporation, partnership or other business entity. Seller is not required to qualify to transact business as a foreign corporation in any jurisdiction.

(b) Seller's authorized capital stock consists of 2,000 shares of no par value common stock, of which 1,173 shares have been duly authorized for issuance, have been validly issued and are outstanding, are fully paid and non-assessable, and are owned of record and beneficially by the Shareholder.

4.3 Absence of Conflicts and Consent Requirements.

(a) Seller's execution and delivery of this Agreement and performance of its obligations hereunder will not (i) conflict with, violate or result in any breach or default or, with notice or lapse of time constitute a default, under (A) Seller's Articles of Incorporation or Bylaws, or (B) subject to consent by First International Bank and/or UPS Capital Business Credit (the "Bank") and RIIFC any mortgage, indenture, agreement, instrument or other contract to which Seller is a party or by which Seller or its property is bound,

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(ii) result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any assets or properties of Seller, or (iii) violate any judgment, order, decree, law, statute, regulation or other judicial or governmental restriction to which Seller or any of its assets is subject or by which it is bound.

(b) The Shareholder's execution and delivery of this Agreement and performance of its obligations hereunder will not (i) conflict with, violate or result in any breach or default or, with notice or lapse of time constitute a default, under (A) the Shareholder's Certificate of Incorporation or Bylaws, or (B) any mortgage, indenture, agreement, instrument or other contract to which the Shareholder is a party or by which the Shareholder or its property is bound,
(ii) result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the purchased assets, or (iii) violate any judgment, order, decree, law, statute, regulation or other judicial or governmental restriction to which the Shareholder or any of its assets is subject or by which it is bound. The Shareholder's execution and delivery of this Agreement and performance of its obligations hereunder, will not require the consent of, or any prior filing with or notice to, any governmental authority, lender or other third party, and any such consent, filing or notice will be received or delivered, as the case may be, on or prior to the Closing Date.

4.4 Financial Statements. Seller has delivered to Buyer true and correct copies of the unaudited balance sheets for recent periods (the "Balance Sheet") and its related statements of income and retained earnings and cash flows (the "Financial Statements"). The Financial Statements (a) present fairly the financial position of Seller at the periods then ended and the results of its operations and cash flows for the periods then ended, (b) have been prepared in accordance with GAAP consistently applied, (c) show all material liabilities, absolute and contingent, of Seller required to be shown by generally accepted accounting principles ("GAAP") and (d) contain no misrepresentations, misstatements or omissions of material facts.

4.5 Absence of Certain Changes. Since the date of the Balance Sheet, there has not been any material adverse change in the financial position of Seller or in the results of its operations or to its assets, properties or business.

4.6 Title to Assets.

(a) Contract Rights. The rights of Seller under the Operating Agreements and the Customer Orders are valid and enforceable by Seller and will, at the Closing, be validly assigned to and thereupon enforceable by Buyer, in each case in accordance with their respective terms. Neither Seller nor any of the other parties thereto is in default in any material respect (nor does any circumstance exist which, with notice or the passage of time or both, would result in such a default) under any of the Operating Agreements or Customer Orders, and the assignment by Seller of its rights thereunder to Buyer will not violate the terms thereof.

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(b) Purchased Assets. Except for security interests granted to the Bank (the "UPS Security Interests") and except for rights of RIIFC and others in connection with the RIIFC Obligations and rights of URI, Seller has good and marketable title to the Purchased Assets, free and clear of all liens, claims, security interests and encumbrances and has the right to convey the Purchased Assets to Buyer.

4.7 Loss Contingencies. There are no claims, actions, suits or other proceedings pending, or to the knowledge of Seller threatened, against Seller or any of the Purchased Assets before any court, agency or other judicial, administrative or other governmental body or arbitrator, and to Seller's knowledge, no state of facts exists which would be likely to give rise to any such claim, action, suit or other proceeding.

4.8 Compliance With Law. Seller has complied with, and is in compliance with, all laws, statutes, regulations, rules and other requirements of any governmental authority applicable to Seller, its assets and properties and the conduct of its business.

4.9 Taxes.

(a) Returns and Payment of Taxes. All Federal, state and local income, excise or franchise tax returns, real estate and personal property tax returns, sales and use tax returns and all other tax returns required to be filed on or prior to the date hereof by Seller with all taxing authorities have been or prior to the date hereof will have been filed. Except Smithfield Taxes, all amounts shown to be due and payable on such returns, all other taxes, duties and other governmental charges payable by Seller or imposed upon any of the Purchased Assets and for the payment of which there may arise any lien upon the Purchased Assets sold hereunder subsequent to such sale, and all deficiencies, assessments, penalties and interest with respect thereto, in each case due and payable on or before the date hereof or by reason of the sale of the Purchased Assets have been paid by Seller.

(b) Sales, Use and Excise Taxes. All sales, use and excise taxes collectible with respect to all transactions connected with Seller's business through the date hereof have been or will be collected, all amounts due in connection therewith to state and local revenue authorities have been or will be remitted to the appropriate authorities, and no lien or claim with respect thereto will be asserted by such authorities before or after the date hereof.

(c) Withholding of Taxes. There has been withheld or collected from each payment made to each employee of Seller the amount of all taxes (including without limitation federal income taxes, Federal Insurance Contributions Act taxes, and state and local income, payroll and wage taxes) required to be withheld or collected therefrom prior to the date hereof and the same have been paid to the proper tax depositories or collecting authorities.

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4.10 Employee Benefit Plans. Except as provided herein, Buyer, by reason of the transactions contemplated by this Agreement, will not incur any claims, losses, damages, costs, and expenses with respect to or in connection with any pension, welfare, fringe, or other employee benefit plan maintained or contributed to by Seller or any predecessor that provides or provided benefits to any current or former employees or other parties who performed services for Seller (or their beneficiaries or dependents).

4.11 No Material Misstatements or Omissions. The representations and warranties of Seller in this Agreement do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements made therein not misleading.

4.12 Continued Representations. Each of the representations and warranties contained in this Article IV or in any certificate or document delivered pursuant to the provisions of this Agreement, shall survive the delivery of this Agreement and all documents relating hereto.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER

To induce Seller to enter into this Agreement and to sell the Purchased Assets, Buyer hereby represents and warrants to the Seller that:

5.1 Corporate Organization and Authority. Buyer is a corporation duly organized and validly existing in good standing under the laws of Rhode Island, with full corporate power and authority to conduct its business as now conducted and to enter into and perform its obligations under this Agreement. Buyer's execution, delivery and performance of this Agreement and its acquisition of and payment for the Purchased Assets have been duly authorized by all requisite corporate action on the part of Buyer and this Agreement constitutes, and all agreements and other instruments and documents to be executed and delivered by Buyer hereunder will constitute, Buyer's legal, valid and binding obligations, enforceable against Buyer in accordance with its terms.

5.2 Absence of Conflicts and Consent Requirements. Buyer's execution and deliver of this Agreement and performance of its obligations hereunder, including the purchase of and payment for the Assets hereunder, do not and will not conflict with, violate or result in any breach or default or, with notice or lapse of time, or both, constitute a default, under Buyer's Articles of Incorporation or Bylaws or any mortgage, indenture, agreement, instrument or other contract to which Buyer is a party or any judgment, order, decree, law, statute, regulation or other judicial or governmental restriction to which Buyer is subject. Buyer's execution and delivery of this Agreement and performance of its obligations hereunder, including the purchase of and payment for the Purchased Assets, do not and will not require the consent of, or any prior filing with or notice to, any governmental authority or other third party.

5.3 Continued Representations. Each of the representations and warranties contained in this Article IV or in any certificate or document delivered pursuant to the provisions of this Agreement, shall survive the delivery of this Agreement and all documents relating hereto.

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ARTICLE VI

CERTAIN COVENANTS AND AGREEMENTS

6.1 Seller's Employees. Buyer may offer employment to Seller's employees on such terms and conditions as Buyer may deem appropriate in its sole discretion. In no event shall Buyer be or become liable to Seller or its employees on account of wages, vacation pay, severance pay, benefit or any other matter relating to or arising in connection with such employees' employment by Seller or the Shareholder, except as expressly included in the Assumed Liabilities.

6.2 Further Assurances. Each of Seller and Buyer agrees that at any time and from time to time it will promptly execute and deliver to the other such further assurances, instruments and documents and take such further action as the other may reasonably request in order to carry out the full intent and purpose of this Agreement.

6.3 Fees, Expenses and Sales Taxes. Seller, Buyer, and the Shareholder shall each pay its or his own fees and other costs or expenses incident to the negotiation, preparation and execution of this Agreement and the transactions contemplated hereby, including the fees and expenses of its or her own counsel, accountants, appraisers and other experts.

6.4 No Brokers. Each of Seller and Buyer represents that no broker or finder has been involved or engaged by it in connection with the transactions contemplated hereby.

ARTICLE VII
INDEMNIFICATION

7.1 Indemnification of Buyer by Seller and the Shareholder. Seller and the Shareholder, jointly and severally, shall indemnify and hold Buyer, Buyer's Principals and its and their attorneys, affiliates, representatives, agents, officers, directors, successors or assigns harmless from and against any liability, loss, cost, expense, judgment, order, settlement, obligations, deficiency, claim, suit, proceeding (whether formal or informal), investigation, Lien or other damage, including, without limitation, reasonable attorneys' fees and expenses (collectively, "Damages"), resulting from, arising out of or incurred with respect to:

(a) a breach of any representation, warranty, covenant or agreement of Seller or the Shareholder contained herein; or

8

(b) the Excluded Liabilities.

7.2 Indemnification of Seller. Buyer shall indemnify and hold Seller and Shareholder and their attorneys, affiliates, representatives, agents, officers, directors, successors or assigns, harmless from and against any Damages resulting from, arising out of, or incurred with respect to:

(a) a breach of any representation, warranty, covenant or agreement by Buyer contained herein; or

(b) the Assumed Liabilities.

ARTICLE VIII
MISCELLANEOUS

8.1 Merger Clause. This Agreement contains the final, complete and exclusive statement of the agreement between the parties with respect to the transactions contemplated herein and all prior or contemporaneous written or oral agreements with respect to the subject matter hereof are merged herein.

8.2 Amendments. No change, amendment, qualification or cancellation hereof shall be effective unless in writing and executed by each of the parties hereto by their duly authorized officers.

8.3 Benefits and Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Buyer may form a wholly-owned subsidiary or other business entity for the purpose of assuming all of Buyer's rights and obligations under this Agreement.

8.4 Notices. All notices, requests and demands and other communications hereunder must be in writing and shall be deemed to have been duly given when personally delivered, or when place in the United States Mails and forwarded by Registered or Certified Mail, return receipt requested, postage prepaid, or delivered pre-paid by a nationally recognized courier service, addressed to the party to whom such notice is being given at the following addresses:

If to Seller or the Shareholder:

Infinite Group, Inc.

595 Blossom Road
Suite 309
Rochester, New York 14610 Attention: Michael Smith, President

9

With a copy to:

Kenneth S. Rose, Esq.


Morse, Zelnick, Rose & Lander, LLP

405 Park Avenue
Suite 1401
New York, New York 10022-4405

If to Buyer:

Rolben Acquisition Company

One Industrial Drive South Smithfield, Rhode Island 02917

With a copy to:

Joseph F. Whinery, Jr.

Cameron & Mittleman LLP
56 Exchange Terrace
Providence, Rhode Island 02903

Any party may change the address(es) to which notices to it are to be sent by giving notice of such change to the other parties in accordance with this Section.

8.5 Captions. The captions are for convenience of reference only and shall not be construed as a part of this Agreement.

8.6 Governing Law. This Agreement shall be construed, interpreted, enforced and governed by and under the laws of Rhode Island.

8.7 Exhibits. All of the Exhibits hereto referred to in this Agreement are hereby incorporated herein by reference and shall be deemed and construed to be a part of this Agreement for all purposes.

8.8 Severability. The invalidity or unenforceability of any one or more phrases, sentences, clauses or provisions of this Agreement shall not affect the validity or enforceability of the remaining portions of this Agreement or any part thereof.

8.9 Counterparts. This Agreement may be executed in several counterparts and on separate signature pages, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Delivery of an executed counterpart of this Agreement by telecopier shall be effective as delivery of an original executed counterpart. Any party delivering such a copy by telecopier shall also deliver an original counterpart, but the failure to do so shall not affect the validity, enforceability or binding effect of this Agreement.

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8.10 Time. Time is of the essence of this Agreement and all of its terms and conditions.

[SIGNATURE PAGE FOLLOWS]

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[SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT]

IN WITNESS WHEREOF, Seller, the Shareholder and Buyer have each executed this Agreement or caused this Agreement to be executed by their respective duly authorized officers as of the day and year first above written.

LASER FARE, INC.

By:_____________________________
President

INFINITE GROUP, INC.

By:_____________________________
President

ROLBEN ACQUISITION COMPANY

By:_____________________________
Vice President


MODIFICATION AGREEMENT No. 2 TO
PROMISSORY NOTES

This MODIFICATION AGREEMENT No. 2 is made as of June 1, 2005 between Infinite Group, Inc., a Delaware corporation with offices at 595 Blossom Road, Suite 309, Rochester, NY 14610 ("Borrower") and Northwest Hampton Holdings, LLC, a New York limited liability company with an address at 6640 Golf View Rise, Victor, NY 14564 ("NWHH").

WHEREAS, NWHH is the holder of eight (8) Promissory Notes originally issued by the Borrower to Northeast Hampton Holdings, LLC ("NEHH"), as described in more detail in the attached Schedule A (collectively, the Notes); and

WHEREAS, NEHH has assigned the Notes to NWHH pursuant to an Assignment of Promissory Notes dated December 1, 2004; and

WHEREAS, NWHH and the Borrower are parties to a Modification Agreement to Promissory Notes dated December 1, 2004 pursuant to which, among other things, the parties agreed that the holder shall have the right in its sole discretion upon written notice to the Borrower at any time after September 1, 2005 to convert all or part of the principal amount of the Notes, together with accrued and unpaid interest, for common stock of the Borrower at the conversion rate of $.05 per share, as adjusted to reflect stock splits, distributions, recapitalizations, etc.; and

WHEREAS, the parties desire to modify the terms and conditions of the Promissory Notes as follows:

NOW, THEREFORE, the parties agree as follows:

1) The Notes and each of them are modified to provide that the holder shall have the right in its sole discretion upon written notice to the Borrower at any time after November 30, 2005 to convert all or part of the principal amount of the Notes, together with accrued and unpaid interest, for common stock of the Borrower at the conversion rate of $.05 per share, as adjusted to reflect stock splits, distributions, recapitalizations, etc.

2) Except as modified by this Agreement, all of the terms, covenants and conditions of the Notes shall remain the same.

In witness whereof, Borrower and NWHH have executed this Agreement under the day and year first written above.

INFINITE GROUP, INC.


By: Michael S. Smith, President

NORTHWEST HAMPTON HOLDINGS, LLC


By: James A. Villa, President

PROMISSORY NOTES OF INFINITE GROUP, INC.
IN FAVOR OF NORTHEAST HAMPTON HOLDINGS, LLC

Holder                       Principal Amt                       Date

Northeast Hampton

Holdings, LLC                  $100,000                        1/16/03
Northeast Hampton
Holdings, LLC                  $100,000                        7/17/03
Northeast Hampton
Holdings, LLC                  $    800                        9/10/03
Northeast Hampton
Holdings, LLC                  $  3,000                        11/5/03
Northeast Hampton
Holdings, LLC                  $ 40,000                        11/6/03
Northeast Hampton
Holdings, LLC                  $ 50,000                       11/21/03
Northeast Hampton
Holdings, LLC                  $  2,000                        1/30/04
Northeast Hampton
Holdings, LLC                  $ 22,000                        3/11/04


MODIFICATION AGREEMENT No. 2 TO

PROMISSORY NOTES

This MODIFICATION AGREEMENT No. 2 is made as of June 1, 2005 between Infinite Group, Inc., a Delaware corporation with offices at 595 Blossom Road, Suite 309, Rochester, NY 14610 ("Borrower") and Allan Robbins, an individual residing at 1575 Bayshore Boulevard, Rochester, NY 14622 (the "Lender").

WHEREAS, the Lender is the holder of eight (8) Convertible Promissory Notes issued by the Borrower to the Lender, as described in more detail in the attached Schedule A (collectively, the Notes); and

WHEREAS, the Lender and the Borrower are parties to a Modification Agreement to Promissory Notes dated December 1, 2004 pursuant to which, among other things, the parties agreed that the holder shall have the right in its sole discretion upon written notice to the Borrower at any time after September 1, 2005 to convert all or part of the principal amount of the Notes, together with accrued and unpaid interest, for common stock of the Borrower at the conversion rate of $.05 per share, as adjusted to reflect stock splits, distributions, recapitalizations, etc.; and

WHEREAS, the parties desire to modify the terms and conditions of the Promissory Notes as follows:

NOW, THEREFORE, the parties agree as follows:

1) The Notes and each of them are modified to provide that the holder shall have the right in its sole discretion upon written notice to the Borrower at any time after November 30, 2005 to convert all or part of the principal amount of the Notes, together with accrued and unpaid interest, for common stock of the Borrower at the conversion rate of $.05 per share, as adjusted to reflect stock splits, distributions, recapitalizations, etc.

2) Except as modified by this Agreement, all of the terms, covenants and conditions of the Notes shall remain the same.

In witness whereof, Borrower and the Lender have executed this Agreement under the day and year first written above.

INFINITE GROUP, INC.


By: Michael S. Smith, President


Allan Robbins

CONVERTIBLE PROMISSORY NOTES OF INFINITE GROUP, INC.

IN FAVOR OF ALLAN ROBBINS

Holder                       Principal Amt                       Date

Allan Robbins                  $  25,000                       2/25/03
Allan Robbins                  $  15,000                       4/15/03
Allan Robbins                  $  60,000                       4/25/03
Allan Robbins                  $  40,000                       5/22/03
Allan Robbins                  $  60,000                        7/2/03
Allan Robbins                  $  40,000                       12/4/03
Allan Robbins                  $    4,000                       1/2/04
Allan Robbins                  $  70,000                       2/26/04


EXHIBIT 14.1

INFINITE GROUP, INC.

CODE OF ETHICS FOR THE CHIEF EXECUTIVE OFFICER,
CHIEF FINANCIAL OFFICER AND FINANCIAL MANAGERS

The Company's Chief Executive Officer (the "CEO"), Chief Financial Officer (the "CFO"), and all financial managers of Infinite Group, Inc. (the "Company") are bound by the provisions set forth herein relating to honest and ethical conduct, including the handling of conflicts of interest and compliance with applicable laws, rules and regulations:

1. The CEO, CFO, and financial managers are responsible for maintaining the Company's accounting records in accordance with all applicable laws, and ensure that the accounting records are proper, supported, classified, and do not contain any false or misleading entries.

2. The CEO, CFO, and financial managers are responsible for the Company's system of internal financial controls and shall promptly bring to the attention of the Chairman of the Audit Committee, any information he or she may have concerning:

a) significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial data; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's financial reporting, disclosures, or internal control over financial reporting.

3. The CEO, CFO and all financial managers are responsible for full, fair, accurate, timely and understandable disclosure in:

a) reports and documents that the Company files with or submits to the SEC; and

b) the Company's other communications with the public, including both written and oral disclosures, statements and presentations.

4. The CEO, CFO and all financial managers are not permitted, directly or indirectly, to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified public accountant engaged in the performance of an audit or review of the financial statements of the Company that are required to be filed with the SEC if such person knew or was unreasonable in not knowing that such action could, if successful, result in rendering such financial statements materially misleading. For purposes of this Code of Ethics, actions that "could, if successful, result in rendering such financial statements materially misleading" include, but are not


limited to, actions taken at any time with respect to the professional engagement period to fraudulently influence, coerce, manipulate, or mislead an auditor:

a) to issue a report on the Company's financial statements that is not warranted in the circumstances (due to material violations of generally accepted accounting principles, generally accepted auditing standards, or other applicable standards);

b) not to perform audit, review or other procedures required by generally accepted auditing standards or other applicable professional standards;

c) not to withdraw an issued report; or

d) not to communicate matters to the Audit Committee.

5. The CEO, CFO and each financial manager shall promptly bring to the attention of the Chairman of the Audit Committee any information he or she may have concerning:

a) evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company or its employees or agents, or

b) any violation of this Code of Ethics.

6. The CEO, CFO, and financial managers shall not, during the term of their employment with the Company, compete with the Company and may never let business dealings on behalf of the Company be influenced, or even appear to be influenced, by personal or family interests. The CEO, CFO and financial managers shall promptly bring to the attention of the Chairman of the Audit Committee any information he or she may have concerning any actual or apparent conflicts of interest between personal and professional relationships, involving any management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls.

7. The Company is committed to complying with both the letter and the spirit of all applicable laws, rules and regulations. The Company intends to prevent the occurrence of conduct not in compliance with this Code of Ethics and to halt any such conduct that may occur as soon as reasonably possible after its discovery. Allegations of non-compliance will be investigated whenever necessary and evaluated at the proper level(s). Those found to be in violation of this Code of Ethics, including failures to report potential violations by others, are subject to appropriate disciplinary action, up to and including termination of employment. Criminal misconduct may be referred to the appropriate legal authorities for prosecution.

8. The Company will strive to keep confidential the identity of anyone reporting a possible violation. To facilitate the fullest compliance possible, and encourage employees to ask questions when presented with potential violations, the Company will not tolerate retaliation against any employee asking questions or making a good faith report in an attempt to comply with this

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code. Open communication of issues and concerns by all employees without fear of retribution or retaliation is vital to the successful implementation of this Code. All employees are required to cooperate with internal investigation of misconduct and unethical behavior.

9. Any waiver of this Code of Ethics may be made only by the Audit Committee and will be promptly disclosed as required pursuant to federal securities laws, regulations and applicable listing standards.

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EXHIBIT 23.1

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S CONSENT

We hereby consent to the incorporation of our report dated October 31, 2003, except for Note 13, as to which the date is September 27, 2004 and Note 2 and Note 18 as to which the date is March 31, 2005, included in this 10-KSB, in the previously filed Registration Statements of Infinite Group, Inc. on Form S-8 (No. 333-36266) and Form S-2 (No. 333-51768).

FREED MAXICK & BATTAGLIA, CPAs, PC

Buffalo, New York
July 22, 2005


EXHIBIT 31.1

CERTIFICATION

I, Michael Smith, certify that:

1. I have reviewed this annual report on Form 10-KSB of Infinite Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

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


EXHIBIT 31.2

CERTIFICATION

I, Michael S. Smith, certify that:

1. I have reviewed this annual report on Form 10-KSB of Infinite Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: July 26, 2005                            /s/ Michael S. Smith
                                               ---------------------------------
                                               Michael S. Smith
                                               Chief Financial Officer


EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Infinite Group, Inc. (the "Company") on Form 10-KSB for the fiscal year ending December 31, 2002 as filed with the Securities and Exchange Commission ("SEC") on the date hereof (the "Report"), I, Michael Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

/s/ Michael S. Smith
-----------------------
Michael S. Smith
Chief Executive Officer

July 26, 2005


EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Infinite Group, Inc. (the "Company") on Form 10-KSB for the fiscal year ending December 31, 2002 as filed with the Securities and Exchange Commission ("SEC") on the date hereof (the "Report"), I, Michael S. Smith, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

/s/ Michael S. Smith
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Michael S. Smith
Chief Financial Officer

July 26, 2005