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 March 31, 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. Yes x No o



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes x No o



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



|Large accelerated filer o | Accelerated filer o        
|------------------------- | ---------------------------
|                          |                            
|Non-accelerated filer o   | Smaller reporting company x



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



APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS



Indicate by check mark whether the registrant filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan
confirmed by a court. Yes o No o



APPLICABLE ONLY TO CORPORATE ISSUERS



State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As of May 14, 2014, there were 46,652,707 outstanding shares of the
Registrant's Common Stock, $.01 par value.














LATTICE INCORPORATED

March 31, 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 | 18  
|Item 3. Quantitative and Qualitative Disclosure About Market Risks                            | 22  
|Item 4T. Controls and Procedures                                                              | 22  
|                                                                                              |     
|PART II – OTHER
    INFORMATION                                                              
|                                                                                              |     
|Item 1. Legal Proceedings                                                                     | 23  
|Item 1A. Risk Factors                                                                         | 23  
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           | 23  
|Item 3. Defaults Upon Senior Securities                                                       | 23  
|Item 4. Reserved                                                                              | 23  
|Item 5. Other Information                                                                     | 23  
|Item 6. Exhibits                                                                              | 24  
|                                                                                              |     
|SIGNATURES                                                                                    | 29  





































2







PART
I – FINANCIAL INFORMATION



Item
1. Financial Statements



LATTICE
INCORPORATED AND SUBSIDIARIES

CONDENSED
CONSOLIDATED BALANCE SHEETS



|                                                                                                                    |  | March 31, |             |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------- |  | --------- | ----------- | - | ------------ | -
|                                                                                                                    |  | 2014      |             |   | 2013         |  
|ASSETS:                                                                                                             |  |           |             |   |              |  
|Current assets:                                                                                                     |  |           |             |   |              |  
|Cash and cash equivalents                                                                                           |  | $         | 712,306     |   |              | $
|Accounts receivable                                                                                                 |  |           | 1,975,266   |   |              |  
|Inventories                                                                                                         |  |           | 1,064       |   |              |  
|Note receivable - current                                                                                           |  |           | 466,667     |   |              |  
|Costs and estimated earnings in excess of billings                                                                  |  |           | 8,393       |   |              |  
|Other current assets                                                                                                |  |           | 124,269     |   |              |  
|Total current assets                                                                                                |  |           | 3,287,965   |   |              |  
|                                                                                                                    |  |           |             |   |              |  
|Property and equipment, net                                                                                         |  |           | 780,159     |   |              |  
|Other intangibles, net                                                                                              |  |           | 813,471     |   |              |  
|Note receivable - long term                                                                                         |  |           | 233,333     |   |              |  
|Other assets                                                                                                        |  |           | 12,812      |   |              |  
|Total assets                                                                                                        |  | $         | 5,127,740   |   |              | $
|                                                                                                                    |  |           |             |   |              |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                |  |           |             |   |              |  
|Current liabilities:                                                                                                |  |           |             |   |              |  
|Accounts payable                                                                                                    |  | $         | 1,130,915   |   |              | $
|Accrued expenses                                                                                                    |  |           | 2,422,071   |   |              |  
|Customer advances                                                                                                   |  |           | 986,646     |   |              |  
|Notes payable - current, net of debt discount                                                                       |  |           | 2,224,441   |   |              |  
|Derivative liability                                                                                                |  |           | 135,741     |   |              |  
|Billings in excess of costs and estimated earned profits on uncompleted                                             |  |           | –           |   |              |  
|Total current liabilities                                                                                           |  |           | 6,899,814   |   |              |  
|Long term liabilities:                                                                                              |  |           |             |   |              |  
|Notes Payable - long term                                                                                           |  |           | –           |   |              |  
|Total long term liabilities                                                                                         |  |           | –           |   |              |  
|Total liabilities                                                                                                   |  |           | 6,899,814   |   |              |  
|                                                                                                                    |  |           |             |   |              |  
|                                                                                                                    |  |           |             |   |              |  
|Shareholders' equity                                                                                                |  |           |             |   |              |  
|Preferred Stock - .01 par value                                                                                     |  |           |             |   |              |  
|Series A 9,000,000 shares authorized 5,875,815 issued and outstanding                                               |  |           | 58,758      |   |              |  
|Series B 1,000,000 shares authorized 1,000,000 issued and 502,160 outstanding                                       |  |           | 10,000      |   |              |  
|Serise C 520,000 shares authorized 520,000 issued and outstanding                                                   |  |           | 5,200       |   |              |  
|Serise D 636,400 shares authorized 590,910 issued and outstanding                                                   |  |           | 5,909       |   |              |  
|Common stock - .01 par value, 200,000,000 authorized, 46,652,707 and 35,304,714 issued and outstanding respectively |  |           | 471,652     |   |              |  
|Additional paid-in capital                                                                                          |  |           | 44,784,071  |   |              |  
|Accumulated deficit                                                                                                 |  |           | (46,549,568 | ) |              |  
|                                                                                                                    |  |           | (1,213,978  | ) |              |  
|Stock held in treasury, at cost                                                                                     |  |           | (558,096    | ) |              |  
|Equity Attributable to shareowners of Lattice Incorporated                                                          |  |           | (1,772,074  | ) |              |  
|Equity Attributable to noncontrolling interest                                                                      |  |           | –           |   |              |  
|Total liabilities and shareholders' equity                                                                          |  | $         | 5,127,740   |   |              | $



See
accompanying notes to the condensed consolidated financial statements.





3









LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATION

(Unaudited)



|                                                           |  | Three Month's Ended March 31, |           
|---------------------------------------------------------- |  | ----------------------------- | ----------
|                                                           |  | 2014                          |           
|                                                           |  |                               |           
|Revenue                                                    |  | $                             | 2,333,841 
|                                                           |  |                               |           
|Cost of Revenue                                            |  |                               | 1,440,871 
|                                                           |  |                               |           
|Gross Profit                                               |  |                               | 892,970   
|                                                           |  |                               | 38.3%     
|Operating expenses:                                        |  |                               |           
|Selling, general and administrative                        |  |                               | 968,002   
|Research and development                                   |  |                               | 216,782   
|Total operating expenses                                   |  |                               | 1,184,784 
|                                                           |  |                               |           
|Income (loss) from operations                              |  |                               | (291,814  
|                                                           |  |                               |           
|Other income (expense):                                    |  |                               |           
|Derivative expense                                         |  |                               | (13,043   
|Financing Fees                                             |  |                               | (7,820    
|Interest expense                                           |  |                               | (164,115  
|Total other income                                         |  |                               | (184,978  
|                                                           |  |                               |           
|Income (Loss) before taxes                                 |  |                               | (476,792  
|                                                           |  |                               |           
|Income taxes                                               |  |                               | –         
|                                                           |  |                               |           
|Net income (loss) from continuing operations               |  |                               | (476,792  
|                                                           |  |                               |           
|Net Income(Loss) from operations of discontinued component |  |                               | –         
|                                                           |  |                               |           
|Net income (loss)                                          |  |                               | (476,792  
|                                                           |  |                               |           
|Income (loss) per common share                             |  |                               |           
|Basic                                                      |  |                               | 36,740,854
|Diluted                                                    |  |                               | 36,740,854
|                                                           |  |                               |           
|Weighted average shares:                                   |  |                               |           
|Basic                                                      |  |                               | (0.01     
|Diluted                                                    |  |                               | (0.01     



See
accompanying notes to the condensed consolidated financial statements.





4









LATTICE INORPORATED AND SUBSIDIARIES

CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  | Three Month’s Ended
    March 31, |         
|--------------------------------------------------------------------------------- |  | --------------------------------- | --------
|                                                                                  |  | 2014                              |         
|                                                                                  |  |                                   |         
|Cash flow from operating activities:                                              |  |                                   |         
|Net Loss                                                                          |  | $                                 | (476,792
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                   |         
|Operating activities discontinued operations                                      |  |                                   | –       
|Gain on disposition of discontinued Government segment assets                     |  |                                   | –       
|Derivative (income) expense                                                       |  |                                   | 13,043  
|Amortization of intangible assets                                                 |  |                                   | 81,968  
|Amortization of debt discount                                                     |  |                                   | 113,625 
|Gain on extinguishment of debt                                                    |  |                                   | –       
|Financing fees                                                                    |  |                                   | 6,921   
|Share-based compensation                                                          |  |                                   | 58,039  
|Depreciation                                                                      |  |                                   | 91,905  
|Changes in operating assets and liabilities:                                      |  |                                   | –       
|(Increase) decrease in:                                                           |  |                                   |         
|Accounts receivable                                                               |  |                                   | (77,410 
|Other current assets                                                              |  |                                   | (42,063 
|Costs and estimated earnings in excess of billings                                |  |                                   | (8,393  
|Increase (decrease) in:                                                           |  |                                   |         
|Accounts payable and accrued liabilities                                          |  |                                   | 239,425 
|Billings in excess of costs and estimated earnings                                |  |                                   | (45,796 
|Customer advances                                                                 |  |                                   | (37,320 
|Total adjustments                                                                 |  |                                   | 393,944 
|Net cash provided by operating activities                                         |  |                                   | (82,848 
|Net cash provided by - Discontinued operations                                    |  |                                   |         
|Cash Used in investing activities:                                                |  |                                   |         
|Purchase of equipment                                                             |  |                                   | (10,352 
|Net cash used in investing activities                                             |  |                                   | (10,352 
|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                                                         |  |                                   | (303,636
|Proceeds from the issuance of common stock issued, net                            |  |                                   | 796,441 
|Proceeds from the issuance of note payable, net of discount                       |  |                                   | –       
|Payments on director loans                                                        |  |                                   | –       
|Net cash used in financing activities                                             |  |                                   | 492,805 
|Net increase (decrease) in cash and cash equivalents                              |  |                                   | 399,605 
|Cash and cash equivalents - beginning of period                                   |  |                                   | 312,703 
|Cash and cash equivalents - end of period                                         |  | $                                 | 712,308 
|                                                                                  |  |                                   |         
|Supplemental cash flow information                                                |  |                                   |         
|Interest paid in cash                                                             |  | $                                 | 35,413  
|Summary of Non cash Investing and Financing activities                            |  |                                   |         
|Conversion of Notes Payable and Accrued Interest into Common Stock                |  | $                                 | 312,818 



See
accompanying notes to the condensed consolidated financial statements.





5







Lattice Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial
Statements

March 31, 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 Dept of
Defense agencies either as prime contractor or as a subcontractor to another prime contractor. On April 2, 2013, we entered
an Asset Purchase Agreement (“Purchase Agreement”) with Blackwatch International, Inc.
(“Blackwatch”), a Virginia corporation, pursuant to which we primarily sold our government Dept. of Defense (DoD)
contract vehicles for approximately $1.2 million. These assets essentially comprised our 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 March 31, 2013 the financial results of the government services business are being reported as discontinued
operations.



On November 1, 2013 we purchased certain of assets with Innovisit, LLC. The assets mainly 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 are being transferred to Lattice, including but not limited to certain employees, and leases.
This acquisition complimented the product offering of our telecom services business.





6







(b) Basis of Presentation going concern



At March 31, 2014, our working capital deficiency
was $3,612,000 which improved from a working capital deficiency of $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 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 the full financing
objective currently underway. Management is currently engaged in raising capital with a goal of raising approximately $3,600,000,
the proceeds of which to be used to improve working capital and strengthen our balance sheet. 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 have closed on approximately $1,063,000 of equity financing by issuing restricted common stock to accredited investors, have
solicited interests for an additional $2,600,000 investment from various investors anticipated to close by June 2014 timeframe.
There is no assurance, however, that we will succeed in raising this 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.



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 highly dependent on obtaining the remainder of the targeted
financing investment for which we have has 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 months ended March 31, 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 end December 31, 2013 appearing in
Form 10-K filed on March 31, 2014.





7







(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 three months ended March 31, 2014 and twelve months
ended December 31, 2013, there was approximately $648,000 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 $648,000 will be amortized over the weighted average remaining service period.



(g) Revenue Recognition



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



Government claims: Unapproved claims relate
to contracts where costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract
vehicles. The unapproved claims are considered to be probable of collection and have been recognized as revenue in previous years.
Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,244,000 and $1,244,000 as of March
31, 2014 and December 31, 2013. 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.





8







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. In
accordance with the contract terms, the unbilled receivables at December 31, 2013 will be billed in 2014. Amounts are billed based
on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.



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 months ended March 31, 2014.





9







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



Long-lived assets include:



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



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



(j) 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



In July, 2013, the FASB issued Accounting
Standards Update, or ASU, No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force),
or ASU 2013-11. The amendments in ASU 2013-11 provide guidance on the financial statement presentation of an unrecognized tax benefit
when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should
be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented
in the financial statements as a liability. The amendments in ASU No. 2013-11 do not require new recurring disclosures. The amendments
in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments
in ASU No. 2013-11 are not expected to have a material impact on our consolidated financial statements.



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.





10







Note 2 – Notes payable



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



|                                          |  | March 31,  2014 |           |  | December 31, 2013 |  
|----------------------------------------- |  | --------------- | --------- |  | ----------------- | -
|                                          |  |                 |           |  |                   |  
|Bank line-of-credit (a)                   |  | $               | –         |  |                   | $
|Notes payable to Stockholder/director (b) |  |                 | 192,048   |  |                   |  
|Notes Payable (c)                         |  |                 | 1,752,393 |  |                   |  
|Note Payable, Innovisit (d)               |  |                 | 280,000   |  |                   |  
|Total notes payable                       |  |                 | 2,224,441 |  |                   |  
|Less current maturities                   |  |                 | 2,224,441 |  |                   |  
|Long-term debt                            |  | $               | –         |  |                   | $



(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 March 31, 2014 and December 31, 2013 was $0 and $0 respectively.  At March 31, 2014 and December 31, 2013
our interest rate was approximately 13.25%.



(b) Notes
Payable Stockholders/Director



The first note bears interest at 21.5%
per annum. During December 2010, the note was amended to flat monthly payments of $6,000 until maturity, December
31, 2013, at which time any remaining interest and or principal will be paid. This note has an outstanding balance of $24,048 and
$75,315 as of December 31, 2013 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.



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.





11







(c) Note
Payable



On June 11, 2010, Lattice closed on a Note
Payable for $1,250,000. The net proceeds to the Company were $1,100,000. The $150,000 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 and 2012. 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.



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 is $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.



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 March 31, 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.





12







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



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 Notes bear 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. Zero interest payable if $600,000 principal is paid within three months from the date of this
Note; 12% annual interest accrues on the principal sum beginning March 30, 2014 if the principal remains outstanding, with interest
paid monthly, in arrears, on the last day of the month, $6000 per month 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 stockholders, 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; No dividend yield, expected volatility of 176.04%, a risk free rate of 1.72% 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 carrying values at March 31 2014 and December 31, 2013 were $488,953 and $377,907 respectively, comprised of the
face value of the loan of $600,000 less original issue discount of $30,000 (March 2014) and $60,000 (December 2013); less the debt
discount of $70,172 (March 2013) and $140,343 (December 2013) and $10,875 (March 2014) and $21,750 (December 2013) representing
the fair values of the warrants and stock issued respectively.



(d) Notes
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 had paid $170,000 during the quarter ended March 31, 2014. Additionally, the Company issued 500,000
common shares in lieu of the January 31, 2014 $60,000 installment payment under the note leaving a balance outstanding of $280,000
at March 31, 2014. The April 30, 2014 $60,000 installment was paid in cash.





13







Note 3 – Derivative financial
instruments



The balance sheet caption derivative liabilities
consist of Warrants, issued in connection with the 2005 Laurus Financing Arrangement, and the 2006 Omnibus Amendment and Waiver
Agreement with Laurus. These derivative financial instruments are indexed to an aggregate of 758,333 shares of the Company’s
common stock as of March 31, 2014 and December 31, 2013 and are carried at fair value. The balance at March 31, 2014 was $135,741
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 March 31, 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 2.72% and remaining life 8.48 years.



Note 4 – Litigation



From time to time, lawsuits are threatened
or filed against us in the ordinary course of business. Such lawsuits typically involve claims from customers, former or current
employees, and vendors related to issues common to our industry. Such threatened or pending litigation also can involve claims
by third-parties, either against customers or ourselves, involving intellectual property, including patents. A number of such claims
may exist at any given time. In certain cases, derivative claims may be asserted against us for indemnification or contribution
in lawsuits alleging use of our intellectual property, as licensed to customers, infringes upon intellectual property of a third-party.
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 March 31, 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 has asserted that the payments were late, and that the holder is
entitled to an additional $80,000 payment. The Company is defending.





14







Note 5 – 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 three months ended March 31, 2013 which are included in
the net income (loss) from discontinued operations:



|                                               |  | Three Months Ended March 31, |  
|---------------------------------------------- |  | ---------------------------- | -
|                                               |  | 2014                         |  
|Revenue                                        |  | $                            | –
|Cost of Revenue                                |  |                              | –
|Gross Profit                                   |  |                              | –
|                                               |  |                              | –
|Selling, general and administrative expenses   |  |                              | –
|Amortization expense                           |  |                              | –
|Income (loss) from operations                  |  |                              | –
|Interest expense                               |  |                              | –
|Gain on sale of discontinue operation          |  |                              |  
|Income (Loss) before taxes                     |  |                              | –
|Income taxes (benefit)                         |  |                              | –
|Net income (loss) from Discontinued operations |  | $                            | –





15







Note 6 – Note Receivable



As part of sale of Lattice Government assets
on April 2, 2013, the Company received a promissory note from purchaser for $700,000 which carries 3% annum interest rate payable
in  12 equal quarterly installments payments of $61,216.03 over a 3 year period first installment being 7/31/2013 with each
successive payment being on the 15th day of the month following close each calendar quarter. The note is secured by personal guarantee
by the principal owner of Purchaser. As of the filing date, the Company has not received 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)). As of May 15, 2014, the Company
has not received any installment due to the writ of garnishment issued with respect to the default, See Note 4.



Note 7 – 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 8 – Issuance of Common Shares



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.



We did not issue any employee options during
the three months ended March 31, 2104.



During the three months ended March 31, 2014, we did not issue
any common stock warrants.





16







Note 9 – 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 March 31 2014 is approximately $9,000 per month.



Future minimum lease commitments as of
March 31, 2014 as follows:



|                             |  | Operating |        
|---------------------------- |  | --------- | -------
|                             |  | Leases    |        
|2014                         |  | $         | 67,413 
|2015                         |  |           | 51,211 
|2016                         |  |           | –      
|Total minimum lease payments |  | $         | 118,624



Total rent expense was $29,403 for
the quarter ended March 31, 2014.





17







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



In the first quarter
revenues increased by 7% compared to the prior year period. Included in the overall growth our recurring revenue or call processing
component accounted for approximately 67% of total revenues. As a component of recurring revenues, our direct call provisioning
service revenue increased by 24% compared to the prior year period. 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.                                                                                         





18







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 will be complete in the second quarter with the entire project
being completed in early third quarter.



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 plan to continue this growth by expanding our direct
services within the states we serve, expanding to other states, and continue to sell our technology to strategic partners both
in the U.S. and internationally.  Our technology is currently operating in Canada, U.K., Japan, and the Caribbean.  We
plan on expanding our installations in these countries as well as continuing to pursue other partners with goal of expanding our
global footprint.



With the company turning
back EBITDA positive in 2013 and continuing the growth of the communications business the company 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 MARCH 31, 2014 COMPARED
TO THE THREE MONTHS ENDED MARCH 31, 2013



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



|                                              |  | For the Three Months Ending March 31, |          
|--------------------------------------------- |  | ------------------------------------- | ---------
|                                              |  | 2014                                  |          
|REVENUE                                       |  | $                                     | 2,333,841
|                                              |  |                                       |          
|Net income (loss)                             |  | $                                     | (476,792 
|                                              |  |                                       |          
|Net (loss) per common share – Basic & Diluted |  | $                                     | (0.01    





19







|                                  |  | OPERATING EXPENSES                |         |  | PERCENT OF SALES                  | 
|--------------------------------- |  | --------------------------------- | ------- |  | --------------------------------- | 
|                                  |  | THREE MONTHS ENDED MARCH 31, 2014 |         |  | THREE MONTHS ENDED MARCH 31, 2013 | 
|                                  |  |                                   |         |  |                                   | 
|Research & Development            |  |                                   | 216,782 |  |                                   | 
|                                  |  |                                   |         |  |                                   | 
|Selling, General & Administrative |  |                                   | 968,002 |  |                                   | 



REVENUES:



Total revenues for the three months ended
March 31, 2014 increased by $150,000 or 6.9% to $2,334,000 compared to $2,184,000 for the three months ended March 31, 2013. Included
in total revenues for the quarter were revenues attributable to the Innovisit acquisition in November 2013, which accounted for
$513,000. Excluding the effect of the Innovisit acquisition, baseline revenues decreased $363,000 or 17%. The decrease was attributable
to lower technology revenues compared to the prior year period. The Company’s revenues segments into technology revenues
and recurring service revenues. The decrease in technology revenue from prior year is not indicative of a trend as these revenues
are timing related and not linear quarter to quarter. We expect technology sales to increase in the remainder of 2014. Our direct
call provisioning service revenue where we provide services direct to correctional facilities increased 24% from prior year levels.
Recurring revenues as a component of total revenues accounted for 70% for the quarter. The recurring services increase is 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. We expect continued growth in both components of revenue for the full fiscal
year ended December 31, 2014.



GROSS MARGIN:



Gross profit for the three months ended
March 31, 2014 was $893,000, an increase of $211,000 or 31% compared to the $682,000 for three months ended March 31, 2013. Gross
margin, as a percentage of revenues, increased to 38.3% from 31.2% for the same period in 2013. The increase in gross margin was
primarily due to an increase in gross margin from our wholesaled technology revenues from 44% to 62%. The prior year gross margin
was lower due to technology orders to larger customers which are strategic for the Company. 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 27%.



RESEARCH AND DEVELOPMENT EXPENSES:



Research and development expenses consist
primarily of salaries and related personnel costs, and consulting fees associated with product development in our Technology Products
segment. For the three months ended March 31, 2014, research and development expenses increased to $217,000 as compared to $150,000
for the three months ended March 31, 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 March 31, 2014,
SG&A expenses increased 58% to $968,000 from $614,000 in the comparable period prior year. As a percentage of revenues, SG&A
was 41.5% for the three months ended March 31, 2014 versus 28.1% in the comparable period a year ago. Included in the current quarter
SG&A were expenses totaling $245,000 attributable the Innovisit acquisition (Nov 2013), not present in the year ago period.
Excluding Innovisit expenses of $245,000, baseline SG&A expenses increased $109,000 or 18% from prior year levels. The increase
was primarily investment in selling and marketing expenses 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.





20







INTEREST EXPENSE:



Interest Expense increased to $164,000
for the three months ended March 31, 2014 compared to $73,000 for the three months ended March 31, 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):



The Company’s net loss for the three
months ended March 31, 2014 was $477,000 compared to a net loss of $117,000 for the three months ended March 31, 2013. The increase
was mainly due to; lower technology sales in the current quarter compared to prior year and higher SG&A expenses as explained
above. These impacts were partially offset by the net income contribution from the Innovisit acquisition when comparing to the
prior year quarter. We anticipate the technology sales to increase the remainder of 2014 and that the current quarter net loss
is primarily timing related.



LIQUIDITY AND CAPITAL RESOURCES:



Cash and cash equivalents
increased to $712,306 at March 31, 2014 from $312,703 at December 31, 2013.



Net cash used by operating
activities was $83,000 for the three months ended March 31, 2014 compared to net cash used by operating activities of $381,000
in the corresponding period ended March 31, 2013. Net cash used by operating activities in the current quarter was mainly driven
by lower technology sales in the current quarter which are timing related.



Net cash used in investment
activities was $10,000 for the three months ended March 31, 2014 compared to $63,000 in the corresponding period ended March 31,
2013. 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 $493,000 for the three months ended March 31, 2014 compared to net cash provided by financing activities
of $536,000 in the corresponding period ended March 31, 2013. The $493,000 provided by financing was comprised of payments of debt
totaling approximately $304,000 offset by net proceeds of $796,000 on the 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 exchange of principal and accrued interest on existing notes with several investors.



Going concern considerations:



At March 31, 2014,
our working capital deficiency was $3,612,000 which improved from a working capital deficiency of $4,490,000 at December 31, 2013.
We have approximately $2.2 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 cashflows 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
cashflows, maintain availability under our line of credit financing, and the ability to raise additional alternative financing.
We were able to raise capital from the issuance of commons stock during the quarter totaling approximately $1,063,000, of which
$267,000 was exchanged for existing debt and accrued interest in conjunction with the offering. The net cash proceeds to the Company
to be used for general working capital was $796,000. 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.





21







We have an ongoing
need for capital to support the continued expansion of our direct telecom services. A note payable for $982,000 matured October
31, 2012 and is past due and is in violation of the note agreement.  The note holder has not invoked the default provisions
under the note. The note is secured with certain accounts receivable and we are depending on the collection of these
receivables to fund the repayment of this note.  The Company continues to have discussions with private investors and investment
groups in an attempt to procure the additional funding needed.  These efforts will proceed unabated.  The Company
can provide no guarantee that this funding will be realized.



Our current cash position,
availability on our line of credit and current level of operating cashflows are not adequate to; (i) support our current working
capital requirements (ii) support the interest costs and principal payments coming due on debt and (iii) support the increased
capital requirements for equipment purchases supporting the growth planned  in our telecommunications segment. The alternative
financing over what was raised in the quarter 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:



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.



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 March 31, 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 March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s
internal  controls over financial reporting.





22







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.



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.





23







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)                                                                                                                        





24







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





25







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





26







|      |                                                                                                                                                                                                         
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 | Contribution and Exchange Agreement By and Among Lattice Incorporated and Cummings Creek Capital, Inc. and Ralph Alexander Dated as of May 16, 2011.(7)                                                 
|      |                                                                                                                                                                                                         
|10.36 | Employment Agreement with Ralph Alexander.(7)                                                                                                                                                           
|      |                                                                                                                                                                                                         
|10.37 | Asset Purchase Agreement by and among the Company and Blackwatch International, Inc., dated as of March 29, 2013. (8)                                                                                   
|      |                                                                                                                                                                                                         
|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).                                                              





27







|        |                                                                                                                                                                                          
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1    | Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act                                                                               
|        |                                                                                                                                                                                          
|31.2    | Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act                                                                               
|        |                                                                                                                                                                                          
|32.1    | Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code          
|        |                                                                                                                                                                                          
|32.2    | Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code          
|        |                                                                                                                                                                                          
|99.1    | Pledge and Security Agreement made by and between Science Dynamics Corporation in favor of and being delivered to Michael Ricciardi as Owner Representative, dated September 19, 2006.(1)
|        |                                                                                                                                                                                          
|99.10   | Lockup Agreement from Laurus Master Fund, LTD.(1)                                                                                                                                        
|        |                                                                                                                                                                                          
|99.11   | Irrevocable Proxy.(1)                                                                                                                                                                    
|        |                                                                                                                                                                                          
|99.2    | Escrow Agreement by and between Science Dynamics Corporation, Ricciardi Technologies, Inc. and the individuals listed on Schedule 1 thereto, dated September 19, 2006.(1)                
|        |                                                                                                                                                                                          
|99.3    | Form of Lock Up Agreement, executed pursuant to the Securities Purchase Agreement between Science Dynamics Corporation and Barron Barron Partners, dated September 15, 2006.(1)          
|        |                                                                                                                                                                                          
|99.4    | Temporary Hardship Exemption                                                                                                                                                             
|        |                                                                                                                                                                                          
|101.INS | XBRL Instance Document*                                                                                                                                                                  
|        |                                                                                                                                                                                          
|101.SCH | XBRL Schema Document*                                                                                                                                                                    
|        |                                                                                                                                                                                          
|101.CAL | XBRL Calculation Linkbase Document*                                                                                                                                                      
|        |                                                                                                                                                                                          
|101.DEF | XBRL Definition Linkbase Document*                                                                                                                                                       
|        |                                                                                                                                                                                          
|101.LAB | XBRL Label Linkbase Document*                                                                                                                                                            
|        |                                                                                                                                                                                          
|101.PRE | XBRL Presentation Linkbase Document*                                                                                                                                                     





* To be furnished by amendment per Temporary Hardship Exemption under Regulation S-T.

(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 27, 2011

(8) Incorporated by reference to the 8-K filed by the Company on May 6, 2013





28







SIGNATURES



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



DATE: May 15, 2014



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



DATE: May 15, 2014



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

































29