**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, 2008.**




*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 xNo 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 filero
            Accelerated
                fileroNon-accelerated
                filero
            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 18, 2008, there were 16,829,950
      outstanding shares of the Registrant's Common Stock, $.01 par
      value.









**LATTICE
      INCORPORATED**


**JUNE
      30, 2008 QUARTERLY REPORT ON FORM 10-Q**




**TABLE
      OF CONTENTS**




**Page****PART
                I - FINANCIAL INFORMATION**Item
                1. Financial Statements
            3Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            14Item
                3. Quantitative and Qualitative Disclosure About Market
                Risks
            21Item
                4T. Controls and Procedures
            21**PART
                II - OTHER INFORMATION**Item
                1. Legal Proceedings
            22Item
                1A. Risk Factors
            22Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            23Item
                3. Defaults Upon Senior Securities
            23Item
                4. Submission of Matters to a Vote of Security Holders
            23Item
                5. Other Information
            23Item
                6. Exhibits
            23**SIGNATURES**
            24


2




**LATTICE
          INCORPORATED AND SUBSIDIARIES**
 
 **CONSOLIDATED
          BALANCE SHEETS**
 **(UNAUDITED)**
 
 **June
                    30,**
                
                **December
                    31,****2008**
                
                **2007****(Unaudited)**
                
                **(Audited)**ASSETS:Current
                    assets:Cash
                    and cash equivalents
                
                $
                600,058
                
                $
                769,915Accounts
                    receivable, net
                
                
                3,680,606
                
                
                3,839,744Inventories
                
                
                56,708
                
                
                65,846Other
                    current assets
                
                
                116,093
                
                
                127,801Total
                    current assets
                
                
                4,453,465
                
                
                4,803,306Property
                    and equipment, net
                
                
                44,795
                
                
                27,530Goodwill
                
                
                6,879,632
                
                
                7,629,632Other
                    intangibles, net
                
                
                4,609,957
                
                
                5,354,071Other
                    assets
                
                
                52,784
                
                
                118,623Total
                    assets
                
                $
                16,040,633
                
                $
                17,933,162LIABILITIES
                    AND SHAREHOLDERS' EQUITYCurrent
                    liabilities:Accounts
                    payable
                
                $
                1,718,116
                
                $
                2,716,411Accrued
                    expenses
                
                
                1,772,512
                
                
                1,252,916Contigent
                    liabilities
                
                
                900,000
                
                
                1,500,000Customer
                    deposits
                
                
                15,000
                
                
                15,000Notes
                    payable
                
                
                1,624,866
                
                
                1,050,254Derivative
                    liability
                
                
                793,974
                
                
                7,217,099Total
                    current liabilities
                
                
                6,824,468
                
                
                13,751,680Deferred
                    tax liabilities
                
                
                2,313,538
                
                
                2,661,954Minority
                    interest
                
                
                159,180
                
                
                214,599Shareholders'
                    equityPreferred
                    Stock series A 9,000,000 shares authorized, 7,838,686
                    issued
                
                
                78,387
                
                
                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
                
                
                -0-Common
                    stock - .01 par value, 200,000,000 authorized, 16,842,428 issued,
                    and
                    16,829,428 outstanding
                
                
                168,425
                
                
                168,425Additional
                    paid-in capital
                
                
                38,166,752
                
                
                36,854,901Accumulated
                    deficit
                
                
                (31,287,484
                )
                
                (35,408,951
                )7,141,280
                
                
                1,702,762Common
                    stock held in treasury, at cost
                
                
                (397,833
                )
                
                (397,833
                )Shareholders'
                    equity
                
                
                6,743,447
                
                
                1,304,929Total
                    liabilities and shareholders' equity
                
                $
                16,040,633
                
                $
                17,933,162
 
 See
          accompanying notes to the consolidated financial statements.
  3
 
 **LATTICE
          INCORPORATED AND SUBSIDIARIES**
 
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**
 
 **Six
                    Months Ended June 30,**
                
                **Three Months Ended June 30,****2008**
                
                **2007**
                
                **2008**
                
                **2007**Revenue
                    - Technology Services
                
                $
                6,881,682
                
                $
                6,265,887
                
                $
                3,527,669
                
                $
                3,378,808Revenue
                    - Technology Products
                
                
                437,311
                
                
                630,487
                
                
                200,418
                
                
                341,085Total
                    Revenue
                
                
                7,318,993
                
                
                6,896,374
                
                
                3,728,087
                
                
                3,719,893Cost
                    of Revenue - Technology Services
                
                
                5,003,050
                
                
                2,945,113
                
                
                2,633,724
                
                
                1,561,851Cost
                    of Revenue - Technology Products
                
                
                168,016
                
                
                212,170
                
                
                79,478
                
                
                122,978Total
                    cost of revenue
                
                
                5,171,066
                
                
                3,157,283
                
                
                2,713,202
                
                
                1,684,829Gross
                    Profit
                
                
                2,147,927
                
                
                3,739,091
                
                
                1,014,885
                
                
                2,035,064Operating
                    expenses:Selling,
                    general and administrative
                
                
                2,547,727
                
                
                2,567,147
                
                
                1,436,837
                
                
                1,438,424Research
                    and development
                
                
                217,657
                
                
                205,298
                
                
                109,172
                
                
                96,257Amortization
                    expense
                
                
                744,114
                
                
                1,040,856
                
                
                372,057
                
                
                520,428Total
                    operating expenses
                
                
                3,509,498
                
                
                3,813,301
                
                
                1,918,066
                
                
                2,055,109Loss
                    from operations
                
                
                (1,361,571
                )
                
                (74,210
                )
                
                (903,181
                )
                
                (20,045
                )Other
                    income (expense):Derivative
                    income (expense)
                
                
                2,554,590
                
                
                1,060,882
                
                
                2,374,923
                
                
                1,906,247Extinguishment
                    (gain) loss
                
                
                2,607,525
                
                
                (157,130
                )
                
                2,607,525
                
                
                -Interest
                    expense
                
                
                (81,446
                )
                
                (479,002
                )
                
                (30,625
                )
                
                (93,198
                )Finance
                    expense
                
                
                (1,466
                )
                
                (14,318
                )
                
                (1,014
                )
                
                (9,318
                )Total
                    other income (expense)
                
                
                5,079,203
                
                
                410,432
                
                
                4,950,809
                
                
                1,803,731Minority
                    Interest
                
                
                55,419
                
                
                (101,179
                )
                
                27,997
                
                
                (54,136
                )Income
                    before taxes
                
                
                3,773,051
                
                
                235,043
                
                
                4,075,625
                
                
                1,729,550Income
                    taxes benefit
                
                
                (348,416
                )
                
                -
                
                
                (174,208
                )
                
                -Net
                    income
                
                $
                4,121,467
                
                $
                235,043
                
                $
                4,249,833
                
                $
                1,729,550Reconciliation
                    of net income lossIncome
                    applicable to common shareholders:Net
                    income
                
                $
                4,121,467
                
                $
                235,043
                
                $
                4,249,833
                
                $
                1,729,550Series
                    B Preferred stock dividend
                
                
                (25,000
                )
                
                (25,000
                )
                
                (12,500
                )
                
                (12,500
                )Income
                    applicable to common stockholders
                
                $
                4,096,467
                
                $
                210,043
                
                $
                4,237,333
                
                $
                1,717,050Income
                    per common shareBasic
                
                $
                0.24
                
                $
                0.01
                
                $
                0.25
                
                $
                0.10Diluted
                
                $
                0.03
                
                $
                -
                
                $
                0.03
                
                $
                -Weighted
                    average shares:Basic
                
                
                16,829,428
                
                
                16,642,428
                
                
                16,829,428
                
                
                16,642,428Diluted
                
                
                56,250,208
                
                
                64,230,056
                
                
                54,403,291
                
                
                64,230,056
  See
          accompanying notes to the consolidated financial statements.
  4
 
 **LATTICE
          INCORPORATED AND SUBSIDIARIES**
 
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 
 **Six
                    Months Ended June 30,****2008**
                
                **2007**Cash
                    flow from operating activities:Net
                    income before preferred dividends
                
                $
                4,121,467
                
                $
                235,043Adjustments
                    to reconcile net loss to net used for operating
                    activities:Derivative
                    income
                
                
                (2,554,590
                )
                
                (1,060,882
                )Amortization
                    of intangible assets
                
                
                744,114
                
                
                1,040,856Amortization
                    of debt discount (effective method)
                
                
                -
                
                
                205,809Amortization
                    of deferred financing
                
                
                -
                
                
                127,525Extinguishment
                    (gain) loss
                
                
                (2,607,525
                )
                
                157,130Deferred
                    income taxes
                
                
                (348,416
                )
                
                -Minority
                    interest
                
                
                (55,419
                )
                
                101,179Share-based
                    compensation
                
                
                56,041
                
                
                122,880Depreciation
                
                
                15,579
                
                
                8,250Changes
                    in operating assets and liabilities:(Increase)
                    decrease in:Accounts
                    receivable
                
                
                159,138
                
                
                (1,559,695
                )Inventories
                
                
                9,138
                
                
                (21,887
                )Other
                    current assets
                
                
                11,708
                
                
                36,167Other
                    assets
                
                
                65,839
                
                
                26,380Increase
                    (decrease) in:Accounts
                    payable and accrued liabilities
                
                
                (328,698
                )
                
                603,196Deferred
                    revenue
                
                
                -
                
                
                (62,495
                )Total
                    adjustments
                
                
                (4,833,091
                )
                
                (275,587
                )Net
                    cash used for operating activities
                
                
                (711,624
                )
                
                (40,544
                )Cash
                    Used in investing activities:Purchase
                    of equipment
                
                
                (32,844
                )
                
                -Net
                    cash used for investing activities
                
                
                (32,844
                )
                
                -Cash
                    flows from financing activities:Payments
                    on notes payable
                
                
                (84,500
                )
                
                (68,000
                )Bank
                    line-of-credit borrowings (payments), net
                
                
                659,111
                
                
                (11,557
                )Net
                    cash provided by (used for) by financing activities
                
                
                574,611
                
                
                (79,557
                )Net
                    decrease in cash and cash equivalents
                
                
                (169,857
                )
                
                (120,101
                )Cash
                    and cash equivalents - beginning of period
                
                
                769,915
                
                
                392,275Cash
                    and cash equivalents - end of period
                
                $
                600,058
                
                $
                272,174Supplemental
                    cash flow informationInterest
                    paid in cash
                
                $
                56,194
                
                $
                215,685Supplemental
                    disclosures of Non-Cash Investing & Financing
                    ActivitiesGoodwill
                
                
                (750,000
                )
                
                -
 
 See
          accompanying notes to the consolidated financial statements.
  5


**LATTICE
      INCORPORATED AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





**Note
      1- Organization and summary of significant accounting
      policies:**





**a)
      Organization:**





Lattice
      Incorporated (the "Company") was incorporated in the State of Delaware in May
      1973 and commenced operations in July 1977. The Company began as a provider
      of
      specialized solutions to the telecom industry. Throughout its history Lattice
      has adapted to the changes in this industry by reinventing itself to be more
      responsive and open to the dynamic pace of change experienced in the broader
      converged communications industry of today. Currently Lattice provides advanced
      solutions for several vertical markets. The greatest change in operations is
      in
      the shift from being a component manufacturer to a service provider which
      includes developing software applications for clients based on its core platform
      technology. To further its strategy of becoming a service provider, the Company
      acquired a majority interest in Systems Management Engineering, Inc, (“SMEI”) in
      February 2005 and purchased all of the issued and outstanding common shares
      of
      Ricciardi Technologies Inc. “(RTI”) in September 2006. 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. With the SMEI and the RTI acquisitions,
      approximately 92% of the Company’s revenues are derived from solution services.
      In January 2007, we changed our name from Science Dynamics Corporation to
      Lattice Incorporated.





**b)
      Basis of Presentation:**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with generally accepted accounting principles for interim
      financial information and with the instructions to Item 310 of Regulation S-B.
      Accordingly; they do not include all of the information and footnotes required
      by generally accepted accounting principles for complete financial statements.
      For further information, refer to the financial statements and footnotes thereto
      included in the Company's annual report for Form 10-KSB for the year ended
      December 31, 2007. In the opinion of management, all adjustments (consisting
      of
      normal recurring accruals) considered necessary for a fair presentation have
      been included. Operating results for the six month period ended June 30, 2008
      are not necessarily indicative of the results that may be expected for the
      year
      ended December 31, 2008.





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 Company has a working capital deficiency
      of $2,371,000 including non-cash derivative liabilities of $793,974. The
      Company’s ability to continue as a going concern is dependent upon its ability
      to obtain adequate alternative financing to support its operations and satisfy
      any obligations coming due.





**c)
      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.





**d)
      Use of estimates** :





The
      preparation of these financial statements in accordance with accounting
      principles generally accepted in the United States of America (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 of 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.


6




**e)**  **Revenue****Recognition**:





Revenue
      is recognized when all significant contractual obligations have been satisfied
      and collection of the resulting receivable is reasonably assured. Revenue from
      product sales is recognized when the goods are shipped and title passes to
      the
      customer.





The
      company applies the guidance of SOP-97-2 with regards to its software products
      sold under its Technology Products segment. Under this guidance, the Company
      determined that its product sales do not contain multiple deliverables for
      an
      extended period beyond delivery where bifurcation of multiple elements is
      necessary. The software is embedded in the products sold and shipped. Revenue
      is
      recognized upon delivery, installation and acceptance by the customer. PCS
      (post-contract support) and upgrades are billed separately and when rendered
      or
      delivered and not contained in the original arrangement with the customer.
      Installation services are included with the original customer arrangement but
      are rendered at the time of delivery of the product and invoicing.




In
      our
      Technology Services segment, our revenues are derived from IT and business
      process outsourcing services under cost-plus, time-and-material, and fixed-price
      contracts, which may extend up to 5 years. For fixed-price contracts, revenues
      are generally recorded as delivery is made. For time-and-material contracts,
      revenues are computed by multiplying the number of direct labor-hours expended
      in the performance of the contract by the contract billing rates and adding
      other billable direct costs. Under cost-plus contracts, revenues are recognized
      as costs are incurred and include an estimate of applicable fees earned.
      Services provided over the term of these arrangements may include, network
      engineering, architectural guidance, database management, expert programming
      and
      functional area expert analysis   Revenue is generally recognized when the
      service is provided and the amount earned is not contingent upon any further
      event.




Our
      fixed
      price contracts are primarily based on unit pricing (labor hours) or level
      of
      effort As such, the Company recognizes revenue for the number of units delivered
      in any given fiscal period. Accordingly, these contracts do not fall within
      the
      scope of SOP 81-1, *Accounting
      for Performance of Construction-Type and Certain Production-Type
      Contracts* , where
      revenue is recognized on the percentage-of-completion method using costs
      incurred in relation to total estimated costs.





**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. For the six months ended
      June
      30, 2008 and 2007, share-based payment expense was $56,041 and $122,880,
      respectively. As
      of
      June 30, 2008, there was approximately $1,735,288 of total unrecognized
      compensation cost related to unvested share-based compensation awards granted
      under the equity compensation plans which does not include the effect of future
      grants of equity compensation, if any. The $1,735,288 will be amortized over
      the
      weighted average remaining service period.




**g)
      Derivative financial instruments and registration payment
      arrangements:**





Derivative
      financial instruments, as defined in Financial Accounting Standard No. 133, *Accounting
      for Derivative Financial Instruments and Hedging Activities* (“FAS
      133”), consist of financial instruments or other contracts that contain a
      notional amount and one or more underlying (e.g. interest rate, security price
      or other variable), require no initial net investment and permit net settlement.
      Derivative financial instruments may be free-standing or embedded in other
      financial instruments. Further, derivative financial instruments are initially,
      and subsequently, measured at fair value and recorded as liabilities or, in
      rare
      instances, assets. The Company generally does not use derivative financial
      Company’s own stock. These contracts require careful evaluation to determine
      whether derivative features embedded in host contracts require bifurcation
      and
      fair value measurement or, in the case of freestanding derivatives (principally
      warrants) whether certain conditions for equity  classification has been
      achieved. In instances where derivative financial instruments require liability
      classification, the Company is required to initially and subsequently measure
      such instruments at fair value. Accordingly, the Company adjusts the fair value
      of these derivative components at each reporting period through a charge to
      income until such time as the instruments acquire classification in
      stockholders’ equity. See Note 5 for additional information.


7




As
      previously stated, derivative financial instruments are initially recorded
      at
      fair value and subsequently adjusted to fair value at the close of each
      reporting period. The Company estimates fair values of derivative financial
      instruments using various techniques (and combinations thereof) that are
      considered to be consistent with the objective measuring fair values. In
      selecting the appropriate technique, management considers, among other factors,
      the nature of the instrument, the market risks that it embodies and the expected
      means of settlement. For less complex derivative instruments, such as
      free-standing warrants, the Company generally uses the Black-Scholes-Merton
      option valuation technique because it embodies all of the requisite assumptions
      (including trading volatility, dividend yield, estimated terms and risk free
      rates) necessary to fair value these instruments. For complex derivative
      instruments, such as embedded conversion options, the Company generally uses
      the
      Flexible Monte Carlo valuation technique because it embodies all of the
      requisite assumptions (including credit risk, interest-rate risk and
      exercise/conversion behaviors) that are necessary to fair value these more
      complex instruments. For forward contracts that contingently require net-cash
      settlement as the principal means of settlement, the Company projects and
      discounts future cash flows applying probability-weightage to multiple possible
      outcomes. Estimating fair values of derivative financial instruments requires
      the development of significant and subjective estimates that may, and are likely
      to, change over the duration of the instrument with related changes in internal
      and external market factors. In addition, option-based techniques are highly
      volatile and sensitive to changes in the trading market price of our common
      stock, which has a high-historical volatility. Since derivative financial
      instruments are initially and subsequently carried at fair values, our income
      (loss) will reflect the volatility in these estimate and assumption
      changes.





h)   Fair
      Value of Financial Instruments





On
      January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value
      Measurements, defines fair value, establishes a three-level valuation hierarchy
      for disclosures of fair value measurement and enhances disclosures requirements
      for fair value measures. The carrying amounts reported in the balance sheets
      for
      current assets and current liabilities qualified as financial instruments are
      a
      reasonable estimate of fair value because of the short period of time between
      the origination of such instruments and their expected realization and their
      current market rate of interest. The three levels are defined as
      follow:





·
            Level
                1 — inputs to the valuation methodology are quoted prices (unadjusted)
                for
                identical assets or liabilities in active
                markets.





·
            Level
                2 — inputs to the valuation methodology include quoted prices for similar
                assets and liabilities in active markets, and inputs that are observable
                for the assets or liability, either directly or indirectly, for
                substantially the full term of the financial
                instruments.





·
            Level
                3 — inputs to the valuation methodology are unobservable and significant
                to the fair value.





As
      of
      June 30, 2008 and December 31, 2007, the derivative liabilities amounted to
      $793,974 and $7,217,099, respectively. In accordance with SFAS 157, the Company
      determined that the carrying value of these derivatives approximated the fair
      value using the level 1 inputs.





**Note
      2- Contingent Liability / RTI Earn-Out:**




In
      June
      2008, the Company filed suit in New Jersey Superior Court against Michael
      Ricciardi and Marie Ricciardi, former shareholders of Ricciardi Technologies,
      Inc. (“RTI”), along with the Domenix Corporation, a company owned by Marie
      Ricciardi and operated by her and Michael Riccardi. The defendants removed
      the
      case to the United States District Court for the district of New Jersey, where
      it is now pending under the caption, ** *Lattice,
      Inc. v.Marie Ricciardi, et al.,*  Civil
      Action No. 08 cv 3208 (the “New Jersey Action”). The New Jersey Action seeks to
      enforce the restrictive covenant contained in the September 12, 2006 Stock
      Purchase Agreement (the “SPA”), pursuant to which the Company purchased RTI
      from, ** *inter
      alia,*  the
      Ricciardis. The restrictive covenant prohibits the former owners of RTI from
      (a)
      competing, directly or indirectly against Lattice and RTI and/or (b) soliciting
      employees or others engaged by RTI for a period of three years from the date
      of
      the SPA. The Company seeks a preliminary injunction to prevent Marie Ricciardi,
      acting in concert with her husband and through Domenix, from continuing to
      breach the restrictive covenant and damages in an as yet undetermined amount
      for
      damages resulting from the breach. A hearing on Lattice’s motion for preliminary
      injunction occurred on August 7, 2008. The defendants in the New Jersey Action
      deny the allegations made by the Company and assert that the New Jersey federal
      court lacks personal jurisdiction and that venue is improper. The Company
      believes that the federal court in New Jersey is the appropriate forum and
      is
      vigorously contesting the defendants’ efforts to have the New Jersey Action
      dismissed or transferred to another venue. There can be no assurance that the
      Company will ultimately be successful in the New Jersey Action.


8




Michael
      Ricciardi also filed a suit against the Company in June, 2008, in the United
      States District Court for the Eastern District of Virginia under the
      caption ** *Michael
      Ricciardi v. Lattice, Inc.,* Civil
      Action No. 1:08-cv-519 (the “Virginia Action”) In the Virginia Action, Michael
      Ricciardi (a) disputes the Company’s claim (the “Indemnity Claim”) that it is
      entitled to be paid approximately $308,000, plus fees and costs, from the escrow
      created pursuant to the SPA to cover its Indemnifiable Losses (a defined term
      under the SPA), claiming instead that the entire escrow should be dispersed
      to
      him as the representative of the RTI shareholders, as provided for in the SPA,
      and (b) asserts that a contingent $1.5 million Earn Out Payment (as such term
      is
      defined in the SPA) provided for in the SPA is due and payable by the Company
      to
      the former shareholders of RTI. The Company has denied Ricciardi’s contentions
      and intends to vigorously pursue its claims in the Virginia Action, which it
      believes are meritorious.




The
      Company previously recorded a reserve of $1.5 million in the third quarter
      of
      2007 in connection with its then estimate of the Earn Out Payment. Whether
      the
      payment is due and owing depends on a determination of EBITDA (as defined in
      the
      SPA) for the one year period following the closing of the acquisition of RTI
      (the “Earn Out Period”). Subsequently, the Company has made the required
      calculations of EBITDA (as it is defined in the SPA) and the Company believes
      that EBITDA for the Earn Out Period did not achieve the minimum amount required
      under the SPA to justify any Earn Out Payment to the former shareholders of
      RTI.
      The Company has delivered the required notice of its determination of EBITDA
      for
      the Earn Out Period to Michael Riccardi as owner representative of the former
      RTI shareholders. To the extent that Mr. Ricciardi may contest the Company’s
      determination, and the parties cannot mutually agree on the matter, the SPA
      provides for a neutral auditor to review the determination and promptly make
      a
      final ruling on the amount, if any, of an Earn Out Payment. Under the SPA the
      ruling of the neutral auditor is final and unappealable. The Company has reduced
      and reclassified the $1.5 million reserve (established in 2007) to $900,000
      as a
      contingent litigation reserve which includes $150,000 of potential legal fees
      required to settle the various matters set forth in this footnote. On August
      14,
      2008 the Company made a tentative settlement with the former shareholders of
      RTI
      to pay $750,000 against the Earn out as specified in the SPA which will be
      paid
      over the next twenty-four months, consisting of interest only for the first
      twelve months and then twelve monthly installments of $62,500 plus interest.
      Accordingly, the Company has reduced its initial estimate from $1.5million
      to
      $900,000 which includes $150,000 in estimated legal fees based the tentative
      settlement.




**Note
      3- Segment reporting:**





Management
      views its business as two operating units, Technology Products and Technology
      Services.




**Six
                  Months Ended June 30,**
              
              **Three Months Ended June 30,****2008**
              
              **2007****
              
              **2008**
              
              **2007****Revenues:Technology
                  Services
              
              $
              6,725,594
              
              $
              5,571,390
              
              $
              3,421,451
              
              $
              3,078,048Technology
                  Products
              
              
              593,399
              
              
              1,324,985
              
              
              306,636
              
              
              641,845Total
                  Consolidated Revenues
              
              
              7,318,993
              
              
              6,896,374
              
              
              3,728,087
              
              
              3,719,893Gross
                  Profit:Technology
                  Services
              
              
              1,802,417
              
              
              2,981,436
              
              
              846,655
              
              
              1,686,392Technology
                  Products
              
              
              345,510
              
              
              757,655
              
              
              168,230
              
              
              348,672Total
                  Consolidated
              
              
              2,147,927
              
              
              3,739,091
              
              
              1,014,885
              
              
              2,035,064Total
                  Assets:Technology
                  Services
              
              
              15,623,853Technology
                  Products
              
              
              416,780Total
                  Consolidated Assets
              
              
              16,040,633





**
      2007
      Segment Information was updated to reclassify revenues attributable to its
      Aquifer and Sensorview technology from the Services segment to the Products
      Segment. The increase in Product Segment revenues and gross profit for the
      three
      month period 2007 was $300,760 and $130,565 respectively. The increase in
      Product Segment revenues and gross profit for the six month period ended June
      30, 2008 was $694,498 and $339,338 respectively. As discussed in our overview,
      the technology products segment reflects product and/or related service revenues
      which are based on and includes our proprietary technology (Aquifer, SensorView,
      BubbleLink) as its core framework technology.




9




**Note 4
      - Notes payable**





Notes
      payable consists of the following as of June 30, 2008 and December 31,
      2007:





June
                30,
              2008
            
            December
                31,
              2007Bank
                line-of-credit**(a)**
            
            $
            1,399,366
            
            $
            740,254Notes
                payable to Stockholders/Officers**(b)**
            
            
            225,500
            
            
            310,000Total
                notes payable
            
            
            1,624,866
            
            
            1,050,254Less
                current maturities
            
            
            (1,624,866
            )
            
            (1,050,254
            )Long-term
                debt
            
            $
            -
            
            $
            -





**(a)
      Bank line-of-credit:**




On
      March
      7, 2008, Lattice Incorporated (the “Company”) entered into a Loan and Security
      Agreement (the “Loan Agreement”) with the Private Bank of Peninsula (“Private
      Bank”) pursuant to which Private Bank agreed to extend a line of credit of up to
      $4.0 million to the Company. Pursuant to the Loan Agreement, the Company can
      request advances on the line-of-credit, which in the aggregate cannot exceed
      85%
      of the Company’s eligible accounts receivable. The line-of-credit bears interest
      at 3% above the Prime Rate (8.25% at June 30, 2008. The outstanding balance
      at
      June 30, 2008 was $1,399,366.





**(b)
      Notes payable stockholders/officers:**




At
      June
      30,, 2008 the Company has a short-term loan payable to a former officer and
      stockholder of the Company totaling $13,000. This note bears interest of 8.0%
      per annum. The note is an unsecured demand note and payable in full by December
      31, 2008.





At
      June30, 2008 the Company has a term note payable of $212,500 with a director
      of
      the Company. The note bears interest at 20% per annum and is payable monthly
      at
      $ $16,000 with any residual balance maturing December 2008.





**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 17,438,465 and 40,483,333 shares of the Company’s common stock as of June 30,
      2008 and December 31, 2007, respectively, and are carried at fair value. The
      following tabular presentations set forth information about the derivative
      instruments as of June 30, 2008 and June 30, 2007:





Six
                months
              ended
              June
                30,
              2008
            
            Six
                months
              ended
              June
                30,
              2007
            
            Three
                months
              ended
              June
                30,
              2008
            
            Three
                months
              ended
              June
                30,
              2007Derivative
                income(expense):Conversion
                features
            
            
            —
            
            $
            (467,120
            )
            
            —
            
            
            —Warrant
                derivative
            
            $
            2,554,590
            
            $
            1,528,002
            
            $
            2,374,923
            
            $
            1,906,247




10





June
                30,
              2008
            
            December
                31
              2007Derivative
                liabilities:Warrant
                derivative
            
            $
            (
                793,974
            )
            $
            (7,217,099
            )




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, 2008 included conversion or strike prices ranging from $0.10 - $1.10;
      historical volatility factors ranging from 104.26% - 106.49% based upon forward
      terms of instruments; terms-remaining term for all instruments; and a risk
      free
      rate ranging from 2.91% - 4.29%.





Embedded
      derivative instruments consist of multiple individual features that were
      embedded in the convertible debt instruments. The Company evaluated all
      significant features of the hybrid instruments and, where required under current
      accounting standards, bifurcated features for separate report classification.
      These features were, as attributable to each convertible note, aggregated into
      one compound derivative financial instrument for financial reporting purposes.
      The compound embedded derivative instruments were valued using the Flexible
      Monte Carlo methodology because that model embodies certain relevant assumptions
      (including, but not limited to, interest rate risk, credit risk, and
      Company-controlled redemption privileges) that are necessary to value these
      complex derivatives.  Since the conversion feature no longer required
      bifurcation as of February 2, 2007, there was no compound derivative recorded
      as
      of June 30, 2008. The expense recorded in the six months ended June 30, 2007
      related to the fair value adjustments on the embedded derivative instrument
      from
      the period from January 1, 2007 through February 2, 2007





**Note
      6 -Exchange of** **Warrants
      for shares of Series C Preferred Stock**





In
      accordance with the Exchange Agreement, dated June 30, 2008, Barron Partners
      L.P. agreed to cancel their unregistered warrants in exchange for 520,000 shares
      of newly issued Series C Convertible Preferred Stock. The following warrants
      were cancelled in the exchange transaction:


-
            Series
                A Warrants indexed to 10,544,868 shares of common stock which were
                originally issued in conjunction with the September 19, 2006 Barron
                financing


-
            Series
                B Warrants indexed to 12,500,000 shares of common stock which were
                originally issued in conjunction with the September 19, 2006 Barron
                financing


-
            Additional
                Warrants indexed to 1,900,000 shares of common stock which were originally
                issued in February 2007 as consideration for a waiver on overdue
                payments
                due to Barron Partners, L.P.





The
      Series A and B warrants did not meet all the conditions of EITF 00-19 for equity
      classification so they had been recorded as derivative liabilities since
      inception. The fair value of the Series A and B warrants on the transaction
      date
      was determined to be $3,868,535 using the Black-Scholes option pricing model.
      Significant assumptions used in the Black Scholes model as of the date of the
      exchange included strike prices ranging from $0.275 to $0.25; a historical
      volatility factor of 106.49% based upon forward terms of instruments; a
      remaining term of 3.25 years; and a risk free rate of 2.91%





The
      Additional Warrants had achieved equity classification and they had been
      recorded in equity since inception. Their fair value at their inception (and
      thus their carrying value at the time of the exchange) was
      $1,031,130.


11




On
      June
      30, 2008, we designated 575,000 shares of our preferred stock as Series C
      Convertible Preferred Stock (“Series C Preferred”). The Series C Preferred has a
      par value of $0.01 and each share of preferred stock is convertible into 10
      shares of common stock at any time, at the option of the holder. The conversion
      prices are subject to anti-dilution protection for (i) traditional capital
      restructurings, such as splits, stock dividends and reorganizations and (ii)
      sales or issuances of common shares or contracts to which common shares are
      indexed at less than the stated conversion prices. Holders of the Company’s
      Series C Preferred are not entitled to dividends and the Holder has no
      redemption privileges. In considering the application of Statement 133, we
      identified those specific terms and features embedded in the contract that
      possess the characteristics of derivative financial instruments. Those features
      included the conversion option and buy-in and non-delivery puts. In evaluating
      the respective classification of these embedded derivatives, we are required
      to
      determine whether the host contract (the Series C Preferred) is more akin to
      a
      debt or equity instrument in regards to the risks. This determination is
      subjective. However, in complying with the guidance provided in EITF D-109
      Determining the Nature of a Host Contract Related to a Hybrid Financial
      Instrument Issued in the Form of a Share under Statement No. 133 we concluded,
      based upon the preponderance and weight of all terms, conditions and features
      of
      the host contracts, that the Series C Preferred was more akin to an equity
      instrument for purposes of considering the clear and close relation of the
      embedded feature to the host contract. Based upon this conclusion, we further
      concluded that (i) embedded features did not require derivative liability
      classification and (ii) certain Non-delivery and Buy-in puts which require
      the
      Company to make-whole the investor for market fluctuation losses in the event
      of
      non-delivery of conversion shares meet the requisite criteria of a derivative
      financial instrument and should be bifurcated. Since share delivery is in the
      Company’s option and they have enough authorized shares to settle their
      share-settleable debt, it was determined that the value of these puts was
      deminimus.





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





**Note
      7 -Earnings per share**





Six months
              ended June 30,
              2008
            
            Six months ended
              June 30, 2007
            
            Three months
              ended June 30,
              2008
            
            Three months
              ended June 30,
              2007Income
                (loss) applicable to common stockholders, as reported
            
            $
            4,096,467
            
            $
            210,043
            
            $
            4,237,333
            
            $
            1,717,050Reconciliation
                to numerator for diluted earnings per share:Income
                on derivative warrants
            
            
            (2,554,590
            )
            
            (1,528,002
            )
            
            (2,374,923
            )
            
            (1,906,247
            )Preferred
                stock dividends
            
            
            25,000
            
            
            25,000
            
            
            12,500
            
            
            12,500Numerator
                for diluted earnings per share
            
            $
            1,566,877
            
            $
            (1,292,959
            )
            $
            1,874,910
            
            $
            (176,697
            )Weighted
                average shares
            
            
            16,829,428
            
            
            16,642,428
            
            
            16,829,428
            
            
            16,642,428Reconciliation
                to denominator for diluted earnings per shareDilutive
                derivative warrants
            
            
            5,004,267
            
            
            27,011,111
            
            
            3,286,262
            
            
            27,011,111Shares
                indexed to convertible preferred stock
            
            
            34,110,568
            
            
            20,398,517
            
            
            34,110,568
            
            
            20,398,517Dilutive
                employee options
            
            
            305,945
            
            
            178,000
            
            
            177,033
            
            
            178,000Denominator
                for diluted earnings per share
            
            
            56,250,208
            
            
            64,230,056
            
            
            54,403,291
            
            
            64,230,056Earnings
                per common share:Basic
            
            
            0.24
            
            
            0.01
            
            
            0.25
            
            
            0.10Diluted
            
            
            0.03
            
            
            (0.00
            )
            
            0.03
            
            
            (0.00
            )





The
      above
      table includes only dilutive instruments and their effects on earnings per
      common share.


12




**Note
      8 Stock Base Compensation:**





On
      May
      15, 2008 the Company approved the adoption of the Company’s 2008 Employee Stock
      Option Plan. Under the Plan, options may be granted which are intended to
      qualify as Incentive Stock Options (“ISOs”) under Section 422 of the Internal
      Revenue Code of 1986 (the “Code”) or which are not (“Non-ISOs”) intended to
      qualify as Incentive Stock Options there under. The maximum number of options
      made available for issuance under the Plan are ten million (10,000,000) options.
      The options may be granted to officers, directors, employees or consultants
      of
      the Company and its subsidiaries at not less than 100% of the fair market value
      of the date on which options are granted. The term of each Option granted under
      the Plan shall be contained in a stock option agreement between the Optionee
      and
      the Company.


In
      May
      2008 the board issued 6,184,000 options to various officers and directors of
      the
      company. The company recorded $46,208 in connection with the options plus $9,833
      from prior grants, for a total stock base compensation expense of
      $56,041.





The
      weighted-average fair value per share of the options granted during 2008 was
      estimated on the date of grant using the Black-Scholes-Merton option pricing
      model; the following assumptions were used to estimate the fair value of the
      options at grant date based on the following:





2008
            
            2007Risk-Free
                interest rate
            
            
            4.91
            %
            
            4.27
            %Expected
                dividend yield
            
            
            
            
            
            —Expected
                stock price volatility
            
            
            106.49
            %
            
            131
            %Expected
                option Life
            
            
            5.5
                years
            
            
            10
                years





Number of
            
            Number of
            
            Weighted-Options
            
            Options
            
            AverageAvailable
            
            Outstanding
            
            Exercise PriceBalance
                December 31, 2007
            
            
            467,000
            
            
            1,371,000
            
            $
            1.002008
                Plan
            
            
            10,000,000Options
                granted under Plan in 2008
            
            
            (6,184,000
            )
            
            6,184,000
            
            
            .33Balance
                June 30, 2008
            
            
            4,283,000
            
            
            7,555,000
            
            $
            .45




**Note
      9 Subsequent events:**





On
      August
      14, 2008 the Company reached a tentative settlement with the former shareholders
      of RTI to pay $750,000 (See Note 2).




13


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




The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our consolidated financial
      statements and related notes included elsewhere in this report. References
      in
      this section to "Lattice Inc." the "Company," "we," "us," and "our" refer to
      Lattice Incorporated and our direct and indirect subsidiaries on a consolidated
      basis unless the context indicates otherwise.




This
      quarterly report contains forward looking statements relating to our Company's
      future economic performance, plans and objectives of management for future
      operations, projections of revenue mix and other financial items that are based
      on the beliefs of, as well as assumptions made by and information currently
      known to, our management. The words "expects, intends, believes, anticipates,
      may, could, should" and similar expressions and variations thereof are intended
      to identify forward-looking statements. The cautionary statements set forth
      in
      this section are intended to emphasize that actual results may differ materially
      from those contained in any forward looking statement.





The
      following discussion and analysis should be read in conjunction with the
      consolidated financial statements, included herewith. 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 $6,887,000 or 94% of our
      overall revenues for the six months ended June 30, 2008. Of our total government
      contract revenues, 89% were from Prime contract vehicles.





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.


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-KSB for the fiscal year ended December 31,
      2007. 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.





**RESULTS
      OF OPERATIONS**





THREE
      MONTHS ENDED JUNE 30, 2008 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
      2007




REVENUES:





Total
      revenues for the three months ended June 30, 2008 increased slightly to
      $3,728,000 from $3,720,000 for the three months ended June 30, 2007. Revenue
      from work under federal government contracts increased to $3,527,000 or 5%
      from
      $3,378,000 in the year ago period. As a percentage of overall revenues, revenues
      from federal government contracts represented 95%.




COST
      OF
      REVENUES:





Cost
      of
      revenues include direct labor and other direct costs such as materials and
      subcontractor costs, incurred to provide our services and solutions to our
      customers.  Generally, changes in costs of services are correlated to
      changes in revenue as resources are consumed in the production of that revenue.
      For the three months ended June 30, 2008, cost of revenues increased 61% to
      $2,713,000 from $1,685,000 for the three months ended June 30,
      2007.  As a percentage of revenue, cost of services was 72.8% for the three
      months ended June 30, 2008 as compared to 45.3% for the three months ended
      June 30, 2007.  The increase in cost of services, as a percentage of
      revenue, is due primarily to the Company increasing its use of subcontractors
      on
      programs for which we are acting as the prime contractor. Revenues attributable
      to subcontractors accounted for 52% of our overall revenues from gov’t contracts
      versus 12% in the year ago period.





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, 2008, research and development expenses increased
      to
      $109,172 as compared to $96,257 for the three months ended June 30,
      2007.





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 expenses (SG & A) expense include facilities,
      selling, bid and proposal, indirect overhead, fringe benefits, corporate
      expenses professional fees and other discretionary costs. For the three months
      ended June 30, 2008, SG&A decreased slightly to $1,436,837 from
      $1,438,424 for the three months ended June 30, 2007.   As a
      percentage of revenue, selling, general and administrative costs were 38.5%
      for
      the three months ended June 30, 2008 as compared to 38.7% for the three
      months ended June 30, 2007. Included in current quarter’s SG&A was
      $150,000 of nonrecurring legal expenses accrued related to the litigation with
      former RTI shareholders (see Note 2). Excluding the legal nonrecurring, SG&A
      expense decreased to $1,287,000 or 34.5% of revenues. The reduction in expenses
      was primarily driven by a reduction in indirect overhead (which varies
      proportionately to head count) caused by an overall reduction in the Company’s
      headcount. The decrease in headcount compared with prior year included
      reductions in billable staffing as the Company’s revenue mix shifted more
      towards subcontractors and to a lesser extent reductions in the Company’s
      administrative headcount.


15





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, 2008 was $372,000
      compared to $520,000 in the year ago period.




INTEREST
      EXPENSE:





Interest
      Expense decreased to $30,625 the three months ended June 30, 2008 compared
      to
      $93,198 for the three months ended June 30, 2007. Included in 2008 interest
      were
      primarily the interest charges on its revolving line-of-credit and short term
      notes. The decrease in interest expense is primarily due to the reduction of
      interest rate being charged on our new line of credit. Additionally, in
      September 2007 we paid off $750,000 in short term debt.





DERIVATIVE
      INCOME (EXPENSE):





The
      following table is derived from Note 5 in the accompanying financial
      statements.





Six months
              ended
              June 30,
              2008
            
            Six months
              ended
              June 30,
              2007
            
            Three months
              ended
              June 30,
              2008
            
            Three months
              ended
              June 30,
              2007Derivative
                income(expense):Conversion
                features
            
            
            —
            
            $
            (467,120
            )
            
            —
            
            
            —Warrant
                derivative
            
            $
            2,554,590
            
            $
            1,528,002
            
            $
            2,374,923
            
            $
            1,906,247




June
                30,
              2008
            
            December
                31
              2007Derivative
                liabilities:Warrant
                derivative
            
            $
            (
                793,974
            )
            $
            (7,217,099
            )




NET
      INCOME:





The
      Company's net income for the three months ended June 30, 2008 was $4,249,833
      compared to net income of $1,729,550 for the three months ended June 30, 2007.
      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 a non-cash derivative gain of $2,374,923, a gain on debt extinguishment
      of $2,607,525 (see Note 5) and an income tax benefit of $174,208 related to
      the
      carrying value of deferred tax liabilities.




16





**SIX
      MONTHS ENDED JUNE 30, 2008 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
      2007**




REVENUES:





Total
      revenues for the six months ended June 30, 2008 increased 6.1% to $7,319,000
      from $6,896,000 for the six months ended June 30, 2007. Revenue from work under
      federal government contracts increased to $6,882,000 or 9.8% from $6,266,000
      in
      the year ago period. As a percentage of total revenues, revenues from federal
      government contracts represented 94%.





COST
      OF
      REVENUES:





Cost
      of
      revenues include direct labor and other direct costs such as materials and
      subcontractor costs, incurred to provide our services and solutions to our
      customers.  Generally, changes in costs of services are correlated to
      changes in revenue as resources are consumed in the production of that revenue.
      For the six months ended June 30, 2008, cost of revenues increased 63.8% to
      $5,171,066 from $3,157,283 for the six months ended June 30,
      2007.  As a percentage of revenue, cost of services was 71% for the six
      months ended June 30, 2008 as compared to 46% for the six months ended
      June 30, 2007.  The increase in cost of services, as a percentage of
      revenue, is due primarily to the Company increased use of subcontractors on
      programs for which we are acting as the prime contractor. Revenues attributable
      to subcontractors accounted for 51% of our revenues from gov’t contracts versus
      19% in the year ago period.





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, 2008, research and development expenses increased
      to
      $217,657 as compared to $205,298 for the six months ended June 30, 2007.
      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 expenses include facilities, selling, bid and
      proposal, indirect labor, fringe benefits, corporate expenses, professional
      fees
      and other discretionary costs. For the six months ended June 30, 2008,
      SG&A decreased slightly to $2,548,000 from $2,567,000 for the six months
      ended June 30, 2007.   As a percentage of revenue, selling,
      general and administrative costs were 34.2% for the six months ended
      June 30, 2008 as compared to 37.2% for the six months ended June 30,
      2007. Included in current period’s SG&A was $150,000 of nonrecurring legal
      expenses accrued related to the litigation with former RTI shareholders (see
      Note 2). Excluding the nonrecurring legal, SG&A expense decreased to
      $2,398,000 or 32.8% of revenues. The reduction in expenses was primarily driven
      by an overall reduction in the Company’s headcount. The decrease in headcount
      compared with prior year included reductions in billable staffing as the
      Company’s revenue mix shifted towards subcontractors and to a lesser extent
      reductions in the Company’s administrative headcount.




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, 2008 was $744,114
      compared to $1,040,856 for the six months ended June 30, 2007.




INTEREST
      EXPENSE:





Interest
      Expense decreased to $81,446 the six months ended June 30, 2008 compared to
      $479,002 for the six months ended June 30, 2007. Included in 2008 interest
      were
      primarily the interest charges on its revolving line-of-credit and short term
      notes. Interest in the year ago period included interest charges related to
      debt
      discount on the Company’s convertible debenture with Barron which converted to
      Preferred Stock in the 1 st quarter
      of 2007. Interest attributable to the Barron convertible note was approximately
      $205,000. We also extinguished approximately $750,000 in short term notes in
      September 2007. Also contributing to the decrease was a lowering of the interest
      rate on the Company’s new revolving line of credit with Private Bank.


17





DERIVATIVE
      INCOME (EXPENSE):





The
      following table is derived from Note 5 in the accompanying financial
      statements.





Six months
              ended
              June 30,
              2008
            
            Six months
              ended
              June 30,
              2007
            
            Three months
              ended
              June 30,
              2008
            
            Three months
              ended
              June 30,
              2007Derivative
                income(expense):Conversion
                features
            
            
            —
            
            $
            (467,120
            )
            
            —
            
            
            —Warrant
                derivative
            
            $
            2,554,590
            
            $
            1,528,002
            
            $
            2,374,923
            
            $
            1,906,247








June
                30,
              2008
            
            December
                31
              2007Derivative
                liabilities:Warrant
                derivative
            
            $
            (
                793,974
            )
            $
            (7,217,099
            )




NET
      INCOME:





The
      Company's net income for the six months ended June 30, 2008 was $4,121,467
      compared to net income of $235,043 for the six months ended June 30, 2007.
      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 period
      included a non-cash derivative gain of $2,554,590 and a gain on debt
      extinguishment of $2,607,525 (see Note 5) and an income tax benefit of $348,416
      related to the carrying value of deferred tax liabilities





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 the Company’s working
      capital deficiency of $2,371,000 including non-cash derivative liabilities
      of
      $793,974. The Company reported negative cash flows from operations of $712,000
      for the six months ended June 30, 2008. In addition, in 2007 the Company
      recorded a liability of $1,500,000 in connection with an earn-out provision
      of
      its securities purchase agreement with the former owners of RTI which has been
      reduced and reclassified as contingent liability of $900,000 in accordance
      with
      FAS 5 accounting standards (See Note 2 Contingent liability for a detailed
      discussion). Due to the negative operating cash flows and the working capital
      deficiency, the Company does not have sufficient working capital to support
      operations and satisfy debt service payments on liabilities coming due over
      the
      next twelve months. 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 its ability to obtain adequate
      alternative financing sufficient to support operations until the necessary
      operating improvements are made and to be able to satisfy its short tem debt
      payments. We can not guarantee that we be successful in obtaining debt or equity
      financing. At the time of this filing, the Company has not obtained the
      financing needed.


18




Working
      capital and other activities:




The
      Company’s working capital deficiency as of June 30, 2008 amounts to $2,371,003
      compared to a deficiency of $8,948,374 as of December 31, 2007. Included in
      the
      June 30, 2008 deficiency was $793,974 of non-cash derivative liabilities.
      Excluding derivative liabilities, our current assets are $4,453,465 compared
      to
      current liabilities of $6,030,494. Included in current liabilities is a
      contingent liability of $900,000 related to ongoing litigation with former
      RTI
      shareholders (see Note 2 and Note 8).





For
      the
      six month period ended June 30, 2008, cash and cash equivalents decreased to
      $600,058from $769,915 at December 31, 2007.





Net
      cash
      used by operating activities was $711,624for the six months ended June 30,
      2008
      compared to net cash used by operating activities of $40,544 in the
      corresponding six month period ended June 30, 2007.





Net
      cash
      provided by financing activities was $574,611 for the six months ended June
      30,
      2008 compared to net cash used in financing of $79,557 in the corresponding
      six
      months ended June 30, 2007.





Short-term
      notes at June 30, 2008 totaled $1,624,866 compared to $1,050,254 at December
      31,
      2007. Included in short term notes $244,000 payable in full by December 31,
      2008. (See Note 4 to the Financial Statements for a discussion of these
      liabilities)





The
      Company’s negative cash flow from operations of $711,624 for the six months
      ended June 30, 2008 has been financed by borrowings on its line of credit
      facility and the Company’s cash and cash equivalents. The outstanding balance on
      its line of credit at June 30 was $1,399,366 compared to $740,257 at December
      31, 2007.





**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, revenues, and results
      of
      operations, liquidity or capital expenditures. The Company does not have
      adequate liquidity for the next twelve month’s to neither service its short term
      debt, satisfy a potential contingent liability of $750,000 nor fund its
      near-term negative operating cash flows until the necessary operating
      improvements are made. Accordingly, the Company is actively engaged in seeking
      alternative financing to provide adequate capital to allow it sufficient time
      to
      improve operations and service debt payments coming due in the next twelve
      months. As of this filing, the Company has not secured the financing required.




**CRITICAL
      ACCOUNTING POLICIES AND SENSITIVE ESTIMATES:**





**SENSITIVE
      ESTIMATES:**





The
      Company’ financial statements have been prepared in accordance with accounting
      principles generally accepted in the United States (US GAAP). The preparation
      of
      these financial statements 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.


19




**Derivative
      Financial Instruments:**





Derivative
      financial instruments are initially recorded at fair value and subsequently
      adjusted to fair value at the close of each reporting period. The Company
      estimates fair values of derivative financial instruments using various
      techniques (and combinations thereof) that are considered to be consistent
      with
      the objective measuring of fair values. In selecting the appropriate technique,
      management considers, among other factors, the nature of the instrument, the
      market risks that it embodies and the expected means of settlement. For less
      complex derivative instruments, such as free-standing warrants, the Company
      generally uses the Black-Scholes-Merton option valuation technique because
      it
      embodies all of the assumptions (including trading volatility, estimated terms
      and risk free rates) necessary to fair value these instruments. For complex
      derivative instruments, such as embedded conversion options, the Company
      generally uses the Flexible Monte Carlo valuation technique because it embodies
      all of the requisite assumptions (including credit risk, interest rate risk
      and
      exercise/conversion behaviors) that are necessary to fair value these more
      complex instruments. For forward contracts that contingently require net-cash
      settlement as the principal means of settlement, the Company projects and
      discounts future cash flows applying probability-weightage to multiple possible
      outcomes. Estimating fair values of derivative financial instruments, requires
      the development of significant and subjective estimates that may, and are likely
      to, change over the duration of the instrument with related changes in internal
      and external market factors. In addition, option-based techniques are highly
      volatile and sensitive to changes in the trading market price of our common
      stock, which has a high-historical volatility. Since derivative financial
      instruments are initially and subsequently carried at fair values, our income
      (loss) will reflect the volatility in these estimate and assumption
      changes.





**Revenue
      Recognition:**





Revenue
      is recognized when all significant contractual obligations have been satisfied
      and collection of the resulting receivable is reasonably assured. Revenue from
      product sales is recognized when the goods are shipped and title passes to
      the
      customer.





The
      company applies the guidance of SOP-97.2, "Interim Guidance for Conducting
      Aggregate Exposure and Risk Assessments," with regards to its software products.
      Under this guidance, the Company determined that its product sales do not
      contain multiple deliverables for an extended period beyond delivery where
      bifurcation of multiple elements is necessary. The software is embedded in
      the
      products sold and shipped. Revenue is recognized upon delivery, installation
      and
      acceptance by the customer. PCS (post contract customer support) and upgrades
      are billed separately and when rendered or delivered and not contained in the
      original arrangement with the customer. Installation services are included
      with
      the original customer arrangement but are rendered at the time of delivery
      of
      the product and invoicing.





The
      Company provides IT and business process outsourcing services under
      time-and-material, fixed-price contracts, which may extend up to 5 years.
      Services provided over the term of these arrangements may include, network
      engineering, architectural guidance, database management, expert programming
      and
      functional area expert analysis   Revenue is generally recognized when the
      product or service is provided and the amount earned is not contingent upon
      any
      further event.





**Impairments
      of long-lived assets:**





At
      least
      annually, the Company reviews all long-lived assets with determinate lives
      for
      impairment. Long-lives assets subject to this evaluation include property and
      equipment and intangible assets that amount to $11,489,589 (or 75%) of total
      assets at June 30, 2008. The Company considers the possibility that
      impairments may exist when indicators of impairment are present. In the event
      that indicators are identified or, if within management’s normal evaluation
      cycle, the Company establishes the presence of possible impairment by comparing
      asset carrying values to undiscounted projected cash flows. The preparation
      of
      cash flow projections requires management to develop many estimates about the
      Company’s performance. These estimates include consideration of revenue streams
      from existing customer bases, the potential increase and decrease in customer
      sales activity and potential changes in the Company’s direct and indirect costs.
      In addition, if the carry values of long-lived assets exceed undiscounted cash
      flow, the Company would estimate the impairment based upon discounted cash
      flow.
      The development of discount rates necessary to develop this cash flow
      information requires additional assumptions, including the development of market
      and risk adjusted rates for discounting cash flows. While management utilizes
      all available information in developing these estimates, actual results are
      likely to be different from those estimates.





Goodwill
      represents the difference between the purchase price of an acquired business
      and
      the fair value of the net assets of businesses the Company has acquired.
      Goodwill is not amortized. Rather, the Company tests goodwill for impairment
      annually (or in interim periods if events or changes in circumstances indicate
      that its carrying amount may not be recoverable) by comparing the fair value
      of
      each reporting unit, as measured by discounted cash flows, to the carrying
      value
      of the reporting unit to determine if there is an indication that potential
      impairment may exist. One of the most significant assumptions underlying this
      process is the projection of future sales. The Company reviews its assumptions
      when goodwill is tested for impairment and makes appropriate adjustments, if
      any, based on facts and circumstances available at that time. While management
      utilizes all available information in developing these estimates, actual results
      are likely to be different than those estimates.


20




**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK.**




N/A.




**ITEM
      4T. CONTROLS AND PROCEDURES.**





**Evaluation
      of Disclosure Controls and Procedures**




Our
      management is responsible for establishing and maintaining a system of
      disclosure controls and procedures (as defined in Rule 13a-15(e)) under the
      Exchange Act) that is designed to ensure that information required to be
      disclosed by the Company in the reports that we file or submit under the
      Exchange Act is recorded, processed, summarized and reported, within the time
      specified in the Commission's rules and forms. Disclosure controls and
      procedures include, without limitation, controls and procedures designed to
      ensure that information required to be disclosed by an issuer in the reports
      that it files or submits under the Exchange Act is accumulated and communicated
      to the issuer's management, including its principal executive officer or
      officers and principal financial officer or officers, or persons performing
      similar functions, as appropriate to allow timely decisions regarding required
      disclosure.




Pursuant
      to Rule 13a-15(b) under the Exchange Act the Company carried out an evaluation
      with the participation of the Company’s management, including Paul Burgess, the
      Company’s Chief Executive Officer (“CEO”) and Joe Noto, the Company’s Chief
      Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure
      controls and procedures (as defined under Rule 13a-15(e) under the Exchange
      Act)
      as of the six months ended June 30, 2008. Based upon that evaluation, the
      Company’s CEO and CFO concluded that the Company’s disclosure controls and
      procedures were not effective to ensure that information required to be
      disclosed by the Company in the reports that the Company files or submits under
      the Exchange Act, is recorded, processed, summarized and reported, within the
      time periods specified in the SEC’s rules and forms, and that such information
      is accumulated and communicated to the Company’s management, including the
      Company’s CEO and CFO, as appropriate, to allow timely decisions regarding
      required disclosure. As disclosed in the Company’s 10-KSB for the year ended
      December 31, 2007, the Company’s CEO and CFO concluded that the limited
      financial backgrounds of certain members of the Compan’s executive management
      team beyond its CFO are inhibiting its financial reporting process. The Company
      intends to hire additional personnel with more substantial financial backgrounds
      but has not done so to date.




**Changes
      in internal controls**




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 2008
      Quarter ended June 30, 2008.  Based on that evaluation, our Chief Executive
      Officer and our Chief Financial Officer concluded that no change occurred in
      the
      Company's internal controls over financial reporting during the 2008 Quarter
      ended June 30, 2008 that has materially affected, or is reasonably likely to
      materially affect, the Company's internal controls over financial
      reporting.




21


**PART
      II**




**OTHER
      INFORMATION**




**ITEM
      1 - LEGAL PROCEEDINGS**




In
      June
      2008, the Company filed suit in New Jersey Superior Court against Michael
      Ricciardi and Marie Ricciardi, former shareholders of Ricciardi Technologies,
      Inc. (“RTI”), along with the Domenix Corporation, a company owned by Marie
      Ricciardi and operated by her and Michael Riccardi. The defendants removed
      the
      case to the United States District Court for the district of New Jersey, where
      it is now pending under the caption, *Lattice, Inc. v.Marie Ricciardi, et al.,* Civil
      Action No. 08 cv 3208 (the “New Jersey Action”). The New Jersey Action seeks to
      enforce the restrictive covenant contained in the September 12, 2006 Stock
      Purchase Agreement (the “SPA”), pursuant to which the Company purchased RTI
      from, *inter alia,* the
      Ricciardis. The restrictive covenant prohibits the former owners of RTI from
      (a)
      competing, directly or indirectly against Lattice and RTI and/or (b) soliciting
      employees or others engaged by RTI for a period of three years from the date
      of
      the SPA. The Company seeks a preliminary injunction to prevent Marie Ricciardi,
      acting in concert with her husband and through Domenix, from continuing to
      breach the restrictive covenant and damages in an as yet undetermined amount
      for
      damages resulting from the breach. A hearing on Lattice’s motion for preliminary
      injunction occurred on August 7, 2008. The defendants in the New Jersey Action
      deny the allegations made by the Company and assert that the New Jersey federal
      court lacks personal jurisdiction and that venue is improper. The Company
      believes that the federal court in New Jersey is the appropriate forum and
      is
      vigorously contesting the defendants’ efforts to have the New Jersey Action
      dismissed or transferred to another venue. There can be no assurance that the
      Company will ultimately be successful in the New Jersey Action.




Michael
      Ricciardi also filed a suit against the Company in June, 2008, in the United
      States District Court for the Eastern District of Virginia under the
      caption ** *Michael
      Ricciardi v. Lattice, Inc.,* Civil
      Action No. 1:08-cv-519 (the “Virginia Action”) In the Virginia Action, Michael
      Ricciardi (a) disputes the Company’s claim (the “Indemnity Claim”) that it is
      entitled to be paid approximately $308,000, plus fees and costs, from the escrow
      created pursuant to the SPA to cover its Indemnifiable Losses (a defined term
      under the SPA), claiming instead that the entire escrow should be dispersed
      to
      him as the representative of the RTI shareholders, as provided for in the SPA,
      and (b) asserts that a contingent $1.5 million Earn Out Payment (as such term
      is
      defined in the SPA) provided for in the SPA is due and payable by the Company
      to
      the former shareholders of RTI. The Company has denied Ricciardi’s contentions
      and intends to vigorously pursue its claims in the Virginia Action, which it
      believes are meritorious.




The
      Company previously recorded a reserve of $1.5 million in the third quarter
      of
      2007 in connection with its then estimate of the Earn Out Payment. Whether
      the
      payment is due and owing depends on a determination of EBITDA (as defined in
      the
      SPA) for the one year period following the closing of the acquisition of RTI
      (the “Earn Out Period”). Subsequently, the Company has made the required
      calculations of EBITDA (as it is defined in the SPA) and the Company believes
      that EBITDA for the Earn Out Period did not achieve the minimum amount required
      under the SPA to justify any Earn Out Payment to the former shareholders of
      RTI.
      The Company has delivered the required notice of its determination of EBITDA
      for
      the Earn Out Period to Michael Riccardi as owner representative of the former
      RTI shareholders. To the extent that Mr. Ricciardi may contest the Company’s
      determination, and the parties cannot mutually agree on the matter, the SPA
      provides for a neutral auditor to review the determination and promptly make
      a
      final ruling on the amount, if any, of an Earn Out Payment. Under the SPA the
      ruling of the neutral auditor is final and unappealable. There can be no
      assurance that the Company will be successful in recovering some or all of
      the
      amount of its Indemnity Claim or that the Company will be successful in the
      Virginia Action or in any proceeding before a neutral auditor to determine
      the
      amount, if any, of the Earn Out Payment. On August 14, 2008 the Company and
      the
      former shareholders of RTI tentatively agreed to a settlement pursuant to which
      the Company agreed to paythe former shareholders of RTI $750,000 against
      the Earn out as specified in the SPA which will be paid over the next
      twenty-four months, consisting of interest only for the first twelve months
      and
      then twelve monthly installments of $62,500 plus interest. Accordingly, the
      Company has reduced its initial estimate from $1.5million to $900,000 which
      includes $150,000in estimated legal fees based the tentative settlement. There
      can be no assurance that a final settlement will be reached.




A
      copy of
      the SPA was filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed on September 25, 2006 and the terms of the SPA are hereby incorporated
      by
      reference.




**ITEM
      1A. RISK FACTORS**




There
      have been no material changes from the Risk Factors described in our Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2007 **.**


22




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




On
      May
      15, 2008 the Company approved the adoption of the Company’s 2008 Employee Stock
      Option Plan. Under the Plan, options may be granted which are intended to
      qualify as Incentive Stock Options (“ISOs”) under Section 422 of the Internal
      Revenue Code of 1986 (the “Code”) or which are not (“Non-ISOs”) intended to
      qualify as Incentive Stock Options there under. The maximum number of options
      made available for issuance under the Plan are ten million (10,000,000) options.
      The options may be granted to officers, directors, employees or consultants
      of
      the Company and its subsidiaries at not less than 100% of the fair market value
      of the date on which options are granted. The term of each Option granted under
      the Plan shall be contained in a stock option agreement between the Optionee
      and
      the Company.




In
      May
      2008 the board issued 6,184,000 options to various officers and directors of
      the
      company.




Pursuant
        to an Exchange Agreement between the Company and Barron Partners LP (“Barron”),
        dated June 30, 2008, the Company issued Barron 520,000 shares of Series C
        Convertible Preferred Stock. The Series C Preferred has a par value of $0.01
        and
        each share of preferred stock is convertible into 10 shares of common stock
        at
        any time, at the option of the holder. The conversion prices are subject
        to
        anti-dilution protection for (i) traditional capital restructurings, such
        as
        splits, stock dividends and reorganizations and (ii) sales or issuances of
        common shares or contracts to which common shares are indexed at less than
        the
        stated conversion prices. Holders of the Company’s Series C Preferred are not
        entitled to dividends and the Holder has no redemption
        privileges.





We
      claim
      an exemption from the registration requirements of the Securities Act of
      1933, as amended (the "Act") for the issuance of the options pursuant to Section
      4(2) of the Act.




**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**
            
            **Description**31.1
            
            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




23


**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, 2008**




**LATTICE
                INCORPORATED***BY:*
            */S/
                Paul Burgess***
            *PAUL
                BURGESS***
            *CHIEF
                EXECUTIVE OFFICER*
              *(PRINCIPAL
                EXECUTIVE*
              *OFFICER),
                SECRETARY AND*
              *DIRECTOR*




*BY:*
            */s/
                Joe Noto***
            *JOE
                NOTO***
            *CHIEF
                FINANCIAL OFFICER*
              *(PRINCIPAL
                ACCOUNTING*
              *OFFICER)
                AND DIRECTOR*




24