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 MARCH 31, 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 o 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 oNo 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 May 8, 2009, there were 16,639,441
outstanding shares of the Registrant's Common Stock, $.01 par
value.
  
  LATTICE
INCORPORATED
 MARCH
31, 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
                    12Item
      3. Quantitative and Qualitative Disclosure About Market
    Risks
                    16Item
      4T. Controls and Procedures
                    16PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
                    17Item
      1A. Risk Factors
                    17Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                    18Item
      3. Defaults Upon Senior Securities
                    18Item
      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
 
 March 31
                    
                    
                    December 31,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Audited)ASSETS:Current
      assets:Cash
      and cash equivalents
                    
                    $
                    376,664
                    
                    
                    $
                    1,363,130Accounts
      receivable, net
                    
                    
                    3,238,027
                    
                    
                    
                    3,560,690Inventories
                    
                    
                    30,704
                    
                    
                    
                    30,704Other
      current assets
                    
                    
                    112,870
                    
                    
                    
                    51,008Total
      current assets
                    
                    
                    3,758,265
                    
                    
                    
                    5,005,532Property
      and equipment, net
                    
                    
                    20,253
                    
                    
                    
                    21,090Goodwill
                    
                    
                    3,599,386
                    
                    
                    
                    3,599,386Other
      intangibles, net
                    
                    
                    2,110,500
                    
                    
                    
                    2,409,748Other
      assetes
                    
                    
                    54,427
                    
                    
                    
                    54,459Total
      assets
                    
                    $
                    9,542,831
                    
                    
                    $
                    11,090,215LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    1,450,409
                    
                    
                    $
                    1,698,551Accrued
      expenses
                    
                    
                    2,170,036
                    
                    
                    
                    1,726,891Customer
      deposits
                    
                    
                    15,000
                    
                    
                    
                    15,000Notes
      payable
                    
                    
                    487,416
                    
                    
                    
                    1,766,098Derivative
      liability
                    
                    
                    373,049
                    
                    
                    
                    200,606Total
      current liabilities
                    
                    
                    4,495,910
                    
                    
                    
                    5,407,146Long
      term liabilities:Long
      Term Debt
                    
                    
                    482,841
                    
                    
                    
                    666,515Deferred
      tax liabilities
                    
                    
                    1,036,928
                    
                    
                    
                    1,200,283Total
      long term liabilities
                    
                    
                    1,519,769
                    
                    
                    
                    1,866,798Total
      liabilities
                    
                    
                    6,015,679
                    
                    
                    
                    7,273,944Minority
      interest
                    
                    
                    187,885
                    
                    
                    
                    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
                    
                    
                    38,543,809
                    
                    
                    
                    38,418,897Accumulated
      deficit
                    
                    
                    (34,909,178
                    )
                    
                    
                    (34,499,822
                    )3,897,363
                    
                    
                    
                    4,181,087Common
      stock held in treasury, at cost
                    
                    
                    (558,096
                    )
                    
                    
                    (558,096
                    )Shareholders'
      equity
                    
                    
                    3,339,267
                    
                    
                    
                    3,622,991Total
      liabilities and shareholders' equity
                    
                    $
                    9,542,831
                    
                    
                    $
                    11,090,215
 
 See
accompanying notes to condensed consolidated finanical
statements
  3
 
 Lattice
Incorporated and Subsidaries
 Consolidated
Statements of Operations
 
 Three Months EndedMarch31,2009
                          
                          
                          2008Revenue
      - Technology Services
                          
                          $
                          3,506,525
                          
                          
                          $
                          3,354,013Revenue
      - Technology Products
                          
                          
                          301,358
                          
                          
                          
                          236,893Total
      Revenue
                          
                          
                          3,807,883
                          
                          
                          
                          3,590,906Cost
      of Revenue - Technology Services
                          
                          
                          2,439,757
                          
                          
                          
                          2,369,326Cost
      of Revenue - Technology Products
                          
                          
                          115,407
                          
                          
                          
                          88,538Total
      cost of revenue
                          
                          
                          2,555,164
                          
                          
                          
                          2,457,864Gross
      Profit
                          
                          
                          1,252,719
                          
                          
                          
                          1,133,042Operating
      expenses:Selling,
      general and administrative
                          
                          
                          1,118,308
                          
                          
                          
                          1,069,640Research
      and development
                          
                          
                          152,494
                          
                          
                          
                          149,735Amortization
      expense
                          
                          
                          299,248
                          
                          
                          
                          372,057Total
      operating expenses
                          
                          
                          1,570,050
                          
                          
                          
                          1,591,432Loss
      from operations
                          
                          
                          (317,331
                          )
                          
                          
                          (458,390
                          )Other
      income (expense):Derivative
      income (expense)
                          
                          
                          (172,443
                          )
                          
                          
                          179,667Other
      expense
                          
                          
                          (4,840
                          )
                          
                          
                          -Interest
      expense
                          
                          
                          (76,191
                          )
                          
                          
                          (50,821
                          )Finance
      expense
                          
                          
                          (1,026
                          )
                          
                          
                          (452
                          )Total
      other income (expense)
                          
                          
                          (254,500
                          )
                          
                          
                          128,394Minority
      Interest
                          
                          
                          5,395
                          
                          
                          
                          27,422Loss
      before taxes
                          
                          
                          (566,436
                          )
                          
                          
                          (302,574
                          )Income
      taxes (benefit)
                          
                          
                          (163,355
                          )
                          
                          
                          (174,208
                          )Net
      loss
                          
                          $
                          (403,081
                          )
                          
                          $
                          (128,366
                          )Reconciliation
      of net lossLoss  applicable
      to common shareholders:Net
      loss
                          
                          $
                          (403,081
                          )
                          
                          $
                          (128,336
                          )Series
      B Preferred stock dividend
                          
                          
                          (6,277
                          )
                          
                          
                          (12,500
                          )Loss
      applicable to common stockholders
                          
                          $
                          (409,358
                          )
                          
                          $
                          (140,836
                          )Loss
      per common shareBasic
                          
                          $
                          (0.02
                          )
                          
                          $
                          (0.01
                          )Diluted
                          
                          $
                          (0.02
                          )
                          
                          $
                          (0.01
                          )Weighted
      average shares:Basic
                          
                          
                          16,700,554
                          
                          
                          
                          16,828,428Diluted
                          
                          
                          16,700,554
                          
                          
                          
                          16,828,428
 
 See
accompanying notes to condensed consolidated finanical
statements
  4
  Lattice
Incorporated and Subsidaries
 Consolidated
Statements of Cash Flows
 
 Three Months endedMarch31,2009
                    
                    
                    2008Cash
      flow from operating activities:Net
      loss before preferred dividends
                    
                    $
                    (403,081
                    )
                    
                    $
                    (128,336
                    )Adjustments
      to reconcile net loss to net used for operating
activities:Derivative
      (income) expense
                    
                    
                    172,443
                    
                    
                    
                    (179,667
                    )Amortization
      of intangible assets
                    
                    
                    299,248
                    
                    
                    
                    372,057Deferred
      income taxes
                    
                    
                    (163,355
                    )
                    
                    
                    (174,208
                    )Minority
      interest
                    
                    
                    (5,395
                    )
                    
                    
                    (27,422
                    )Share-based
      compensation
                    
                    
                    125,631
                    
                    
                    
                    9,833Depreciation
                    
                    
                    837
                    
                    
                    
                    3,676Changes
      in operating assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
                    
                    
                    (359,568
                    )
                    
                    
                    850,650Other
      current assets
                    
                    
                    (61,862
                    )
                    
                    
                    41,721Other
      assets
                    
                    
                    32
                    
                    
                    
                    17,524Increase
      (decrease) in:Accounts
      payable and accrued liabilities
                    
                    
                    205,554
                    
                    
                    
                    (1,057,349
                    )Deferred
      revenue
                    
                    
                    -
                    
                    
                    
                    15,000Total
      adjustments
                    
                    
                    213,565
                    
                    
                    
                    (128,185
                    )Net
      cash provided by ( used in) operating activities
                    
                    
                    (189,516
                    )
                    
                    
                    (256,521
                    )Cash
      flows from investing activities:Purchase
      of equipment
                    
                    
                    -
                    
                    
                    
                    (16,594
                    )Net
      cash used in investing activities
                    
                    
                    -
                    
                    
                    
                    (16,594
                    )Cash
      flows from financing activities:Payments
      on notes payable
                    
                    
                    (21,000
                    )
                    
                    
                    (66,000
                    )Bank
      line-of-credit borrowings (payments), net
                    
                    
                    (775,950
                    )
                    
                    
                    637,407Net
      cash provided by (used in) by financing activities
                    
                    
                    (796,950
                    )
                    
                    
                    571,407Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (986,466
                    )
                    
                    
                    298,292Cash
      and cash equivalents - beginning of period
                    
                    
                    1,363,130
                    
                    
                    
                    769,915Cash
      and cash equivalents - end of period
                    
                    $
                    376,664
                    
                    
                    $
                    1,068,207Supplemental
      cash flow informationInterest
      paid in cash
                    
                    $
                    57,289
                    
                    
                    $
                    19,302Taxes
      paid
                    
                    $
                    4,805
                    
                    
                    $
                    2,080Supplemental
      Disclosures of Non-Cash Financing ActivitiesProceeds
      from Factoring agreement paid directly to 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 finanical statements  5
 Lattice
Incorporated and Subsidiaries
 Notes
to Condensed Consolidated Financial Statements
 March
31, 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 March
31, 2009 the Company has a working capital deficiency of $737,645 including
non-cash derivative liabilities of approximately $373,000.  For the
three months ended March 31, 2009, the Company had a loss from operations of
approximately $317,000 of which $299,000 was from non-cash amortization of
intangibles this condition 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 dependent upon management’s continuing and successful execution
on its business plan to achieve profitability. 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 March 31, 2009 and for the
three months ended March 31, 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.
 
 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.
  6
 
 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 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
March 31, 2009, there was approximately $1,025,000 of total unrecognized
compensation cost related to unvested share-based compensation awards granted.
The $1,025,000 will be charged to operations over the weighted average remaining
service period. For the three months ended March 31, 2009 share-based
compensation was $125,622 compared to $9,833 in the year ago
period.
  7
  g) 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.
  Three Months EndedMarch 31,2009
                            
                            
                            2008Revenues:Goverment
      Services
                            
                            $
                            3,506,525
                            
                            
                            $
                            3,354,013Other
                            
                            
                            301,358
                            
                            
                            
                            236,893Total
      Consolidated Revenues
                            
                            $
                            3,807,883
                            
                            
                            $
                            3,590,906Gross
      Profit:Government
      Services
                            
                            $
                            1,066,768
                            
                            
                            $
                            984,687Corporate
      and other
                            
                            
                            185,951
                            
                            
                            
                            148,355Total
      Consolidated
                            
                            $
                            1,252,719
                            
                            
                            $
                            1,133,042
  March
      31,
                          
                          
                          December
      31,2009
                          
                          
                          2008Total
      Assets:Goverment
      Services
                          
                          $
                          9,099,475
                          
                          
                          $
                          10,127,333Corporate
      and Other
                          
                          
                          443,356
                          
                          
                          
                          962,882Total
      Consolidated Assets
                          
                          $
                          9,542,831
                          
                          
                          $
                          11,090,215
  Note
3 - Due from Factor
 
 On March
11, 2009, Lattice Incorporated (the “Company”) entered into an
Accounts Receivable Purchase Agreement (the “Agreement”) with Republic Capital
Access, LLC (“Republic Capital”).  The Agreement shall terminate on
December 31, 2009 unless otherwise extended by the parties.  The
maximum amount of receivables purchased under the Agreement shall not exceed
$2,500,000.
  Pursuant
to the terms of the Agreement, Republic Capital agreed to purchase certain
eligible receivables of the Company (the “Eligible
Receivable”)  without recourse, at an initial purchase price equal to
90% of the face amount of the Eligible Receivables (the “Initial Purchase
Price”). Within 2 days of the collection of the Eligible Accounts (the “Residual
Payment Date”), Republic Capital shall pay the Company an amount equal to the
total amount collected less the sum of (i) the Initial Purchase Price; (ii) the
Discount Factor (as defined below) owed with respect to the purchased
receivable; and (iii) the total of all accrued and unpaid Program Access
Fees.  On each Residual Payment Date, Republic Capital is entitled to
deduct from any collections an amount equal to 0.35% of the face amount of the
purchased receivable (the “Discount Factor”).  Upon execution of the
Agreement, the Company paid Republic Capital an enrollment fee of
$12,500.  Further, on each Residual Payment Date, an amount equal to
the sum of 0.0226% of the daily ending account balance for each day during the
applicable period will be deducted from the amount collected (the “Program
Access Fee”).  In addition, pursuant to the terms of the Agreement,
the Company is required to pay Republic Capital a quarterly fee equal
to $2,500 if the average account balance for each day is less than
$1,500,000.
 
 Due from Factor:March 31,
                        
                        
                        December 31,2009
                        
                        
                        2008Accounts
      receivable factored
                        
                        $
                        739,550
                        
                        
                        $
                        -0-Amounts
      advanced and outstanding
                        
                        
                        665,595
                        
                        
                        $
                        -0-Due
      from Factor net of fees
                        
                        $
                        71,200
                        
                        
                        $
                        -0-
 
 Balance
due from factor is included in accounts receivable.
  9
 
 Note 4
- Notes payable
 
 Notes
payable consists of the following as of March 31, 2009 and December 31,
2008:
  March
      31,
                          
                          
                          December 31,2009
                          
                          
                          2008Bank
      line-of-credit (a)
                          
                          $
                          -
                          
                          
                          $
                          1,458,183Note
      Payble – former RTI owners (b)
                          
                          
                          750,000
                          
                          
                          
                          750,000Notes
      payable to Stockholders/Officers (c )
                          
                          
                          220,257
                          
                          
                          
                          224,430Total
      notes payable
                          
                          
                          970,257
                          
                          
                          
                          2,432,613Less
      current maturities
                          
                          
                          (487,416
                          )
                          
                          
                          (1,766,098
                          )Long-term
      debt
                          
                          $
                          482,841
                          
                          
                          $
                          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 Ricciard 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 $375,000 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:
  At March
31, 2009 the Company has a short-term loan payable to a former officer and
stockholder of the Company totaling $2,000. This note bears interest of 8.0% per
annum. The note is an unsecured demand note and payable in full by April 30,
2009.
 
 At March
31, 2009 the Company has a term note payable of $218,257 with a director of the
Company. The note bears interest at 21.5% per annum and is payable monthly at $
9,368 with any residual balance maturing March 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 March 31,
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
March 31, 2009 included conversion or strike prices ranging from $0.10 - $1.10;
historical volatility factors ranging from 122.18% - 127.84% based upon forward
terms of instruments; terms-remaining term for all instruments; and a risk free
rate ranging from 1.00% - 1.55%.
 
 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 92% and 93% of our
total revenues for three months ended March 31, 2009 and 2008
 respectively. Accounts receivable for these contracts totaled at March 31,
2009 and December 31, 2008 was $2,980,776 and
$3,335,667 respectively.
  The
Company has two contract vehicles that account
for   78%  and  76 %  of its sales
in the three months ended March 31, 2009 and 2008
respectively.  Accounts receivable for these contracts totaled at
March 31, 2009 and 2008 was $1,357,000 and
$1,584,000 respectively.
  Note
7 – Common Stock
 On
February 4, 2009 Barrons Converted 28,000 shares of series A preferred stock
into 100,000 shares of common stock. Each share of preferred series A can be
converted into 3.57 shares of the Company’s common stock.
  11
  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 $3,506,525 or 92% of our
overall revenues for the three months ended March 31, 2009. Of our total
government contract revenues, approximately 90% were from Prime contract
vehicles.
  RESULTS OF
OPERATIONS
 
 THREE
MONTHS ENDED MARCH 31, 2009 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2008
  REVENUES:
 
 Total
revenues for the three months ended March 31, 2009 increased by $216,977 or 6.0%
to $3,807,883 compared to $3,590,906 for the three months ended March 31, 2008.
Our  Goverment Services segment which represents revenues from
professional engineering services to Federal government Dept of Defense (DoD)
agencies accounted for 92.1% 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 quarter ended March 31,
2009.
 
 GROSS
MARGIN:
 
 Gross
margin for the three months ended March 31, 2009 was $1.252,719, an increase of
$119,677or 10.6% compared to the $1,133,042 for three months ended March 31,
2008. Gross margin, as a percentage of revenues, increased to 32.9% from 31.6%
for the same period in 2008. The increase in percentage was mainly due to a
higher percentage (7.9%) of overall revenues attributable to higher margin
technology products compared to 6.6% in the year ago period combined with an
increase in our government service margins. Our government service margins were
increased to 30.4% from 28.4% prior year.  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. Lower margin
subcontractor revenues as  a percentage of our total government
services revenue was 58% versus 49% in the year ago quarter.
  12
 
 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 March 31, 2009,
research and development expenses increased slightly to $152,494 as compared to
$149,735 for the three months ended March 31, 2008.  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 three months ended March 31, 2009, SG&A expenses increased to $1,118,308
from $1,069,640  in the comparable period prior year.  As a
percentage of revenues, SG&A was 29.4% for the current quarter ended March
31, 2009 versus 29.8% in the comparable period a year ago. The increase in
expense was mainly attributable to investments in sales and
marketing  staff late in the 4th quarter
of 2008.
 
 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 March 31, 2009 was $299,248
compared to $372,057 for the three months ended March 31, 2008. The decrease is
attributed to certain intangibles being fully amortized in 2008.
  INTEREST
EXPENSE:
 
 Interest
Expense increased to $76,191 for the three months ended March 31, 2009 compared
to $50,821 for the three months ended March 31, 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 RTI note.
 
 DERIVATIVE
INCOME (EXPENSE):
 
 The
following table is derived from Note 5 in the accompanying financial
statements.
  Three months
                        ended
                        March 31, 2009
                      
                      
                      Three months
                        ended
                        March 31, 2008Derivative
      income (expense)Conversion
      features
                      
                      $
                      
                      
                      
                      $Warrant
      derivative
                      
                      $
                      (172,443
                      )
                      
                      $
                      179,667
 
 NET
INCOME:
 
 The
Company's net loss for the three months ended March 31, 2009 was
$403,081compared to net loss of $128,366 for the three months ended March 31,
2008. Net income is influenced by the matters discussed in the other sections of
this MD&A. However, it should be noted that the net income in the current
quarter included  non-cash derivative expense of $172,433 versus a
non-cash derivative gain of 179,667 in the prior year quarter accounting for
$352,000 unfavorable impact to net income when making a  prior year
comparison.
 
 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 three
months ended March 31, 2009 we had negative operating cash of $189,516. and the
Company’s working capital deficiency at March 31, 2009 of $737,645 including
non-cash derivative liabilities of $373,049. 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; obtain advances under its accounts receivable
factoring agreement and to obtain adequate alternative financing sufficient
enough to support operations until the necessary operating improvements are
made.
  13
 
 On March
11, 2009, Lattice Incorporated (the “Company”) entered into an Accounts
Receivable Purchase Agreement (the “Agreement”) with Republic Capital Access,
LLC (“Republic Capital”).  The Agreement shall terminate on December
31, 2009 unless otherwise extended by the parties.  The maximum amount
of receivables purchased under the Agreement shall not exceed
$2,500,000.
 
 Pursuant
to the terms of the Agreement, Republic Capital agreed to purchase certain
eligible receivables of the Company (the “Eligible Receivables”) at an initial
purchase price equal to 90% of the face amount of the Eligible Receivables (the
“Initial Purchase Price”). Within 2 days of the collection of the Eligible
Accounts (the “Residual Payment Date”), Republic Capital shall pay the Company
an amount equal to the total amount collected less the sum of (i) the Initial
Purchase Price; (ii) the Discount Factor (as defined below) owed with respect to
the purchased receivable; and (iii) the total of all accrued and unpaid Program
Access Fees.  On each Residual Payment Date, Republic Capital is
entitled to deduct from any collections an amount equal to 0.35% of the face
amount of the purchased receivable (the “Discount Factor”).  Upon
execution of the Agreement, the Company paid Republic Capital an enrollment fee
of $12,500.  Further, on each Residual Payment Date, an amount equal
to the sum of 0.0226% of the daily ending account balance for each day during
the applicable period shall be deducted from the amount collected (the “Program
Access Fee”).  In addition, pursuant to the terms of the Agreement,
the Company shall pay Republic Capital a quarterly fee equal to $2,500 if the
average account balance for each day is less than $1,500,000.On March 20, 2008,
Lattice Incorporated (the “Company”) paid off the outstanding balance on its
line of credit of $1,465,076 with Private Bank with $800,000 from its cash
reserves and the remaining $665,076 advanced by Republic Capital Access.
(“RCA”).
 
 Working
capital and other activities:
  The
Company’s working capital deficiency as of March 31, 2009 amounts to $737,645
compared to a deficiency of $401,614 as of December 31, 2008. Included in the
deficiency was $373,049 and $200,606 of non-cash derivative liabilities
respectively. Excluding derivative liabilities, at March 31, 2009 our current
assets of $3,758,000 compared to current liabilities of $4,122,861.
 
 For the
three month period ended March 31, 2009, cash and cash equivalents decreased to
$373,664 from $1,363,130 at December 31, 2008 primarily due to the repayment of
approximately $755,000 on the Private Bank line of credit.
 
 Net
cash used by operating activities was $189,516 for the three months ended March
31, 2009 compared to net cash used for operating activities of $256,551 in the
corresponding three month period ended March 31, 2008.
 
 Net cash
used by financing activities was $796,950for the three months ended March 31,
2008 compared to net cash provided by financing of $571,407 in the corresponding
three months ended March 31, 2008.
 
 Non-current
liabilities at March 31, 2009 totaled $487,000   compared to
$1,766,098 at December 31, 2008. The decrease is primarily due to the repayment
of the Private Bank line of credit.
 
 The
Company’s negative cash flow from operations of $189,516 for the three months
endedMarch 31, 2009 has been mainly financed by the reduction in the Company’s
cash and cash equivalents.
 
 14
 
 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.
  15
   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 March 31, 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 March 31,
2009, management has concluded that our internal control over financial
reporting was not effective as of March 31, 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 March 31, 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 March 31, 2009
that has materially affected, or is reasonably likely to materially affect, the
Company’s
internal  controls over financial reporting.
  16
 
 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.
  17
  ITEM
2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  None.
  ITEM
3 - DEFAULTS UPON SENIOR SECURITIES
  None.
  ITEM
4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
  None.
  ITEM
5 - OTHER INFORMATION
  None.
  There
were no material changes to the procedures by which security holders may
recommend nominees to the registrant’s board of directors.
  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
  18
  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:
May 11, 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
  19