UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



(Mark One)



xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934



FOR THE QUARTERLY PERIOD ENDED June 30,
2014



COMMISSION FILE NUMBER 000-10690



LATTICE INCORPORATED



(Exact Name of Registrant as Specified in
its Charter)



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



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



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



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



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



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 filero        
|------------------------ | --------------------------
|                         |                           
|Non-accelerated filero   | Smaller reporting companyx



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



APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS



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



APPLICABLE ONLY TO CORPORATE ISSUERS



State the number of
shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 14, 2014, there
were 47,165,183 outstanding shares of the Registrant's Common Stock, $0.01 par value.











LATTICE INCORPORATED

JUNE 30, 2014 QUARTERLY REPORT ON FORM
10-Q



TABLE OF CONTENTS



|                                                                                              | Page
|--------------------------------------------------------------------------------------------- | ----
|PART I – FINANCIAL INFORMATION                                                               
|                                                                                              |     
|Item 1. Financial Statements                                                                  | 3   
|Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16  
|Item 3. Quantitative and Qualitative Disclosure About Market Risks                            | 20  
|Item 4T. Controls and Procedures                                                              | 20  
|                                                                                              |     
|PART II – OTHER INFORMATION                                                                  
|                                                                                              |     
|Item 1. Legal Proceedings                                                                     | 21  
|Item 1A. Risk Factors                                                                         | 21  
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           | 21  
|Item 3. Defaults Upon Senior Securities                                                       | 21  
|Item 4. Reserved                                                                              | 21  
|Item 5. Other Information                                                                     | 21  
|Item 6. Exhibits                                                                              | 22  
|                                                                                              |     
|SIGNATURES                                                                                    | 26  





2









LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED
BALANCE SHEETS



|                                                                                                                          |  | June 30, |             |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------- |  | -------- | ----------- | - | ------------ | -
|                                                                                                                          |  | 2014     |             |   | 2013         |  
|ASSETS:                                                                                                                   |  |          |             |   |              |  
|Current assets:                                                                                                           |  |          |             |   |              |  
|Cash and cash equivalents                                                                                                 |  | $        | 1,036,240   |   |              | $
|Accounts receivable                                                                                                       |  |          | 2,275,356   |   |              |  
|Inventories                                                                                                               |  |          | 1,170       |   |              |  
|Note receivable - current                                                                                                 |  |          | 466,667     |   |              |  
|Other current assets                                                                                                      |  |          | 451,481     |   |              |  
|Total current assets                                                                                                      |  |          | 4,230,913   |   |              |  
|                                                                                                                          |  |          |             |   |              |  
|Property and equipment, net                                                                                               |  |          | 732,530     |   |              |  
|Other intangibles, net                                                                                                    |  |          | 731,503     |   |              |  
|Note receivable - long term                                                                                               |  |          | 233,333     |   |              |  
|Other assets                                                                                                              |  |          | 12,812      |   |              |  
|Total assets                                                                                                              |  | $        | 5,941,091   |   |              | $
|                                                                                                                          |  |          |             |   |              |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                      |  |          |             |   |              |  
|Current liabilities:                                                                                                      |  |          |             |   |              |  
|Accounts payable                                                                                                          |  | $        | 1,218,165   |   |              | $
|Accrued expenses                                                                                                          |  |          | 2,428,236   |   |              |  
|Customer advances                                                                                                         |  |          | 1,078,966   |   |              |  
|Notes payable - current, net of debt discount                                                                             |  |          | 1,578,067   |   |              |  
|Shares to be issued                                                                                                       |  |          | 187,000     |   |              |  
|Derivative liability                                                                                                      |  |          | 77,880      |   |              |  
|Billings in excess of costs and estimated earnings                                                                        |  |          | 34,196      |   |              |  
|Total current liabilities                                                                                                 |  |          | 6,602,509   |   |              |  
|Long-term liabilities:                                                                                                    |  |          |             |   |              |  
|Derivative liability                                                                                                      |  |          | 991,054     |   |              |  
|Notes payable - long-term                                                                                                 |  |          | 310,075     |   |              |  
|Total long-term liabilities                                                                                               |  |          | 1,301,129   |   |              |  
|Total liabilities                                                                                                         |  |          | 7,903,638   |   |              |  
|                                                                                                                          |  |          |             |   |              |  
|                                                                                                                          |  |          |             |   |              |  
|Shareholders' equity                                                                                                      |  |          |             |   |              |  
|Preferred Stock - $0.01 par value                                                                                         |  |          |             |   |              |  
|Series A 9,000,000 shares authorized 5,875,815 and 6,575,815 issued and outstanding, respectively                         |  |          | 58,758      |   |              |  
|Series B 1,000,000 shares authorized 1,000,000 issued and 502,160 outstanding                                             |  |          | 10,000      |   |              |  
|Series C 520,000 shares authorized 520,000 issued and outstanding                                                         |  |          | 5,200       |   |              |  
|Series D 636,400 shares authorized 590,910 issued and outstanding                                                         |  |          | 5,909       |   |              |  
|Common stock - $0.01 par value, 200,000,000 authorized, 47,165,183 and 35,304,714 issued and
    outstanding respectively |  |          | 471,652     |   |              |  
|Common stock subscribed - 500,000 shares                                                                                  |  |          | 5,000       |   |              |  
|Additional paid-in capital                                                                                                |  |          | 44,897,109  |   |              |  
|Accumulated deficit                                                                                                       |  |          | (46,858,080 | ) |              |  
|                                                                                                                          |  |          | (1,404,452  | ) |              |  
|Stock held in treasury, at cost                                                                                           |  |          | (558,096    | ) |              |  
|Total shareholders's equity                                                                                               |  |          | (1,962,547  | ) |              |  
|Total liabilities and shareholders' equity                                                                                |  | $        | 5,941,091   |   |              | $



See accompanying notes to the condensed
consolidated financial statements.



3







LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(Unaudited)



|                                                              |  | Three Months Ended  June 30, |            |   | Six Months Ended  June 30, |  
|------------------------------------------------------------- |  | ---------------------------- | ---------- | - | -------------------------- | -
|                                                              |  | 2014                         |            |   | 2013                       |  
|                                                              |  |                              |            |   |                            |  
|Revenue                                                       |  | $                            | 2,253,609  |   |                            | $
|                                                              |  |                              |            |   |                            |  
|Cost of revenue                                               |  |                              | 1,349,818  |   |                            |  
|                                                              |  |                              |            |   |                            |  
|Gross profit                                                  |  |                              | 903,790    |   |                            |  
|                                                              |  |                              | 40.1%      |   |                            |  
|Operating expenses:                                           |  |                              |            |   |                            |  
|Selling, general and administrative                           |  |                              | 1,046,944  |   |                            |  
|Research and development                                      |  |                              | 214,455    |   |                            |  
|Total operating expenses                                      |  |                              | 1,261,400  |   |                            |  
|                                                              |  |                              |            |   |                            |  
|Loss from operations                                          |  |                              | (357,609   | ) |                            |  
|                                                              |  |                              |            |   |                            |  
|Other income (expense):                                       |  |                              |            |   |                            |  
|Derivative income (expense)                                   |  |                              | 290,730    |   |                            |  
|Financing fees                                                |  |                              | (15,532    | ) |                            |  
|Interest expense                                              |  |                              | (219,882   | ) |                            |  
|Total other income (expense)                                  |  |                              | 55,316     |   |                            |  
|                                                              |  |                              |            |   |                            |  
|Loss before taxes                                             |  |                              | (302,293   | ) |                            |  
|                                                              |  |                              |            |   |                            |  
|Income taxes                                                  |  |                              | –          |   |                            |  
|                                                              |  |                              |            |   |                            |  
|Net loss from continuing operations                           |  |                              | (302,293   | ) |                            |  
|                                                              |  |                              |            |   |                            |  
|Net income from operations of discontinued component (Note 5) |  |                              | –          |   |                            |  
|                                                              |  |                              |            |   |                            |  
|Net income (loss)                                             |  |                              | (302,293   | ) |                            |  
|                                                              |  |                              |            |   |                            |  
|Basic net income (loss) per common share                      |  |                              |            |   |                            |  
|From continuing operations                                    |  | $                            | (0.01      | ) |                            | $
|From discontinued operations                                  |  | $                            | –          |   |                            | $
|                                                              |  |                              |            |   |                            |  
|Diluted net income (loss) per common share                    |  |                              |            |   |                            |  
|From continuing operations                                    |  | $                            | (0.01      | ) |                            | $
|From discontinued operations                                  |  | $                            | –          |   |                            | $
|                                                              |  |                              |            |   |                            |  
|Weighted average shares:                                      |  |                              |            |   |                            |  
|Basic                                                         |  |                              | 47,632,207 |   |                            |  
|Diluted                                                       |  |                              | 47,632,207 |   |                            |  



See accompanying notes to the condensed
consolidated financial statements.



4







LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS

FOR THE SIX MONTH'S ENDED JUNE 30, 2014
AND 2013



|                                                                                          |  | 2014 |            |   | 2013 |  
|----------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Cash flow from operating activities:                                                      |  |      |            |   |      |  
|Net loss                                                                                  |  | $    | (779,085   | ) |      | $
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |      |            |   |      |  
|Operating activities discontinued operations                                              |  |      | –          |   |      |  
|Gain on disposition of discontinued government segment assets                             |  |      | –          |   |      |  
|Derivative (income) expense                                                               |  |      | (277,687   | ) |      |  
|Amortization of intangible assets                                                         |  |      | 163,936    |   |      |  
|Amortization of debt discount                                                             |  |      | 261,248    |   |      |  
|Financing fees                                                                            |  |      | 23,352     |   |      |  
|Share-based compensation                                                                  |  |      | 116,078    |   |      |  
|Depreciation                                                                              |  |      | 183,810    |   |      |  
|Bad debt expense                                                                          |  |      | 18,044     |   |      |  
|Changes in operating assets and liabilities:                                              |  |      |            |   |      |  
|(Increase) decrease in:                                                                   |  |      |            |   |      |  
|Accounts receivable                                                                       |  |      | (395,544   | ) |      |  
|Inventories                                                                               |  |      | 8,160      |   |      |  
|Other current assets                                                                      |  |      | (400,893   | ) |      |  
|Increase (decrease) in:                                                                   |  |      |            |   |      |  
|Accounts payable and accrued liabilities                                                  |  |      | 520,540    |   |      |  
|Billings in excess of costs and estimated earnings                                        |  |      | (11,601    | ) |      |  
|Customer advances                                                                         |  |      | 55,000     |   |      |  
|Total adjustments                                                                         |  |      | 264,443    |   |      |  
|Net cash used in operating activities                                                     |  |      | (514,641   | ) |      |  
|                                                                                          |  |      |            |   |      |  
|Cash flows from investing activities:                                                     |  |      |            |   |      |  
|Proceeds from sale of government services segment                                         |  |      | –          |   |      |  
|Purchase of equipment                                                                     |  |      | (54,628    | ) |      |  
|Net cash used in investing activities                                                     |  |      | (54,628    | ) |      |  
|                                                                                          |  |      |            |   |      |  
|Cash flows from financing activities:                                                     |  |      |            |   |      |  
|Revolving credit facility (payments) borrowings, net                                      |  |      | –          |   |      |  
|Payments on capital equipment lease                                                       |  |      | –          |   |      |  
|Payments on notes payable - discontinued operations                                       |  |      | –          |   |      |  
|Payments on notes payable                                                                 |  |      | (1,063,635 | ) |      |  
|Proceeds from the issuance of common stock, net                                           |  |      | 796,441    |   |      |  
|Proceeds from common stock subscribed                                                     |  |      | 60,000     |   |      |  
|Proceeds from notes payable                                                               |  |      | 1,500,000  |   |      |  
|Payments on director loans                                                                |  |      | –          |   |      |  
|Net cash provided by financing activities                                                 |  |      | 1,292,806  |   |      |  
|                                                                                          |  |      |            |   |      |  
|Net increase (decrease) in cash and cash equivalents                                      |  |      | 723,537    |   |      |  
|Cash and cash equivalents - beginning of period                                           |  |      | 312,703    |   |      |  
|Cash and cash equivalents - end  of period                                                |  | $    | 1,036,240  |   |      | $
|                                                                                          |  |      |            |   |      |  
|Supplemental cash flow information                                                        |  |      |            |   |      |  
|Interest paid in cash                                                                     |  | $    | 120,047    |   |      | $
|                                                                                          |  |      |            |   |      |  
|Summary of non-cash investing and financing activities                                    |  |      |            |   |      |  
|Conversion of notes payable into common stock                                             |  | $    | 227,272    |   |      | $
|Conversion of accrued interest into common stock                                          |  | $    | 39,546     |   |      | $
|Dividends declared but not paid                                                           |  | $    | 12,496     |   |      | $
|Common stock issued for principle payment on note payable                                 |  | $    | 60,000     |   |      | $



See accompanying notes to the condensed
consolidated financial statements.



5







Lattice Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial
Statements

June 30, 2014

(Unaudited)



Note 1 – Organization and Summary of Significant Accounting
Policies



(a) Organization



Lattice Incorporated (the “Company”)
was incorporated in the State of Delaware May 1973 and commenced operations in July 1977. The Company began as a provider of specialized
solutions to the telecom industry. Throughout its history Lattice has adapted to the changes in this industry by reinventing itself
to be more responsive and open to the dynamic pace of change experienced in the broader converged communications industry of today.
Currently Lattice provides advanced solutions for several vertical markets. The greatest change in operations is in the shift from
being a component manufacturer to a solution provider focused on developing applications through software on its core platform
technology. To further its strategy of becoming a solutions provider, the Company acquired a majority interest in “SMEI”
in February 2005. In September 2006 the Company purchased all of the issued and outstanding shares of the common stock of Lattice
Government Services, Inc., (“LGS”) (formerly Ricciardi Technologies Inc. (“RTI”)). LGS was founded in 1992
and provides software consulting and development services for the command and control of biological sensors and other Department
of Defense requirements to United States federal governmental agencies either directly or through prime contractors of such governmental
agencies. LGS’s proprietary products include SensorView, which provides clients with the capability to command, control and
monitor multiple distributed chemical, biological, nuclear, explosive and hazardous material sensors. In December 2009 we changed
RTI’s name to Lattice Government Services Inc. In January 2007, we changed our name from Science Dynamics Corporation to
Lattice Incorporated. On May 16, 2011 we acquired 100% of the shares of Cummings Creek Capital, a holding Company which itself
owns 100% of the shares of CLR Group Limited. (“CLR”). CLR is a government contractor which complements our government
services business by expanding markets and service offerings. Together the SMEI, RTI and CLR acquisitions formed our federal government
services business unit. Through 2013 we operated in two segments, our federal government services unit and our telecommunication
services business.



As part of the Company’s strategy
to focus on its higher growth potential communications business, the Company decided during the first quarter of 2013 to exit the
government services segment which derived its revenues mainly from contracts with federal government Department of Defense agencies
either as prime contractor or as a subcontractor to another prime contractor. On April 2, 2013, we entered an Asset Purchase Agreement
(“Purchase Agreement”) with Blackwatch International, Inc. (“Blackwatch”), a Virginia corporation, pursuant
to which we primarily sold our government Department of Defense (DoD) contract vehicles for approximately $1.2 million. These assets
essentially comprised our Federal Government services segment operations. The Company retained the residual assets and liabilities
of Lattice government services, Inc. We ceased operations of the federal government business back in April, 2013 coinciding with
the sale of assets to Blackwatch. For the period ended June 30, 2013 the financial results of the government services business
are being reported as discontinued operations.



On November 1, 2013 we purchased certain
assets of Innovisit, LLC. The assets acquired included; awarded contracts, customer lists, and its intellectual property rights
to the Video Visitation software assets. Under the agreement, the workforce and operating infrastructure supporting Innovisit’s
business operations were transferred to Lattice, including but not limited to certain employees, and leases. This acquisition complimented
the product offering of our telecom services business.



(b) Basis of Presentation Going Concern



At June 30, 2014, our working capital deficiency
was approximately $2,372,000 which improved from a working capital deficiency of approximately $4,490,000 at December 31, 2013.
Cash from operations and available capacity on current credit facilities are insufficient to cover liabilities currently due and
the liabilities which will mature over the next twelve months. Additionally, we are past due on promissory notes with investors
and payables with trade creditors. We have several payment arrangements in place but face continuing pressures with negotiating
payment arrangements with trade creditors regarding overdue payables. These conditions raise substantial doubt regarding our ability
to continue as a going concern. Our ability to continue as a going concern is highly dependent upon our ability to; improve our
operating cash flow, maintain our credit lines and secure additional financing. Management was able raise $1,500,000 of convertible
debt financing during the quarter ended June 30, 2014 which resulted in net proceeds of $1,352,000 which was used to improve our
working capital, strengthen our balance sheet and provide liquidity for growth. Securing sufficient capital for our growth strategy
may also reduce doubts about our ability to operate as a going concern. During the quarter ended March 31, 2014, we closed on approximately
$1,063,000 of equity financing by issuing restricted common stock to various accredited investors for cash proceeds of $796,441
and $266,818 resulting from the conversion of notes payable and accrued interest. There is no assurance, however, that we will
succeed in raising additional financing and obtain the capital sufficient to provide for all of our liquidity needs. In the event
we fail to obtain the additional capital needed and/or restructure our existing debts with current creditors, we may be required
to curtail our operations significantly. During the quarter ended June 30, 2014, the Company received $60,000 of cash proceeds
relating the sale of 500,000 shares of common stock subscribed.



6







Our current cash position, availability
on our lines of credit and current level of operating cash flow is insufficient to support (i) current working capital requirements
(ii) pay the interest costs and principal payments on maturing liabilities, and (iii) provide the additional capital for equipment
purchases necessary to support our growth plans. In this regard, we are dependent on obtaining the additional financing needed
for which we have been soliciting interest. Also, we remain dependent upon maintaining and increasing our cash flow from operations
and maintaining the continuing availability on our lines of credit. There can be no assurances that our businesses will generate
sufficient forward operating cash flows, we will be able to obtain the balance of the financing sought, or that future borrowings
under our line of credit facilities will be available in an amount sufficient to service our current indebtedness or to fund other
liquidity needs.



The financial statements have been prepared
in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements
of the Securities and Exchange Commission (“SEC”).



(c) Interim Condensed Consolidated Financial Statements



The condensed consolidated financial statements
for the three and six months ended June 30, 2014 are unaudited. In the opinion of management, such condensed consolidated financial
statements include all adjustments (consisting of normal recurring accruals) necessary for the fair representation of the consolidated
financial position and the consolidated results of operations. The consolidated results of operations for the periods presented
are not necessarily indicative of the results to be expected for the full year.  The interim condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013
appearing in Form 10-K filed on March 31, 2014.



(d) Principles of Consolidation



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



(e) Use of Estimates



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



(f) Share-Based Payments



On January 1, 2006, the Company adopted
the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification 718-10, Accounting
for Share-Based Payment , to account for compensation costs under its stock option plans and other share-based arrangements.  ASC
718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial
statements based on their fair values.



For purposes of estimating fair value
of stock options, we use the Black-Scholes-Merton valuation technique. For the six months ended June 30, 2014 and twelve months
ended December 31, 2013, there was approximately $590,000 and $706,000 of total unrecognized compensation cost related to unvested
share-based compensation awards granted under the equity compensation plans which do not include the effect of future grants of
equity compensation, if any. The $590,000 will be amortized over the weighted average remaining service period.



7







(g)
                                         Revenue Recognition



Telecommunication Services:



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



Government Claims:



Unapproved claims relate to contracts where
costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract vehicles. The
unapproved claims are considered to be probable of collection and have been recognized as revenue in previous years. Unapproved
claims included as a component of accounts receivable totaled approximately $1,244,000 as of June 30, 2014 and December 31, 2013,
respectively. Consistent with industry practice, we classify assets and liabilities related to these claims as current, even though
some of these amounts may not be realized within one year.



Revenues Recognition for Innovisit:



Revenues from construction contracts are
included in contract revenue in the consolidated statements of operations and are recognized under the percentage-of-completion
accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project.
This method is used as management considers expended cost to be the best available measure of progress on these contracts, the
majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating
costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.



Contract costs include all direct material
and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. General and administrative costs are charged to expense as
incurred.



Changes in job performance, job conditions
and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result
in revisions to costs and income. Such revisions are recognized in the period in which they are determined. An amount equal to
contract costs incurred that are attributable to claims is included in revenue when realization is probable and the amount can
be reliably estimated.



Costs and estimated earnings in excess
of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings
had not been presented to customers because the amount were not billable under the contract terms at the balance sheet date. Amounts
are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues
recognized.



Service Revenues:



Service revenues are recorded when the
service is provided and when collection can be reasonably assured



(h) Segment Reporting



FASB ASC 280-10-50, Disclosure about
Segments of an Enterprise and Related Information requires use of the “management approach” model for segment reporting.
The management approach model is based on the way a company’s management organizes segments within the company for making
operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a company. The Company had operated in two segments
prior to 2013 but with the decision to focus on the communications business and exit the federal government services business,
the Company now operates in one segment for the three and six months ended June 30, 2014.



(i) Depreciation, Amortization and Long-Lived
Assets:



Property, Plant and Equipment:



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



Identifiable Intangible Assets:



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



8







(j) Fair Value Disclosures



Management believes that the carrying values
of financial instruments, including, cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value
as a result of the short-term maturities of these instruments. As discussed in Note 1(m), below, derivative financial instruments
are carried at fair value.



The carrying values of the Company’s
long term debts approximates their fair values based upon a comparison of the interest rates and terms of such debt to the rates
and terms of debt currently available to the Company.



(k) Recent Accounting Pronouncements



We do not believe there would have been
a material effect on the accompanying consolidated financial statements had any other recently issued, but not yet effective, accounting
standards been adopted in the current period.



Note 2 – Notes Payable



Notes payable consists of the following
as of June 30, 2014 and December 31, 2013:



|                                          |  | June 30, 2014 |           |  | December 31, 2013 |  
|----------------------------------------- |  | ------------- | --------- |  | ----------------- | -
|                                          |  |               |           |  |                   |  
|Bank line-of-credit (a)                   |  | $             | –         |  |                   | $
|Notes payable to shareholder/director (b) |  |               | 192,048   |  |                   |  
|Notes payable (c)                         |  |               | 2,666,019 |  |                   |  
|Note payable, Innovisit (d)               |  |               | 220,000   |  |                   |  
|Total notes payable                       |  |               | 3,078,067 |  |                   |  
|Less current maturities                   |  |               | 1,578,067 |  |                   |  
|Long-term debt                            |  | $             | 1,500,000 |  |                   | $



(a) Bank Line-of-Credit



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



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



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



The outstanding balance owed on the line
at June 30, 2014 and December 31, 2013 was $0 and $0 respectively.  At June 30, 2014 and December 31, 2013
our interest rate was approximately 13.25%.



(b) Notes Payable Shareholder/Director



The first note bears interest at 21.5%
per annum. During December 2010, the note was amended to flat monthly payments of $6,000 until maturity, December
31, 2013, at which time any remaining interest and or principal will be paid. This note has an outstanding balance of $24,048 and
$75,315 as of June 30, 2014 and December 31, 2012, respectively. Payment of the note is past due however the note holder has not
invoked his rights under the default provisions of the note.



9







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



(c) Notes Payable



On June 11, 2010, Lattice closed on a note
payable for $1,250,000. The net proceeds to the Company were $1,100,000. The $150,000 was amortized over the life of the note
as additional interest expense. The note matured June 30, 2012 and payment of principal was due at that time in the lump sum value
of $981,655 including any unpaid interest. On June 30, 2012 the holder of the note agreed to an extension for payment in full
of the note to October 31, 2012. In addition to the maturity extension the Company agreed to increase the collateral by $250,000
the note was secured by certain receivables totaling $981,655, the new secured total is approximately $1,232,000. Until maturity,
Lattice is required to make quarterly interest payments (calculated in arrears) at 12% stated interest with the first quarter interest
payment of $37,500 due September 30, 2010 and $37,500 due each quarter end thereafter until the final payment comes due October
31, 2012 totaling $1,019,155 including the final interest payment. Concurrent with the note, an intercreditor agreement was signed
between Action Capital and Holder where Action Capital has agreed to subordinate the Action Lien on certain government contracts,
task orders and accounts receivable totaling $981,655. During November 2011, $268,345 of the original $1,250,000 accounts receivable
securing the note was collected, escrowed and paid directly to the note holder by Action Capital thereby reducing the outstanding
balance on the note and the collateral to $981,655 at December 31, 2013. During quarter ended March 31, 2014 we paid $100,000 reducing
the principal on this note to $881,655. As of June 30, 2014, there is $881,655 of unpaid principal remaining on this note. As of
the date of this filing, the Company is currently in violation under this note agreement from not paying the principal due at the
October 31, 2012 maturity date. The Company is current with quarterly interest payments. The holder has not as of the date of this
filing invoked his rights under the default provisions of the note.



During the quarter ended June 30, 2011,
we issued a two year promissory note payable for $200,000 to a shareholder of the Company.  The note bears interest
of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment
on June 30, 2011. On May 15, 2013 the maturity date, the principal amount of $200,000 became due along with any unpaid and
accrued interest. The Company is not in compliance with the terms of the note. We have accrued interest at current rate; no default
provision has been invoked. As of June 30, 2014, there is $200,000 of unpaid principal remaining on this note



During the quarter ended September 30,
2011, we issued a two year promissory note payable for $227,272 to an investor. The note bears interest of 12% per year. The Company
is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on September 30, 2011.
In conjunction with the Company’s private placement of common stock during the quarter ended March 31, 2014, the Company
issued 2,223,484 common shares thereby paying the principal of $227,272 and accrued interest of $39,546.



On December 13, 2011, we converted outstanding
invoices that we owed a vendor by converting the liability to a promissory note in the amount of $416,533. The note is payable
quarterly over a two year term with principal payments due as follows: December 31, 2011 of $10,000, January 15, 2012 of $50,000,
March 31, 2012 of $20,000, June 30, 2012 of $30,000, September 30, 2012 of $30,000, December 31, 2012 of $45,000, March 31, 2013
of $45,000, June 30, 2013 of $55,000, September 30, 2013 of $55,000 and December 31, 2013 of $76,533. The note carries a 12% annual
interest rate calculated on the outstanding principal balance payable monthly. As of December 31, 2013, the outstanding balance
of the note was $20,000. The Company was in default under this note agreement in that it did not pay certain principal payments
when due. In June 2013, the Company was served a writ of garnishment against the note receivable of $700,000 from Blackwatch International
Inc. for the outstanding balance due for which we are in default. In October 2013, the Company reached a settlement arrangement
whereby the holder agreed to forbear any further collection actions against the Company in exchange for $280,000 payable as follows;
$240,000 on October 10, 2013 and then $10,000 payable monthly over four months starting November 10, 2013. The January and February
payments totaling $20,000 were paid as of March 31, 2014 leaving a remaining balance of $0 under the settlement arrangement at
March 31, 2014. During the quarter ended June 30, 2014 the note holder contended that the Company was not in compliance with the
timing of payments of the settlement arrangement. As a result, the Company agreed to settle the note in full for a payment of $32,500
during the quarter ended June 30, 2014. This note was paid in full with cash during June 2014.



On January 23, 2012, we issued several
promissory notes to private investors with face values totaling $198,000. The proceeds from the notes totaled $175,000 used for
working capital. The discount of $23,000 has been recorded as a deferred financing fee and amortized over the life of the note.
The notes bear interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with
a pro-rata interest payment on March 31, 2012. During the quarter ended March 31, 2014, the Company paid in cash the principal
owed on two of the notes totaling $113,636 leaving a remaining balance owed of $84,364 at June 30, 2014. On January 23, 2014 the
maturity date, the principal amount of the notes were due along with any unpaid and accrued interest. As a result, Company is not
in compliance with the terms of the note. We are current with interest payments; no default provision has been invoked.



10







On February 26, 2013, the Company issued
a note to an investor for $600,000 for which $580,400 of net proceeds were received. The note bears interest of 12% payable monthly
and is due in full to investor by the earlier of (i) September 1, 2013 or (ii) the date the customer pays for the system. 
The note was issued to finance the costs associated with a purchase order transaction with a large telecommunications customer.
In addition to the interest we agreed to deliver warrants to the lender for the purchase of up to 800,000 shares of common stock
at an exercise price of $0.08 per share, with anti-dilution provisions covering capital stock changes affecting all shareholders,
exercisable for four years from the date of issuance. A debt discount of $64,547 was recorded representing the fair value of the
warrants issued and was fully amortized to interest expense during the nine months ended September 30, 2013. The fair value of
the warrants was determined using the Black Scholes pricing model with the following assumptions; dividend yield of 0%, expected
volatility of 159%, a risk free rate of 0.73% and an expected life of 4 years. The Company also recorded amortization of deferred
financing fees of $19,600 representing agency fees which has been fully amortized to expense. The Company paid this note in full
on July 27, 2013.



On October 7, 2013, we issued a promissory
note with a face value of $110,000 and 150,000 warrants to an investor. The net proceeds from the note totaled $94,700 and were
used for working capital. A debt discount totaling $27,185 had been recorded comprised of an original issue discount of 10% or
$11,000 and the fair value of the warrants issued of $16,185. Also being deducted from proceeds were $4,300 in placement agent
fees and expenses which was expensed as financing fees. The note bears interest of 12% per year, however no interest charged if
paid off before January 1, 2014.  On December 31, 2013, the principal amount of the note was paid in full from the December
31, 2013 financing with the same investor (see paragraph below). Accordingly, the unamortized debt discount of $27,185 was recorded
as interest expense.



On December 31, 2013, the Company issued
a note to an investor for $600,000 for which $411,000 of net proceeds were received. Of the 600,000; $60,000 was an original issue
discount of 10% or $60,000, $110,000 was used to pay-off the October 2013 note held by the same investor and $19,000 was used for
placement fees and legal expenses. No interest is payable if the $600,000 of principal is paid within three months from the date
of this note. If the principal is not paid within that time frame, the note will bear 12% annual interest which accrues on the
principal sum beginning March 30, 2014, with interest paid monthly, in arrears, on the last day of the month. Monthly payments
of $6,000 per month will be due with first cash payment due April 30, 2014, and will continue until the amount due is paid. The
net proceeds of $411,000 were used for working capital purposes. In addition to the interest we agreed to deliver warrants to the
lender for the purchase of up to 1,000,000 shares of common stock at an exercise price of $0.11 per share, with anti-dilution provisions
covering capital stock changes affecting all shareholders, exercisable for four years from the date of issuance. In addition, the
Company issued 145,000 shares of common stock. A debt discount of $162,093 was recorded representing the fair value of the warrants
and the common stock issued and is being amortized over the term of the note which matures June 30, 2014. The fair value of the
warrants was determined using the Black Scholes pricing model with the following assumptions; dividend yield of 0%, expected volatility
of 176.04%, a risk free rate of 1.72% and an expected life of 4 years. The Company also recorded deferred financing fees of $19,600
representing agency fees which has been fully amortized to expense. The carrying values at June 30, 2014 and December 31, 2013
were $0 and $377,907 respectively. This note was paid in full with the proceeds of the May 30, 2014 financing discussed below.



On May 30 2014, the Company entered into
a Note Purchase and Security Agreement with Lattice Funding, LLC (“Lender”), a Pennsylvania limited liability company
affiliated with Cantone Asset Management, LLC as a placement agent.   The Company delivered a secured promissory note
in the principal sum of $1,500,000, bearing interest at 8% per annum plus a 2% monitoring fee and maturing on May 15, 2017.  
Interest and fees on the note are payable quarterly.   Outstanding principal may be converted into restricted common
stock.   The Company also executed UCC financing statements, securing the note with proceeds of certain agreements.  
In addition to cash fees and reimbursed expenses to placement agent which totaled $148,000, the Company is to deliver 1,350,000
shares of restricted common stock to Cantone Asset Management, LLC as placement agent fees. The 1,350,000 shares were valued at
the closing share price $0.12 per share and resulted in deferred financing of $162,000. The deferred financing fees recorded during
the current quarter including the cash fees paid totaled $310,000. This will be amortized ratably over the term of the note. The
shares to be delivered are being carried as a current liability in shares to be issued until such time as delivery of the shares
is completed. The Company used $600,000 of gross proceeds to repay an existing bridge loan with an affiliate of Lender. Each $10,000
of note principal is convertible into 75,000 common shares at an exercise price of $0.133333 per share any time after November
30, 2014, to be adjusted for splits, reorganizations, stock dividends and similar corporate events (anti-dilution provisions. The
outstanding balance on the note was $1,500,000 at June 30 2014.



(d) Note Payable - Innovisit



In conjunction with the purchase of intellectual
property and certain other assets of Innovisit (See Note #6) on November 1, 2013, Lattice issued a promissory note for $590,000
to Icotech LLC, the owner of Innovisit.  Lattice agreed to pay to Icotech; (a) $250,000 on November 30, 2013, and four payments
of $60,000 on each of January 1, 2014, April 30, 2014, July 31, 2014, and October 31, 2014; and final payment of $100,000 due and
payable on January 31, 2015. The note bears no interest on the unpaid principal amount and is secured with the intellectual
property acquired. The Company issued 500,000 common shares in lieu of the January 31, 2014 $60,000 installment payment under the
note, and paid the April 30, 2014 installment of $60,000 in cash, leaving a balance outstanding of $220,000 at June 30, 2014.



11







Note 3 – Convertible Notes



On May 30 2014, the Company entered into a Note Purchase and
Security Agreement with Lattice Funding, LLC (“Lender”), a Pennsylvania limited liability company affiliated with Cantone
Asset Management, LLC. The Company delivered a secured promissory note (the “Note”) in the principal sum
of $1,500,000, bearing interest at 8% per annum and maturing on May 15, 2017. Interest on the Note is payable quarterly.
Outstanding principal may be converted into restricted common stock. The Company also executed UCC financing statements,
securing the Note with proceeds of certain agreements.



Each $10,000 of note principal is convertible into 75,000 common
shares at an exercise price of $0.133333 per share any time after November 30, 2014, to be adjusted for splits, reorganizations,
stock dividends and similar corporate events (anti-dilution provisions).  If the market price of Lattice common equals or
exceeds twice the exercise price and certain other conditions are met, the Company may call the Note at face value for the purpose
of forcing conversion of the balance of the Note into common stock.



The Convertible Notes contain a
provision whereby the conversion price is adjustable upon the occurrence of certain events, including the issuance of common
stock or common stock equivalents at a price which is lower than the current conversion price. Under FASB ASC 815-40-15-5,
the embedded conversion feature is not considered indexed to the Company’s own stock and, therefore, does not meet the
scope exception in FASB ASC 815-10-15 and thus needs to be accounted for as a derivative liability. The initial fair value at
May 30 2014 of the embedded conversion feature was estimated at $1,223,923 and recorded as a derivative liability, resulting
in a net carrying value of the note at May 30, 2014 of $276,077 ($1,500,000 face value less $1,223,923 debt discount). On
June 30 2014 the derivative was valued at $991,054 which resulted in derivative income of $232,869. The debt discount was
amortized using the effective interest method and was $1,189,925 at June 30, 2014 resulting in a finance charge of $33,998
included in the statement of operations. The fair value of the embedded conversion feature is estimated at the end of each
quarterly reporting period using the Monte Carlo model.



The debt discount is being amortized over
the life of the convertible note using the effective interest method.



Inherent in the Monte Carlo Valuation model
are assumptions related to expected volatility, remaining life, risk-free rate and expected dividend yield.  For the
Convertible Notes using a Monte Carlo model, we estimate the probability and timing of potential future financing and fundamental
transactions as applicable.  The assumptions used by the Company are summarized below:



Convertible Notes



|                        |  | June 30, 2014 |       |  | Inception |  
|----------------------- |  | ------------- | ----- |  | --------- | -
|Closing stock price     |  | $             | 0.11  |  |           | $
|Conversion price        |  | $             | 0.13  |  |           | $
|Expected volatility     |  |               | 135%  |  |           |  
|Remaining term (years)  |  |               | 2.88  |  |           |  
|Risk-free rate          |  |               | 0.83% |  |           |  
|Expected dividend yield |  |               | 0%    |  |           |  



Convertible notes consist of the following at June 30, 2013
and December 31, 2012:



|                                     |  | June 30, 2014 |            |   | December 31, 2013 |  
|------------------------------------ |  | ------------- | ---------- | - | ----------------- | -
|Convertible notes                    |  | $             | 1,500,000  |   |                   | $
|Discount on convertible notes        |  |               | (1,223,923 | ) |                   |  
|Accumulated amortization of discount |  |               | 33,998     |   |                   |  
|Total convertible notes              |  | $             | 310,075    |   |                   | $



12







Note 4 – Fair Value



Warrants:



The balance sheet caption derivative liabilities
consist of warrants, issued in connection with the 2005 Laurus Financing Arrangement, and the 2006 Omnibus Amendment and Waiver
Agreement with Laurus. These derivative financial instruments are indexed to an aggregate of 758,333 shares of the Company’s
common stock as of June 30, 2014 and December 31, 2013 and are carried at fair value. The balance at June 30, 2014 was $77,880
compared to $122,698 at December 31, 2013.



The valuation of the derivative warrant
liabilities is determined using a Black Scholes Merton Model. Freestanding derivative instruments, consisting of warrants and options
that arose from the Laurus financing are valued using the Black-Scholes-Merton valuation methodology because that model embodies
all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the Black
Scholes models as of June 30, 2014 included conversion or strike price of $0.10; historical volatility factor of 181% based upon
forward terms of instruments, and a risk free rate of 2.60% and remaining life 8.23 years.



In accordance with FASB ASC 820, “Fair
Value Measurements and Disclosures”, the following table represents the Company’s fair value hierarchy for its financial
assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013:



Convertible Notes:



|                      |  | Level 3 |         |  | Total |  
|--------------------- |  | ------- | ------- |  | ----- | -
|June 30, 2014:        |  |         |         |  |       |  
|                      |  |         |         |  |       |  
|Derivative Instrument |  | $       | 991,054 |  |       | $



|                      |  |   | Level 3 |  |  |   | Total | 
|--------------------- |  | - | ------- |  |  | - | ----- | 
|December 31, 2013:    |  |   |         |  |  |   |       | 
|                      |  |   |         |  |  |   |       | 
|Derivative Instrument |  | $ | –       |  |  | $ | –     | 



Level 3 financial instruments
consist of certain embedded conversion features. The fair value of these embedded conversion features that have exercise reset
features are estimated using a Monte Carlo valuation model. The Company adopted the disclosure requirements of ASU 2011-04, “Fair
Value Measurements,” during the quarter ended June 30, 2014. The unobservable input used by the Company was the estimation
of the likelihood of a reset occurring on the embedded conversion feature of the Convertible Notes.  These estimates
of the likelihood of completing an equity raise that would meet the criteria to trigger the reset provisions are based on numerous
factors, including the remaining term of the financial instruments and the Company’s overall financial condition.



The following table summarizes the changes
in fair value of the Company’s Level 3 financial instruments for the period ended June 30, 2014.



|                                                                                                   |  | June 30, 2014 |          
|-------------------------------------------------------------------------------------------------- |  | ------------- | ---------
|Beginning Balance                                                                                  |  | $             | –        
|Initial recognition - Derivative liability of embedded conversion feature of the Convertible Notes |  |               | 1,223,923
|                                                                                                   |  |               |          
|Change in fair value                                                                               |  |               | 232,869  
|                                                                                                   |  |               |          
|Ending Balance                                                                                     |  | $             | 991,054  



Changes in the unobservable input values
would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable
input used in the fair value measurement is the estimation of the likelihood of the occurrence of a change to the conversion price
based on the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood would result
in a higher (lower) fair value measurement.



13







Note 5 – Litigation



From time to time, lawsuits are
threatened or filed against us in the ordinary course of business. Such lawsuits typically involve claims from customers, former
or current employees, and vendors related to issues common to our industry. Such threatened or pending litigation also can involve
claims by third-parties, either against customers or ourselves, involving intellectual property, including patents. A number of
such claims may exist at any given time. In certain cases, derivative claims may be asserted against us for indemnification or
contribution in lawsuits alleging use of our intellectual property, as licensed to customers, infringes upon intellectual property
of a third-party. Per FASB ASC 450-20-25; recognition of a contingency loss may only be made if the event is (1) probable and (2)
the amount of the loss can be reasonably estimated. There were no liabilities of this type at June 30, 2014 and December 31, 2013.
In June 2013, the Company was served a writ of garnishment with respect to our note receivable from the sale of our governmental
services segment due to a default on the December 13, 2011 note payable (see footnote 2(c)). In October 2013, the Company reached
a settlement arrangement whereby the holder agreed to forbear any further collection actions against the Company in exchange for
$280,000 payable as follows; $240,000 on October 10, 2013 and then $10,000 payable monthly over four months starting November 10,
2013. $280,000 was paid by the Company as of the date of this filing. However, the holder had asserted that the payments were late,
and that the holder is entitled to an additional $80,000 payment. The Company settled this matter in full during the quarter ended
June 30, 2014 for $32,500 paid in cash. The Note is now fully satisfied and the Note holder
has released all related claims.



Note 6 – Discontinued Operations:



On April 2, 2013, we entered an Asset Purchase
Agreement (“Purchase Agreement”) with Blackwatch International, Inc. (“Blackwatch”), a Virginia corporation,
pursuant to which we primarily sold our government Dept. of Defense (DoD) contract vehicles for approximately $1.2 million. These
assets essentially comprised our Government services segment operations.



The following table shows the results of
operations of Lattice Government Services segment for the six months ended June 30, 2014 which are included in the net income (loss)
from discontinued operations:



|                                             |  | Six Months Ended June 30, |  
|-------------------------------------------- |  | ------------------------- | -
|                                             |  | 2014                      |  
|Revenue                                      |  | $                         | –
|Cost of revenue                              |  |                           | –
|Gross profit                                 |  |                           | –
|                                             |  |                           | –
|Selling, general and administrative expenses |  |                           | –
|Amortization expense                         |  |                           | –
|Loss from operations                         |  |                           | –
|Interest expense                             |  |                           | –
|Gain on sale of discontinued operations      |  |                           | –
|Income before taxes                          |  |                           | –
|Income tax (benefit)                         |  |                           | –
|Net income from discontinued operations      |  | $                         | –



Note 7 – Note Receivable



As part of sale of Lattice Government assets
on April 2, 2013, the Company received a promissory note from purchaser for $700,000 which carries 3% annum interest rate payable
in 12 equal quarterly installments payments of $61,216 over a 3 year period first installment being July 31, 2013 with each
successive payment being on the 15th day of the month following close each calendar quarter. The note is secured by personal guarantee
by the principal owner of Purchaser. Previously, the Company had not received any of the installments due to the writ of garnishment
issued with regards to the default on the December 13, 2011 note (see footnote 2(c)). The writ of garnishment has been released
as a result of settling the default during the quarter (see Note 4). We have not received any payments as of June 30, 2014. The
Company is currently in the process of collecting the past due installments under the note totaling $306,080.



14







Note 8 – Conversion of Preferred Stock



On January 14, 2014, we issued 1,178,562
common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 330,000
shares of Series A Preferred Stock owned by Barron Partners.



On March 18, 2014, we issued 1,321,418
common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 370,000
shares of Series A Preferred Stock owned by Barron Partners



Note 9 – Issuance of Common Stock



During the quarter ended March 31, 2014,
the Company issued 8,860,489 restricted common shares at a price of $0.12 per share in a series of private placements for a gross
financing amount of $1,063,259. Of which, net cash proceeds of $796,441 were received and $266,818 was derived from the conversion
of principal and accrued interest on existing notes with several investors.



During the quarter ended June 30, 2014,
the Company sold 500,000 shares restricted common shares at a price of $0.12 per share in a private placement with an investor
for a gross financing amount of $60,000. As of June 30, 2014, the shares had not been issued.



We did not issue any employee options during
the three and six months ended June 30, 2014.



During the three and six months ended June 30, 2014, we did
not issue any common stock warrants.



Note 10 – Commitments



(a) Operating Leases



The Company leases its office, sales and
manufacturing facilities under non-cancelable operating leases with varying terms expiring through 2015. The leases generally provide
that the Company pay the taxes, maintenance and insurance expenses related to the leased assets.



We currently have two leases for office
facilities located in the United States with lease expirations occurring through March 31, 2015. The total average monthly rent
for these leases during the quarter ended June 30 2014 is approximately $9,000 per month.



Future minimum lease commitments as of
June 30, 2014 as follows:



|                             |  | Operating |       
|---------------------------- |  | --------- | ------
|                             |  | Leases    |       
|2014 (remaining)             |  | $         | 32,083
|2015                         |  |           | 28,403
|Total minimum lease payments |  | $         | 60,486



Total rent expense was $21,525 for
the quarter ended June 30, 2014 and $50,929 for the six months ended June 30, 2014.



15







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



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



The following discussion and analysis should
be read in conjunction with the financial statements and notes thereto included elsewhere in this report and with our annual report
on Form 10-K for the fiscal year ended December 31, 2013. This discussion should not be construed to imply that the results discussed
herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual
operating results in the future. Such discussion represents only the best present assessment of our management.



GENERAL OVERVIEW



Business Overview:



In the second quarter revenues increased
by 17.8% compared to the prior year period. Included in the overall growth our recurring revenue or call processing component accounted
for approximately 71% of total revenues. As a component of recurring revenues, our direct call provisioning service revenue increased
by 11.3% compared to the prior year period. In the second quarter and for the remainder of the year the Company will continue to
invest in upgrading our sales and marketing efforts. In 2013 we moved our call center to an in-house service and introduced our
new fully integrated product suite ICON that temporarily slowed our revenue growth. With the addition of the new call center we
anticipate our growth rates to begin to pick up again in 2014. Although our quarterly growth rates tend to fluctuate based on our
customers buying patterns, we anticipate our annual growth to continue.



In 2013 we introduced the first version
of our next generation cloud based technology platform ICON Integrated Corrections Operations Network. The system includes a full
suite of services and products available in modules, enabling service providers and correctional facilities to choose from a number
of services that best fits their needs. The technology includes modules for:



| | · | Products and Services management, this includes fully integrated video, kiosk, and inmate tablet based services.
| | - | ----------------------------------------------------------------------------------------------------------------
| | · | Customer Information Database.                                                                                  
| | · | Payment Processing.                                                                                             
| | · | Account/Billing                                                                                                 
| | · | Customer Care.                                                                                                  
| | · | Investigative Tool Sets.                                                                                        
| | · | Jail Management System.                                                                                         



The launch of the new product and the integration
of our new call center with the ICON platform temporarily slowed our growth in 2013 but we have begun to see the initial implementation
of the new platform help the company return to historical growth rates. As we continue to implement new modules to the ICON platform
we anticipate seeing further revenue expansion in 2014.



We have had a number of inquiries and installations
in the international market in the past years with little marketing effort from the company. This combined with an unknown potential
in the international market the company hired Communication Media Advisors (CMA) to evaluate the potential of the international
market and develop a business plan that will enable the company to effectively capitalize on any international market opportunities.
The first phase of the project was completed in the second quarter with the entire project being completed in early third quarter.
The second phase of the project will evaluate and refine the Company’s domestic strategy with a focus on expanding sales
and marketing efforts, geographic focus and appropriate product mix.



Currently the Company derives its revenue
from direct service, wholesale service, and technology sales. Moving forward the Company will focus on direct service and technology
sales as most of our legacy wholesale contracts will be expiring in 2014. In 2014 the Company has started to invest in product
development and expanding sales and marketing efforts that we anticipate will increase revenue growth in both direct service and
technology sales. To date we have begun to see an increase in our sales pipeline and we have a number of technology projects under
way that we anticipate being completed later in 2014. Revenue from the projects won’t be recognized until completion and
therefore the revenue from these projects is not being recognized in the current quarter.



16







In the fourth quarter of 2013 we successfully
completed an asset purchase agreement of Innovisit, an industry leader in video visitation technology. With the acquisition we
now operate in 26 states and the number of inmates using our service or are being provided a service by other companies utilizing
our technology is over 50,000 inmates.  We have continued to see success from the acquisition as we have expanded our product
portfolio and have seen an increase in our sales pipeline as a direct result of the acquisition.



With the Company turning back EBITDA positive
in 2013 and continuing the growth of the communications business the company has taken on a number of initiatives to improve the
balance sheet. The Company has successfully completed one round of equity financing and is in the process pursuing additional financing
to improve our liquidity and help accelerate our growth with additional investments in product development, sales and marketing.
In addition, since we divested only certain assets with the government division sale, we retained $1.2 million of receivables with
Federal Government Department of Defense agencies and are working aggressively to collect it. Once the receivable is collected
the company will use the proceeds to pay down existing debt.



RESULTS OF OPERATIONS



THREE MONTHS ENDED JUNE 30, 2014 COMPARED
TO THE THREE MONTHS ENDED JUNE 30, 2013



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



|                                                     |  | For  the  Three Months Ended   June 30, |          
|---------------------------------------------------- |  | --------------------------------------- | ---------
|                                                     |  | 2014                                    |          
|Revenue                                              |  | $                                       | 2,254,000
|                                                     |  |                                         |          
|Net income (loss)                                    |  | $                                       | (501,000 
|                                                     |  |                                         |          
|Net income (loss) per common share – basic & diluted |  | $                                       | (0.01    



|                                    |  | OPERATING EXPENSES                 |           |  | PERCENT OF SALES                   | 
|----------------------------------- |  | ---------------------------------- | --------- |  | ---------------------------------- | 
|                                    |  | THREE MONTHS ENDED  June 30,  2014 |           |  | THREE MONTHS ENDED  June 30,  2013 | 
|                                    |  |                                    |           |  |                                    | 
|Research and development            |  |                                    | 214,000   |  |                                    | 
|                                    |  |                                    |           |  |                                    | 
|Selling, general and administrative |  |                                    | 1,047,000 |  |                                    | 



REVENUE:



Total revenues for the three months ended
June 30, 2014 increased by $341,000 or 18% to $2,254,000 compared to $1,913,000 for the three months ended June 30, 2013. Our direct
call provisioning service revenue where we provide services direct to correctional facilities increased 11% from prior year levels.
Recurring revenues as a component of total revenues accounted for $1,593,000 or 71% for the quarter. The recurring services increase
is mainly attributable to volume growth from the continuing addition to the number of customer contracts where we provide
direct telecom service provisioning to end-user correctional facilities. Our technology sales where we provide wholesaled technology
systems and software to other service providers increased to $661,000 from $406,000 in the year ago quarter. We expect continued
growth in both components of revenue for the full fiscal year ended December 31, 2014.



GROSS PROFIT:



Gross profit for the three months ended
June 30, 2014 was $904,000 compared to the $645,000 for three months ended June 30, 2013. Gross profit, as a percentage of revenues,
increased to 40.1% from 33.7% for the same period in 2013. The increase in gross profit was primarily due to an increase
in higher margin wholesaled technology revenue as a component of total revenues from $406,000 to $661,000. Margins in both lines
of our business; technology sales and recurring service revenue remained consistent with prior year levels. We expect the technology
margin prospectively to be in the 60% range on average. Margin from the recurring revenue service component of revenues were consistent
with the prior year period at approximately 23%.



17







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, 2014, research and development expenses increased to $214,000 as compared to $164,000
for the three months ended June 30, 2013. The increase was due to hiring of additional engineering staff. Management believes that
continual enhancements of the Company's existing products are required to enable the Company to maintain its current competitive
position.



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:



Selling, general and administrative ("SG&A")
expenses consist primarily of expenses for management, finance, administrative personnel, legal, accounting, consulting fees, sales
commissions, marketing, facilities costs, corporate overhead and depreciation expense. For the three months ended June 30, 2014,
SG&A expenses increased to $1,047,000 from $673,000 in the comparable period prior year. As a percentage of revenues, SG&A
was 46.5% for the three months ended June 30, 2014 versus 35.2% in the comparable period a year ago. SG&A expenses increased
$374,000 or 56% from prior year levels. Included in the increase was approximately $175,000 attributable to the Innovisit business
acquired November 1, 2013. The remainder of the increase was mainly attributable to investments in selling and marketing to support
growth and to a lesser extent an increase in non-cash share based compensation of $56,000 compared to the prior year quarter.



INTEREST EXPENSE:



Interest expense increased to $186,000
for the three months ended June 30, 2014 compared to $148,000 for the three months ended June 30, 2013. The current quarter included
amortization of debt discount of $114,000 related to warrants issued December 31, 2013 in conjunction with debt financing.



NET INCOME (LOSS) FROM CONTINUING OPERATIONS:



The Company’s net loss for the three
months ended June 30, 2014 was $302,000 compared to a net loss of $347,000 for the three months ended June 30, 2013. The decrease
was mainly due to higher SG&A expenses as explained above partially offset by a higher gross profit contribution compared to
prior year..



SIX MONTHS ENDED JUNE 30, 2014 COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 2013



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



|                                            |  | For  the  Six Months Ended   June 30, |          
|------------------------------------------- |  | ------------------------------------- | ---------
|                                            |  | 2014                                  |          
|Revenue                                     |  | $                                     | 4,587,000
|                                            |  |                                       |          
|Net loss                                    |  | $                                     | (978,000 
|                                            |  |                                       |          
|Net loss per common share – basic & diluted |  | $                                     | (0.02    



|                                    |  | OPERATING EXPENSES               |           |  | PERCENT OF SALES                 | 
|----------------------------------- |  | -------------------------------- | --------- |  | -------------------------------- | 
|                                    |  | SIX MONTHS ENDED  JUNE 30,  2014 |           |  | SIX MONTHS ENDED  JUNE 30,  2013 | 
|                                    |  |                                  |           |  |                                  | 
|Research and development            |  |                                  | 431,000   |  |                                  | 
|                                    |  |                                  |           |  |                                  | 
|Selling, general and administrative |  |                                  | 2,015,000 |  |                                  | 



REVENUE:



Total revenues for the six months ended
June 30, 2014 increased by $490,000 or 12% to $4,587,000 compared to $4,097,000 for the six months ended June 30, 2013. Recurring
revenues increased 5.5% to $3,160,000 which accounted for 69% of total revenues. Wholesale technology revenues increased 29.6%
to $1,427,000. Recurring revenues are derived from call processing transactions for end-user correctional facilities either through
a direct customer relationship or in conjunction with a wholesale partner.



18





GROSS PROFIT:



Gross profit for the six months ended June
30, 2014 was $1,797,000 compared to the $1,327,000 for six months ended June 30, 2013. Gross profit, as a percentage of revenues,
increased to 39.2% from 32.4% for the same period in 2013. The increase was attributable to a higher mix percentage of overall
revenue being derived from higher wholesaled technology revenue. Gross margin as a percentage of revenues for recurring revenues
was mainly consistent with the prior year period at 25% to 30%. The gross margin percentage on our wholesaled technology revenues
increased to 61% from 40%. The increase in margin was primarily order driven and not indicative of a trend. The gross margin for
wholesaled technology revenues will vary with larger sales orders but we expect the margins to be in the 60% range on average.



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, 2014, research and development expenses increased to $431,000 as compared to $313,000
for the six months ended June 30, 2013. Management believes that continual enhancements of the Company's existing products are
required to enable the Company to maintain its current competitive position.



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:



Selling, general and administrative ("SG&A")
expenses consist primarily of expenses for management, finance, administrative personnel, legal, accounting, consulting fees, sales
commissions, marketing, facilities costs, corporate overhead and depreciation expense. For the six months ended June 30, 2014,
SG&A expenses increased to $2,015,000 from $1,188,000 in the comparable period prior year. As a percentage of revenues, SG&A
was 43.9% for the six months ended June 30, 2014 versus 29% in the comparable period a year ago. The increase was mainly driven
by higher selling and marketing costs during the current year as the Company expanded its foot print into new geographic markets.



INTEREST EXPENSE:



Interest expense increased to $350,000
for the six months ended June 30, 2014 compared to $239,000 for the six months ended June 30, 2013. Included in the current period
interest was $227,000 of the amortized debt discount.



NET INCOME (LOSS) FROM CONTINUING OPERATIONS:



The Company’s net loss from continuing
operations for the six months ended June 30, 2014 was $978,000 compared to a net loss of $428,000 for the six months ended June
30, 2013. The increase in loss was mainly attributable to higher operating expenses due to an increase in engineering staffing
and selling and marketing expenses. The increase in expenses was partially offset by an increase in gross profit contribution on
higher revenues.



LIQUIDITY AND CAPITAL RESOURCES:



Cash and cash equivalents increased to
$1,036,000 at June 30, 2014 from $313,000 at December 31, 2013.



Net cash used by operating activities was
$515,000 for the six months ended June 30, 2014 compared to net cash used by operating activities of $394,000 in the corresponding
period ended June 30, 2013.



Net cash used in investing activities was
$55,000 for the six months ended June 30, 2014 compared to net cash provided of $91,000 in the corresponding period ended June
30, 2013 due to the proceeds on the sale of the government services segment. The investments were the purchase of property, plant
and equipment supporting our direct services telecom installations. We expect to continue to have a requirement for capital on
a project by project basis as we are awarded direct service contracts. To date, we have financed these equipment purchases with
equipment based financing, debt and equity financings.



Net cash provided by financing activities
was $1,293,000 for the six months ended June 30, 2014 compared to net cash provided by financing activities of $354,000 in the
corresponding period ended June 30, 2013. The $1,293,000 was comprised of net cash proceeds of $2,356,000 from the issuance of
common stock and notes payable partially offset by the repayment of debt totaling $1,064,000.



19







GOING CONCERN CONSIDERATIONS:



At June 30, 2014, our working capital deficiency
was $2,372,000 which compared to a working capital deficiency of $4,490,000 at December 31, 2013. We have approximately $1.6 million
in principal due on notes which are either past due or are coming due in the next twelve months. Our current cash position and
projected operating cash flows are inadequate to cover these payments coming due. The working capital deficiency combined with
the debt service due in the next twelve months raise substantial doubt regarding our ability to continue as a going concern. Our
ability to continue as a going concern is highly dependent upon our ability to achieve planned operating cash flows, maintain availability
under our line of credit financing, and the ability to raise additional alternative financing. Management continues to be engaged
in securing the additional capital required to support the Company’s liquidity and operating needs. However, there is no
assurance that we will be able to raise additional alternative financing needed and/or restructure our existing debt to provide
the necessary liquidity to continue operations.



Our current cash position, availability
on our line of credit and current level of operating cash flows in aggregate is not adequate to; (i) support our current working
capital requirements (ii) support the interest costs and principal payments coming due on debt and (iii) support the increased
capital requirements for equipment purchases supporting the growth planned in our telecommunications segment. The additional
financing needed over what was raised in the six months ended June 30, 2014 has not been identified at the time of this filing.
The Company’s projected operating cash flows alone will not generate adequate liquidity to service our current indebtedness
or to fund other liquidity needs over the next twelve months. In this regard, we are highly dependent on obtaining the alternative
financing needed.



Financing Activities:



Net cash provided by financing activities
was $1,293,000 for the six months ended June 30, 2014 compared to net cash provided by financing activities of $354,000 in the
corresponding period ended June 30, 2013. The $1,293,000 was comprised of net cash proceeds of $2,356,000 from the issuance of
common stock and notes payable partially offset by the repayment of debt totaling $1,064,000.



OFF BALANCE SHEET ARRANGEMENTS:



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



ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.



N/A.



ITEM 4. CONTROLS AND PROCEDURES.



Evaluation of Disclosure Controls and Procedures



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



Changes in Internal Control



Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls
over financial reporting occurred during the 2014 quarter ended June 30, 2014. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that no change occurred in the Company’s internal controls over financial reporting
during the 2014 quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s
internal  controls over financial reporting.



20







PART II



OTHER INFORMATION



ITEM 1 - LEGAL PROCEEDINGS



We are a party to pending legal proceeding
as discussed previously in the filing; however our property is not the subject of any pending legal proceeding that is not in the
ordinary course of business or otherwise material to the financial condition of our business. Two pending proceedings involving
our Government Service Division are Subcontractor suits relating to payments on change orders. We expect to resolve these and any
similar suits within the ordinary course of business. None of our directors, officers or affiliates is involved in a proceeding
adverse to our business or has a material interest adverse to our business.



ITEM 1A - RISK FACTORS



There have been no material changes from
the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.



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



Common Stock Issuance:



During the quarter ended March 31, 2014,
the Company issued 8,860,489 restricted common shares at a price of $0.12 per share in a series of private placements for a gross
financing amount of $1,063,259. Of which, net cash proceeds of $796,441 were received and $266,818 was derived from the conversion
of principal and accrued interest on existing notes with several investors.



During the quarter ended June 30, 2014,
the Company sold 500,000 shares restricted common shares at a price of $0.12 per share in a private placement with an investor
for a gross financing amount of $60,000. As of June 30, 2014, the shares had not been issued.



Conversion of Preferred Stock:



On January 14, 2014, we issued 1,178,562
common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 330,000
shares of Series A Preferred Stock owned by Barron Partners.



On March 18, 2014, we issued 1,321,418
common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 370,000
shares of Series A Preferred Stock owned by Barron Partners



ITEM 3 - DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4 - RESERVED



ITEM 5 - OTHER INFORMATION



None.



21







ITEM 6. EXHIBITS.



|Exhibit
        Number | Description                                                                                                                                                                                                                                                                                                                                                      
|---------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|2.2                    | Stock Purchase Agreement dated December 16, 2004 among Science Dynamics Corporation, Systems Management Engineering, Inc. and the shareholders of Systems Management Engineering, Inc. identified on the signature page thereto (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on December 22, 2004)                  
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|2.3                    | Amendment No. 1 to Stock Purchase Agreement dated February 2, 2005 among Science Dynamics Corporation, Systems Management Engineering, Inc. and the shareholders of Systems Management Engineering, Inc. identified on the signature page thereto (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 11, 2005)
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|2.4                    | Stock purchase agreement by Ricciardi Technologies, Inc., its Owners, including Michael Ricciardi as the Owner Representative and Science Dynamics Corporation, dated as of September 12, 2006.(1)                                                                                                                                                               
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.1                    | Certificate of Incorporation (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)                                                                                                                                                                                                      
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.2                    | Amendment to Certificate of Incorporation dated October 31, 1980 (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)                                                                                                                                                                  
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.3                    | Amendment to Certificate of Incorporation dated November 25, 1980 (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)                                                                                                                                                                 
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.4                    | Amendment to Certificate of Incorporation dated May 23, 1984 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)                                                                                                                             
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.5                    | Amendment to Certificate of Incorporation dated July 13, 1987 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)                                                                                                                            
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.6                    | Amendment to Certificate of Incorporation dated November 8, 1996 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)                                                                                                                         
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.7                    | Amendment to Certificate of Incorporation dated December 15, 1998 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)                                                                                                                        
|3.8                    | Amendment to Certificate of Incorporation dated December 4, 2002 (Incorporated by reference to the Company’s information statement on Schedule 14C filed with the Securities and Exchange Commission on November 12, 2002)                                                                                                                                       
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.9                    | By-laws (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)                                                                                                                                                                                                                           
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|3.10                   | Restated Certificate of Incorporation (Incorporated by reference to the Registration Statement On Form SB-2. file with the Securities and Exchange Commission on February 12, 2007)                                                                                                                                                                              
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|4.1                    | Secured Convertible Term Note dated February 11, 2005 issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                                                                                                                                          
|                       |                                                                                                                                                                                                                                                                                                                                                                  
|4.2                    | Common Stock Purchase Warrant dated February 11, 2005 issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                                                                                                                                          



22







|4.3   | Second Omnibus Amendment to Convertible Notes and Related Subscription Agreements of Science Dynamics Corporation issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on March 2, 2005)    
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                     
|4.4   | Form of warrant issued to Barron Partners LP.(1)                                                                                                                                                                                                                    
|      |                                                                                                                                                                                                                                                                     
|4.5   | Promissory Note issued to Barron Partners LP.(1)                                                                                                                                                                                                                    
|      |                                                                                                                                                                                                                                                                     
|4.6   | Form of warrant issued to Dragonfly Capital Partners LLC.(1)                                                                                                                                                                                                        
|      |                                                                                                                                                                                                                                                                     
|4.7   | Secured Promissory Note issued to Michael Ricciardi.(1)                                                                                                                                                                                                             
|      |                                                                                                                                                                                                                                                                     
|4.8   | Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund LTD to Purchase up to 3,000,000 share of Common Stock of Lattice Incorporated.(1)                                                                                                   
|      |                                                                                                                                                                                                                                                                     
|4.9   | Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase up to 6,000,000 shares of Common Stock of Lattice Incorporated**                                                                                                   
|      |                                                                                                                                                                                                                                                                     
|4.10  | Common Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase 14,583,333 Shares Of Common Stock of Lattice Incorporated.                                                                                                                              
|      |                                                                                                                                                                                                                                                                     
|4.11  | Second Amended and Restated Secured Term Note from Lattice Incorporated to Laurus Master Fund, LTD.                                                                                                                                                                 
|      |                                                                                                                                                                                                                                                                     
|10.1  | Executive Employment Agreement Amendment made as of February 14, 2005 by and between Science Dynamics Corporation and Paul Burgess (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on March 2, 2005).(1)                   
|      |                                                                                                                                                                                                                                                                     
|10.2  | Stock Purchase Agreement by Ricciardi Technologies, Inc., its Owners, including Michael Ricciardi as Owner Representative and Lattice Incorporated, dated September 12, 2006.(1)                                                                                    
|      |                                                                                                                                                                                                                                                                     
|10.3  | Omnibus Amendment and Waiver between Lattice Incorporated and Laurus Master Fund, LTD, dated September 18, 2006.(1)                                                                                                                                                 
|      |                                                                                                                                                                                                                                                                     
|10.4  | Agreement dated December 30, 2004 between Science Dynamics Corporation and Calabash Consultancy, Ltd. (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 25, 2005)                                               
|      |                                                                                                                                                                                                                                                                     
|10.5  | Employment Agreement dated January 1, 2005 between Science Dynamics Corporation, Systems Management Engineering, Inc. and Eric D. Zelsdorf (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 25, 2005)           
|      |                                                                                                                                                                                                                                                                     
|10.6  | Executive Employment of dated March 7, 2005 by and between Science Dynamics Corporation and Joe Noto (Incorporated by reference to the 10-KSB filed on April 17, 2006)                                                                                              
|      |                                                                                                                                                                                                                                                                     
|10.7  | Sub-Sublease Agreement made as of June 22, 2001 by and between Software AG and Systems Management Engineering, Inc. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                  
|      |                                                                                                                                                                                                                                                                     
|10.8  | Securities Purchase Agreement dated February 11, 2005 by and between Science Dynamics Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                       
|      |                                                                                                                                                                                                                                                                     
|10.9  | Master Security Agreement dated February 11, 2005 among Science Dynamics Corporation, M3 Acquisition Corp., SciDyn Corp. and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
|      |                                                                                                                                                                                                                                                                     
|10.10 | Stock Pledge Agreement dated February 11, 2005 among Laurus Master Fund, Ltd., Science Dynamics Corporation, M3 Acquisition Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)   
|      |                                                                                                                                                                                                                                                                     
|10.11 | Subsidiary Guaranty dated February 11, 2005 executed by M3 Acquisition Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                                        



23







|10.12 | Registration Rights Agreement dated February 11, 2005 by and between Science Dynamics Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                              
|10.13 | Microsoft Partner Program Agreement (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                                                                           
|      |                                                                                                                                                                                                                                              
|10.14 | AmberPoint Software Partnership Agreement (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)                                                                                     
|      |                                                                                                                                                                                                                                              
|10.15 | Securities Agreement between Science Dynamics Corporation and Barron Partners LP, dated September 15, 2006.(1)                                                                                                                               
|      |                                                                                                                                                                                                                                              
|10.16 | Employment Agreement between Science Dynamics Corporation and Michael Ricciardi.(1)                                                                                                                                                          
|      |                                                                                                                                                                                                                                              
|10.17 | Amendment to Employment Agreement - Paul Burgess.(1)                                                                                                                                                                                         
|      |                                                                                                                                                                                                                                              
|10.18 | Amendment to Employment Agreement - Joe Noto.(1)                                                                                                                                                                                             
|      |                                                                                                                                                                                                                                              
|10.19 | Registration Rights Agreement by and among Science Dynamics Corporation and Barron Partners LLP, dated As of September 19, 2006.(1)                                                                                                          
|      |                                                                                                                                                                                                                                              
|10.20 | Amendment to Securities Purchase Agreement and Registration Rights Agreement (Incorporated by Reference to the Registration Statement on Form SB-2 filed with the SEC on February 12, 2007).                                                 
|      |                                                                                                                                                                                                                                              
|10.21 | Exchange Agreement between Lattice Incorporated and Barron Partners LP dated June 30, 2008.(2)                                                                                                                                               
|      |                                                                                                                                                                                                                                              
|10.22 | Certificate of Designations of Series C Preferred Stock.(2)                                                                                                                                                                                  
|      |                                                                                                                                                                                                                                              
|10.23 | Accounts Receivable Purchase Agreement dated March 11, 2009.(3)                                                                                                                                                                              
|      |                                                                                                                                                                                                                                              
|10.24 | Securities Purchase Agreement dated February 1, 2010                                                                                                                                                                                         
|      |                                                                                                                                                                                                                                              
|10.25 | Promissory Note issued to I. Wistar Morris. (4)                                                                                                                                                                                              
|      |                                                                                                                                                                                                                                              
|10.26 | Security Agreement dated June 11, 2010 by and between Lattice, Incorporated, Lattice Government Services, Inc. and I. Wistar Morris.(4)                                                                                                      
|      |                                                                                                                                                                                                                                              
|10.27 | Inter-Creditor Agreement dated June 11, 2010 among Action Capital Corporation and I. Wistar Morris. (4)                                                                                                                                      
|      |                                                                                                                                                                                                                                              
|10.28 | Amendment Number One to Promissory Note issued to I. Wistar Morris dated July 21, 2010.(4)                                                                                                                                                   
|      |                                                                                                                                                                                                                                              
|10.29 | Amendment Number One to Security Agreement by and between Lattice, Incorporated, Lattice Government Services, Inc. and I. Wistar Morris dated July 21, 2010.(4)                                                                              
|      |                                                                                                                                                                                                                                              
|10.30 | First Amendment to Intercreditor Agreement between Action Capital Corporation and I. Wistar Morris. (4)                                                                                                                                      
|      |                                                                                                                                                                                                                                              
|10.31 | Certificate of Designation, Series D Convertible Preferred Stock, dated February 10, 2011.(5)                                                                                                                                                
|      |                                                                                                                                                                                                                                              
|10.32 | Securities Purchase Agreement, between the Company and Barron Partners LP, dated February 14, 2011.(5)                                                                                                                                       
|      |                                                                                                                                                                                                                                              
|10.33 | Securities Purchase Agreement between Company and Barron Partners LP, dated March 28, 2011                                                                                                                                                   
|      |                                                                                                                                                                                                                                              
|10.34 | Amended Certificate of Designation, Series D Convertible Preferred Stock, dated April 17, 2011.(6)                                                                                                                                           
|      |                                                                                                                                                                                                                                              
|10.35 | Asset Purchase Agreement by and among the Company and Blackwatch International, Inc., dated as of March 29, 2013. (7)                                                                                                                        
|      |                                                                                                                                                                                                                                              
|14.1  | Code of Ethics (Incorporated by reference to the Company’s annual report on Form 10-KSB for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on April 9, 2004)                                     
|      |                                                                                                                                                                                                                                              
|21.1  | Subsidiaries of the Company(Incorporated by Reference to the Registration Statement on Form SB-2 filed with the SEC on February 12, 2007).                                                                                                   



24









|31.1    | Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act                                                                               
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                          
|31.2    | Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act                                                                               
|        |                                                                                                                                                                                          
|32.1    | Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code          
|        |                                                                                                                                                                                          
|32.2    | Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code          
|        |                                                                                                                                                                                          
|99.1    | Pledge and Security Agreement made by and between Science Dynamics Corporation in favor of and being delivered to Michael Ricciardi as Owner Representative, dated September 19, 2006.(1)
|        |                                                                                                                                                                                          
|99.2    | Escrow Agreement by and between Science Dynamics Corporation, Ricciardi Technologies, Inc. and the individuals listed on Schedule 1 thereto, dated September 19, 2006.(1)                
|        |                                                                                                                                                                                          
|99.3    | Form of Lock Up Agreement, executed pursuant to the Securities Purchase Agreement between Science Dynamics Corporation and Barron Barron Partners, dated September 15, 2006.(1)          
|        |                                                                                                                                                                                          
|99.4    | Lockup Agreement from Laurus Master Fund, LTD.(1)                                                                                                                                        
|        |                                                                                                                                                                                          
|99.5    | Irrevocable Proxy.(1)                                                                                                                                                                    
|        |                                                                                                                                                                                          
|99.6    | Temporary Hardship Exemption                                                                                                                                                             
|       
|101.INS | XBRL Instance Document*                                                                                                                                                                  
|        |                                                                                                                                                                                          
|101.SCH | XBRL Schema Document*                                                                                                                                                                    
|        |                                                                                                                                                                                          
|101.CAL | XBRL Calculation Linkbase Document*                                                                                                                                                      
|        |                                                                                                                                                                                          
|101.DEF | XBRL Definition Linkbase Document*                                                                                                                                                       
|        |                                                                                                                                                                                          
|101.LAB | XBRL Label Linkbase Document*                                                                                                                                                            
|        |                                                                                                                                                                                          
|101.PRE | XBRL Presentation Linkbase Document*                                                                                                                                                     





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



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



25







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 14, 2014



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



DATE: August 14, 2014



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









26