UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549




FORM
10-Q




(Mark
One)




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


ACT
OF 1934




FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2009.




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.
      Employerincorporation
      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. Yes  x No o





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). Yes  x No o





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 o
            Accelerated
      filer oNon-accelerated
      filer o
            Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  o No x




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. Yes  o No  o




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 August 17, 2009, there were 16,929,953
outstanding shares of the Registrant's Common Stock, $.01 par
value.







LATTICE
INCORPORATED


JUNE
30, 2009 QUARTERLY REPORT ON FORM 10-Q




TABLE
OF CONTENTS




PagePART
      I - FINANCIAL INFORMATIONItem
      1. Financial Statements
                3Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                13Item
      3. Quantitative and Qualitative Disclosure About Market
    Risks
                17Item
      4T. Controls and Procedures
                17PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
                17Item
      1A. Risk Factors
                17Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                17Item
      3. Defaults Upon Senior Securities
                17Item
      4. Submission of Matters to a Vote of Security Holders
                18Item
      5. Other Information
                18Item
      6. Exhibits
                18SIGNATURES
                19


2


Lattice
Incorporated and Subsidaries
 Consolidated
Balance sheets
  June
      30,
                        
                        
                        December 31,2009
                        
                        
                        2008(Unaudited)
                        
                        
                        (Audited)ASSETS:Current
      assets:Cash
      and cash equivalents
                        
                        $
                        171,245
                        
                        
                        $
                        1,363,130Accounts
      receivable
                        
                        
                        4,063,355
                        
                        
                        
                        3,560,690Inventories
                        
                        
                        41,684
                        
                        
                        
                        30,704Other
      current assets
                        
                        
                        199,335
                        
                        
                        
                        51,008Total
      current assets
                        
                        
                        4,475,619
                        
                        
                        
                        5,005,532Property
      and equipment, net
                        
                        
                        53,863
                        
                        
                        
                        21,090Goodwill
                        
                        
                        3,599,386
                        
                        
                        
                        3,599,386Other
      intangibles, net
                        
                        
                        1,811,252
                        
                        
                        
                        2,409,748Other
      assetes
                        
                        
                        55,734
                        
                        
                        
                        54,459Total
      assets
                        
                        $
                        9,995,854
                        
                        
                        $
                        11,090,215LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                        
                        $
                        2,174,346
                        
                        
                        $
                        1,698,551Accrued
      expenses
                        
                        
                        2,252,785
                        
                        
                        
                        1,741,891Notes
      payable
                        
                        
                        613,305
                        
                        
                        
                        1,766,098Derivative
      liability
                        
                        
                        264,676
                        
                        
                        
                        200,606Total
      current liabilities
                        
                        
                        5,305,112
                        
                        
                        
                        5,407,146Long
      term liabilities:Long
      Term Debt
                        
                        
                        348,053
                        
                        
                        
                        666,515Deferred
      tax liabilities
                        
                        
                        873,573
                        
                        
                        
                        1,200,283Total
      long term liabilities
                        
                        
                        1,221,626
                        
                        
                        
                        1,866,798Total
      liabilities
                        
                        
                        6,526,738
                        
                        
                        
                        7,273,944Minority
      interest
                        
                        
                        182,833
                        
                        
                        
                        193,280Shareholders'
      equityPreferred
      Stock - .01 par valuePreferred
      Stock series A 9,000,000 shares authorized, 7,810,686
      and  7,838,686 issued
                        
                        
                        78,107
                        
                        
                        
                        78,387Preferred
      Stock series B 1,000,000 shares authorized  1,000 000
      issued
                        
                        
                        10,000
                        
                        
                        
                        10,000Preferred
      Stock series C 575,000 shares authorized 520,000 issued
                        
                        
                        5,200
                        
                        
                        
                        5,200Common
      stock - .01 par value, 200,000,000 authorized,16,942,428
      and 16,842,428 issued, and 16,639,441 and 16,539,441 outstanding
      respectively
                        
                        
                        169,425
                        
                        
                        
                        168,425Additional
      paid-in capital
                        
                        
                        38,669,442
                        
                        
                        
                        38,418,897Accumulated
      deficit
                        
                        
                        (35,087,795
                        )
                        
                        
                        (34,499,822
                        )3,844,379
                        
                        
                        
                        4,181,087Common
      stock held in treasury, at cost
                        
                        
                        (558,096
                        )
                        
                        
                        (558,096
                        )Shareholders'
      equity
                        
                        
                        3,286,283
                        
                        
                        
                        3,622,991Total
      liabilities and shareholders' equity
                        
                        $
                        9,995,854
                        
                        
                        $
                        11,090,215
  See
Accompanying notes to Condensed Consolidated Finanical
Statements
  3
  Lattice
Incorporated and Subsidaries
 Consolidated
Statements of Operations
  Six
      Months Ended
                            
                            
                            Three Months EndedJune 30,
                            
                            
                            June 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Revenue
      - Technology Services
                            
                            $
                            7,367,448
                            
                            
                            $
                            6,881,682
                            
                            
                            $
                            3,860,923
                            
                            
                            $
                            3,527,669Revenue
      - Technology Products
                            
                            
                            607,135
                            
                            
                            
                            437,311
                            
                            
                            
                            305,777
                            
                            
                            
                            200,418Total
      Revenue
                            
                            
                            7,974,583
                            
                            
                            
                            7,318,993
                            
                            
                            
                            4,166,700
                            
                            
                            
                            3,728,087Cost
      of Revenue - Technology Services
                            
                            
                            5,217,955
                            
                            
                            
                            5,003,050
                            
                            
                            
                            2,776,859
                            
                            
                            
                            2,633,724Cost
      of Revenue - Technology Products
                            
                            
                            223,054
                            
                            
                            
                            168,016
                            
                            
                            
                            107,647
                            
                            
                            
                            79,478Total
      cost of revenue
                            
                            
                            5,441,009
                            
                            
                            
                            5,171,066
                            
                            
                            
                            2,884,506
                            
                            
                            
                            2,713,202Gross
      Profit
                            
                            
                            2,533,574
                            
                            
                            
                            2,147,927
                            
                            
                            
                            1,282,194
                            
                            
                            
                            1,014,885Operating
      expenses:Selling,
      general and administrative
                            
                            
                            2,361,793
                            
                            
                            
                            2,551,383
                            
                            
                            
                            1,239,801
                            
                            
                            
                            1,436,837Research
      and development
                            
                            
                            295,677
                            
                            
                            
                            217,657
                            
                            
                            
                            143,182
                            
                            
                            
                            109,172Amortization
      expense
                            
                            
                            598,496
                            
                            
                            
                            740,458
                            
                            
                            
                            299,248
                            
                            
                            
                            372,057Total
      operating expenses
                            
                            
                            3,255,966
                            
                            
                            
                            3,509,498
                            
                            
                            
                            1,682,231
                            
                            
                            
                            1,918,066Loss
      from operations
                            
                            
                            (722,392
                            )
                            
                            
                            (1,361,571
                            )
                            
                            
                            (400,037
                            )
                            
                            
                            (903,181
                            )Other
      income (expense):Derivative
      income (expense)
                            
                            
                            (64,070
                            )
                            
                            
                            2,554,590
                            
                            
                            
                            108,373
                            
                            
                            
                            2,374,923Other
      expense
                            
                            
                            0
                            
                            
                            
                            2,607,525
                            
                            
                            
                            0
                            
                            
                            
                            2,607,525Interest
      expense
                            
                            
                            (124,312
                            )
                            
                            
                            (81,446
                            )
                            
                            
                            (48,121
                            )
                            
                            
                            (30,625
                            )Finance
      expense
                            
                            
                            (1,802
                            )
                            
                            
                            (1,466
                            )
                            
                            
                            (776
                            )
                            
                            
                            (1,014
                            )Total
      other income (expense)
                            
                            
                            (190,184
                            )
                            
                            
                            5,079,203
                            
                            
                            
                            59,476
                            
                            
                            
                            4,950,809Minority
      Interest income
                            
                            
                            10,447
                            
                            
                            
                            55,419
                            
                            
                            
                            5,052
                            
                            
                            
                            27,997Net
      income (loss) before taxes
                            
                            
                            (902,129
                            )
                            
                            
                            3,773,051
                            
                            
                            
                            (335,509
                            )
                            
                            
                            4,075,625Income
      taxes (benefit)
                            
                            
                            (326,710
                            )
                            
                            
                            (348,416
                            )
                            
                            
                            (163,355
                            )
                            
                            
                            (174,208
                            )Net
      Income (loss)
                            
                            $
                            (575,419
                            )
                            
                            $
                            4,121,467
                            
                            
                            $
                            (172,154
                            )
                            
                            $
                            4,249,833Net
      income (Loss)  applicable to common
shareholders:Net
      income (loss)
                            
                            $
                            (575,419
                            )
                            
                            $
                            4,121,467
                            
                            
                            $
                            (172,154
                            )
                            
                            $
                            4,249,833Series
      B Preferred stock dividend
                            
                            
                            (12,554
                            )
                            
                            
                            (25,000
                            )
                            
                            
                            (6,277
                            )
                            
                            
                            (12,500
                            )Income
      (Loss) applicable to common stockholders
                            
                            $
                            (587,973
                            )
                            
                            $
                            4,096,467
                            
                            
                            $
                            (178,431
                            )
                            
                            $
                            4,237,333Income
      (Loss) per common shareBasic
                            
                            $
                            (0.04
                            )
                            
                            $
                            0.24
                            
                            
                            $
                            (0.01
                            )
                            
                            $
                            0.25Diluted
                            
                            $
                            (0.04
                            )
                            
                            $
                            0.03
                            
                            
                            $
                            (0.01
                            )
                            
                            $
                            0.03Weighted
      average shares:Basic
                            
                            
                            16,720,555
                            
                            
                            
                            16,829,428
                            
                            
                            
                            16,739,444
                            
                            
                            
                            16,829,428Diluted
                            
                            
                            16,720,555
                            
                            
                            
                            56,250,208
                            
                            
                            
                            16,739,444
                            
                            
                            
                            54,403,291
  See
Accompanying notes to  condensed Consolidated Financial
Statements
  4
  Lattice
Incorporated and Subsidaries
 Consolidated
Statements of Cash Flows
  Six Months endedJune 30,2009
                      
                      
                      2008Cash
      flow from operating activities:Net
      loss before preferred dividends
                      
                      $
                      (575,419
                      )
                      
                      $
                      4,121,467Adjustments
      to reconcile net loss to net used for operating
activities:Derivative
      (income) expense
                      
                      
                      64,070
                      
                      
                      
                      (2,554,590
                      )Amortization
      of intangible assets
                      
                      
                      598,496
                      
                      
                      
                      744,114Extinguishment
      (gain) loss
                      
                      
                      
                      
                      
                      
                      (2,607,525
                      )Deferred
      income taxes
                      
                      
                      (326,710
                      )
                      
                      
                      (348,416
                      )Minority
      interest
                      
                      
                      (10,447
                      )
                      
                      
                      (55,419
                      )Share-based
      compensation
                      
                      
                      251,266
                      
                      
                      
                      56,041Depreciation
                      
                      
                      -
                      
                      
                      
                      15,579Changes
      in operating assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
                      
                      
                      (1,184,897
                      )
                      
                      
                      159,138Inventories
                      
                      
                      (10,980
                      )
                      
                      
                      9,138Other
      current assets
                      
                      
                      (144,621
                      )
                      
                      
                      11,708Other
      assets
                      
                      
                      (1,275
                      )
                      
                      
                      65,839Increase
      (decrease) in:Accounts
      payable and accrued liabilities
                      
                      
                      971,355
                      
                      
                      
                      (328,698
                      )Total
      adjustments
                      
                      
                      206,257
                      
                      
                      
                      (4,833,091
                      )Net
      cash provided by ( used in) operating activities
                      
                      
                      (369,162
                      )
                      
                      
                      (711,624
                      )Cash
      flows from investing activities:Purchase
      of equipment
                      
                      
                      (32,773
                      )
                      
                      
                      (32,844
                      )Net
      cash used in investing activities
                      
                      
                      (32,773
                      )
                      
                      
                      (32,844
                      )Cash
      flows from financing activities:Payments
      on notes payable
                      
                      
                      (14,000
                      )
                      
                      
                      (84,500
                      )Bank
      line-of-credit borrowings (payments), net
                      
                      
                      (775,950
                      )
                      
                      
                      659,111Net
      cash provided by (used in) by financing activities
                      
                      
                      (789,950
                      )
                      
                      
                      574,611Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      (1,191,885
                      )
                      
                      
                      (169,857
                      )Cash
      and cash equivalents - beginning of period
                      
                      
                      1,363,130
                      
                      
                      
                      769,915Cash
      and cash equivalents - end of period
                      
                      $
                      171,245
                      
                      
                      $
                      600,058Supplemental
      cash flow informationInterest
      paid in cash
                      
                      $
                      100,769
                      
                      
                      $
                      56,194Taxes
      paid
                      
                      $
                      4,805
                      
                      
                      $
                      -Supplemental
      Disclosures of Non-Cash Financing ActivitiesSale
      of accounts receivable by factor proceeds paid directlyto
      Private Bank Facility
                      
                      $
                      682,232
                      
                      
                      $
                      -Preferred
      stock dividends
                      
                      $
                      6,277
                      
                      
                      $
                      12,500Conversion
      of 28,000 preferred share into 100,000 of common
                      
                      $
                      (280
                      )
                      
                      $
                      -Conversion
      of 28,000 preferred share into 100,000 of common
                      
                      $
                      1,000
                      
                      
                      $
                      -Additional
      paid in capital
                      
                      $
                      (720
                      )
                      
                      $
                      -
  See
Accompanying Notes to Condensed Consolidated Financial
Statements
  5
 
 Lattice
Incorporated and Subsidiaries
 Notes
to Condensed Consolidated Financial Statements
 June
30, 2009 (Unaudited)
 
 Note
1 - Organization and summary of significant accounting policies:
 
 a)
Organization
 
 Lattice
Incorporated (the "Company") was incorporated in the State of Delaware 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
Ricciardi Technologies Inc. (“RTI”). RTI 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. RTI’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. With the SMEI and the RTI acquisitions, approximately 92% of the
Company’s revenues are derived from solution services. RTI’s income and
expresses are included in the results of operations from September 19, 2006. In
January 2007, we changed our name from Science Dynamics Corporation to Lattice
Incorporated.
 
 b)
Basis of Presentation going concern
 
 At June
30, 2009 the Company has a working capital deficiency of $829,000 including
non-cash derivative liabilities of approximately $265,000.  For the
six months ended June 30, 2009, the Company had a loss from operations of
approximately $722,000 of which $598,000 was from non-cash amortization of
intangibles and $251,000 was from non-cash share based
compensation.  This condition taken in conjunction with the Company’s
history of operating losses raises 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 management’s continuing and successful
execution on its business plan to achieve profitability and availability of
financing. 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 June 30, 2009 and for
the  six and three months ended June 30, 2009 and 2008 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, 2008 appearing in Form 10K filed on
April 13, 2009.
  6
 
 d) Principles of
consolidation:
 
 The
consolidated financial statements included 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 minority
interests. 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)
Reclassification
 
 Certain
March 31, 2009 amounts have been reclassified to conform to the June 30, 2009
presentation.
  g)
Share-based payments
 
 On
January 1, 2006, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board Statement of Financial Accounting Standards
(“SFAS”) No. 123(R), Accounting for Share-based
payments , to account for compensation costs under its stock option plans
and other share-based arrangements. Prior to January 1, 2006, the Company
utilized the intrinsic value method under Accounting Principles Board Opinion
No. 25, Accounting for Stock
Issued to Employees . Statement 123R 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
June 30, 2009, there was approximately $899,000 of total unrecognized
compensation cost related to unvested share-based compensation awards granted.
The $899,000 will be charged to operations over the weighted average remaining
service period. For the  six months ended June 30, 2009 share-based
compensation was $251,266 compared to  $56,041 in the year ago period
and $125,633 and 9,833 for three months ended June 30,2009 and 2008
respectively.
 h)
Events occurring after reporting date
 
 The
Company has evaluated events and transactions that occurred between June 30,
2009 and August 19, 2009, which is the date the financial statements were issued
for possible disclosure and recognition in the financial statements. See Note 9
for subsequent events.
  7
 
 i)
Recent accounting pronouncements
 
 In the
opinion of management, there are no recent accounting pronouncements that will
have a material effect on the company’s consolidated financial
statements.
  8
 
 Note
2- Segment reporting
 
 Management
views its business as one reportable segment: Government services. The Company
evaluates performance based on profit or loss before intercompany
charges.
 Six Months Ended
                      
                      
                      Three Months EndedJune 30,
                      
                      
                      June 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Revenues:Goverment
      Services
                      
                      $
                      7,367,448
                      
                      
                      $
                      6,725,594
                      
                      
                      $
                      3,860,923
                      
                      
                      $
                      3,421,451Other
                      
                      
                      607,135
                      
                      
                      
                      593,399
                      
                      
                      
                      305,777
                      
                      
                      
                      306,636Total
      Consolidated Revenues
                      
                      $
                      7,974,583
                      
                      
                      $
                      7,318,993
                      
                      
                      $
                      4,166,700
                      
                      
                      $
                      3,728,087Gross
      Profit:Government
      Services
                      
                      $
                      2,149,493
                      
                      
                      $
                      1,802,417
                      
                      
                      $
                      1,084,064
                      
                      
                      $
                      846,655Corporate
      and other
                      
                      
                      384,081
                      
                      
                      
                      345,510
                      
                      
                      
                      198,130
                      
                      
                      
                      168,230Total
      Consolidated
                      
                      $
                      2,533,574
                      
                      
                      $
                      2,147,927
                      
                      
                      $
                      1,282,194
                      
                      
                      $
                      1,014,885
 
 June
      30
                                
                                
                                December
      312009
                                
                                
                                2008Total
      Assets:Goverment
      Services
                                
                                $
                                9,523,380
                                
                                
                                $
                                10,127,333Corporate
      and Other
                                
                                
                                472,474
                                
                                
                                
                                962,882Total
      Consolidated Assets
                                
                                $
                                9,995,854
                                
                                
                                $
                                11,090,215
 Note
3 – Factoring agreement:
 
 On July
17, 2009, the Company terminated its factoring arrangement with Republic Capital
Access (“RCA”) and entered into a financing and security agreement with Action
Capital. There are no outstanding balances owed to RCA as of June 30, 2009 nor
was any amounts owed as of the July 17th termination date.  (See note
9)
  Due from Factor:Six
      months
                                                  ended
                                                  June 30,2009Accounts
      receivable factored
                                                
                                                $
                                                1,825,991Amounts
      advanced
                                                
                                                
                                                1,808,413June 30,2009Due
      from Factor,  net of fees
                                                
                                                $
                                                -0-
   9
  Note 4
- Notes payable
 
 Notes
payable consists of the following as of June 30, 2009 and December 31,
2008:
  June
      30,
                        
                        
                        December 31,2009
                        
                        
                        2008Bank
      line-of-credit (a)
                        
                        $
                        -
                        
                        
                        $
                        1,458,183Note
      Payble – former RTI owners (b)
                        
                        
                        750,000
                        
                        
                        
                        750,000Notes
      payable to Stockholders/director (c )
                        
                        
                        211,358
                        
                        
                        
                        224,430Total
      notes payable
                        
                        
                        961,358
                        
                        
                        
                        2,432,613Less
      current maturities
                        
                        
                        (613,305
                        )
                        
                        
                        (1,766,098
                        )Long-term
      debt
                        
                        $
                        348,053
                        
                        
                        $
                        666,515
 
 (a)
Bank line-of-credit:
  The
line of credit with Private Bank matured February 28, 2009.  The
outstanding balance with Private Bank of $1,455,650 was paid in full on March
11, 2009.
 
 (b)
Note payable - former RTI owners:
 
 In
accordance with the Settlement Agreement with Michael Ricciardi as owner
representative of the former RTI shareholders the Company issued a 24 month
promissory note to the former RTI shareholders. The promissory bears interest at
a rate of 10%. Commencing in October 2008, the Company is required to make
payments consisting solely of interest for the initial 12 months that the
promissory note is outstanding. Commencing in October 2009, the Company is
required to make monthly payments of principal of $62,500 plus interest. A total
of $562,500 of this note is due within the next twelve months and classified as
current with monthly payments of $62,500 starting October 2009.
  (c)
Notes payable stockholders/officers:
  The
Company owed a balance at June 30, 2009 and December 31, 2008 of
$0  and $8,000 respectively to a former officer/ stockholder of the
Company.
 
 At June
30, 2009 and December 31, 2008  the Company had a balance owing on a
term note payable of $211,358 and $216,430 respectively, with a director of the
Company. The note bears interest at 21.5% per annum and is payable monthly in
amounts ranging from $6,000 to $10,000 with any residual balance maturing
December 2011.
 
 Note
5 - Derivative financial instruments:
 
 The
balance sheet caption derivative liabilities consist of Warrants, issued in
connection with the 2005 Laurus Financing Arrangement, the 2006 Omnibus
Amendment and Waiver Agreement with Laurus, and the 2006 Barron Financing
Arrangement. These derivative financial instruments are indexed to an aggregate
of 4,313,465  shares of the Company’s common stock as of June 30, 2009
and December 31, 2008 and are carried at fair value.
  10
 
 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 and Barron 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 June
30, 2009 included conversion or strike prices ranging from $0.10 - $1.10;
historical volatility factors ranging from 122.18% - 123.01% based upon forward
terms of instruments; terms-remaining term for all instruments; and a risk free
rate ranging from 1.64% - 3.53%.
 
 Note
6 - Major Customers and Concentrations
 
 Our
government service segment’s primary  "end-user" customer is the U.S.
Department of Defense (DoD) which accounted for approximately 93% and 94% of our
total revenues for six months ended June 30, 2009 and 2008  respectively.
For the three months ended June 30, 2009 and 2008 they accounted for 92% and 95%
of our total revenue. Accounts receivable for these contracts totaled at June
30, 2009 and December 31, 2008 was $3,826,985 and
$3,335,667 respectively.
  Included
in the government segment is two contract vehicles that account
for   74% and   65%  of its sales in the
six months ended June 30, 2009 and 2008 respectively and  70% and 55%
of its sales in the three months ended June 30, 2009 and 2008 respectively
Accounts receivable for these contracts totaled at June 30, 2009 and 2008 was
$2,925,982 and $2,354,713 respectively.
 
 Note
7 – Earnings per share
 Six
      Months
                    
                    
                    Three
      MonthsEnded
      June 30,
                    
                    
                    Ended
      June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Income
      (loss) applicable to common shareholders
                    
                    $
                    (587,973
                    )
                    
                    $
                    4,096,467
                    
                    
                    $
                    (178,431
                    )
                    
                    $
                    4,237,333Reconciliation
      to numerator for diluted earnings per shareIncome
      on derivative warrants
                    
                    
                    -
                    
                    
                    
                    (2,554,590
                    )
                    
                    
                    -
                    
                    
                    
                    (2,374,923
                    )Preferred
      stock dividends
                    
                    
                    -
                    
                    
                    
                    25,000
                    
                    
                    
                    -
                    
                    
                    
                    12,500Numerator
      for diluted earnings per share
                    
                    $
                    (587,973
                    )
                    
                    $
                    1,566,877
                    
                    
                    $
                    (178,431
                    )
                    
                    $
                    1,874,910Weighted
      average shares
                    
                    
                    16,720,555
                    
                    
                    
                    16,829,428
                    
                    
                    
                    16,739,444
                    
                    
                    
                    16,829,428Reconciliation
      to denominator for diluted earnings per shareDilutive
      derivative warrants
                    
                    
                    -
                    
                    
                    
                    5,004,267
                    
                    
                    
                    -
                    
                    
                    
                    3,286,262Shares
      indexed to convertible preferred stock
                    
                    
                    -
                    
                    
                    
                    34,110,568
                    
                    
                    
                    -
                    
                    
                    
                    34,110,568Dilutive
      employee options
                    
                    
                    -
                    
                    
                    
                    305,945
                    
                    
                    
                    -
                    
                    
                    
                    177,033Denominator
      for diluted earnings per share
                    
                    
                    16,720,555
                    
                    
                    
                    56,250,208
                    
                    
                    
                    16,739,444
                    
                    
                    
                    54,403,291Earnings
      per common share:Basic
                    
                    
                    (0.04
                    )
                    
                    
                    0.24
                    
                    
                    
                    (0.01
                    )
                    
                    
                    0.25Diluted
                    
                    
                    (0.04
                    )
                    
                    
                    0.03
                    
                    
                    
                    (0.01
                    )
                    
                    
                    0.03
 
 Note
8 - Subsequent Events
 
 Action
Capital Line of Credit:
 
 On July
17, 2009, the Company terminated its factoring arrangement with Republic Capital
Access (“RCA”) and entered into a financing and security agreement with Action
Capital. There are no outstanding balances owed to RCA as of June 30, 2009 nor
was any amounts owed as of the July 17th termination date.
  Also on
July 17, 2009, the Company and its wholly-owned subsidiary, Ricciardi
Technologies, Inc. (“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”).  An
acceptable receivable is one that is approved by Action Capital and less than 90
days old. 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.
  11
  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.
 
 Royal
Bank America Leasing Equipment Lease:
 
 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 Telecom business. 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. As
of June 30, 2009, no payments on the equipment credit facility had been advanced
by Royal Bank to 3rd party
vendors. Accordingly, the Company did not record any liability in its Balance
Sheet as of June 30, 2009.
 
 Modification
of Employee Options:
 
 At the
Board meeting held July 15, 2009, the Board of Directors of Lattice approved the
re-pricing of outstanding employee options to current market. Under the
modification, outstanding options would be re-priced at current market ( $0.09
per share at July 15 close) and extend vesting period an additional
year.  The Company currently has 7,680,000 employee options
outstanding issued under its 2002 and 2008 stock options plans ranging in strike
price from $0.33 to $1.80. The Company will record any incremental expense as a
result of the re-pricing.
  12





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, 2008.
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





Lattice
Incorporated was incorporated in the State of Delaware in May 1973 and commenced
operations in July 1977. We have been developing and delivering secure
technologically advanced communication solutions for over twenty-five years and
recently expanded our product offering to include IT solutions with the
acquisition of 86% of Systems Management Engineering, Inc. ("SMEI") on February
14, 2005. In September 2006, pursuant to a Stock Purchase Agreement, dated as of
September 12, 2006 (the "RTI Agreement"), the Company purchased all of the
issued and outstanding shares of the common stock of Ricciardi Technologies Inc.
("RTI"). RTI 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 though prime contractors of such governmental
agencies RTI'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. RTI is
headquartered in Manassas, Virginia. The purchase of RTI's common stock was
completed on September 19, 2006.




We intend
to continue the expansion of our sales efforts both within the federal
government secure software solutions space and commercial accounts. We continue
to build upon our recent success in these markets by expanding our marketing
efforts through our direct sales strategy. Our strong contract backlog has given
us an opportunity to expand our existing revenue base. With regards to our
acquisition strategy, we will continue to pursue profitable companies with
proprietary products and services we can sell to our existing customers and
which have synergies with our existing business.





We derive
substantially all of our revenues from governmental contracts under which we act
as both a prime contractor and indirectly as a subcontractor. Revenues from
government contracts accounted for approximately $7,367,000 or 92% of our
overall revenues for the six months ended June 30, 2009. Of our total government
contract revenues, approximately 90% were from Prime contract
vehicles.




RESULTS OF
OPERATIONS





THREE
MONTHS ENDED JUNE 30, 2009 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2008




REVENUES:





Total
revenues for the three months ended June 30, 2009 increased by $438,613 or
11.77% to $4,166,700 compared to $3,728,087 for the three months ended June 30,
2008. Our Goverment Services segment which represents revenues from professional
engineering services to Federal government Dept of Defense (DoD) agencies
accounted for 93% of total revenues.  The increase was mainly
attributable to a formula based price increase on our cost plus contracts which
is based on our projected indirect overhead costs relative to our direct labor
costs. Cost plus contracts accounted for approximately 80% of our government
service revenues for the three months ended June 30, 2009.





GROSS
MARGIN:





Gross
margin for the three months ended June 30, 2009 was $1,282,194, an increase of
$267,309 or 26.3% compared to the $1,014,885 for three months ended June 30,
2008. Gross margin, as a percentage of revenues, increased to 30.8% from 27.2%
for the same period in 2008. The increase in percentage was primarily
due  to an increase in gross margin from Government services related
to pricing on our cost-plus contract vehicles compared to prior year levels.
This was partially offset by an increase in lower margin revenues handled by
subcontractors relative to total revenues.


13


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 June 30, 2009,
research and development expenses increased to $143,182 as compared to $109,172
for the three months ended June 30, 2008.  The increase was mostly due
to market adjustments to salary levels  for technical staff.
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, fringe benefits, indirect overhead, labor costs of billable
technical staff not charged to a project or contract, finance, administrative
personnel, legal, accounting, consulting fees, sales commissions, marketing,
facilities costs, corporate overhead and depreciation expense.  For
the three months ended June 30, 2009, SG&A expenses decreased  to
$1,239,801 from $1,436,837 in the comparable period prior year.  As a
percentage of revenues, SG&A was 29.8% for the three months ended June 30,
2009 versus 38.5% in the comparable period a year ago. The decrease in expense
was mainly attributable to nonrecurring litigation costs included in the prior
year  period .





AMORTIZATION
EXPENSES:





Non-cash
amortization expenses related to intangible assets acquired in the acquisitions
of RTI and SMEI are stated separately in our statement of operations..
Amortization expense for the three months ended June 30, 2009 was $299,248
compared to $372,057 for the three months ended June 30, 2008. The decrease is
attributed to certain intangibles being fully amortized in 2008 and an
impairment charge to the carrying value of intangibles taken in the 4th quarter
of 2008..




INTEREST
EXPENSE:





Interest
Expense increased to $48,121 for the three months ended June 30, 2009 compared
to $30,625 for the three months ended June 30, 2008.  Interest expense
in 2009 was comprised primarily of interest charges on its revolving
line-of-credit and short term notes. The increase is attributed to higher
interest rate we pay on our line of credit versus prior year level combined with
interest expense incurred on the $750,000 note with the former owners of
RTI.





NET
INCOME:





The
Company's  net loss for the three months ended June 30, 2009 was
$172,154 compared to net income of $4,249,833 for the three months ended June
30, 2008.It should be noted that the net income in the year ago quarter included
non-cash derivative income of $2,374,923 and a gain on extinguishment of
$2,607,525 related to the exchange of Preferred Series C Stock for outstanding
warrants held by Barron Partners L.P. Excluding these amounts, the year ago net
income adjusts to a net loss of $730,000





SIX
MONTHS ENDED JUNE 30, 2009 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2008




REVENUES:





Total
revenues for the six months ended June 30, 2009 increased by $655,590 or 9.0% to
$7,974,583 compared to $7,318,993 for the six months ended June 30, 2008. Our
Goverment Services segment which represents revenues from professional
engineering services to Federal government Dept of Defense (DoD) agencies
accounted for 92% of total revenues.  The increase was mainly
attributable to a formula based price increase on our cost plus contracts which
is based on our projected indirect overhead costs relative to our direct labor
costs. Cost plus contracts accounted for approximately 80% of our government
service revenues for the six months ended June 30, 2009.





GROSS
MARGIN:





Gross
margin for the six months ended June 30, 2009 was $2,533,574, an increase of
$385,647or 18% compared to the $2,147,927 for six months ended June 30, 2008.
Gross margin, as a percentage of revenues, increased to 31.8% from 29.3% for the
same period in 2008.  The increase was mainly attributable to the rate
increase on our cost plus contract vehicles and higher margin on our
subcontractor revenues partially offset by an unfavorable shift in revenue mix
towards subcontractor revenues relative to direct labor or in-house revenues.
Lower margin subcontractor revenues as a percentage of our total government
services revenue was 54% versus 51% in the prior period.


14


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 six months ended June 30, 2009,
research and development expenses increased to $295,577 as compared to $217,657
for the six months ended June 30, 2008.  The increase was mostly due
to market level adjustments to salaries for technical
staff.  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, fringe benefits, indirect overhead, finance, administrative
personnel, legal, accounting, consulting fees, sales commissions, marketing,
facilities costs, corporate overhead and depreciation expense.  For
the six months ended June 30, 2009, SG&A expenses decreased to $2,361,793
from $2,551,383 in the comparable period prior year.  As a percentage
of revenues, SG&A was 29.6% for the six months ended June 30, 2009 versus
34.9% in the comparable period a year ago.  The decrease in expense
was mainly attributable to nonrecurring litigation and integration expenses
incurred  in the prior year  period partially offset by an
increase in selling and marketing costs .





AMORTIZATION
EXPENSES:





Non-cash
amortization expenses related to intangible assets acquired in the acquisitions
of RTI and SMEI are stated separately in our statement of operations..
Amortization expense for the six months ended June 30, 2009 was $598,496
compared to $740,458 for the six months ended June 30, 2008. The decrease is
attributable to certain intangibles being fully amortized in 2008 and reduced
amortization expense as a result of an impairment charge to the carrying value
of intangibles taken in the 4th quarter
of 2008.




INTEREST
EXPENSE:





Interest
Expense increased to $124,312 for the six months ended June 30, 2009 compared to
$81,446 for the six months ended June 30, 2008.  Interest expense in
2009 was comprised primarily of interest charges on its revolving line-of-credit
and short term notes. The increase is attributed to higher interest rate we pay
on our line of credit versus prior year level combined with interest expense
incurred on the $750,000 note with the former RTI shareholders.





LIQUIDITY
AND CAPITAL RESOURCES





Going
concern considerations:





The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The going concern basis was due to the
Company’s historical negative operating cash flow and losses. For the six months
ended June 30, 2009 we had  negative cash flows from operations of
$369.162 and the Company’s working capital deficiency at June 30, 2009 was
$829,493 including non-cash derivative liabilities of $264,676. These conditions
raise doubt regarding the Company’s ability to continue as a going concern. The
Company’s ability to continue as a going concern is dependent upon its ability
to improve near term operating performance; continued availability under its
line of credit financing and its ability to raise  alternative
financing in a difficult credit environment.





On July
17, 2009, the Company terminated its factoring arrangement with Republic Capital
Access (“RCA”) and entered into a financing and security agreement with Action
Capital. There are no outstanding balances owed to RCA as of June 30, 2009 nor
was any amounts owed as of the July 17th
termination date.





On July
17, 2009, the Company and its wholly-owned subsidiary, Ricciardi Technologies,
Inc. (“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”). An
acceptable receivable is one that is approved by Action Capital and less than 90
days old.  The maximum amount eligible to be advanced to the Company by
Action Capital under the Action Agreement is $3,000,000.  The Company
shall 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
shall pay a monthly fee to Action Capital equal to 0.75% of the outstanding
balance at the end of the month.





Pursuant
to the Action Agreement, the Company granted Action Capital a security interest
in certain assets of the Company including all accounts, accounts receivable,
contract rights, rebates and books and records pertaining to the foregoing. To
date the Company has borrowed approximately $1,000,000 against the line of
credit.


15


Working
capital and other activities:




The
Company’s working capital deficiency as of June 30, 2009 amounts to $829,493
compared to a deficiency of $401,614 as of December 31, 2008. Included in the
deficiency was $264,676 and $200,606 of non-cash derivative liabilities
respectively. Excluding non-cash derivative liabilities, at June 30, 2009
current assets of $4,475,619 compared to current liabilities of
$5,040,436.





For the
six month period ended June 30, 2009, cash and cash equivalents decreased to
$171,245 from $1,363,130 at December 31, 2008 primarily due to the repayment of
approximately $1,458,000 debt outstanding on the Private Bank line of credit
facility.





Net
cash used in operating activities was $369,162 for the six months ended June 30,
2009 compared to net cash used for operating activities of $711,624 in the
corresponding six month period ended June 30, 2008.





Due to an
increase in our transaction based sale contracts in our Telecom business we
entered into a capital lease agreement to purchase approximately $130,000 in
equipment.  The payments terms are $5,196 per month for 32 months and
a $1,00 buy-out at the end of the lease term.





Net cash
used by financing activities was $789,950 for the six months ended June 30, 2009
compared to net cash provided by financing of $574,611 in the corresponding six
months ended June 30, 2008.





Non-current
liabilities at June 30, 2009 totaled $1,221,626 compared to $1,866,798 at
December 31, 2008. The decrease is primarily due to an increase in the current
maturities of $375,000  on the $750,000 note due to  the
former owners of Ricciardi Technologies combined with a decrease in deferred tax
liabilities of $326,000 from $1,200,000 to $874,000





We have
principal coming due in the next twelve months totaling $562,500 on the $750,000
note with the former RTI owners. Monthly principal payments of $62,500 per month
will start in October 2009.  Additionally, we have payments totalling
approximately $120,000 coming due on short term notes payable, monthly ranging
from $7,000-$11,000. The Company is highly dependent on increasing its cashflows
from operations over the next twelve months and maintaining availability on its
line of credit facility to satisfy these payments and to cover interest costs on
its debt.





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, 2008.
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.





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.


16


ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.




N/A.




ITEM
4T. 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, 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.





Management
has determined that, as of June 30, 2009, there were material weaknesses in both
the design and effectiveness of our internal control over financial
reporting.  Management has assessed these deficiencies and determined
that there were weaknesses in the Company’s internal control over financial
reporting.  As a result of our assessment that material weaknesses in
our internal control over financial reporting existed as of June 30, 2009,
management has concluded that our internal control over financial reporting was
not effective as of June 30, 2009.  A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.





The
deficiencies in our internal controls over financial reporting and our
disclosure controls and procedures are related to the limited financial
backgrounds of our management and a lack of segregation of duties due to
the size of our accounting department. When our financial position improves, we
intend to hire additional personnel to remedy such deficiencies.





Changes
in internal control




Our
management, with the participation 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 2009 Quarter
ended June 30, 2009. 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 2009 Quarter ended June
30, 2009 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




We are
not a party to any 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. 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, 2008.





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




None.




ITEM
3 - DEFAULTS UPON SENIOR SECURITIES




None.


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ITEM
4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS




None.




ITEM
5 - OTHER INFORMATION




None.




Item
6. Exhibits





Exhibit
                  Number
                
                Description31.1
                
                Certification
      by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
      of the Exchange Act31.2
                
                Certification
      by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
      of the Exchange Act32.1
                
                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 Code32.2
                
                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


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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:
August 18, 2009




LATTICE
      INCORPORATEDBY:
                /s/
      Paul BurgessPAUL
      BURGESSCHIEF
      EXECUTIVE OFFICER
                  (PRINCIPAL
      EXECUTIVE
                  OFFICER),
      SECRETARY AND
                  DIRECTOR




BY:
                  /s/
      Joe NotoJOE
      NOTOCHIEF
      FINANCIAL OFFICER
                    (PRINCIPAL
      ACCOUNTING
                    OFFICER)
      AND DIRECTOR


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