SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q/A

(Amendment No. 2)



x Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the quarterly period ended September 30,
2015



or



o Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the transition period from _______________to
_______________.



Commission File Number 000-10690



LATTICE INCORPORATED

(Exact name of registrant as specified in its
charter)



|Delaware                                                                       |  | 22-2011859                                  
|------------------------------------------------------------------------------ |  | --------------------------------------------
|(State or Other
        Jurisdiction of
        Incorporation or Organization) |  | (I.R.S. Employer
        Identification No.)



7150 N. Park DrivePennsauken, New Jersey 08109

(Address of Principal
Executive Offices including zip code)



(856) 910-1166

(Registrant’s
Telephone Number, Including Area Code)



Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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  ̈



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  ̈



Indicate by check mark if the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company

|Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o(Do not check if a smaller reporting company) | Smaller reporting company x
|------------------------- | ------------------- | -------------------------------------------------------------------- | ---------------------------



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



As of November 16, 2015, 63,964,057 shares
of the issuer’s common stock, par value $0.01, were outstanding.













Explanatory Note



This Amendment no. 2 to the Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 2015, is being filed to revise the disclosure contained in Item 3 of Part II
.. Except for the section mentioned, there are no other changes.


















TABLE OF CONTENTS



|Part I    FINANCIAL INFORMATION                                                                | 3 
|---------------------------------------------------------------------------------------------- | --
|                                                                                               |   
|ITEM 1   CONSOLIDATED FINANCIAL STATEMENTS                                                     | 3 
|                                                                                               |   
|ITEM 2   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 17
|                                                                                               |   
|ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            | 22
|                                                                                               |   
|ITEM 4   CONTROLS AND PROCEDURES.                                                              | 23
|                                                                                               |   
|Part II    OTHER INFORMATION                                                                   | 24
|                                                                                               |   
|ITEM 1   LEGAL PROCEEDINGS                                                                     | 24
|                                                                                               |   
|ITEM 1A.   RISK FACTORS                                                                        | 24
|                                                                                               |   
|ITEM 2   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           | 24
|                                                                                               |   
|ITEM 3   DEFAULTS UPON SENIOR SECURITIES                                                       | 24
|                                                                                               |   
|ITEM 4   mine safety disclosures                                                               | 24
|                                                                                               |   
|ITEM 5   OTHER INFORMATION                                                                     | 25
|                                                                                               |   
|ITEM 6   EXHIBITS                                                                              | 25





2







Part
1. FINANCIAL INFORMATION



ITEM 1     CONSOLIDATED FINANCIAL STATEMENTS



LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                  |  | September 30, |             |   | December 31, |  
|------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------ | -
|                                                                                                  |  | 2015          |             |   | 2014         |  
|                                                                                                  |  | (Unaudited)   |             |   |              |  
|ASSETS:                                                                                           |  |               |             |   |              |  
|Current assets:                                                                                   |  |               |             |   |              |  
|Cash and cash equivalents                                                                         |  | $             | 89,791      |   |              | $
|Accounts receivable                                                                               |  |               | 2,271,736   |   |              |  
|Inventories                                                                                       |  |               | 16,000      |   |              |  
|Note receivable                                                                                   |  |               | 120,000     |   |              |  
|Costs and gross profit in excess of billings                                                      |  |               | 408,079     |   |              |  
|Other current assets                                                                              |  |               | 438,129     |   |              |  
|Total current assets                                                                              |  |               | 3,343,735   |   |              |  
|                                                                                                  |  |               |             |   |              |  
|Property and equipment, net                                                                       |  |               | 566,074     |   |              |  
|Other intangibles, net                                                                            |  |               | 552,512     |   |              |  
|Note receivable                                                                                   |  |               | 364,685     |   |              |  
|Other assets                                                                                      |  |               | 58,473      |   |              |  
|Total assets                                                                                      |  | $             | 4,885,479   |   |              | $
|                                                                                                  |  |               |             |   |              |  
|LIABILITIES AND SHAREHOLDERS' DEFICIT                                                             |  |               |             |   |              |  
|Current liabilities:                                                                              |  |               |             |   |              |  
|Accounts payable                                                                                  |  | $             | 1,290,768   |   |              | $
|Accrued expenses                                                                                  |  |               | 2,937,503   |   |              |  
|Customer advances                                                                                 |  |               | 1,543,487   |   |              |  
|Notes payable, net of debt discount                                                               |  |               | 1,461,832   |   |              |  
|Derivative liability                                                                              |  |               | 22,581      |   |              |  
|Deferred revenue                                                                                  |  |               | 79,653      |   |              |  
|Capital lease obligation                                                                          |  |               | 4,443       |   |              |  
|Total current liabilities                                                                         |  |               | 7,340,267   |   |              |  
|                                                                                                  |  |               |             |   |              |  
|Long term liabilities:                                                                            |  |               |             |   |              |  
|Derivative liability                                                                              |  |               | 218,819     |   |              |  
|Capital lease obligation                                                                          |  |               | 8,403       |   |              |  
|Convertible notes payable, net of debt discount                                                   |  |               | 1,241,198   |   |              |  
|Notes payable                                                                                     |  |               | 39,311      |   |              |  
|Total long term liabilities                                                                       |  |               | 1,507,731   |   |              |  
|Total liabilities                                                                                 |  |               | 8,847,998   |   |              |  
|                                                                                                  |  |               |             |   |              |  
|                                                                                                  |  |               |             |   |              |  
|Shareholders' deficit                                                                             |  |               |             |   |              |  
|Preferred stock - $.01 par value                                                                  |  |               |             |   |              |  
|Series A 9,000,000 shares authorized 3,565,815 and 5,405,815 issued and outstanding, respectively |  |               | 35,658      |   |              |  
|Series B 1,000,000 shares authorized 1,000,000 issued and outstanding                             |  |               | 10,000      |   |              |  
|Series C 520,000 shares authorized issued and outstanding                                         |  |               | 5,200       |   |              |  
|Series D 590,910 shares authorized issued and outstanding                                         |  |               | 5,909       |   |              |  
|Common stock - $.01 par value, 200,000,000 authorized,                                            |  |               | 639,641     |   |              |  
|63,964,057 and 53,879,348 issued and outstanding, respectively                                    |  |               |             |   |              |  
|Common stock subscribed - 500,000 shares                                                          |  |               | 5,000       |   |              |  
|Additional paid-in capital                                                                        |  |               | 45,855,805  |   |              |  
|Accumulated deficit                                                                               |  |               | (49,960,861 | ) |              |  
|Accumulated other comprehensive income (loss)                                                     |  |               | (775        | ) |              |  
|                                                                                                  |  |               | (3,404,423  | ) |              |  
|Stock held in treasury, at cost                                                                   |  |               | (558,096    | ) |              |  
|Total shareholders' deficit                                                                       |  |               | (3,962,519  | ) |              |  
|Total liabilities and shareholders' deficit                                                       |  | $             | 4,885,479   |   |              | $



See accompanying notes to the condensed consolidated financial statements.





3







LATTICE INCORPORATED AND SUBSIDIARIES

CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS



|                                          |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|----------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | -
|                                          |  | 2015                             |            |   | 2014                            |  
|                                          |  | (Unaudited)                      |            |   | (Unaudited)                     |  
|Revenue                                   |  | $                                | 1,901,730  |   |                                 | $
|                                          |  |                                  |            |   |                                 |  
|Cost of revenue                           |  |                                  | 1,288,495  |   |                                 |  
|                                          |  |                                  |            |   |                                 |  
|Gross profit                              |  |                                  | 613,235    |   |                                 |  
|                                          |  |                                  |            |   |                                 |  
|Operating expenses:                       |  |                                  |            |   |                                 |  
|Selling, general and administrative       |  |                                  | 1,113,035  |   |                                 |  
|Research and development                  |  |                                  | 282,095    |   |                                 |  
|Total operating expenses                  |  |                                  | 1,395,130  |   |                                 |  
|                                          |  |                                  |            |   |                                 |  
|Loss from operations                      |  |                                  | (781,895   | ) |                                 |  
|                                          |  |                                  |            |   |                                 |  
|Other income (expense):                   |  |                                  |            |   |                                 |  
|Derivative income (expense)               |  |                                  | 37,091     |   |                                 |  
|Amortization of deferred financing fees   |  |                                  | (43,821    | ) |                                 |  
|Write-off of note receivable              |  |                                  | –          |   |                                 |  
|Interest expense                          |  |                                  | (205,946   | ) |                                 |  
|Total other income (expense)              |  |                                  | (212,676   | ) |                                 |  
|                                          |  |                                  |            |   |                                 |  
|Loss before taxes                         |  |                                  | (994,571   | ) |                                 |  
|                                          |  |                                  |            |   |                                 |  
|Income taxes                              |  |                                  | –          |   |                                 |  
|                                          |  |                                  |            |   |                                 |  
|Net loss                                  |  |                                  | (994,571   | ) |                                 |  
|Preferred stock dividend                  |  |                                  | (6,277     | ) |                                 |  
|Net loss available to common shareholders |  |                                  | (1,000,848 | ) |                                 |  
|                                          |  |                                  |            |   |                                 |  
|Loss per common share                     |  |                                  |            |   |                                 |  
|Basic                                     |  | $                                | (0.02      | ) |                                 | $
|Diluted                                   |  | $                                | (0.02      | ) |                                 | $
|                                          |  |                                  |            |   |                                 |  
|Weighted average shares:                  |  |                                  |            |   |                                 |  
|Basic                                     |  |                                  | 63,223,840 |   |                                 |  
|Diluted                                   |  |                                  | 63,223,840 |   |                                 |  
|                                          |  |                                  |            |   |                                 |  
|Comprehensive Loss                        |  |                                  |            |   |                                 |  
|Net loss                                  |  |                                  | (994,571   | ) |                                 |  
|Foreign currency translation gain (loss)  |  |                                  | 5,146      |   |                                 |  
|Comprehensive Loss                        |  |                                  | (989,425   | ) |                                 |  



See accompanying notes to the condensed consolidated financial statements.





4







LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014



|                                                                                          |  | 2015 |            |   | 2014 |  
|----------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Cash flows from operating activities:                                                     |  |      |            |   |      |  
|Net loss                                                                                  |  | $    | (2,048,375 | ) |      | $
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |      |            |  
|Write-off of note receivable                                                              |  |      | 37,500     |   |      |  
|Derivative (income) expense                                                               |  |      | (599,563   | ) |      |  
|Stock issued for services                                                                 |  |      | 60,000     |   |      |  
|Amortization of intangible assets                                                         |  |      | 97,500     |   |      |  
|Amortization of debt discount                                                             |  |      | 227,294    |   |      |  
|Bad debt expense                                                                          |  |      | 35,375     |   |      |  
|Amortization of deferred financing fees                                                   |  |      | 186,598    |   |      |  
|Share-based compensation                                                                  |  |      | 187,074    |   |      |  
|Depreciation                                                                              |  |      | 247,940    |   |      |  
|Changes in operating assets and liabilities:                                              |  |      |            |   |      |  
|(Increase) decrease in:                                                                   |  |      |            |   |      |  
|Accounts receivable                                                                       |  |      | (58,180    | ) |      |  
|Inventories                                                                               |  |      | (14,469    | ) |      |  
|Costs in excess of billings                                                               |  |      | 41,050     |   |      |  
|Other current assets                                                                      |  |      | 102,100    |   |      |  
|Deposits                                                                                  |  |      | 17,598     |   |      |  
|Increase (decrease) in:                                                                   |  |      |            |   |      |  
|Accounts payable and accrued liabilities                                                  |  |      | 198,213    |   |      |  
|Deferred revenue                                                                          |  |      | (2,975     | ) |      |  
|Customer advances                                                                         |  |      | 356,262    |   |      |  
|Total adjustments                                                                         |  |      | 1,119,317  |   |      |  
|Net cash used in operating activities                                                     |  |      | (929,058   | ) |      |  
|                                                                                          |  |      |            |   |      |  
|Cash flows from investing activities:                                                     |  |      |            |   |      |  
|Principal payments received on note receivable                                            |  |      | 52,815     |   |      |  
|Purchase of equipment                                                                     |  |      | (39,956    | ) |      |  
|Net cash provided by (used in) investing activities                                       |  |      | 12,859     |   |      |  
|                                                                                          |  |      |            |   |      |  
|Cash flows from financing activities:                                                     |  |      |            |   |      |  
|Cash paid for financing                                                                   |  |      | (168,800   | ) |      |  
|Payments on capital lease                                                                 |  |      | (1,739     | ) |      |  
|Payments on notes payable                                                                 |  |      | (484,199   | ) |      |  
|Proceeds from the issuance of common stock, net                                           |  |      | –          |   |      |  
|Proceeds from common stock subscribed                                                     |  |      | –          |   |      |  
|Proceeds from notes payable                                                               |  |      | 500,000    |   |      |  
|Proceeds from convertible notes payable                                                   |  |      | 908,000    |   |      |  
|Net cash provided by financing activities                                                 |  |      | 753,262    |   |      |  
|                                                                                          |  |      |            |   |      |  
|Effect of exchange rate changes on cash                                                   |  |      | (3,226     | ) |      |  
|                                                                                          |  |      |            |   |      |  
|Net increase (decrease) in cash and cash equivalents                                      |  |      | (166,163   | ) |      |  
|Cash and cash equivalents - beginning of period                                           |  |      | 255,954    |   |      |  
|Cash and cash equivalents - end  of period                                                |  |      | 89,791     |   |      |  
|                                                                                          |  |      |            |   |      |  
|Supplemental cash flow information                                                        |  |      |            |   |      |  
|Interest paid in cash                                                                     |  | $    | 225,669    |   |      | $
|                                                                                          |  |      |            |   |      |  
|Summary of non-cash investing and financing activities                                    |  |      |            |   |      |  
|Dividends declared but not paid                                                           |  | $    | 18,831     |   |      | $
|Conversion of notes payable into common stock                                             |  | $    | –          |   |      | $
|Conversion of accrued interest into common stock                                          |  | $    | –          |   |      | $
|Common stock issued for principal payment on note payable                                 |  | $    | –          |   |      | $
|Common stock issued as prepayment for services                                            |  | $    | 30,000     |   |      | $
|Common stock issued for deferred financing fees                                           |  | $    | 70,000     |   |      | $
|Stock to be issued for debt discount                                                      |  | $    | 158,900    |   |      | $
|Equipment purchased with a capital lease                                                  |  | $    | 14,585     |   |      | $
|Equipment purchased with note payable                                                     |  | $    | 67,275     |   |      | $



See accompanying notes to the condensed consolidated financial statements.





5







LATTICE INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

SEPTEMBER 30, 2015

(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 owned
100% of the shares of CLR Group Limited. (“CLR”), a government contractor. Together, the SMEI, RTI and CLR acquisitions
formed our federal government services business unit, Lattice Government Services (“LGS”). Through 2012 we operated
in two segments, our federal government services unit and our telecommunication services business.



As part of the Company’s strategy to
focus on its higher growth potential communications business, the Company decided during the first quarter of 2013 to exit the
Government services segment, which derived its revenues mainly from contracts with federal government Department of Defense agencies
either as a 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 sold the assets of LGS for approximately $1.2 million. These assets essentially comprised our federal government
services segment operations. The Company retained certain assets and liabilities of LGS. The residual assets included approximately
$1.2 million in incurred cost claims relative to cost recoverable type contract vehicles.



On November 1, 2013, the Company purchased
certain assets of Innovisit, LLC. The acquired assets mainly included: awarded contracts, customer lists, and its intellectual
property rights to video visitation software assets. Under the agreement, the workforce and operating infrastructure supporting
Innovisit’s business operations have been transferred to Lattice, including but not limited to certain employees, and leases.
This acquisition complemented the product offering of our telecom services business.



In 2013, the Company established a wholly owned
subsidiary, Lattice Communications Inc., to enable us to operate in Canada. During 2014, we started operating a call center and
collecting fee income for processing prepaid deposits for a large Canadian telecom provider which operates Lattice technology systems
to provide call provisioning services to correctional facilities located in Canada.



b) Basis of Presentation Going Concern



At September 30, 2015, our working capital
deficiency was approximately $3,997,000 compared to a working capital deficiency of approximately $3,099,000 at December 31, 2014.
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 extended on payables with trade creditors.
We have several payment arrangements in place but face continuing pressures with trade creditors regarding overdue payables. These
conditions raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern
is highly dependent upon our ability to improve our operating cash flow, maintain our credit lines and secure additional capital.
Management is currently engaged in raising capital with a goal of raising approximately $4,000,000, the proceeds of which will
be used to improve working capital and strengthen our balance sheet. During May 2015, we secured a portion of the financing sought
totaling $908,000 with net cash proceeds to the Company of $454,000 (see our 8K filing on May 20, 2015 for details). Securing the
additional capital needed to support our liquidity needs may also reduce doubts about our ability to operate as a going concern.
There is no assurance, however, that we will succeed in raising the additional financing needed 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.





6







The condensed consolidated 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”). The financial statements include all normal
and recurring adjustments that are necessary for a fair presentation of the Company’s consolidated financial position and
operating results. The condensed balance sheet at December 31, 2014 was derived from audited financial statements but does not
include all disclosures required by accounting principles generally accepted in the United States of America.



c) Interim Condensed Consolidated Financial Statements



The condensed consolidated financial
statements for the nine months ended September 30, 2015 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, 2014 appearing in Form 10-K filed on March 31, 2015.



d) Principles of Consolidation



The condensed consolidated 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.



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 consolidated 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) 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), 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.



g) Cash and Cash Equivalents



The Company maintains its cash balances with
various financial institutions. Balance at various times during the year may exceed Federal Deposit Insurance Corporation limits.



h) Inventories



Inventories are stated at the lower of cost
or market, with cost determined on a first-in, first-out basis.



i) Revenue Recognition



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





7







Direct Call Provisioning Services:



Revenues related to collect and prepaid calling
services generated by communication services 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.



Wholesaled Technology:



We sell telephony systems with embedded proprietary
software to other service providers. We recognize revenue when the equipment is shipped to the customer.



Breakage:



In compliance with regulatory tariffs, we recognize
as income prepaid deposits which have aged beyond six to nine months and the customer has not requested a refund of the unused
deposit.



Prepaid Cards:



We also sell prepaid phone cards to end user
facilities on a wholesale basis. We recognize revenue on prepaid phone cards when they are either shipped or emailed to customer
end user facilities.



Software Maintenance:



We offer software maintenance and support contracts
to customers who purchase our technology systems. These are unbundled and invoiced separately and revenue is recognized ratably
over the life of the contract.



Revenue Recognition for Construction Projects:



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



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



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



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



Software and Software License Sales



The Company recognizes revenue when a fixed
fee order has been received and delivery has occurred to the customer. The Company assesses whether the fee is fixed or determinable
and free of contingencies based upon signed agreements received from the customer confirming terms of the transaction. Software
and licenses are delivered electronically to the customer. Revenue attributable to software licenses sold with extended payment
terms in excess of twelve months are recognized ratably over the payment term.





8







j) 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 consolidated
financial statements based on their fair values.



For purposes of estimating fair value of stock
options, we use the Black-Scholes-Merton valuation technique. At September 30, 2015, there was $291,873 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. This amount will be amortized over the remaining vesting periods of the grants.



k) 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At least annually, The Company reviews all
long-lived assets for impairment. When necessary, charges are recorded for impairments of long-lived assets for the amount by which
the fair value is less than the carrying value of these assets.



l) Fair Value of Financial Instruments



In accordance with FASB ASC 820, fair value
is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”)
in an orderly transaction between market participants at the measurement date.



In determining fair value, the Company uses
various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used
when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market
data. Unobservable inputs reflect assumptions about the inputs market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels
based on the inputs as follows:



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



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



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



As of September 30, 2015 and December 31, 2014,
the derivative liabilities amounted to $241,400 and $840,963. In accordance with the accounting standards the Company determined
that the carrying value of these derivatives approximated the fair value using the level 3 inputs.



m) Derivative
Financial Instruments and Registration Payment Arrangements



Derivative financial
instruments, as defined in Financial Accounting Standards, consist of financial instruments or other contracts that contain a notional
amount and one or more underlying variables (e.g. interest rate, security price or other variable), require no initial net investment
and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further,
derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets. The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market
or foreign-currency risks. However, the Company has entered into various types of financing arrangements to fund its business capital
requirements, including convertible debt and other financial instruments indexed to the Company's own stock. These contracts require
careful evaluation to determine whether derivative features embedded in host contracts require bifurcation and fair value measurement
or, in the case of freestanding derivatives (principally warrants) whether certain conditions for equity classification have been
achieved. In instances where derivative financial instruments require liability classification, the Company is required to initially
and subsequently measure such instruments at fair value. Accordingly, the Company adjusts the fair value of these derivative components
at each reporting period through a charge to income until such time as the instruments require classification in stockholders'
equity (deficit). See Note 4 for additional information.





9







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



n) 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 exited its
government services business in April 2013 and is reporting the operating results of that unit as discontinued operations in the
consolidated financial reports. Accordingly, the Company operated in one segment during the nine months ended September 30, 2015
and 2014 (Telecom services).



o) Basic and Diluted Income (Loss) Per Common
Share



The Company calculates income (loss) per common
share in accordance with ASC Topic 260, “Earnings Per Share”. Basic and diluted income (loss) per common share is computed
based on the weighted average number of common shares outstanding. Common share equivalents (which consist of convertible preferred
stock, options and warrants) are excluded from the computation of diluted loss per share since the effect would be anti-dilutive.
Common share equivalents which could potentially dilute basic earnings per share in the future, and which were excluded from the
computation of diluted loss per share, totaled approximately 69 million shares at September 30, 2015 and 2014.



p) Recent Accounting Pronouncements



In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting
principles generally accepted in the United States of America about management's responsibility to evaluate whether there is substantial
doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this
ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.
Early application is permitted. This ASU is not expected to have a significant impact on the Company's consolidated financial statements.



In May 2014, FASB issued Accounting Standards
Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The revenue recognition standard affects all entities that have
contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific
revenue recognition guidance under current GAAP and replaces it with a principle-based approach for determining revenue recognition.
On July 9th the effective date was delayed one year by a vote by the FASB. Public business entities, certain not-for-profit entities,
and certain employee benefit plans would apply the guidance in ASU 2014-09 to annual reporting periods beginning after December
15, 2017, including interim reporting periods within that reporting period. Earlier application would be permitted only as of annual
reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company
has reviewed the applicable ASU and has not, at the current time, quantified the effects of this pronouncement, however it believes
that there will be no material effect on the consolidated financial statements.





10







In April 2015, the FASB issued ASU No. 2015-03
(ASU 2015-03), Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized
debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent
with debt discounts. ASU 2015-03 is effective for fiscal years, and for interim periods within those fiscal years, beginning after
December 15, 2015. Early adoption is permitted. An entity should apply the new guidance on a retrospective basis, wherein the balance
sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance.
The adoption of ASU 2015-03 in the first quarter of fiscal 2017 is not expected to have a material impact on the Company's financial
condition or results of operations.



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



Note 2 – Notes Payable



Notes payable consists of the following as
of September 30, 2015 and December 31, 2014:



|                                                 |  | September 30,2015 |            |   | December 31,2014 |  
|------------------------------------------------ |  | ----------------- | ---------- | - | ---------------- | -
|Bank line of credit (a)                          |  | $                 | –          |   |                  | $
|Notes payable to shareholder/former director (b) |  |                   | 192,048    |   |                  |  
|Notes payable (c)                                |  |                   | 1,261,361  |   |                  |  
|Note payable, Innovisit (d)                      |  |                   | 47,734     |   |                  |  
|Total notes payable                              |  |                   | 1,501,143  |   |                  |  
|Less current maturities                          |  |                   | (1,461,832 | ) |                  |  
|Long term debt                                   |  | $                 | 39,311     |   |                  | $



(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 is obligated to 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
is obligated to pay a monthly fee to Action Capital equal to 0.75% of the total outstanding balance at the end of each month.



The outstanding balance owed on the line at
September 30, 2015 and December 31, 2014 was $0 and $0 respectively. If the credit facility is drawn upon, the interest rate would
be 13.25%.



(b) Notes Payable to Shareholder/Former Director



There are two notes outstanding with a former
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 was to be paid. This note had
an outstanding balance of $24,048 as of September 30, 2015 and December 31, 2014, respectively. 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 principal and interest payments.



The second note is dated October 14, 2011
had a face value of $168,000 of which the Company received $151,200 in net proceeds during October 2011. The discount of
$16,800 was 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 was due at maturity on October 14,
2014. This note had an outstanding balance of $168,000 as of September 30, 2015 and December 31, 2014, respectively. 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 principal
and interest payments.





11







(c) Notes Payable



On June 11, 2010, Lattice closed on a note
payable for $1,250,000. The net proceeds to the Company were $1,100,000. The $150,000 difference between the face amount of the
note and proceeds received 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
and the new secured total is approximately $1,232,000. Until maturity, Lattice is required to make quarterly interest payments
(calculated in arrears) at 12% stated interest with the first quarter interest payment of $37,500 due September 30, 2010 and $37,500
due each quarter end thereafter until the final payment comes due October 31, 2012 totaling $1,019,155 including the final interest
payment. Concurrent with the note, an intercreditor agreement was signed between Action Capital and Holder where Action Capital
has agreed to subordinate the Action Lien on certain government contracts, task orders and accounts receivable totaling $981,655.
During November 2011, $268,345 of the original $1,250,000 accounts receivable securing the note was collected, escrowed and paid
directly to the note holder by Action Capital thereby reducing the outstanding balance on the note and the collateral to $981,655
at December 31, 2013. During 2014 the Company paid $100,000 each in April and July reducing the principal on this note to $781,655
as of December 31, 2014. As of September 30, 2015, there was $781,655 of unpaid principal remaining on this note. As of the date
of this filing, the Company is currently in violation under terms of the note agreement requiring 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. As of December 31, 2014 and September 30, 2015, there was $200,000 of
unpaid principal remaining on this note. The holder has not as of the date of this filing invoked his rights under the default
provisions of the note.



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. 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 June 30, 2012.
During the quarter ended June 30, 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 as of December 31, 2014 and September 30, 2015. On January 23, 2014 the maturity date, the
principal amounts 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.



During March 2015, the Company issued a secured
note to an investor for $500,000 for which $422,000 of net proceeds were received. Of the $500,000; $50,000 was an original issue
discount and $28,000 was used for placement fees and legal expenses. In addition, the Company was required to issue 1,000,000 shares
of common stock ($70,000 based on the closing price of the stock on the date of closing) to the Lender. The original issue discount
was recorded as a debt discount, while the placement and legal fees and the value of the 1,000,000 shares were recorded as deferred
financing fees and included in prepaid expenses on the balance sheet. The debt discount is amortized using the effective interest
method. The debt discount has been fully amortized as of September 30, 2015. We paid $363,200 of the principal balance on this
note from the proceeds of the $908,000 convertible note closed May 2015. Because the principal was not paid in full by June 17,
2015, the Company was required to make monthly payments of $1,596 beginning July 17, 2015 and is being charged an annual interest
rate of 14%. If the Company defaults on this note by missing a potential scheduled payment date, the Company must issue the Lender
1,250,000 shares of common stock, while still being responsible for the outstanding principal and interest. On July 17, 2015, the
Company defaulted on the required monthly payment and was required to issue the 1,250,000 shares. The value of the shares to be
issued was $25,000, which is included in interest expense. The shares have yet to be issued so the value of the shares is included
in accrued expenses. The principal outstanding on this note as of September 30, 2015 was $136,800.



During June 2015, we closed on an equipment
loan of $67,275 with Royal Bank America Leasing, L.P. The loan is payable monthly at $2,136 per month over a 36 month term with
the last payment due in May 2018. The principal balance on this loan as of September 30, 2015 was $58,542.



(d) Note Payable - Innovisit



In conjunction with the purchase of intellectual
property and certain other assets of Innovisit 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, (b) four payments of $60,000 on each
of January 1, 2014, April 30, 2014, July 31, 2014, and October 31, 2014, and (c) final payment of $100,000 was due and payable
on January 31, 2015. The note bears no interest on the unpaid principal amount and is secured with the intellectual property acquired.
The Company issued 500,000 common shares in lieu of the January 31, 2014 $60,000 installment payment under the note, and paid installments
totaling $120,000 in cash in 2014, leaving a balance outstanding of $160,000 as of December 31, 2014. In 2015, the Company made
cash payments on this note totaling $112,266 leaving $47,734 outstanding as of September 30, 2015.





12







Note 3 – Convertible Notes



Convertible Note With Derivative Conversion
Feature



On May 30, 2014, the Company entered into a
Note Purchase and Security Agreement with Lattice Funding, LLC (“Lender”), a Pennsylvania limited liability company
affiliated with Cantone Asset Management, LLC. The Company delivered a secured promissory note (the “LF1 Note”) in
the principal sum of $1,500,000, bearing interest at 8% per annum and maturing on May 15, 2017. Interest on the LF1 Note is payable
quarterly. Outstanding principal may be converted into restricted common stock. The Company also executed UCC financing statements,
securing the LF1 Note with proceeds of certain agreements.



Each $10,000 of note principal is convertible
into 75,000 common shares at an exercise price of $0.133333 per share any time after November 30, 2014, to be adjusted for splits,
reorganizations, stock dividends and similar corporate events (anti-dilution provisions).  If the market price of Lattice
common stock equals or exceeds twice the exercise price and certain other conditions are met, the Company may call the Note at
face value for the purpose of forcing conversion of the balance of the LF1 Note into common stock.



The LF1 Note contains a provision whereby the
conversion price is adjustable upon the occurrence of certain events, including the issuance of common stock or common stock equivalents
at a price which is lower than the current conversion price. Under FASB ASC 815-40-15-5, the embedded conversion feature is not
considered indexed to the Company’s own stock and, therefore does not meet the scope exception in FASB ASC 815-10-15 and
thus needs to be accounted for as a derivative liability. The initial fair value at May 30, 2014 of the embedded conversion feature
was estimated at $1,223,923 and recorded as a derivative liability, resulting in a net carrying value of the note at May 30, 2014
of $276,077 ($1,500,000 face value less $1,223,923 debt discount). OnSeptember 30,
2015 the derivative was valued at $218,819 which resulted in a derivative gain of $26,110 for the quarter ended September 30, 2015.
The debt discount was amortized using the effective interest method and was $956,090 at September 30, 2015 resulting in a finance
charge of $66,321 for the quarter ended September 30, 2015 included in the statement of operations. The fair value of the embedded
conversion feature is estimated at the end of each quarterly reporting period using the Monte Carlo model.



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



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



|                        |  | September 30,2015 |       |  | December 31,2014 |  
|----------------------- |  | ----------------- | ----- |  | ---------------- | -
|Closing stock price     |  | $                 | 0.03  |  |                  | $
|Conversion price        |  | $                 | 0.13  |  |                  | $
|Expected volatility     |  |                   | 165%  |  |                  |  
|Remaining term (years)  |  |                   | 1.63  |  |                  |  
|Risk-free rate          |  |                   | 0.52% |  |                  |  
|Expected dividend yield |  |                   | 0%    |  |                  |  



The convertible note with a derivative conversion feature consists
of the following at September 30, 2015 and December 31, 2014:



|                                     |  | September 30,2015 |            |   | December 31,2014 |  
|------------------------------------ |  | ----------------- | ---------- | - | ---------------- | -
|Principal                            |  | $                 | 1,500,000  |   |                  | $
|Discount                             |  |                   | (1,223,923 | ) |                  |  
|Accumulated amortization of discount |  |                   | 267,833    |   |                  |  
|Total                                |  | $                 | 543,910    |   |                  | $



Other Convertible Note



On May 13, 2015, the Company entered into a
Note Purchase and Security Agreement with Lattice Funding, LLC (“Lender”), a Pennsylvania limited liability company
affiliated with Cantone Asset Management, LLC. The Company delivered a secured promissory note (the “LF2 Note”) in
the principal sum of $908,000, bearing interest at 8% per annum and maturing on April 30, 2020. Interest on the LF2 Note is payable
quarterly. After six months the Lender has the right to convert the principal amount of the note into conversion shares at any
time before maturity at a price of $0.15, to be adjusted for splits, reorganizations, stock dividends and similar corporate events
(anti-dilution provisions). The Company cannot prepay the amount due. The Company also executed UCC financing statements,
securing the LF2 Note with proceeds of certain agreements.





13







Each $1,000 of note principal is convertible
into 1,000 common shares at an exercise price of $0.15, to be adjusted for splits, reorganizations, stock dividends and similar
corporate events (anti-dilutive provisions). If the market price of Lattice common stock equals or exceeds twice the exercise price
and certain other conditions are met, the Company may call the note at face value for the purpose of forcing conversion of the
balance of the note in common stock.



The agreement contains a provision that for
every $1,000 borrowed, the Company would need to issue 2,500 common shares to holder. The Company borrowed $908,000 on the note
and needs to issue 3,178,000 shares valued at $0.07 per share based on the closing price the day of the borrowings. This resulted
in a debt discount of $222,460, which is being amortized over the life of the loan using the effective interest method. Amortization
expense of the debt discount was $7,881 in the current quarter. The Company has yet to issue 2,270,000 of these shares and has
$158,900 included in accrued expenses at September 30, 2015.



In addition, the Company incurred deferred
financing fees of $133,173 in connection with the notes which will be amortized over the life of the notes. Amortization expense
for these deferred financing fees for the quarter ended September 30 2015 was $6,659. Included within the $133,173 is $42,373 relating
to 605,333 shares to be issued upon closing of the agreement. The shares were valued at $0.07 per share, the market price of the
stock at the closing date of the agreement.



The LF2 convertible note consists of the following at
September 30, 2015:



|                                     |  | September 30, 2015 |         
|------------------------------------ |  | ------------------ | --------
|Principal                            |  | $                  | 908,000 
|Discount                             |  |                    | (222,460
|Accumulated amortization of discount |  |                    | 11,748  
|Total                                |  | $                  | 697,288 



Note 4 – Fair Value of Derivative
Financial Instruments



The condensed consolidated balance sheet caption
derivative liability includes warrants and a convertible note. The warrants were 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 September 30, 2015 and December 31, 2014, and are carried
at fair value. The balance at September 30, 2015 was $22,581 compared to $69,765 at December 31, 2014. The convertible note issued
May 30, 2014 (See Note 3) is indexed to 11,250,028 shares of the Company’s common stock and is carried at fair value of $218,819
at September 30, 2015.



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 September 30, 2015 included the September 30, 2015 publicly traded stock price of the Company of $0.03, the conversion
or strike price of $0.10 per the agreement, a historical volatility factor of 216% based upon forward terms of instruments, and
a risk free rate of 1.75% and remaining life 6.98 years.



Note 5 – Litigation



On June 26, 2015, a former wholesale partner
filed an arbitration claim against us with JAMS pursuant to a Master Services Agreement, dated December 31, 2008 (the “MSA”).
The former partner alleges that we breached the MSA by failing to pay commissions pursuant to the MSA and that we owe them approximately
$2.9 million, including interest. We filed a reply to the claim on July 24, 2015.



Except as disclosed above, we are not a party
to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course
of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is
involved in a proceeding adverse to our business or has a material interest adverse to our business.





14







Note 6 – Note Receivable



As part of the sale of Lattice Government assets
on April 2, 2013, the Company received a promissory note from Blackwatch International, Inc. for $700,000, which carried a 3% annual
interest rate payable in 12 equal quarterly installments of $61,216 over a 3 year period. The first installment was due July 31,
2013 and each successive payment was due on the 15th day of the month following close of each quarter. Blackwatch never
made these payments; therefore, the Company filed a lawsuit in the Superior Court of New Jersey to collect the monies. On April
7, 2015, a settlement was signed and the note receivable was settled for $537,500. The agreement calls for 7 quarterly payments
of $30,000 after the April 15, 2015 payment, with the remaining balance of $297,500 being due in full on January 15, 2017. The
Company received the first and second payments on April 15, 2015 and July 15, 2015. Blackwatch failed to pay the amount that was
due and payable under Paragraph 2a of the Agreement on October 15, 2015. Written notice of default was sent to Blackwatch on November
4th and Lattice shall exercise all of its rights and pursue all of its remedies against Blackwatch as set forth in the Agreement.



Note 7 – Commitments



(a) Operating Leases



The Company leases its office, sales and manufacturing
facilities under non-cancelable operating leases with varying terms expiring through 2016. The leases generally provide that the
Company pay the taxes, maintenance and insurance expenses related to the leased assets.



Future minimum lease commitments as of September 30, 2015 are approximately
as follows:



|For the Twelve Months Ending September 30, : |  |   |       
|-------------------------------------------- |  | - | ------
|2016                                         |  | $ | 31,868



Total rent expense was $19,000 for the quarter ended September 30,
2015 compared to $25,755 in the prior year quarter.



(b) Capital lease



During May 2015, we entered into a capital
lease financing obligation with Marlin Leasing Corporation in the amount of $14,585 which bears interest at 13% and is payable
monthly over a 3 year term at $497.00 per month.  The lease includes an end of term purchase option of $1.00. The outstanding
principal balance on this lease at September 30, 2015 was $12,846.



Note 8 – Conversion of Preferred Stock



On March 27, 2015, we issued 714,280 shares
of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.



On April 7, 2015, we issued 1,571,416 shares
of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.



On April 29, 2015, we issued 1,303,561 shares
of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.



On June 2, 2015, we issued 1,607,130 shares
of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.



On June 10, 2015, we issued 1,374,989 shares
of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.



Note 9 – Issuance of Common Stock



On January 30, 2015 the Company entered into
an agreement for a term of one year with a service provider, requiring 1,000,000 shares to be issued to the service provider in
the form of compensation. The shares were valued at $90,000 based on the stock price on the date of the agreement. The stock compensation
expense recorded for the quarter ended September 30, 2015 was $22,500. The remaining $30,000 is recorded on the balance sheet in
prepaid expenses and will be expensed over the term of the agreement.





15







On May 14, 2015, the Company issued 1,000,000
shares as a finance fee for the March 2015 $500,000 bridge note. The shares were values at $0.07 per share and as a result $70,000
of deferred financing fees was accrued and recorded in the Balance Sheet at March 31, 2015 as accrued expense. The common shares
were later issued and the accrued expense was reclassified to capital. The deferred finance fee is being amortized to expense over
the term of the note.



On August 14, 2015, in conjunction with a $908,000
convertible note financing, we issued 908,000 shares of our common stock to investors and 605,333 shares of our common stock to
Cantone as placement agent. The note is convertible into 6,053,333 shares of our common stock. The note and shares were issued
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving a public offering.



Note 10 – Reclassifications



Certain amounts from the prior year financial
statements have been reclassified to conform to the current year presentation.



Note 11 – Subsequent
Events



On November 2, 2015,the Company
entered into agreements (the “Purchase Agreement”) with Barron Partners LP (“Barron”) pursuant to which
the Company agreed to purchase from Barron, all of the securities of the Company owned by Barron, namely 2,239,395 shares of the
Company’s common stock, 3,589,488 shares of the Company’s Series A Convertible Preferred Stock, 520,000 shares of the
Company’s Series C Convertible Preferred Stock, and 590,910 shares of the Company’s Series D Convertible Preferred
Stock for $74,466, $461,502, $188,577 and $425,455, respectively. No purchases may be made under the Purchase Agreement after November
30, 2015.



On November 2, 2015 and November 3, 2015,
pursuant to the terms of a Securities Purchase Agreement dated November 2, 2015 (the “Placement Agreement”), the Company
sold an aggregate of 11,570,000 shares of its common stock under subscription agreements to 15 accredited investors for aggregate
gross proceeds of $416,520. In connection with the sale of the shares, the Company paid a placement agent fee of $20,826 in cash
to Boenning & Scattergood, Inc. (“B&S”) and will issue B&S warrants to purchase 347,100 shares of the Company’s
common stock at the price of $0.036 per share. The investors were granted piggyback registration rights in connection with the
Placement Agreement. The net proceeds of the transaction will be used to purchase the securities owned by Barron pursuant to the
Purchase Agreement. The Company may sell up to an additional $1.26 million of shares pursuant to the terms of the Placement Agreement,
which may be used to purchase securities pursuant to the Barron Agreement or for working capital purposes. The securities will
be issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as the transactions will not involve a public
offering.



On November 2, 2015, the Company
agreed to issue 5,000,000 shares of its common stock to Lattice Funding, LLC to amend the promissory note issued to it in May 2015
to eliminate certain anti-dilution provisions. The 5,000,000 shares of the Company’s common stock) to be issued to Lattice
Funding LLC will be issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as the transactions will not
involve a public offering.



On November 2, 2015, the
Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Cantone Asset Management, LLC (“Cantone”),
pursuant to which Cantone will loan the Company a gross amount of $580,000, less an original issue discount of $58,000 (the “Loan”),
of which $136,800 (plus interest) will be used to pay off an outstanding bridge loan to Cantone. The closing of the transactions
contemplated by the Loan Agreement is contingent on the Company raising sufficient funds, when added with the net proceeds of
the Loan, to repurchase all of the securities pursuant to the terms of the Barron Agreement. The Company is also obligated to
issue 1,862,500 shares of its common stock to Cantone pursuant to the Loan Agreement, and will pay Cantone a 3% origination fee
and a 2% non-accountable expense allowance. The Loan is secured by a first priority security interest in the revenues and proceeds
from certain of the Company’s contracts. In connection with the Loan Agreement and the transactions contemplated thereby,
the Company will issue a promissory note in the aggregate principal amount of $580,000 to Cantone (the “Note”). The
Note will not begin to bear interest until February 6, 2015, at which point it will bear interest at a rate of 14% per year. The
Note will mature on May 2, 2016. The Note provides for customary events of default, including the failure to pay any amount due
under the Note on the applicable due date (subject to a cure period), any default on any other indebtedness by the Company, the
Company becoming insolvent, or the company filing for voluntary bankruptcy. In the event of a default, the interest rate on the
Note would increase to 18% per year and the Company would be obligated to pay 10% of the total amount due as liquidated damages.
Cantone received piggy-back registration rights for the shares issued in connection with the Loan. The 1,862,500 shares of the
Company’s common stock) to be issued to Cantone will be issued pursuant to Section 4(a)(2) of the Securities Act of 1933,
as amended, as the transactions will not involve a public offering.









16







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



Forward-Looking Statements



The information in this
annual report contains forward-looking statements. All statements other than statements of historical fact made in this annual
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 consolidated financial statements, included herewith. This discussion should
not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached
herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present
assessment of our management.



Business Overview:



Lattice’s target
domestic market is small to mid-sized correctional facilities. The Company first launched its direct service business during 2011
in the state of Oklahoma. Previously, the Company served this market exclusively through other service providers. As of September
30, 2015, the Company has contracts in 35 of the 69 targeted correctional facilities in Oklahoma, approximately 50% of our target
market. During 2014, we identified 8 additional markets to build on its initial market entry. To date, we have obtained certification
to provide communications services in 5 of these 8 new states, and we are actively engaged in sales and marketing activities in
all five. In addition, we identified key products and services that would enable the Company to maximize revenue generation in
our accounts. These include key modules of our Corrections Operating NetworkTM (COP) which incorporates an investigative tool
set, secure communications, video visitation, payment and trust accounting, customer care and kiosk solutions. In the second quarter
we introduced our Video Arraignment solution, which helps facilities reduce labor costs and security risks associated with transporting
inmates for courtroom arraignments. We are currently installing this solution in 3 facilities.



For the quarter ended September
30, 2015, total revenue decreased by 6% compared to the prior year period. Service revenue for call provisioning and ancillary
services accounted for approximately 68% of total revenues. Direct call provisioning revenue, a component of recurring service
revenue increased by 27%, a key growth metric for our business strategy as we increase the number of deposit touch points and end-user
correctional facilities being serviced. Despite the solid growth in service revenue, the overall revenue decline was attributable
to a decrease in technology sales of $350,000 or 37% during the quarter, compared to prior year. These revenues fluctuate quarter
to quarter and can have a material impact on financial results. Accordingly, management believes the decline in this quarter should
be viewed as a component of quarter to quarter variance. In late Q3 2015, we launched our CellMateTM Mobile platform, providing
inmates with a new wireless communications device that encompasses the latest communications and media tools for inmates to maintain
contact with friends and family and access resources for self-improvement. The value proposition of CellMate Mobile can lead to
an increase in inmate morale and help contribute to a reduction in recidivism. We anticipate a number of new applications and services
being offered through the CellMateTM platform in 2015. The launch of the new product enables the Company to offer a full suite
of services that have not been traditionally available to small and mid-sized correctional facilities. Currently, our average revenue
per inmate is over $800, compared to an industry average of $515 per inmate. We attribute the better revenue performance to quality
and accessibility of service, as well as an innovative product mix. We believe we can further enhance our revenue as we continue
to deploy a full suite of phone, video, and mobile device services across our installation base. As we roll out the new CellMateTM
platform, we believe adoption of the new technology will accelerate as we introduce new services and applications to the platform.
We anticipate beginning to realize revenues from the new platform by the end of this year.



On October 22, 2015 the
FCC adopted a new order to cap call rates charged for inmate phone calls and eliminate most ancillary fees. We anticipate the new
rates to go into effect in the first half of 2016. We have done a preliminary review of the new rates and we don’t anticipate
a material impact to our revenue or gross margins.





17







The Company is currently
engaged in a capital raise to increase working capital and buyout the preferred shares currently held by Barron Partners. The buyback
of the preferred shares will not impact fully diluted share count but will simplify the company’s capital structure.



Additionally, we have had
success in launching our solutions globally. Currently, we have customers in the U.K., Canada, Singapore, Japan, and Bermuda. Canada
is our largest international market. We are currently working with multiple global partners, including telecommunication providers
Bell Canada and Telus, to help develop new opportunities in current and new international markets.



Results of Operations – Three Months
Ended September 30, 2015 Compared To The Three Months Ended September 30, 2014



|                                              |  | 2015 |           |   | 2014 |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | -
|Revenue                                       |  | $    | 1,901,730 |   |      | $
|                                              |  |      |           |   |      |  
|Net loss                                      |  | $    | (994,571  | ) |      | $
|                                              |  |      |           |   |      |  
|Net loss per common share – Basic and Diluted |  | $    | (0.02     | ) |      | $



|                                    |  | Operating Expenses |           |  | Percent Of Sales |  
|----------------------------------- |  | ------------------ | --------- |  | ---------------- | -
|                                    |  | 2015               |           |  | 2014             |  
|Research and Development            |  | $                  | 282,905   |  |                  | $
|                                    |  |                    |           |  |                  |  
|Selling, General and Administrative |  | $                  | 1,113,035 |  |                  | $



REVENUES:



Total revenue for the quarter
decreased 6% to approximately $1,902,000 from $2,031,000 in the prior year quarter. We manage our total revenue in three components:
service revenue, wholesaled technology revenue and licensing revenue.



Service revenue:



Service revenue is generated
either on a direct basis or through a wholesale arrangement. Service revenue consists mainly of call provisioning revenue, fees
charged for prepaid account management, voicemail fees, support services, software maintenance, and validation services. Total
service revenue increased 21% to approximately $1,295,000 from approximately $1,074,000 in the prior year quarter. Service revenue
accounted for 68% of total revenue in the current quarter compared to 53% in the prior year quarter. Service revenue further breaks
down into direct services and wholesaled service.



Direct services revenue
increased 29% to approximately $1,282,000 from approximately $993,000 in the prior year quarter. As a component of direct service
revenue, call provisioning revenue increased 27% to approximately $970,000 from approximately $766,000 in the prior year quarter,
a key strategic measure for our growth strategy. The direct call provisioning increase is mainly attributable to adding touch points
for collecting prepaid deposits, either by installing kiosks or integrating with commissary systems and by increasing the number
of customer contracts where we provide direct telecom service provisioning to end-user correctional facilities.



Wholesaled service revenue
decreased 97% to approximately $14,000 from approximately $81,000 in the prior year quarter. The wholesale revenue decrease was
attributable to a large wholesale contract ending during 2014. Wholesaled revenue going forward will be insignificant as the Company
will continue to focus on providing services directly to end-user facilities.



Wholesaled technology
revenue:



Our technology revenue,
where we provide wholesaled technology systems embedded with our proprietary software to other service providers, decreased by
37% to approximately $607,000 from approximately $957,000 in the prior year quarter. Wholesaled technology revenue varies significantly
quarter to quarter.





18







Software licensing
revenue:



During the first quarter
we adopted a sales model separating perpetual use licenses from technology hardware. The model allows the Company to establish
long term contractual commitments with key partners thereby generating recurring revenue streams and more predictable cash flows.



GROSS PROFIT:



Gross profit for the three
months ended September 30, 2015 decreased to $613,000 from $848,000 in the prior year period. Gross profit, as a percentage of
revenues, decreased to 32% from 42% in the prior year quarter. The decrease in the percentage is largely attributable to a shift
in revenue mix primarily due to the effects of a lower level of wholesaled technology revenue during the quarter compared to the
prior year quarter. Wholesaled technology revenue accounted for 32% of total revenue compared to 47% in the prior year period.
Additionally, the gross profit percentage on our wholesaled technology revenues decreased to approximately 37% from 64% in the
prior year period. The decrease in the current quarter was primarily attributable to an increase in shipments of lower margin hardware
compared to prior year. The decline in gross profit percentage for wholesaled technology revenue is temporary and we expect the
percentage on average to be in the 60% range, consistent with historical performance. Gross profit as a percentage of revenues
for service revenues was consistent with prior year levels, at approximately 30%.



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 September 30, 2015, research and development expenses increased to
approximately $283,000 from $279,000 in the prior year quarter. The increase resulted from augmentation of engineering staff to
support growth in technology products and to support development projects with strategic wholesale partners.



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 September 30, 2015, these expenses increased to approximately $1,113,000 from approximately $1,062,000 in the prior year
quarter. As a percentage of revenues, these expenses were 59% for the current quarter versus 52% in the prior year quarter. The
increase consisted mainly of investments in our selling and marketing infrastructure incurred as the Company continues to expand
its foot print into new geographic markets. These investments were partially offset by cost containment efforts in general administrative
expenses.



INTEREST EXPENSE:



Interest expense increased
to approximately $206,000 from $108,000 in the prior year quarter. Included in the current period interest was approximately $80,000
of amortized debt discount related to debt financings compared to approximately $31,000 in the prior year quarter. Excluding the
non-cash amortization of debt discount, interest increased to approximately $126,000 from approximately $77,000 resulting from
a greater level of average borrowings.



LOSS FROM OPERATIONS:



The Company’s loss
from operations increased to $782,000 from a loss of $493,000 in the prior year quarter. The increase in loss was largely attributable
to a decrease in gross profit resulting from lower technology sales combined with higher operating expenses. Technology sales fluctuate
quarter to quarter and the decrease during the quarter should not be viewed as a trend. The higher operating expenses, discussed
above, related to investments in selling and marketing. The current quarter loss included noncash expenses for depreciation, amortization
and share-based compensation totaling approximately $247,000 compared to non-cash items totaling $282,000 in the prior year quarter.



Results of Operations – Nine Months
Ended September 30, 2015 Compared To The Nine Months Ended September 30, 2014



|                                              |  | 2015 |            |   | 2014 |  
|--------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Revenue                                       |  | $    | 5,826,608  |   |      | $
|                                              |  |      |            |   |      |  
|Net loss                                      |  | $    | (2,048,375 | ) |      | $
|                                              |  |      |            |   |      |  
|Net loss per common share – Basic and Diluted |  | $    | (0.04      | ) |      | $





19







|                                    |  | Operating Expenses |           |  | Percent Of Sales |  
|----------------------------------- |  | ------------------ | --------- |  | ---------------- | -
|                                    |  | 2015               |           |  | 2014             |  
|Research and Development            |  | $                  | 883,315   |  |                  | $
|                                    |  |                    |           |  |                  |  
|Selling, General and Administrative |  | $                  | 3,335,338 |  |                  | $



REVENUES:



Total revenue decreased
12% to approximately $5,827,000 from approximately $6,618,000 in the prior year period. We manage our total revenue in three components:
service revenue, wholesaled technology products and licensing revenue.



Service revenue:



Service revenue
derives from services provided to correctional facilities either on a direct basis or through a wholesale arrangement.
Service revenue consists mainly of call provisioning revenue, fees charged for prepaid account management, voicemail,
support, software maintenance and validation services. Service revenue in total decreased 12% to approximately $3,737,000
from approximately $4,235,000 in the prior year period. Service revenue accounted for 64% of total revenue in the current
period and  in the prior year period. Service revenue further breaks down into direct services and wholesaled
service.



Direct service revenue
increased 17% to approximately $3,694,000 from approximately $3,161,000 in the prior year period. Included in the $3,694,000 is
call provisioning revenue, which increased 17% to approximately $2,853,000 from approximately $2,445,000 in the prior year period,
which is a key strategic measure for our growth strategy. The direct call provisioning increase is mainly attributable to adding
touch points for collecting prepaid deposits either by installing kiosks or integrating with commissary systems combined with an
increase in the number of customer contracts where we provide direct telecom service provisioning to end-user correctional facilities.



Wholesaled service revenue
decreased 96% to approximately $43,000 from approximately $1,074,000 in the prior year period. The wholesale revenue decrease
was attributable to a large wholesale service contract ending during 2014.



Wholesaled Technology
revenue:



Our technology product
revenues, where we provide wholesaled technology systems embedded with our proprietary software to other service providers, decreased
by 12.3%, to $2,090,000, from $2,383,000 in the prior period.



Software Licensing
revenue:



During
the first quarter we adopted a sales model separating perpetual use licenses from technology hardware. The model allows the Company
to establish long term contractual commitments with key partners thereby generating recurring revenue streams and more predictable
cash flows.



GROSS PROFIT:



Gross profit
decreased to $2,304,000, from $2,645,000 in the prior year period. Gross profit, as a percentage of revenues, was even with
last year at approximately 40.0%. Wholesaled technology revenue accounted for 36% of total revenue in the current year and
prior year period. The gross profit percentage for wholesaled technology revenue will vary with sales order mix but we expect
the percentage on average to be in the 60% range. Gross profit as a percentage of revenues for service revenues was
consistent with prior year level, at approximately 30%.



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. Research and development expenses increased to approximately $883,000 from approximately $810,000
in the prior year period. The increase is due to augmentation of engineering staffing to support growth in adding technology products
and to support development projects in conjunction with strategic wholesale partners.





20







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. These expenses increased
by approximately $359,000 to approximately $3,335,000 from approximately $2,977,000 in the prior year period. As a percentage of
revenues, these expenses were 57% versus 45% in the prior year period. The increase mainly consisted of cost containment in general
administrative expenses offset by investments in our selling and marketing infrastructure as the Company continues to expand its
foot print into new geographic markets.



INTEREST EXPENSE:



Interest expense increased
to approximately $509,000 from $492,000 in the prior year period. Included in the current period interest was approximately $227,000
of amortized debt discount related to debt financings compared to approximately $293,000 in the prior year period. Excluding the
non-cash amortization of debt discount, interest increased to approximately $282,000 from approximately $199,000 resulting from
a greater level of average borrowings.



LOSS FROM OPERATIONS:



The Company’s loss
from operations increased to approximately $1,915,000 from $1,142,000 in the prior year period. The increase in
loss was largely due to the loss of the wholesale service business in 2015 and lower gross
margin on technology sales, which was partially offset by additional gross profit contribution from growth in direct service. Also
factoring into the increase in loss was an increase in operating expenses compared to prior year levels. The higher operating expenses,
discussed above, related mainly to investments in selling and marketing. The current period loss includes non-cash expenses for
depreciation, amortization and share-based compensation totaling approximately $728,000 which compares to noncash totaling $630,000
in the prior year period.



LIQUIDITY AND CAPITAL RESOURCES



Cash and cash equivalents
decreased to approximately $90,000 at September 30, 2015 from approximately $256,000 at December 31, 2014.



Net cash used in operating
activities was approximately $929,000 for the nine months ended September 30, 2015, compared to $809,000 in the prior year period.
Factors included in net cash used in operating activities included a reported net loss of approximately $2,048,000 which adjusts
to a net cash loss of approximately $1,568,000 after adding back non-cash items totaling approximately $480,000, and a change in
our operating assets and liabilities resulting in a positive cash flow of approximately $640,000.



Net cash provided by investing
activities was approximately $13,000 for nine months ended September 30, 2015, compared to net cash used of approximately $118,000
in the prior year period. Net cash provided by investing activities of approximately $13,000 included payments received on principle
relating to the note receivable with Blackwatch International Inc. (see Note 6 to our financials) of $52,815. This was offset by
approximately $40,000 spent on equipment. We expect to continue to have a need 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 and debt
and equity financings.



Net cash provided by financing
activities was approximately $753,000 for the nine months ended September 30, 2015 compared to net cash provided by financing activities
of approximately $985,000 in the prior year period. Key factors included in the $753,000 were: (i) $422,000 of net cash proceeds
from the issuance of a March 2015 bridge financing note in the amount of $500,000 (we paid financing fees of $78,000 in connection
with the issuance of the note) and (ii) $454,000 of net cash proceeds from the issuance of a May 14, 2015 promissory note in the
principal amount of $908,000 (we repaid $363,200 on the $500,000 March 2015 bridge financing and paid cash placement fees of $90,800
in connection with the issuance of the note). This was partially offset by repayments of principal on other debt totaling $123,000.



GOING CONCERN CONSIDERATIONS



At September 30, 2015,
our working capital deficit was approximately $3,997,000, compared to a working capital deficit of approximately $3,099,000 at
December 31, 2014. We have approximately $1.5 million in principal due on notes which are either past due or are coming due in
the next twelve months. Additionally, we are carrying a significant level of past due general unsecured trade payables included
in the current liability section of our balance sheet. A significant component of these current liabilities relates to past due
amounts owed to a former wholesale partner pursuant to a wholesale agreement that terminated in 2014. The amount owed is a general,
unsecured, on-demand liability. On June 26, 2015, this former wholesale partner filed an arbitration claim against us with JAMS
pursuant to the wholesale agreement. The former wholesale partner alleges that we breached the agreement by failing to pay commissions
pursuant to the agreement and that we owe approximately $2.9 million, including interest.  We filed a reply to the claim on
July 24, 2015.  We are also currently negotiating with them to settle the claim (See Note 5 to financials). However, there
is no assurance that we will be successful in these negotiations.





21







Our current cash position
and projected operating cash flows are inadequate to cover these payments that are either past due or coming due in the next twelve
months and support our working capital requirements.



The working capital deficit
and the debt coming due in the next twelve months raise substantial doubt regarding our ability to continue as a going concern.
Our ability to continue as a going concern is highly dependent upon our ability to achieve planned operating cash flows, maintain
availability under our line of credit financing, and the ability to raise additional alternative financing. Management is currently
engaged in obtaining additional capital in the range of $4,000,000 in order to support the Company’s liquidity, improve our
balance sheet and support our operating cash needs. On May 14, 2015, we successfully closed on a portion of the funding sought
totaling $908,000, which resulted in net cash proceeds of $454,000 after paying $363,200 of the $500,000 bridge loan facility which
closed during March 2015 and placement fees of $90,800. Our future operations are highly dependent on obtaining the remainder of
the financing sought. There is no assurance that we will be able to obtain the additional funding needed and/or restructure our
existing debt to provide the necessary liquidity to continue operations.



Financing activities:



During March 2015,
the Company issued a secured note (bridge financing) to an investor for $500,000, of which $422,000 of net proceeds were
received. The note is secured with accounts receivable related to service contracts. The net proceeds of $422,000 were  to
be used for working capital purposes. In addition to the interest, we agreed to deliver 1,000,000 restricted common shares to
the lender. $363,200 of the principal amount of the note issued in this financing were repaid with the proceeds of the May
14, 2015 financing described below.



On May 14, 2015, the Company
closed on funding totaling $908,000 through the issuance of a convertible note. The note is secured with a first priority security
interest in the revenues from certain of the Company’s contracts and the equipment associated with such contracts. Net cash
proceeds to the Company were $454,000 after paying $363,200 of the outstanding March 2015 bridge note of $500,000 and placement
fees of $90,800. (See our recent 8-K filing dated May 14, 2015 for a more detailed discussion.)



On November 2, 2015,
the Company entered into agreements (the “Purchase Agreement”) with Barron Partners LP (“Barron”) pursuant
to which the Company agreed to purchase from Barron, all of the securities of the Company owned by Barron, namely 2,239,395 shares
of the Company’s common stock, 3,589,488 shares of the Company’s Series A Convertible Preferred Stock, 520,000 shares
of the Company’s Series C Convertible Preferred Stock, and 590,910 shares of the Company’s Series D Convertible Preferred
Stock for $74,466, $461,502, $188,577 and $425,455, respectively. No purchases may be made under the Purchase Agreement after
November 30, 2015.



On November 2, 2015
and November 3, 2015, pursuant to the terms of a Securities Purchase Agreement dated November 2, 2015 (the “Placement Agreement”),
the Company sold an aggregate of 11,570,000 shares of its common stock under subscription agreements to 15 accredited investors
for aggregate gross proceeds of $416,520. In connection with the sale of the shares, the Company paid a placement agent fee of
$20,826 in cash to Boenning & Scattergood, Inc. (“B&S”) and will issue B&S warrants to purchase 347,100
shares of the Company’s common stock at the price of $0.036 per share. The investors were granted piggyback registration
rights in connection with the Placement Agreement. The net proceeds of the transaction will be used to purchase the securities
owned by Barron pursuant to the Purchase Agreement. The Company may sell up to an additional $1.26 million of shares pursuant
to the terms of the Placement Agreement, which may be used to purchase securities pursuant to the Barron Agreement or for working
capital purposes. The securities will be issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as the
transactions will not involve a public offering.



On November 2, 2015,
the Company agreed to issue 5,000,000 shares of its common stock to Lattice Funding, LLC to amend the promissory note issued to
it in May 2015 to eliminate certain anti-dilution provisions. The 5,000,000 shares of the Company’s common stock) to be
issued to Lattice Funding LLC will be issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as the transactions
will not involve a public offering.



On November 2, 2015,
the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Cantone Asset Management, LLC (“Cantone”),
pursuant to which Cantone will loan the Company a gross amount of $580,000, less an original issue discount of $58,000 (the “Loan”),
of which $136,800 (plus interest) will be used to pay off an outstanding bridge loan to Cantone. The closing of the transactions
contemplated by the Loan Agreement is contingent on the Company raising sufficient funds, when added with the net proceeds of
the Loan, to repurchase all of the securities pursuant to the terms of the Barron Agreement. The Company is also obligated to
issue 1,862,500 shares of its common stock to Cantone pursuant to the Loan Agreement, and will pay Cantone a 3% origination fee
and a 2% non-accountable expense allowance. The Loan is secured by a first priority security interest in the revenues and proceeds
from certain of the Company’s contracts. In connection with the Loan Agreement and the transactions contemplated thereby,
the Company will issue a promissory note in the aggregate principal amount of $580,000 to Cantone (the “Note”). The
Note will not begin to bear interest until February 6, 2015, at which point it will bear interest at a rate of 14% per year. The
Note will mature on May 2, 2016. The Note provides for customary events of default, including the failure to pay any amount due
under the Note on the applicable due date (subject to a cure period), any default on any other indebtedness by the Company, the
Company becoming insolvent, or the company filing for voluntary bankruptcy. In the event of a default, the interest rate on the
Note would increase to 18% per year and the Company would be obligated to pay 10% of the total amount due as liquidated damages.
Cantone received piggy-back registration rights for the shares issued in connection with the Loan. The 1,862,500 shares of the
Company’s common stock) to be issued to Cantone will be issued pursuant to Section 4(a)(2) of the Securities Act of 1933,
as amended, as the transactions will not involve a public offering.



OFF-BALANCE SHEET ARRANGEMENTS:



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



ITEM
3     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



As a smaller reporting
company we are not required to provide information required by this Item.





22







ITEM
4     CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



We maintain disclosure
controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and
forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed
to provide reasonable assurance that the controls and procedures would meet their objectives.



As required by SEC Rule
13a-15(b), our management carried out an evaluation, with the participation of our Chief Executive and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered
by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were effective.



Changes in Internal Controls



There were no other changes
in our internal control over financial reporting during the three months ended September 30, 2015 that materially affected or is
reasonably likely to materially affect our internal control over financial reporting.











23







Part IIOTHER INFORMATION



ITEM
1     LEGAL PROCEEDINGS



On June 26, 2015, a former
wholesale partner filed an arbitration claim against us with JAMS pursuant to a Master Services Agreement between, dated December
31, 2008 (the “MSA”). They allege that we breached the MSA by failing to pay them commissions pursuant to the MSA and that
we owe them approximately $2.9 million, including interest. We filed a reply to the claim on July 24, 2015.



Except as disclosed above,
we are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not
in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers
or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.



ITEM
1A     RISK FACTORS



There have been no material
changes from the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.



ITEM
2     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



On March 27, 2015, we issued
714,280 shares of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The
shares were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended,
as a transaction by an issuer not involving a public offering.



On April 7, 2015, we issued
1,571,416 shares of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The
shares were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended,
as a transaction by an issuer not involving a public offering.



On April 9, 2015, we issued
1,000,000 shares of our common stock to a consultant in exchange for services to be rendered. The shares were issued pursuant to
the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction by an
issuer not involving a public offering.



On April 29, 2015, we issued
1,303,561 shares of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The
shares were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended,
as a transaction by an issuer not involving a public offering.



On June 2, 2015, we issued
1,607,130 shares of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The
shares were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended,
as a transaction by an issuer not involving a public offering.



On June 10, 2015, we issued
1,374,989 shares of our common stock to one investor upon conversion of our Series A Convertible Redeemable Preferred Stock. The
shares were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended,
as a transaction by an issuer not involving a public offering.



On August 14, 2015, in
conjunction with a $908,000 convertible note financing, we issued 908,000 shares of our common stock to investors and 605,333 shares
of our common stock to Cantone as placement agent. The note is convertible into 6,053,333 shares of our common stock. The note
and shares were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933,
as amended, as a transaction by an issuer not involving a public offering.



There were no other unregistered
sales of equity securities that were not reported on a Current Report on Form 8-K during the quarter.



ITEM
3     DEFAULTS UPON SENIOR SECURITIES



On October 31, 2015,
the Company was obligated to make an interest payment of (i) $30,000 on the $1.5 million 8% Senior Secured Convertible Note dated
as of May 30, 2014 made by the Company in favor of Lattice Funding LLC (“Payee”), and (ii) $18,160 on the $908,000
8% Senior Secured Convertible Note dated as of May 14, 2015 made by the Company in favor of Lattice Funding LLC (“Payee”).
The Payee did not take any action to accelerate payment of the notes or impose any penalties on the Company. The payments were
made by the Company on December 3, 2015 and the Payee has waived the defaults.



ITEM
4     mine safety disclosures



Not Applicable.





24







ITEM
5     OTHER INFORMATION



On November 2, 2015,the Company
entered into agreements (the “Purchase Agreement”) with Barron Partners LP (“Barron”) pursuant to which
the Company agreed to purchase from Barron, all of the securities of the Company owned by Barron, namely 2,239,395 shares of the
Company’s common stock, 3,589,488 shares of the Company’s Series A Convertible Preferred Stock, 520,000 shares of the
Company’s Series C Convertible Preferred Stock, and 590,910 shares of the Company’s Series D Convertible Preferred
Stock for $74,466, $461,502, $188,577 and $425,455, respectively. No purchases may be made under the Purchase Agreement after November
30, 2015.



On November 2, 2015
and November 3, 2015, pursuant to the terms of a Securities Purchase Agreement dated November 2, 2015 (the “Placement Agreement”),
the Company sold an aggregate of 11,570,000 shares of its common stock under subscription agreements to 15 accredited investors
for aggregate gross proceeds of $416,520. In connection with the sale of the shares, the Company paid a placement agent fee of
$20,826 in cash to Boenning & Scattergood, Inc. (“B&S”) and will issue B&S warrants to purchase 347,100
shares of the Company’s common stock at the price of $0.036 per share. The investors were granted piggyback registration
rights in connection with the Placement Agreement. The net proceeds of the transaction will be used to purchase the securities
owned by Barron pursuant to the Purchase Agreement. The Company may sell up to an additional $1.26 million of shares pursuant
to the terms of the Placement Agreement, which may be used to purchase securities pursuant to the Barron Agreement or for working
capital purposes. The securities will be issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as the
transactions will not involve a public offering.



On November 2, 2015,
the Company agreed to issue 5,000,000 shares of its common stock to Lattice Funding, LLC to amend the promissory note issued to
it in May 2015 to eliminate certain anti-dilution provisions. The 5,000,000 shares of the Company’s common stock) to be
issued to Lattice Funding LLC will be issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as the transactions
will not involve a public offering.



On November 2, 2015,
the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Cantone Asset Management, LLC (“Cantone”),
pursuant to which Cantone will loan the Company a gross amount of $580,000, less an original issue discount of $58,000 (the “Loan”),
of which $136,800 (plus interest) will be used to pay off an outstanding bridge loan to Cantone. The closing of the transactions
contemplated by the Loan Agreement is contingent on the Company raising sufficient funds, when added with the net proceeds of
the Loan, to repurchase all of the securities pursuant to the terms of the Barron Agreement. The Company is also obligated to
issue 1,862,500 shares of its common stock to Cantone pursuant to the Loan Agreement, and will pay Cantone a 3% origination fee
and a 2% non-accountable expense allowance. The Loan is secured by a first priority security interest in the revenues and proceeds
from certain of the Company’s contracts. In connection with the Loan Agreement and the transactions contemplated thereby,
the Company will issue a promissory note in the aggregate principal amount of $580,000 to Cantone (the “Note”). The
Note will not begin to bear interest until February 6, 2015, at which point it will bear interest at a rate of 14% per year. The
Note will mature on May 2, 2016. The Note provides for customary events of default, including the failure to pay any amount due
under the Note on the applicable due date (subject to a cure period), any default on any other indebtedness by the Company, the
Company becoming insolvent, or the company filing for voluntary bankruptcy. In the event of a default, the interest rate on the
Note would increase to 18% per year and the Company would be obligated to pay 10% of the total amount due as liquidated damages.
Cantone received piggy-back registration rights for the shares issued in connection with the Loan. The 1,862,500 shares of the
Company’s common stock) to be issued to Cantone will be issued pursuant to Section 4(a)(2) of the Securities Act of 1933,
as amended, as the transactions will not involve a public offering.



ITEM
6     EXHIBITS



The exhibits listed on
the Exhibit Index are filed as part of this report.



|No.       |  | Description                                                                                                     
|--------- |  | ----------------------------------------------------------------------------------------------------------------
|          |  |                                                                                                                 
|31.1*     |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002              
|          |  |                                                                                                                 
|31.2*     |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002              
|          |  |                                                                                                                 
|32.1*     |  | Certification of Chief Executive Officer pursuant to Section 906 Certifications under Sarbanes-Oxley Act of 2002
|          |  |                                                                                                                 
|32.2*     |  | Certification of Chief Financial Officer pursuant to Section 906 Certifications under Sarbanes-Oxley Act of 2002
|          |  |                                                                                                                 
|101.INS** |  | XBRL Instance Document                                                                                          
|101.SCH** |  | XBRL Schema Document                                                                                            
|101.CAL** |  | XBRL Taxonomy Calculation Linkbase Document                                                                     
|101.DEF** |  | XBRL Taxonomy Definition Linkbase Document                                                                      
|101.LAB** |  | XBRL Taxonomy Label Linkbase Document                                                                           
|101.PRE** |  | XBRL Taxonomy Presentation Linkbase Document                                                                    

____________

| | *  | Filed herewith.  
| | -- | -----------------
| | ** | Previously filed.







25







SIGNATURES



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



|                           | LATTICE INCORPORATED
|-------------------------- | --------------------
|                           |                     
|Dated:   December 29, 2015 | By:                 
|                           |                     
|                           |                     
|                           |                     
|                           |                     
|                           | LATTICE INCORPORATED
|                           |                     
|Dated: December 29, 2015   | By:                 
|                           |                     
|                           |                     
|                           |                     























26