UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



(Mark One)



xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934



FOR THE QUARTERLY PERIOD ENDED September
30, 2013.



COMMISSION FILE NUMBER 000-10690



LATTICE INCORPORATED






(Exact Name of Registrant as Specified in
its Charter)



|Delaware                        |  | 22-2011859         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)



|7150 N. Park Drive, Pennsauken, New Jersey |  | 08109     
|------------------------------------------ |  | ----------
|(Address of principal executive offices)   |  | (Zip code)



Issuer's telephone number: (856) 910-1166



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



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesoNoo



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



|Large accelerated filer £ | Accelerated filer £        
|------------------------- | ---------------------------
|                          |                            
|Non-accelerated filer £   | Smaller reporting company S



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



APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS



Indicate
by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed by a court. YesoNoo



APPLICABLE ONLY TO CORPORATE ISSUERS



State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As of November 14 2013, there were 34,325,214 outstanding shares of
the Registrant's Common Stock, $.01 par value.


















LATTICE INCORPORATED

SEPTEMBER 30, 2013 QUARTERLY REPORT ON
FORM 10-Q



TABLE OF CONTENTS



|                                                                                              | Page
|--------------------------------------------------------------------------------------------- | ----
|PART I - FINANCIAL INFORMATION                                                               
|                                                                                              |     
|Item 1. Financial Statements                                                                  | 3   
|Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15  
|Item 3. Quantitative and Qualitative Disclosure About Market Risks                            | 21  
|Item 4T. Controls and Procedures                                                              | 21  
|                                                                                              |     
|PART II - OTHER INFORMATION                                                                  
|                                                                                              |     
|Item 1. Legal Proceedings                                                                     | 21  
|Item 1A. Risk Factors                                                                         | 21  
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           | 22  
|Item 3. Defaults Upon Senior Securities                                                       | 22  
|Item 4. Reserved                                                                              | 22  
|Item 5. Other Information                                                                     | 22  
|Item 6. Exhibits                                                                              | 22  
|                                                                                              |     
|SIGNATURES                                                                                    | 27  







2









LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                                       |  | September 30, |             |   | December 31, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------ | -
|                                                                                                                                                                                                                                       |  | 2013          |             |   | 2012         |  
|                                                                                                                                                                                                                                       |  | (unaudited)   |             |   |              |  
|ASSETS:                                                                                                                                                                                                                                |  |               |             |   |              |  
|Current assets:                                                                                                                                                                                                                        |  |               |             |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                              |  | $             | 124,616     |   |              | $
|Accounts receivable                                                                                                                                                                                                                    |  |               | 2,278,237   |   |              |  
|Note receivable - current                                                                                                                                                                                                              |  |               | 291,667     |   |              |  
|Other current assets                                                                                                                                                                                                                   |  |               | 111,219     |   |              |  
|Total current assets                                                                                                                                                                                                                   |  |               | 2,805,739   |   |              |  
|                                                                                                                                                                                                                                       |  |               |             |   |              |  
|Property and equipment, net                                                                                                                                                                                                            |  |               | 560,629     |   |              |  
|Other intangibles, net                                                                                                                                                                                                                 |  |               | 812,511     |   |              |  
|Note receivable - long term                                                                                                                                                                                                            |  |               | 408,333     |   |              |  
|Other assets                                                                                                                                                                                                                           |  |               | 2,812       |   |              |  
|Assets to be disposed of: goodwill and intangibles                                                                                                                                                                                     |  |               | –           |   |              |  
|Total assets                                                                                                                                                                                                                           |  | $             | 4,590,024   |   |              | $
|                                                                                                                                                                                                                                       |  |               |             |   |              |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                                                                                   |  |               |             |   |              |  
|Current liabilities:                                                                                                                                                                                                                   |  |               |             |   |              |  
|Accounts payable                                                                                                                                                                                                                       |  | $             | 1,346,200   |   |              | $
|Accrued expenses                                                                                                                                                                                                                       |  |               | 1,750,171   |   |              |  
|Customer advances                                                                                                                                                                                                                      |  |               | 992,899     |   |              |  
|Notes payable - current                                                                                                                                                                                                                |  |               | 1,953,158   |   |              |  
|Derivative liability                                                                                                                                                                                                                   |  |               | 93,275      |   |              |  
|Liability to be disposed of                                                                                                                                                                                                            |  |               | –           |   |              |  
|Total current liabilities                                                                                                                                                                                                              |  |               | 6,135,703   |   |              |  
|Long term liabilities:                                                                                                                                                                                                                 |  |               |             |   |              |  
|Long term liability to be disposed of                                                                                                                                                                                                  |  |               | –           |   |              |  
|Notes Payable - long term                                                                                                                                                                                                              |  |               | 168,000     |   |              |  
|Deferred tax liabilities                                                                                                                                                                                                               |  |               | –           |   |              |  
|Total long term liabilities                                                                                                                                                                                                            |  |               | 168,000     |   |              |  
|Total liabilities                                                                                                                                                                                                                      |  |               | 6,303,703   |   |              |  
|                                                                                                                                                                                                                                       |  |               |             |   |              |  
|                                                                                                                                                                                                                                       |  |               |             |   |              |  
|Shareholders' equity                                                                                                                                                                                                                   |  |               |             |   |              |  
|Preferred Stock - .01 par value                                                                                                                                                                                                        |  |               |             |   |              |  
|Series A 9,000,000 shares authorized 6,575,815 issued and outstanding as of September 30, 2013 and 6,895,815 issued and outstanding as of December 31, 2012                                                                            |  |               | 65,758      |   |              |  
|Series B 1,000,000 shares authorized 1,000,000 issued and 502,160 outstanding                                                                                                                                                          |  |               | 10,000      |   |              |  
|Series C 520,000 shares authorized 520,000 issued and
    outstanding                                                                                                                                                                  |  |               | 5,200       |   |              |  
|Series D 636,400 shares authorized 590,910 issued and
    outstanding                                                                                                                                                                  |  |               | 5,909       |   |              |  
|Common stock - .01 par value, 200,000,000 authorized, 34,337,690 and 31,072,690 issued and outstanding respectively as of September 30, 2013 and 33,116,509 and 29,851,509 issued and outstanding respectively as of December 31, 2012 |  |               | 343,378     |   |              |  
|Additional paid-in capital                                                                                                                                                                                                             |  |               | 43,469,459  |   |              |  
|Accumulated deficit                                                                                                                                                                                                                    |  |               | (45,055,287 | ) |              |  
|                                                                                                                                                                                                                                       |  |               | (1,155,583  | ) |              |  
|Stock held in treasury, at cost                                                                                                                                                                                                        |  |               | (558,096    | ) |              |  
|Equity attributable to shareowners of Lattice Incorporated                                                                                                                                                                             |  |               | (1,713,679  | ) |              |  
|Equity attributable to noncontrolling interest                                                                                                                                                                                         |  |               | –           |   |              |  
|Total liabilities and shareholders' equity                                                                                                                                                                                             |  | $             | 4,590,024   |   |              | $





See accompanying notes to the condensed consolidated
financial statements.







3









LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATION

(Unaudited)



|                                                                     |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|-------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | -
|                                                                     |  | 2013                             |            |   | 2012                            |  
|                                                                     |  |                                  |            |   |                                 |  
|Revenue                                                              |  | $                                | 2,173,780  |   |                                 | $
|                                                                     |  |                                  |            |   |                                 |  
|Cost of Revenue                                                      |  |                                  | 1,270,869  |   |                                 |  
|                                                                     |  |                                  |            |   |                                 |  
|Gross Profit                                                         |  |                                  | 902,911    |   |                                 |  
|                                                                     |  |                                  | 41.5%      |   |                                 |  
|Operating expenses:                                                  |  |                                  |            |   |                                 |  
|Selling, general and administrative                                  |  |                                  | 633,704    |   |                                 |  
|Research and development                                             |  |                                  | 167,839    |   |                                 |  
|Total operating expenses                                             |  |                                  | 801,543    |   |                                 |  
|                                                                     |  |                                  |            |   |                                 |  
|Income (loss) from operations                                        |  |                                  | 101,368    |   |                                 |  
|                                                                     |  |                                  |            |   |                                 |  
|Other income (expense):                                              |  |                                  |            |   |                                 |  
|Derivative income (expense)                                          |  |                                  | (21,233    | ) |                                 |  
|Other income                                                         |  |                                  | 46,713     |   |                                 |  
|Interest expense                                                     |  |                                  | (66,130    | ) |                                 |  
|Total other income                                                   |  |                                  | (40,650    | ) |                                 |  
|                                                                     |  |                                  |            |   |                                 |  
|Income before taxes                                                  |  |                                  | 60,718     |   |                                 |  
|                                                                     |  |                                  |            |   |                                 |  
|Income taxes                                                         |  |                                  |            |   |                                 |  
|                                                                     |  |                                  |            |   |                                 |  
|Net income (loss) from continuing operations                         |  |                                  | 60,718     |   |                                 |  
|                                                                     |  |                                  |            |   |                                 |  
|Net income (loss) from operations of discontinued component (Note 5) |  |                                  | (11,273    | ) |                                 |  
|Gain on sale of assets                                               |  |                                  |            |   |                                 |  
|Net income from operations of discontinued component                 |  |                                  | (11,273    | ) |                                 |  
|                                                                     |  |                                  |            |   |                                 |  
|Net income (loss)                                                    |  |                                  | 49,445     |   |                                 |  
|                                                                     |  |                                  |            |   |                                 |  
|Basic net income (loss) per common share                             |  |                                  |            |   |                                 |  
|From continuing operations                                           |  | $                                | 0.00       |   |                                 | $
|From Discontinued operations                                         |  |                                  | (0.00      | ) |                                 |  
|Net income per common share                                          |  | $                                | 0.00       |   |                                 | $
|                                                                     |  |                                  |            |   |                                 |  
|Diluted net income per common share                                  |  |                                  |            |   |                                 |  
|From continuing operations                                           |  | $                                | 0.00       |   |                                 | $
|From Discontinued operations                                         |  |                                  | (0.00      | ) |                                 |  
|Net income per common share                                          |  | $                                | 0.00       |   |                                 | $
|                                                                     |  |                                  |            |   |                                 |  
|Weighted average shares:                                             |  |                                  |            |   |                                 |  
|Basic                                                                |  |                                  | 33,902,907 |   |                                 |  
|Diluted                                                              |  |                                  | 76,867,034 |   |                                 |  





See accompanying notes to the condensed consolidated
financial statements.







4









LATTICE INCORPORATED AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS

(Unaudited)



|                                                                                             |  | Nine Months Ended September 30, |         
|-------------------------------------------------------------------------------------------- |  | ------------------------------- | --------
|                                                                                             |  | 2013                            |         
|                                                                                             |  |                                 |         
|Cash flow from operating activities:                                                         |  |                                 |         
|Net income (loss)                                                                            |  | $                               | (16,222 
|Adjustments to reconcile net income  to net cash provided by (used in) operating activities: |  |                                 |         
|Operating activities discontinued operations                                                 |  |                                 | 48,050  
|Gain on disposition of discontinued Government segment assets                                |  |                                 | (521,443
|Derivative income (expense)                                                                  |  |                                 | 35,641  
|Amortization of intangible assets                                                            |  |                                 | 97,485  
|Amortization of debt discount                                                                |  |                                 | 64,547  
|Gain on extinguishment of debt                                                               |  |                                 | (46,713 
|Financing fees                                                                               |  |                                 | 19,600  
|Share-based compensation                                                                     |  |                                 | 32,604  
|Depreciation                                                                                 |  |                                 | 180,017 
|Changes in operating assets and liabilities:                                                 |  |                                 |         
|(Increase) decrease in:                                                                      |  |                                 |         
|Accounts receivable                                                                          |  |                                 | 142,500 
|Other current assets                                                                         |  |                                 | 71,871  
|Increase (decrease) in:                                                                      |  |                                 |         
|Accounts payable and accrued liabilities                                                     |  |                                 | (186,537
|Deferred revenues                                                                            |  |                                 | –       
|Customer advances                                                                            |  |                                 | 535,969 
|Total adjustments                                                                            |  |                                 | 473,591 
|Net cash provided by (used in) operating activities                                          |  |                                 | 457,369 
|Cash Used in investing activities:                                                           |  |                                 |         
|Purchase of equipment                                                                        |  |                                 | (222,202
|Cash received sale of discontinued operations                                                |  |                                 | 231,670 
|Net cash provided by (used in) investing activities                                          |  |                                 | 9,468   
|Cash flows from financing activities:                                                        |  |                                 |         
|Revolving credit facility (payments) borrowings, net                                         |  |                                 | (232,807
|Payments on capital equipment lease                                                          |  |                                 | (18,846 
|Payments on notes payable - discontinued operations                                          |  |                                 | (56,352 
|Payments on notes payable                                                                    |  |                                 | (600,000
|Proceeds from the issuance of note payable, net of discount                                  |  |                                 | 580,400 
|Payments on director loans                                                                   |  |                                 | (44,984 
|Net cash provided by (used in) financing activities                                          |  |                                 | (372,589
|Net increase (decrease) in cash and cash equivalents                                         |  |                                 | 94,248  
|Cash and cash equivalents - beginning of period                                              |  |                                 | 30,368  
|Cash and cash equivalents - end  of period                                                   |  | $                               | 124,616 
|                                                                                             |  |                                 |         
|Supplemental cash flow information                                                           |  |                                 |         
|Interest paid in cash                                                                        |  | $                               | 270,614 





See accompanying notes to the condensed consolidated
financial statements.



5









Lattice Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial
Statements

September 30, 2013

(Unaudited)



Note 1 – Organization and summary of significant accounting
policies



(a) Organization



Lattice Incorporated (the “Company”)
was incorporated in the State of Delaware in May 1973 and commenced operations in July 1977. The Company began as a provider of
specialized solutions to the telecom industry. Throughout its history Lattice has adapted to the changes in this industry by reinventing
itself to be more responsive and open to the dynamic pace of change experienced in the broader converged communications industry
of today. Currently, Lattice provides advanced solutions for several vertical markets. The greatest change in operations is in
the shift from being a component manufacturer to a solution provider focused on developing applications through software on its
core platform technology. To further its strategy of becoming a solutions provider, the Company acquired a majority interest in
“SMEI” in February 2005. In September 2006 the Company purchased all of the issued and outstanding shares of the common
stock of Lattice Government Services, Inc., (“LGS”) (formerly Ricciardi Technologies Inc. (“RTI”)). LGS
was founded in 1992 and provides software consulting and development services for the command and control of biological sensors
and other Department of Defense requirements to United States federal governmental agencies either directly or through prime contractors
of such governmental agencies. LGS’s proprietary products include SensorView, which provides clients with the capability
to command, control and monitor multiple distributed chemical, biological, nuclear, explosive and hazardous material sensors. In
December 2009 we changed RTI’s name to Lattice Government Services Inc. In January 2007, we changed our name from Science
Dynamics Corporation to Lattice Incorporated. On May 16, 2011 we acquired 100% of the shares of Cummings Creek Capital, a holding
Company which itself owns 100% of the shares of CLR Group Limited. (“CLR”). CLR is a government contractor which complements
our Government Services business by expanding markets and service offerings. During the first quarter of 2013, management decided
that focusing resources on the communications business had more strategic value to the Company’s shareholders. The Government
assets were marketed for sale during the quarter and culminated in a sale on April 2, 2013 for approximately $1.2 million. Accordingly,
the financial performance of the Government segment has been segregated in our financial statements as discontinued operations.
As a result, the Company’s management discussion will be based on its communications business and the Company no longer operates
in multiple segments.



(b) Basis of Presentation going concern



At September 30, 2013 the Company had a
working capital deficiency of $3,330,000. This compared to a working capital deficiency of $3,561,000 at December 31. 2012. The
Company’s working capital deficiency and constrained liquidity raises substantial doubt regarding the Company’s ability
to continue as a going concern. The Company’s ability to continue as a going concern is highly dependent upon (i) management’s
ability to increase operating cashflows (ii), maintain continued availability on its line of credit and the ability to obtain alternative
financing to fund capital requirements and/or debt obligations coming due. The accompanying financial statements do not include
any adjustments that may result from the outcome of this uncertainty.



(c) Interim Condensed Consolidated Financial Statements



The condensed consolidated financial statements
as of Setember 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 are unaudited. In the opinion of management,
such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for
the fair representation of the consolidated financial position and the consolidated results of operations. The consolidated results
of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.  The
interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements
for the year end December 31, 2012 appearing in Form 10-K filed on April 1, 2013.



6





(d) Principles of consolidation



The condensed financial statements include
the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant inter-company
accounts and transactions have been eliminated in consolidation. For those consolidated subsidiaries where Company ownership is
less than 100%, the outside stockholders’ interests are shown as non-controlling interest. Investments in affiliates over
which the Company has significant influence but not a controlling interest are carried on the equity basis.



(e) Use of estimates



The preparation of these financial statements
in accordance with accounting principles generally accepted in the United States (US GAAP) requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis
for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates
and judgments are based on historical experience and on various other assumptions that the Company believes are reasonable under
the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment.
US GAAP requires estimates and judgments in several areas, including those related to impairment of goodwill and equity investments,
revenue recognition, recoverability of inventory and receivables, the useful lives, long lived assets such as property and equipment,
the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results
could differ from the estimates and assumptions used.



(f) Share-based payments



On January 1, 2006, the Company adopted
the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification 718-10, Accounting
for Share-based payment , to account for compensation costs under its stock option plans and other share-based arrangements.
ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. For purposes of estimating fair value of stock options, we use the Black-Scholes-Merton
valuation technique. At September 30, 2013, there is $3,291 of unrecognized compensation cost related to unvested share-based compensation
awards granted. For the three months ended September 30, 2013 share-based compensation was $2,319 compared to $1,421 in the prior
year period. For the nine months ended September 30, 2013 share based compensation was $32,604 over $4,263 for 2012.



(g) Revenue Recognition



Revenues related to collect and prepaid
calling services generated by the communication services segment are recognized during the period in which the calls are made.
In addition, during the same period, the Company records the related telecommunication costs for validating, transmitting, billing
and collection, and line and long distance charges, along with commissions payable to the facilities and allowances for uncollectible
calls, based on historical experience.



Government claims: Unapproved claims relate
to contracts where costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract
vehicles. The unapproved claims are considered to be probable of collection and have been recognized as revenue in prior periods.
Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,555,000 as of September 30, 2013.
Consistent with industry practice, we classify assets and liabilities related to these claims as current, even though some of these
amounts are not expected to be realized within one year.



(h) Segment Reporting



FASB ASC 280-10-50, “Disclosure about
Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment
reporting. The management approach model is based on the way a company’s management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management disaggregates a company. The Company had operated in two
segments prior to 2013 but with the decision to focus on the communications business and exit the federal government services business,
the Company now operates in one segment for the three months and six month’s ended September 30, 2013.





7





(i) Depreciation, amortization and long-lived
assets:



Long-lived assets include:



Property, plant and equipment - These assets
are recorded at original cost. The Company depreciates the cost evenly over the assets’ estimated useful lives. For tax purposes,
accelerated depreciation methods are used as allowed by tax laws.



Goodwill - Goodwill represents the difference
between the purchase price of an acquired business and the fair value of the net assets acquired and the liabilities assumed at
the date of acquisition. Goodwill is not amortized. The Company tests goodwill for impairment annually (or in interim periods if
events or changes in circumstances indicate that its carrying amount may not be recoverable) by comparing the fair value of each
reporting unit, as measured by discounted cash flows, to the carrying value to determine if there is an indication that potential
impairment may exist. Absent an indication of fair value from a potential buyer or similar specific transactions, the Company believes
that the use of this income approach method provides reasonable estimates of the reporting unit’s fair value. Fair value
computed by this method is arrived at using a number of factors, including projected future operating results, economic projections,
and anticipated future cash flows. The Company reviews its assumptions each time goodwill is tested for impairment and makes appropriate
adjustments, if any, based on facts and circumstances available at that time. There are inherent uncertainties, however, related
to these factors and to management’s judgment in applying them to this analysis. Nonetheless, management believes that this
method provides a reasonable approach to estimate the fair value of the Company’s reporting units.



The income approach, which is used for
the goodwill impairment testing, is based on projected future debt-free cash flow that is discounted to present value using factors
that consider the timing and risk of the future cash flows. Management believes that this approach is appropriate because it provides
a fair value estimate based upon the reporting unit’s expected long-term operating and cash flow performance. This approach
also mitigates most of the impact of cyclical downturns that occur in the reporting unit’s industry. The income approach
is based on a reporting unit’s five year projection of operating results and cash flows that is discounted using a build
up approach. The projection is based upon management’s best estimates of projected economic and market conditions over the
related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant
estimates and assumptions include terminal value growth rates, future capital expenditures and changes in future working capital
requirements based on management projections.



Identifiable intangible assets - The Company
amortizes the cost of other intangibles over their useful lives unless such lives are deemed indefinite. Amortizable intangible
assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either
discounted cash flows or appraised values. Intangible assets with indefinite lives are not amortized; however, they are tested
annually for impairment and written down to fair value as required.



(j) Recent accounting pronouncements



No new accounting pronouncements issued
or effective during the period has had or is expected to have a material impact on the financial statements.



8





Note 2 – Notes payable



Notes payable consists of the following
as of September 30, 2013 and December 31, 2012:



|                                          |  | September 30,  2013 |            |   | December 31, 2012 |  
|----------------------------------------- |  | ------------------- | ---------- | - | ----------------- | -
|                                          |  |                     |            |   |                   |  
|Bank line-of-credit (a)                   |  | $                   | –          |   |                   | $
|Notes payable to Stockholder/director (b) |  |                     | 198,331    |   |                   |  
|Capital lease payable (c)                 |  |                     | 6,243      |   |                   |  
|Notes Payable (d)                         |  |                     | 1,916,585  |   |                   |  
|Notes payable Cummings Creek/CLR  (e)     |  |                     | –          |   |                   |  
|                                          |  |                     |            |   |                   |  
|Total notes payable                       |  |                     | 2,121,158  |   |                   |  
|Less current maturities                   |  |                     | (1,953,158 | ) |                   |  
|Long-term debt                            |  | $                   | 168,000    |   |                   | $



(a) Bank Line-of-Credit



On July 17, 2009, the Company and its wholly-owned
subsidiary, Lattice Government Services (formally “RTI”), entered into a Financing and Security Agreement (the “Action
Agreement”) with Action Capital Corporation (“Action Capital”).



Pursuant to the terms of the Action Agreement,
Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable account receivables
of the Company (the “Acceptable Accounts”).  The maximum amount eligible to be advanced to the Company by
Action Capital under the Action Agreement is $3,000,000.  The Company will pay Action Capital interest on the advances
outstanding under the Action Agreement equal to the prime rate of Wachovia Bank, N.A. in effect on the last business day of the
prior month plus 1%.  In addition, the Company will pay a monthly fee to Action Capital equal to 0.75% of the total outstanding
balance at the end of each month.



In addition, pursuant to the Action Agreement,
the Company granted Action Capital a security interest in certain assets of the Company including all, accounts receivable, contract
rights, rebates and books and records pertaining to the foregoing (the “Action Lien”). On June 11, 2010, Action Capital
and an accredited investor entered into an agreement under which $1,250,000 of the collateral otherwise securing advances
covered by the Action Agreement are subordinated to a new security interest securing an additional loan from the accredited investor.
During November 2011, $268,345 of the collateral was collected by Action, escrowed and paid directly to the accredited investor reducing
the collateral and outstanding balance on the loan to $981,655 at September 30, 2013. See (d) below.



The outstanding balance owed on the line
at September 30, 2013 and December 31, 2012 was $0 and $232,807 respectively.  At September 30, 2013 and December
31, 2012 our interest rate was approximately 13.25%.



(b) Notes Payable Stockholders/Director



The first note bears interest at 21.5%
per annum. During December 2010, the note was amended to flat monthly payments of $6,000 until maturity, December
31, 2013, at which time any remaining interest and or principal will be paid. This note has an outstanding balance of $30,331 and
$75,315 as of September 30, 2013 and December 31, 2012, respectively.



The second note dated October 14, 2011
has a face value of $168,000 of which the Company received $151,200 in net proceeds during October 2011. The discount of $16,800
is being amortized to interest expense over the term of the note. The note carries an annual interest rate of 10% payable quarterly
at the rate of $4,200 per quarter. The entire principal on the note of $168,000 is due at maturity on October 14, 2014. The Company
is in arrears on interest payments that were due but has accrued the interest costs on the note. The holder has not as of the date
of this filing invoked his rights under the default provisions of the note related to the past due interest payments.







9





(c) Capital Lease Payable



On June 16, 2009 Lattice entered an equipment
lease financing agreement with Royal Bank America Leasing to purchase approximately $130,000 in equipment for our communication
services. The terms of which included monthly payments of $5,196 per month over 32 months and a  $1.00 buy-out at end
of the lease term. On July 15, 2011 we signed an addendum to this lease and received additional equipment financing for $58,122
payable over 30 months at $2,211 per month. As of September 30, 2013 and December 31, 2012, the outstanding balance was $6,243
and $25,089, respectively.



(d) Note Payable



On June 11, 2010, Lattice closed on a Note
Payable for $1,250,000. The net proceeds to the Company were $1,100,000. The $150,000 is being amortized over the life of
the note as additional interest expense. The note matured June 30, 2012 and payment of principal was due at that time in the lump
sum value of $981,655 including any unpaid interest. On June 30, 2012 the holder of the note agreed to an extension for payment
in full of the note to October 31, 2012. In addition to the maturity extension the Company agreed to increase the collateral by
$250,000 the note was secured by certain receivables totaling $981,655, the new secured total is approximately $1,232,000. Until
maturity, Lattice is required to make quarterly interest payments (calculated in arrears) at 12% stated interest with the first
quarter interest payment of $37,500 due September 30, 2010 and $37,500 due each quarter end thereafter until the final payment
comes due October 31, 2012 totaling $1,019,155 including the final interest payment. Concurrent with the note, an intercreditor
agreement was signed between Action Capital and Holder where Action Capital has agreed to subordinate the Action Lien on certain
government contracts, task orders and accounts receivable totaling $981,655. During November 2011, $268,345 of the original $1,250,000
accounts receivable securing the note was collected, escrowed and paid directly to the note holder by Action Capital thereby reducing
the outstanding balance on the note and the collateral to $981,655 at September 30, 2013. As of the date of this filing, the Company
is currently in violation under this note agreement from not paying the principal due at the October 31, 2012 maturity date. The
Company is current with quarterly interest payments. The holder has not as of the date of this filing invoked his rights under
the default provisions of the note.



During the quarter ended June 30, 2011,
we issued a two year promissory note payable for $200,000 to a shareholder of the Company.  The Note bears interest
of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment
on June 30, 2011. On May 15, 2013 the maturity date, the principal amount of $200,000 became due along with any unpaid and
accrued interest. The Company is not in compliance with the terms of the note. We are current with interest and will continue payment
at current rate, no default provision has been invoked.



During the quarter ended September 30,
2011, we issued a two year promissory note payable for $227,272 to an investor. The Note bears interest of 12% per year. The Company
is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on September 30, 2011.
On August 3, 2013 the maturity date, the principal amount of the note will be due along with any unpaid and accrued interest.
The Company is not in compliance with the terms of the note. We are current with interest and will continue payment at current
rate, no default provision has been invoked.



On December 13, 2011, we converted outstanding
invoices that we owed a vendor by converting the liability to a promissory note in the amount of $416,533. The note is payable
quarterly over a two year term with principal payments due as follows: December 31, 2011 of $10,000, January 15, 2012 of $50,000,
March 31, 2012 of $20,000, June 30, 2012 of $30,000, September 30, 2012 of $30,000, December 31, 2012 of $45,000, March 31, 2013
of $45,000, June 30, 2013 of $55,000, September 30, 2013 of $55,000 and December 31, 2013 of $76,533. The note carries a 12% annual
interest rate calculated on the outstanding principal balance payable monthly. As of September 30, 2013, the outstanding balance
of the note is $309,658. The Company was in default under this note agreement in that it did not pay certain principal payments
when due. In June 2013, the Company was served a writ of Garnishment against the note receivable of $700,000 from Blackwatch International
Inc. for the outstanding balance due for which we are in default. In October 2013, the Company reached a settlement arrangement
whereby the holder agreed to forbear any further collection actions against the Company in exchange for $280,000 payable as follows;
$240,000 on October 10, 2013 and then $10,000 payable monthly over four months starting November 10, 2013. The $240,000 was paid.



On January 23, 2012, we issued several
promissory notes to private investors with face values totaling $198,000. The proceeds from the notes totaled $175,000 used for
working capital. The discount of $23,000 has been recorded as a deferred financing fee and amortized over the life of the note.
The Notes bear interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with
a pro-rata interest payment on March 31, 2012. On January 23, 2014 the maturity date, the principal amount of the notes will
be due along with any unpaid and accrued interest.



10





On February 26, 2013, the Company issued
a note to an investor for $600,000 for which $580,400 of net proceeds were received. The note bears interest of 12% payable monthly
and is due in full to investor by the earlier of (i) September 1, 2013 or (ii) the date the customer pays for the system. 
The note was issued to finance the costs associated with a purchase order transaction with a large telecommunications customer.
In addition to the interest we agreed to deliver warrants to the lender for the purchase of up to 800,000 shares of common stock
at an exercise price of $0.08 per share, with anti-dilution provisions covering capital stock changes affecting all stockholders,
exercisable for four years from the date of issuance. A debt discount of $64,547 was recorded representing the fair value of the
warrants issued and was fully amortized to interest expense during the nine months ended September 30, 2013. The fair value of
the warrants was determined using the Black Scholes pricing model with the following assumptions; No dividend yield, expected volatility
of 159%, a risk free rate of 0.73% and an expected life of 4 years. The Company also recorded amortization of deferred financing
fees of $19,600 representing agency fees which has been fully amortized to expense. The Company paid this note in full on July
27, 2013.



(e)  Notes payable Cummings Creek / CLR



In conjunction with the Cumming Creek Capital
/ CLR acquisition, Lattice assumed notes totaling $676,925 comprised of three notes each with the former principles
of CLR Group.   The notes bear interest on the unpaid principal amount until paid in full, at a rate of four percent
(4.0%) per annum payable quarterly. The Company will pay the unpaid principal amount as follows: beginning on May 31, 2011, the
Company will make equal payments of principal on the first day of each calendar quarter totaling $58,275 (i.e., February 28, May
31, August 30 and November 30), until February 15, 2014. The unpaid balances of the notes were assumed by Purchaser as part of
the sale of our Government assets transaction on April 2, 2013. Accordingly, there is no balance owing as of September 30 2013
on these notes.



Note 3 – Derivative financial
instruments



The balance sheet caption derivative liabilities
consist of Warrants, issued in connection with the 2005 Laurus Financing Arrangement, and the 2006 Omnibus Amendment and Waiver
Agreement with Laurus. These derivative financial instruments are indexed to an aggregate of 758,333 shares of the Company’s
common stock as of September 30, 2013 and December 31, 2012 and are carried at fair value. The balance at September 30, 2013 of
$93,275 compared to $57,634 at December 31, 2012.



The valuation of the derivative warrant
liabilities is determined using a Black Scholes Merton Model. Freestanding derivative instruments, consisting of warrants and options
that arose from the Laurus financing are valued using the Black-Scholes-Merton valuation methodology because that model embodies
all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the Black
Scholes models as of September 30, 2013 included conversion or strike price of $0.10; historical volatility factor of 181% based
upon forward terms of instruments, and a risk free rate of 2.8% and remaining life 8.9 years.



Note 4 – Litigation



From time to time, lawsuits are threatened
or filed against us in the ordinary course of business. Such lawsuits typically involve claims from customers, former or current
employees, and vendors related to issues common to our industry. Such threatened or pending litigation also can involve claims
by third-parties, either against customers or ourselves, involving intellectual property, including patents. A number of such claims
may exist at any given time. In certain cases, derivative claims may be asserted against us for indemnification or contribution
in lawsuits alleging use of our intellectual property, as licensed to customers, infringes upon intellectual property of a third-party.
At present, we are a third-party defendant in a patent infringement suit against one of our customers, which is currently in advance
stages and for settlement negotiations. Management intends to vigorously contest this case. At present, it is too early to estimate
the amount or range of, any potential financial effects related to this matter and any estimate would be so uncertain as to impair
the integrity of these financial statements.  Per FASB ASC 450-20-25; recognition of a contingency loss may only be made if
the event is (1) probable and (2) the amount of the loss can be reasonably estimated. Since the amount cannot be reasonably estimated,
no accrual for this contingent loss has been made to these financial statements. Although there can be no assurance as to the ultimate
disposition of these matters, it is our management’s opinion, based upon the information available at this time, that the
expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the results of
operations, liquidity or financial condition of our company. There were no liabilities of this type at September 30, 2013. In June
2013, the Company was served a writ of Garnishment with respect to our note receivable from the sale of our Governmental services
segment due to a default on the December 13, 2011 note payable (see footnote 2(d). In October 2013, the Company reached a settlement
arrangement whereby the holder agreed to forbear any further collection actions against the Company in exchange for $280,000 payable
as follows; $240,000 on October 10 2013 and then $10,000 payable monthly over four months starting November 10, 2013. The $240,000
was paid. (see footnote 2(d) above).



11





Note 5 – Sale of Assets of Discontinued
Operations:



As part of the Company’s strategy
to focus on its higher growth potential communications business, the Company decided during the first quarter to exit the Government
services segment which derived its revenues mainly from contracts with federal government Dept of Defense agencies either as prime
contractor or as a subcontractor to another prime contractor. On April 2, 2013, we entered an Asset Purchase Agreement (“Purchase
Agreement”) with Blackwatch International, Inc. (“Blackwatch”), a Virginia corporation, pursuant to which we
primarily sold our government Dept. of Defense (DoD) contract vehicles for approximately $1.2 million. These assets essentially
comprised our Government services segment operations. The Company retained the residual assets and liabilities of Lattice Government
services, Inc. The Company recorded a gain of to $521,443 on the sale of these assets during the quarter ended June 30 2013, which
represents the excess of the sales price over the book or carrying value of the assets sold detailed in tabular form below:



On April 2, 2013 Company entered into an
Asset Purchase agreement With Blackwatch International, Inc as follows :



|Consideration received from sale of Government assets:                                                    
|----------------------------------------------------------------------------------------------------------
|Cash                                                                                                      
|Seller notes assumed by buyer                                                                             
|Note receivable from buyer**                                                                              
|Total consideration                                                                                       
|Other Contingencies considerations:                                                                       
|3% of gross revenues on Phase II of an SBIR contract for 24 months if awarded.                            
|Pay up to $100,000 for each of the next two years in the event that certain contract are  rebid and funded
|Total consideration received on sale of assets                                                            
|Carrying value of Lattice Government assets sold (see below)                                              
|Gain (loss) on sale of Government segment assets                                                          
|                                                                                                          
|Carrying value of assets disposed of:                                                                     
|Goodwill and intangibles                                                                                  
|Non-controlling interest                                                                                  
|Deferred tax liability                                                                                    
|                                                                                                          



** 3% annum interest rate,  12
equal quarterly installments payments of $61,216.03 over a 3 year period first installment being 7/31/2013 with each successive
payment being on the 15th day of the month following close each calendar quarter.



With the Company’s decision to exit
the Government services business, the results of operations and cash flows from this business have been classified as discontinued
operations.



The following table shows the results of
operations of Lattice Government Services segment for the nine months ended September 30, 2013 and 2012 which are included in the
net income (loss) from discontinued operations:



|                                               |  | Three Months Ended  September 30, |         |   | Nine Months Ended  September 30, |  
|---------------------------------------------- |  | --------------------------------- | ------- | - | -------------------------------- | -
|                                               |  | 2013                              |         |   | 2012                             |  
|Revenue                                        |  | $                                 | –       |   |                                  | $
|Cost of Revenue                                |  |                                   | –       |   |                                  |  
|Gross Profit                                   |  |                                   | –       |   |                                  |  
|                                               |  |                                   |         |   |                                  |  
|Selling, general and administrative expenses   |  |                                   | 10,257  |   |                                  |  
|Amortization expense                           |  |                                   | –       |   |                                  |  
|Income (loss) from operations                  |  |                                   | (10,257 | ) |                                  |  
|Interest expense                               |  |                                   | (1,016  | ) |                                  |  
|Gain on sale of discontinue operation          |  |                                   | –       |   |                                  |  
|Income (Loss) before taxes                     |  |                                   | (11,273 | ) |                                  |  
|Income taxes (benefit)                         |  |                                   | –       |   |                                  |  
|Net income (loss) from Discontinued operations |  | $                                 | (11,273 | ) |                                  | $





12









As a result of the decision to exit the Government services business, the assets and liabilities to be disposed of are comprised
of the following:



|                         |  | September 30, |   |  | December 31, | 
|------------------------ |  | ------------- | - |  | ------------ | 
|                         |  | 2013          |   |  | 2012         | 
|                         |  | (unaudited)   |   |  |              | 
|                         |  |               |   |  |              | 
|Goodwill                 |  |               | – |  |              | 
|                         |  |               |   |  |              | 
|Intangible assets, net   |  |               | – |  |              | 
|                         |  |               |   |  |              | 
|Note payable             |  |               | – |  |              | 
|                         |  |               |   |  |              | 
|Deferred tax liability   |  |               | – |  |              | 
|                         |  |               |   |  |              | 
|Non-controlling interest |  |               | – |  |              | 



Note 6 – Note Receivable



As part of sale of Lattice Government assets
on April 2, 2013, the Company received a promissory note from purchaser for $700,000 which carries 3% annum interest rate payable
in  12 equal quarterly installments payments of $61,216.03 over a 3 year period first installment being 7/31/2013 with each
successive payment being on the 15th day of the month following close each calendar quarter. The note is secured by personal guarantee
by the principal owner of Purchaser. As of the filing date, the Company has not received the initial two installments due to the
writ of garnishment issued with regards to the default on the December 13, 2011 note (see footnote 2(d)). In October 2013, the
Company reached a settlement with the note holder and expects to release the garnishment and collect the installments in arrears
by the end of the 2013 fiscal year.



Note 7 – Conversion of Preferred Stock



On April 24, 2013, we issued 1,142,848
common shares to Barron Partners L.P. Such shares were issuable upon the March 20, 2013 exercise of conversion rights associated
with 320,000 shares of Series A Preferred Stock owned by Barron Partners.



Note 8 – Net income (loss) per share



The following table sets forth the information
needed to compute basic and diluted earnings per share:





|                                                                          |  | Three Months Ended |            |   | Nine Months Ended |  
|------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | -
|                                                                          |  | September 30,      |            |   | September 30,     |  
|                                                                          |  | 2013               |            |   | 2012              |  
|Basic net income (loss) per common share                                  |  |                    |            |   |                   |  
|Net income (loss) from continuing operation                               |  | $                  | 60,718     |   |                   | $
|Net income (loss) from Discontinue operation                              |  |                    | (11,273    | ) |                   |  
|Numerator for basis net income per share                                  |  | $                  | 49,445     |   |                   | $
|                                                                          |  |                    |            |   |                   |  
|Basic net income (loss) per common share                                  |  |                    |            |   |                   |  
|Net income (loss) from continuing operation                               |  | $                  | 0.00       |   |                   | $
|Net income (loss) from Discontinue operation                              |  |                    | 0.00       |   |                   |  
|Net income per common share                                               |  | $                  | 0.00       |   |                   | $
|                                                                          |  |                    |            |   |                   |  
|Diluted net income (loss) per common share                                |  |                    |            |   |                   |  
|Net income (loss) from continuing operation                               |  | $                  | (0.00      | ) |                   | $
|Net income (loss) from Discontinue operation                              |  |                    | 0.00       |   |                   |  
|Net income per common share                                               |  | $                  | 0.00       |   |                   | $
|Weighted average common shares outstanding:                               |  |                    | 33,902,907 |   |                   |  
|Dilutive securities                                                       |  |                    |            |   |                   |  
|Preferred Stock A, B, C, D                                                |  |                    | 40,921,516 |   |                   |  
|Options                                                                   |  |                    | 2,042,611  |   |                   |  
|Warrants                                                                  |  |                    | 0          |   |                   |  
|Diluted weighted average common shares outstanding and assumed conversion |  |                    | 76,867,034 |   |                   |  





13







For the nine month period ended
September 30, 2013 and the three months September 30, 2102 certain potential shares of common stock have been excluded from
the calculation of diluted income per share because the exercise price was greater than the average market price of our
common stock, and therefore, the effect on diluted income per share would have been anti-dilutive. Also for those periods we had
a net loss, these shares are also excluded because the effect on the diluted income per share would have been anti-dilutive.
The following table sets forth the number of potential shares of common stock that have been excluded from diluted net income
per share because their effect was anti-dilutive.



|        |  | Three Months Ended September 30, |          
|------- |  | -------------------------------- | ---------
|        |  | 2013                             |          
|        |  |                                  |          
|Warrant |  |                                  | 6,178,233



Note 9 - Subsequent event:



On September 11, 2013, we entered confidential letter of intent
(“LOI”) with Innovisit LLC (“Innovisit”), an Alamaba limited liability company, which contemplated our
acquisition of certain of its assets and awarded contracts, customer lists, and its intellectual property rights to the Video Visitation
software (“the Assets”). We recently completed this transaction, when the parties entered an Asset Purchase Agreement
(“Purchase Agreement”), and certain other agreements, each dated as of November 1, 2013. Under these agreements, the
workforce and operating infrastructure supporting Innovisit’s business operations are being transferred to Lattice, including
but not limited to certain employees, and leases.



As part of the consideration, we delivered a $590,000 secured
promissory note, payable in several installments between November 30, 2013 and January 31, 2015. We also entered an employment
agreement with Scott Pritchett, who has joined our organization as a manager. Under his three year employment contract, Mr. Pritchett
is compensated at a base salary of $100,000 as well as commissions based upon realization of agreed upon revenue targets.









14















ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The information in
this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This
Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information
about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the projected results. All statements other than statements of
historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and
future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management’s
current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.



The following discussion
and analysis should be read in conjunction with the financial statements and notes thereto included elsewhere in this report and
with our annual report on Form 10-K for the fiscal year ended December 31, 2012. This discussion should not be construed to imply
that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.



GENERAL OVERVIEW



Business Overview:



GENERAL OVERVIEW



Business Overview:



During the second quarter
we sold our Federal Government contracts and exited the Government Services business. This enabled management to focus on our rapidly
growing Communications Services business. Accordingly, the financial results for the Government Services operations are shown as
income (loss) from discontinued operations. , Our Communication business continues to build upon our technology which is leading
to continuing growth. Since 2009 our communication revenues have grown at a CAGR of 90% from $1.1 million to $7.5 million in 2012.
For the nine months ended September 30, 2013, revenues from our Communication business increased by 3.7% compared to the prior
year period. Included in the overall growth our recurring revenue or call processing component accounted for approximately 72%
of total revenues. During the last two quarters we moved our call center to an in-house service and introduced our new fully integrated
product suite ICON that temporarily slowed our revenue growth. With the addition of the new call center we anticipate our growth
rates to begin to pick up again in the fourth quarter. Although our quarterly growth rates tend to fluctuate based on our customers
buying patterns, we anticipate our annual growth to continue. With the focus on our communications business and the introduction
of our next generation cloud based service and technology, we anticipate remaining EBITDA positive for the year and moving the
company toward profitability.



This year we introduced
our next generation cloud based technology platform ICON Integrated Corrections Operations Network. The system includes a full
suite of services and products available in modules, enabling service providers and correctional facilities to choose from a number
of services that best fits their needs. The technology includes modules for:



| | · | Products and Services management, this
includes fully integrated video, kiosk, and inmate tablet based services.
| | - | ----------------------------------------------------------------------------------------------------------------

| | · | Customer Information Database.
| | - | ------------------------------

| | · | Payment Processing.
| | - | -------------------

| | · | Account/Billing
| | - | ---------------

| | · | Customer Care.
| | - | --------------

| | · | Investigative Tool Sets.
| | - | ------------------------

| | · | Jail Management System.
| | - | -----------------------



15







The first version of the system was released
in the second quarter and we anticipate subsequent releases to continue through the next year. The launch of the new product and
the integration of our new call center with the ICON platform temporarily slowed our growth but we anticipate our growth rate to
return to historical rates in the coming quarters.



We completed the installation
of our product with Telus Canada that will be utilized to provide services to B.C. Corrections. As part of the installation we
opened a Canadian call center this quarter and will begin operations in the fourth quarter of this year. We anticipate seeing revenue
from the call center in the fourth quarter and accelerating early next year. The call center not only provides us the ability to
service the Canadian market but gives us the ability to serve other international markets in addition to serving as a backup facility
for our U.S. based call center.



We currently operate
in 11 states and the number of inmates using our service or are being provided a service by other companies utilizing our technology
is over 50,000 inmates.  We plan to continue this growth by expanding our direct services within the states we serve, expanding
to other states, continue to offer our services to other providers on a wholesale basis, and continue to sell our technology to
strategic partners both in the U.S. and internationally.  Our technology is currently operating in Canada, U.K., Japan, and
the Caribbean.  We plan on expanding our installations in these countries as well as continuing to pursue other partners with
goal of expanding our global footprint.



With the company turning
back EBITDA positive in 2013 and continuing the growth of the communications business the company can now work to improve the balance
sheet. With our improved Income Statement and clarity of our business plan, with the divestiture of our Government business, the
company is actively pursuing additional financing to improve our liquidity and help accelerate our growth with additional investments
in product development, sales and marketing. Although the company has identified several sources of funding the company has yet
to finalize terms that will enable the company to achieve it goals while minimizing the expense and dilutive impact of the financing.
In addition, since we divested only certain assets with the government division sale, we retained $1.5 million of receivables with
Federal Government Department of Defense agencies and are working aggressively to collect it. Once the receivable is collected
the company will use the proceeds to pay down existing debt.



RESULTS OF OPERATIONS



THREE MONTHS ENDED SEPTEMBER 30, 2013
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2012



The following tables set forth income and
certain expense items as a percentage of total revenue:



|                                              |  | For  the  Three Months Ending  September 30, |          
|--------------------------------------------- |  | -------------------------------------------- | ---------
|                                              |  | 2013                                         |          
|REVENUE                                       |  | $                                            | 2,173,780
|                                              |  |                                              |          
|Net income (loss)                             |  | $                                            | 49,445   
|                                              |  |                                              |          
|Net (loss) per common share – Basic & Diluted |  | $                                            | 0.00     



16







|                                  |  | OPERATING EXPENSES                     |         |  | PERCENT OF SALES                       | 
|--------------------------------- |  | -------------------------------------- | ------- |  | -------------------------------------- | 
|                                  |  | THREE MONTHS ENDED September 30,  2013 |         |  | THREE MONTHS ENDED September 30,  2012 | 
|                                  |  |                                        |         |  |                                        | 
|Research & Development            |  |                                        | 167,839 |  |                                        | 
|                                  |  |                                        |         |  |                                        | 
|Selling, General & Administrative |  |                                        | 633,704 |  |                                        | 



REVENUES:



Total revenues for the three months ended
September 30, 2013 increased by $51,000 or 2.4% to $2,174,000 compared to $2,123,000 for the three months ended September 30, 2012.
Recurring revenues accounted for 69% of total revenues in the current quarter. Recurring revenues are derived from call processing
transactions for end-user correctional facilities either through a direct customer relationship or in conjunction with a wholesale
partner.



GROSS MARGIN:



Gross profit for the three months ended
September 30, 2013 was $903,000 compared to the $819,000 for three months ended September 30, 2012. Gross margin, as a percentage
of revenues, increased to 41.5% from 38.6% for the same period in 2012. Gross margin relationships to revenue were stable
with prior periods for both our recurring revenues and wholesaled technology revenue streams. The gross margin for wholesaled technology
revenues will vary with larger sales orders but we expect the margins to be in the 60% range on average. Margins from the recurring
services component of revenues were consistent with the prior year period at approximately 30%. The pickup in margin as a percent
in the quarter compared to the prior year was mainly attributable to higher margin on our wholesaled technology revenues which
was order driven.



RESEARCH AND DEVELOPMENT EXPENSES:



Research and development expenses consist
primarily of salaries and related personnel costs, and consulting fees associated with product development in our Technology Products
segment. For the three months ended September 30, 2013, research and development expenses increased to $168,000 as compared to
$161,000 for the three months ended September 30, 2012. Management believes that continual enhancements of the Company's existing
products are required to enable the Company to maintain its current competitive position.



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:



Selling, General and Administrative ("SG&A")
expenses consist primarily of expenses for management, finance, administrative personnel, legal, accounting, consulting fees,
sales commissions, marketing, facilities costs, corporate overhead and depreciation expense. For the three months ended September
30, 2013, SG&A expenses increased to $634,000 from $550,000 in the comparable period prior year. As a percentage of revenues,
SG&A was 29.2% for the three months ended September 30, 2013 versus 25.9% in the comparable period a year ago. The increase
driven by higher selling and marketing costs as the Company continues to expand its foot print into new geographic markets.



INTEREST EXPENSE:



Interest Expense decreased to $66,000 for
the three months ended September 30, 2013 compared to $102,000 for the three months ended September 30, 2012. The decrease in the
quarter was mainly attributable to debt discounts being fully amortized in prior periods.



NET INCOME (LOSS) from continuing operations:



The Company’s net income from continuing
operations for the three months ended September 30, 2013 was $61,000 compared to a net income of $15,000 for the three months ended
September 30, 2012



17







NINE MONTHS ENDED SEPTEMBER 30, 2013
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2012



The following tables set forth income and
certain expense items as a percentage of total revenue:



|                                              |  | For  the  Nine Months Ending  September 30, |          
|--------------------------------------------- |  | ------------------------------------------- | ---------
|                                              |  | 2013                                        |          
|REVENUE                                       |  | $                                           | 6,270,674
|                                              |  |                                             |          
|Net income (loss)                             |  | $                                           | (16,222  
|                                              |  |                                             |          
|Net (loss) per common share – Basic & Diluted |  | $                                           | (0.00    





|                                  |  | OPERATING EXPENSES                    |           |  | PERCENT OF SALES                     | 
|--------------------------------- |  | ------------------------------------- | --------- |  | ------------------------------------ | 
|                                  |  | NINE MONTHS ENDED SEPTEMEBR 30,  2013 |           |  | SIX MONTHS ENDED SEPTEMBER 30,  2012 | 
|                                  |  |                                       |           |  |                                      | 
|Research & Development            |  |                                       | 481,221   |  |                                      | 
|                                  |  |                                       |           |  |                                      | 
|Selling, General & Administrative |  |                                       | 1,817,814 |  |                                      | 



REVENUES:



Total revenues for the nine months ended
September 30, 2013 increased by $226,000 or 3.7% to $6,271,000 compared to $6,045,000 for the nine months ended September 30, 2012.
Recurring revenues increased 5.2% to $4,494,000 which accounted for 72% of total revenues. Wholesaled technology revenues increased
slightly to $1,777,000. Recurring revenues are derived from call processing transactions for end-user correctional facilities either
through a direct customer relationship or in conjunction with a wholesale partner.



GROSS MARGIN:



Gross profit for the nine months ended
September 30, 2013 was $2,230,000 compared to $2,357,000 for nine months ended September 30, 2012. Gross margin, as a percentage
of revenues, decreased to 35.6% from 39.6% for the same period in 2012. Gross margin as a percentage of revenues for recurring
revenues was mainly consistent with the prior year period at approximately 30%. The gross margin percentage on our wholesale technology
revenues decreased to 62% from 67%. The decrease in margin was primarily order driven and not indicative of a trend. The gross
margin for wholesaled technology revenues will vary with larger sales orders but we expect the margins to be in the 60% range on
average. We expect total gross margin for fiscal 2013 to be in the mid 30% range.



RESEARCH AND DEVELOPMENT EXPENSES:



Research and development expenses consist
primarily of salaries and related personnel costs, and consulting fees associated with product development in our Technology Products
segment. For the nine months ended September 30, 2013, research and development expenses decreased slightly to $481,000 as compared
to $514,000 for the nine months ended September 30, 2012. Management believes that continual enhancements of the Company's existing
products are required to enable the Company to maintain its current competitive position.



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:



Selling, General and Administrative ("SG&A")
expenses consist primarily of expenses for management, finance, administrative personnel, legal, accounting, consulting fees, sales
commissions, marketing, facilities costs, corporate overhead and depreciation expense. For the nine months ended September 30,
2013, SG&A expenses increased to $1,818,000 from $1,770,000 in the comparable period prior year. As a percentage of revenues,
SG&A was 29% for the nine months ended September 30, 2013 versus 29.3% in the comparable period a year ago. The increase driven
by higher selling and marketing costs as the Company continues to expand its foot print into new geographic markets.



18





INTEREST EXPENSE:



Interest Expense increased to $309,000
for the nine months ended September 30, 2013 compared to $271,000 for the nine months ended September 30, 2012. The increase included
$53,000 attributable to the value of warrants expensed in conjunction with the short term financing of a large technology order
delivered in the first quarter of this year. Excluding the effect of the warrants, interest decreased to $256,000. The decrease
mainly was driven mainly by the full amortization of debt discounts in prior periods.



NET INCOME (LOSS) from continuing operations:



The Company’s net loss
from continuing operations for the nine months ended September 30, 2013 was $367,291 compared to a net income of $96,323 for
the nine months ended September 30, 2012.  The prior year period included one-time other income of $256,000. Excluding
the one-time item, net loss from continuing operations for the prior year adjusts to $159,290. The increase in loss was
mainly due to; lower margin on wholesale technology revenues which was order driven, higher selling and marketing
expenses mainly in the current year, the non-recurring non-cash interest expense related to the remaining value of warrants
amortized and an increase in non-cash derivative expense.



LIQUIDITY AND CAPITAL RESOURCES:



Cash and cash equivalents
increased to $125,000 at September 30, 2013 from $30,000 at December 31, 2012.



Net cash provided by
operating activities was $457,000 for the nine months ended September 30, 2013 compared to net cash provided by operating
activities of $346,000 in the corresponding period ended September 30, 2012. Net cash provided by operating activities in the current
period was primarily driven by an increase in customer advance liabilities.



Net cash provided investment
activities was $9,000 for the nine months ended September 30, 2013 compared to net cash used of $114,000 in the corresponding period
ended September 30, 2012. The $9,000 provided by investment activities included $222,000 in investments of property, plant and
equipment supporting our direct services telecom installations offset by the cash proceeds of $231,000 from the sale of government
assets in the second quarter. We expect to continue to have a requirement for capital on a project by project basis as we are awarded
direct service contracts. To date, we have financed these equipment purchases with equipment based financing, debt and equity financings.



Net cash used by financing
activities was $373,000 for the nine months ended September 30, 2013 compared to net cash used by financing activities of $342,000
in the corresponding period ended September 30, 2012. The $373,000 used by financing was comprised of repayments of debt totaling
approximately $720,000, net payments on our line of credit facility of $233,000 partially offset by proceeds of $580,000 from the
note issued during the second quarter as a short term financing to fund the production costs of a large technology sale.



Going concern considerations:



At September 30, 2013,
our working capital deficiency was $3,330,000 which compared to a working capital deficiency of $3,561,000 at December 31, 2012.
It should be noted that we have approximately $2.0 million in debt which includes debt that has come due and is coming due in the
next twelve month’s for which our planned operating cashflows and the availability on our line of credit are inadequate to
cover. These conditions raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as
a going concern is highly dependent upon our ability to improve our operating cashflows over current levels, maintain availability
under our line of credit financing, being able to negotiate and support payment arrangements with trade creditors with past due
balances and the ability to raise alternative financing in the range of $2.0 to $2.5 million. The sale of the government business
during April 2013 provided some support for liquidity since we received cash of approximately $200,000, debt of $282,000 was assumed
by the purchaser and the Company received a note receivable of $700,000 payable quarterly over three years. There is no assurance
that we will be able to raise alternative financing needed and/or restructure our existing debt to provide the necessary liquidity
to continue operations.





19





We have an ongoing
need for capital to support the continued expansion of our direct telecom services. It should be noted that a note for $982,000
which matured October 31, 2012 and is past due and is in violation of the note agreement.    The note is secured with
certain accounts receivable and we are depending on the collection of these receivables to fund the repayment of this
note.  The Company continues to have discussions with private investors and investment groups in an attempt to procure the
additional funding needed.    These efforts will proceed unabated.    The Company can provide no guarantee
that this funding will be realized.



Our current cash position,
availability on our line of credit and current level of operating cashflows are not adequate to; (i) support our current working
capital requirements (ii) support the interest costs and principal payments coming due on debt and (iii) support the increased
capital requirements for equipment purchases supporting the growth planned in our telecommunications segment. The alternative
financing has not been obtained at the time of this filing. The Company’s projected operating cash flows alone will not generate
adequate liquidity to service our current indebtedness or to fund other liquidity needs over the next twelve months.  In this
regard, we are highly dependent on obtaining the alternative financing needed.



Financing Activities:



On February 26, 2013,
the Company issued a note to an investor for $600,000 for which $580,400 of net proceeds were received. The note bears interest
of 12% payable monthly and is due in full to investor by September 1, 2013.  The note was issued to finance the costs associated
with a purchase order transaction with a large telecommunications customer. In addition to the interest we agreed to deliver warrants
to the lender for the purchase of up to 800,000 shares of common stock at an exercise price of $0.08 per share, with anti-dilution
provisions covering capital stock changes affecting all stockholders, exercisable for four years from the date of issuance. A debt
discount of $64,547 was recorded representing the fair value of the warrants issued and $64,547 was amortized to interest expense
during the quarter ended June 30, 2013. The fair value of the warrants was determined using the Black Scholes pricing model with
the following assumptions; No dividend yield, expected volatility of 159%, a risk free rate of 0.73% and an expected life of 4
years. The Company also recorded amortization of deferred financing fees of $19,600 representing agency fees which is being amortized
ratably over the term of the note.



On April 2, 2013, we
entered an Asset Purchase Agreement (“Purchase Agreement”) with Blackwatch International, Inc. (“Blackwatch”),
a Virginia corporation, pursuant to which we sold certain government contracts through and related software, hardware and other
assets related to consulting and other services we provided to departments and agencies of the United States government. 
As part of the purchase price, Blackwatch paid us $200,000 and assumed approximately $282,000 owed to former owners of CLR Group
Ltd. outstanding under promissory notes. We assumed these obligation in connection with our own acquisition of the outstanding
shares of Cummings Creek Capital, Inc. (“Cummings Creek”), a Delaware corporation. As part of the purchase price, Blackwatch
also delivered a promissory note for $700,000 along with a guarantee from James G. Dramby, its principal. Under the terms of the
Purchase Agreement, Blackwatch also has agreed to pay three percent (3%) of gross revenues received on the USAF(SVIR) contract
for twenty-four months and also pay up to $100,000 for each of the next two years in the event the AMC/A6N1 A&AS contract is
rebid successfully and funded.



In June the Company was served a writ of
Garnishment for being in default on a $309,658 note payable with respect to our note receivable from Sale of our Governmental Services
segment. In October 2013, the Company reached a settlement arrangement whereby the holder agreed to forbear any further collection
actions against the Company in exchange for $280,000 payable as follows;$240,000 on October 10 2013 and then $10,000 payable monthly
over four months starting November, 2013. The $240,000 was paid by the Company.



OFF BALANCE SHEET ARRANGEMENTS:



We do not have any off balance sheet arrangements
that are reasonably likely to have a current or future effect on our financial condition, revenue, results of operations, liquidity
or capital expenditures.





20







ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.



N/A.



ITEM 4. CONTROLS AND PROCEDURES.



Evaluation of Disclosure Controls and Procedures



Under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as defined in Rule  13a-15(e)  and 15d-15(e) 
under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report were not effective such that the information required
to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i)  recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules  and forms and (ii)  accumulated and communicated
to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however,
that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud if any, within a company have been detected.



Changes in internal control



Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls
over financial reporting occurred during the 2013 Quarter ended June 30, 2013. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that no change occurred in the Company’s internal controls over financial reporting
during the 2013 Quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s
internal  controls over financial reporting.



PART II



OTHER INFORMATION



ITEM 1 - LEGAL PROCEEDINGS



While we are a party to certain legal proceedings,
such pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course
of business or otherwise material to the financial condition of our business, except to the extent discussed in the financial footnote
4. We expect to resolve current litigation and creditor liabilities within the ordinary course of business. None of our directors,
officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.



ITEM 1A - RISK FACTORS



There have been no material changes from
the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 .



21







ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS



None.



ITEM 3 - DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4 - RESERVED



ITEM 5 - OTHER INFORMATION



None.



ITEM 6. EXHIBITS.



|Exhibit
        Number | Description                                                                                                                                                                                                                                                                                                                                                      
|---------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|2.2                    | Stock Purchase Agreement dated December 16, 2004 among Science Dynamics Corporation, Systems Management Engineering, Inc. and the shareholders of Systems Management Engineering, Inc. identified on the signature page thereto (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on December 22, 2004)                  
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|2.3                    | Amendment No. 1 to Stock Purchase Agreement dated February 2, 2005 among Science Dynamics Corporation, Systems Management Engineering, Inc. and the shareholders of Systems Management Engineering, Inc. identified on the signature page thereto (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 11, 2005)
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|2.4                    | Stock purchase agreement by Ricciardi Technologies, Inc., its Owners, including Michael Ricciardi as the Owner Representative and Science Dynamics Corporation, dated as of September 12, 2006.(1)                                                                                                                                                               
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.1                    | Certificate of Incorporation (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)                                                                                                                                                                                                      
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.2                    | Amendment to Certificate of Incorporation dated October 31, 1980 (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)                                                                                                                                                                  
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.3                    | Amendment to Certificate of Incorporation dated November 25, 1980 (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)                                                                                                                                                                 
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.4                    | Amendment to Certificate of Incorporation dated May 23, 1984 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)                                                                                                                             
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.5                    | Amendment to Certificate of Incorporation dated July 13, 1987 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)                                                                                                                            
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.6                    | Amendment to Certificate of Incorporation dated November 8, 1996 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)                                                                                                                         
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.7                    | Amendment to Certificate of Incorporation dated December 15, 1998 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)                                                                                                                        



22







|3.8  | Amendment to Certificate of Incorporation dated December 4, 2002 (Incorporated by reference to the Company’s information statement on Schedule 14C filed with the Securities and Exchange Commission on November 12, 2002)                                      
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                 
|3.9  | By-laws (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)                                                                                                                          
|     |                                                                                                                                                                                                                                                                 
|3.10 | Restated Certificate of Incorporation (Incorporated by reference to the Registration Statement On Form SB-2. file with the Securities and Exchange Commission on February 12, 2007)                                                                             
|     |                                                                                                                                                                                                                                                                 
|4.1  | Secured Convertible Term Note dated February 11, 2005 issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                                         
|     |                                                                                                                                                                                                                                                                 
|4.2  | Common Stock Purchase Warrant dated February 11, 2005 issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                                         
|     |                                                                                                                                                                                                                                                                 
|4.3  | Second Omnibus Amendment to Convertible Notes and Related Subscription Agreements of Science Dynamics Corporation issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on March 2, 2005)
|     |                                                                                                                                                                                                                                                                 
|4.4  | Form of warrant issued to Barron Partners LP.(1)                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                 
|4.5  | Promissory Note issued to Barron Partners LP.(1)                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                 
|4.6  | Form of warrant issued to Dragonfly Capital Partners LLC.(1)                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                 
|4.7  | Secured Promissory Note issued to Michael Ricciardi.(1)                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                 
|4.8  | Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund LTD to Purchase up to 3,000,000 share of Common Stock of Lattice Incorporated.(1)                                                                                               
|     |                                                                                                                                                                                                                                                                 
|4.9  | Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase up to 6,000,000 shares of Common Stock of Lattice Incorporated**                                                                                               
|     |                                                                                                                                                                                                                                                                 
|4.10 | Common Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase 14,583,333 Shares Of Common Stock of Lattice Incorporated.                                                                                                                          
|     |                                                                                                                                                                                                                                                                 
|4.11 | Second Amended and Restated Secured Term Note from Lattice Incorporated to Laurus Master Fund, LTD.                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                 
|10.1 | Executive Employment Agreement Amendment made as of February 14, 2005 by and between Science Dynamics Corporation and Paul Burgess (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on March 2, 2005).(1)               
|     |                                                                                                                                                                                                                                                                 
|10.2 | Stock Purchase Agreement by Ricciardi Technologies, Inc., its Owners, including Michael Ricciardi as Owner Representative and Lattice Incorporated, dated September 12, 2006.(1)                                                                                
|     |                                                                                                                                                                                                                                                                 
|10.3 | Omnibus Amendment and Waiver between Lattice Incorporated and Laurus Master Fund, LTD, dated September 18, 2006.(1)                                                                                                                                             





23







|10.3  | Agreement dated December 30, 2004 between Science Dynamics Corporation and Calabash Consultancy, Ltd. (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 25, 2005)                                               
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                     
|10.4  | Employment Agreement dated January 1, 2005 between Science Dynamics Corporation, Systems Management Engineering, Inc. and Eric D. Zelsdorf (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 25, 2005)           
|      |                                                                                                                                                                                                                                                                     
|10.5  | Executive Employment of dated March 7, 2005 by and between Science Dynamics Corporation and Joe Noto (Incorporated by reference to the 10-KSB filed on April 17, 2006)                                                                                              
|      |                                                                                                                                                                                                                                                                     
|10.7  | Sub-Sublease Agreement made as of June 22, 2001 by and between Software AG and Systems Management Engineering, Inc. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                  
|      |                                                                                                                                                                                                                                                                     
|10.8  | Securities Purchase Agreement dated February 11, 2005 by and between Science Dynamics Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                       
|      |                                                                                                                                                                                                                                                                     
|10.9  | Master Security Agreement dated February 11, 2005 among Science Dynamics Corporation, M3 Acquisition Corp., SciDyn Corp. and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
|      |                                                                                                                                                                                                                                                                     
|10.10 | Stock Pledge Agreement dated February 11, 2005 among Laurus Master Fund, Ltd., Science Dynamics Corporation, M3 Acquisition Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)   
|      |                                                                                                                                                                                                                                                                     
|10.11 | Subsidiary Guaranty dated February 11, 2005 executed by M3 Acquisition Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                                        
|      |                                                                                                                                                                                                                                                                     
|10.12 | Registration Rights Agreement dated February 11, 2005 by and between Science Dynamics Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                       
|      |                                                                                                                                                                                                                                                                     
|10.13 | Microsoft Partner Program Agreement (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                                                                                                  
|      |                                                                                                                                                                                                                                                                     
|10.14 | AmberPoint Software Partnership Agreement (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                                                                                            
|      |                                                                                                                                                                                                                                                                     
|10.15 | Securities Agreement between Science Dynamics Corporation and Barron Partners LP, dated September 15, 2006.(1)                                                                                                                                                      
|      |                                                                                                                                                                                                                                                                     
|10.16 | Employment Agreement between Science Dynamics Corporation and Michael Ricciardi.(1)                                                                                                                                                                                 
|      |                                                                                                                                                                                                                                                                     
|10.17 | Amendment to Employment Agreement - Paul Burgess.(1)                                                                                                                                                                                                                
|      |                                                                                                                                                                                                                                                                     
|10.18 | Amendment to Employment Agreement - Joe Noto.(1)                                                                                                                                                                                                                    
|      |                                                                                                                                                                                                                                                                     
|10.19 | Registration Rights Agreement by and among Science Dynamics Corporation and Barron Partners LLP, dated As of September 19, 2006.(1)                                                                                                                                 



24







|10.20 | Amendment to Securities Purchase Agreement and Registration Rights Agreement (Incorporated by Reference to the Registration Statement on Form SB-2 filed with the SEC on February 12, 2007).            
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                         
|10.21 | Exchange Agreement between Lattice Incorporated and Barron Partners LP dated June 30, 2008.(2)                                                                                                          
|      |                                                                                                                                                                                                         
|10.22 | Certificate of Designations of Series C Preferred Stock.(2)                                                                                                                                             
|      |                                                                                                                                                                                                         
|10.23 | Accounts Receivable Purchase Agreement dated March 11, 2009.(3)                                                                                                                                         
|      |                                                                                                                                                                                                         
|10.24 | Securities Purchase Agreement dated February 1, 2010                                                                                                                                                    
|      |                                                                                                                                                                                                         
|10.25 | Promissory Note issued to I. Wistar Morris. (4)                                                                                                                                                         
|      |                                                                                                                                                                                                         
|10.26 | Security Agreement dated June 11, 2010 by and between Lattice, Incorporated, Lattice Government Services, Inc. and I. Wistar Morris.(4)                                                                 
|      |                                                                                                                                                                                                         
|10.27 | Inter-Creditor Agreement dated June 11, 2010 among Action Capital Corporation and I. Wistar Morris. (4)                                                                                                 
|      |                                                                                                                                                                                                         
|10.28 | Amendment Number One to Promissory Note issued to I. Wistar Morris dated July 21, 2010.(4)                                                                                                              
|      |                                                                                                                                                                                                         
|10.29 | Amendment Number One to Security Agreement by and between Lattice, Incorporated, Lattice Government Services, Inc. and I. Wistar Morris dated July 21, 2010.(4)                                         
|      |                                                                                                                                                                                                         
|10.30 | First Amendment to Intercreditor Agreement between Action Capital Corporation and I. Wistar Morris. (4)                                                                                                 
|      |                                                                                                                                                                                                         
|10.31 | Certificate of Designation, Series D Convertible Preferred Stock, dated February 10, 2011.(5)                                                                                                           
|      |                                                                                                                                                                                                         
|10.32 | Securities Purchase Agreement, between the Company and Barron Partners LP, dated February 14, 2011.(5)                                                                                                  
|      |                                                                                                                                                                                                         
|10.33 | Securities Purchase Agreement between Company and Barron Partners LP, dated March 28, 2011                                                                                                              
|      |                                                                                                                                                                                                         
|10.34 | Amended Certificate of Designation, Series D Convertible Preferred Stock, dated April 17, 2011.(6)                                                                                                      
|      |                                                                                                                                                                                                         
|10.35 | Asset Purchase Agreement by and among the Company and Blackwatch International, Inc., dated as of March 29, 2013. (7)                                                                                   
|      |                                                                                                                                                                                                         
|14.1  | Code of Ethics (Incorporated by reference to the Company’s annual report on Form 10-KSB for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on April 9, 2004)
|      |                                                                                                                                                                                                         
|21.1  | Subsidiaries of the Company(Incorporated by Reference to the Registration Statement on Form SB-2 filed with the SEC on February 12, 2007).                                                              



25







|31.1  | Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act                                                                               
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                          
|31.2  | Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act                                                                               
|      |                                                                                                                                                                                          
|32.1  | Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code          
|      |                                                                                                                                                                                          
|32.2  | Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code          
|      |                                                                                                                                                                                          
|99.1  | Pledge and Security Agreement made by and between Science Dynamics Corporation in favor of and being delivered to Michael Ricciardi as Owner Representative, dated September 19, 2006.(1)
|      |                                                                                                                                                                                          
|99.10 | Lockup Agreement from Laurus Master Fund, LTD.(1)                                                                                                                                        
|      |                                                                                                                                                                                          
|99.11 | Irrevocable Proxy.(1)                                                                                                                                                                    
|      |                                                                                                                                                                                          
|99.2  | Escrow Agreement by and between Science Dynamics Corporation, Ricciardi Technologies, Inc. and the individuals listed on Schedule 1 thereto, dated September 19, 2006.(1)                
|      |                                                                                                                                                                                          
|99.3  | Form of Lock Up Agreement, executed pursuant to the Securities Purchase Agreement between Science Dynamics Corporation and Barron Barron Partners, dated September 15, 2006.(1)          
|      |                                                                                                                                                                                          
|99.4  | Temporary Hardship Exemption                                                                                                                                                             





|101.INS | XBRL Instance Document*             
|------- | ------------------------------------
|        |                                     
|101.SCH | XBRL Schema Document *              
|        |                                     
|101.CAL | XBRL Calculation Linkbase Document* 
|        |                                     
|101.DEF | XBRL Definition Linkbase Document*  
|        |                                     
|101.LAB | XBRL Label Linkbase Document *      
|        |                                     
|101.PRE | XBRL Presentation Linkbase Document*





|(1) Incorporated by reference to the 8-K filed by the Company with the SEC on September 25, 2006                             
|-----------------------------------------------------------------------------------------------------------------------------
|(2) Incorporated by reference to the 8-K filed by the Company on July 8, 2008                                                
|(3) Incorporated by reference to the 8-K filed by the Company on March 27, 2009                                              
|(4) Incorporated by reference to the 10-Q for fiscal quarter ending June 30, 2010 and filed by the Company on August 20, 2010
|(5) Incorporated by reference to the 8-K filed by the Company on February 22, 2011                                           
|(6) Incorporated by reference to the 8-K filed by the Company on March 13, 2011                                              
|(7) Incorporated by reference to the 8-K filed by the Company on May 6, 2013                                                 



|* | To be filed by amendment
|- | ------------------------



26







SIGNATURES



Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



DATE: November 14, 2013



| |     | LATTICE INCORPORATED                                                       
| | --- | ---------------------------------------------------------------------------
| |     |                                                                            
| | BY: | /S/ PAUL BURGESS                                                           
| |     | PAUL BURGESS                                                               
| |     | CHIEF EXECUTIVE OFFICER(PRINCIPAL EXECUTIVE OFFICER),SECRETARY AND DIRECTOR



DATE: November  14, 2013



| | BY: | /S/ JOE NOTO                                         
| | --- | -----------------------------------------------------
| |     | JOE NOTO                                             
| |     | CHIEF FINANCIAL OFFICER(PRINCIPAL ACCOUNTING OFFICER)







27